The Tragic State of Affairs, Part V

 It’s easy to criticise. Something that I unfortunately do most of the time at People, Ideas & Objects. That is just the way I see it and it’s a result of too many difficulties being experienced by everyone in the greater oil and gas economic structure. Unnecessarily so. On the other hand we also propose a comprehensive solution to what we believe ails the industry. A solution that has a low cost in comparison to the benefits that can be gained by everyone. Industries of all kinds, and eventually all industries, are being disintermediated by Information Technology. Why would oil and gas be immune to these forces? Disintermediation isn’t about the technology, it’s about the business model. The ability of the old hierarchical structures to produce value in today’s society is challenged and diminishing at a rapid rate. There are better ways to organize and if the difficulties in the oil and gas industry weren’t present it would be necessary to disintermediate it nonetheless. I therefore see it as justifiable to criticize the impediment to this demand for change, that being the bureaucrats, those officers and directors of producers responsible for the comprehensive erosion of the industry's value for all the reasons we’ve noted. And in turn establish the basis where everyone can gain an opportunity to increase value through disintermediation.

One of the areas that we documented was how People, Ideas & Objects, our user community and their service providers have been designed to achieve success. In late February, this eight part series detailed what we propose to do to ensure that oil and gas becomes successful. These include the variety of different opportunities that we’ve exploited and are available to us at this time. It is important to note that one of the critical issues causing difficulties in oil and gas is what I call a modern day software bug. The inability of the current ERP systems, those systems which we’ve noted define and support the organization, to change. Change is critical for an organization to exploit its opportunities and avoid the issues that come upon it. Without a software development capability such as what People, Ideas & Objects have proposed, the inability to enhance and change the ERP software creates a static situation that is terminal to an organization. We believe that the issues that caused this difficulty being experienced in oil and gas is the exploitation by the bureaucrats that we noted in last Thursday’s blog post. Secondly we feel that the business model of the existing ERP software vendors, which focuses on code and customers, constrains their capacity to change in an inverse relationship to the size of those two variables. People, Ideas & Objects therefore developed a change based business model that is fundamentally different to what prior generations of ERP providers offered. 

The eight parts of the series that identified why People, Ideas & Objects, our user community and their service provider organizations would rebuild the oil and gas producers and industry in the dynamic, innovative, accountable and profitable vision of the Preliminary Specification were as follows.

Part I Budget

Access to the primary revenue stream of the oil and gas industry is the only manner in which an initiative such as People, Ideas & Objects software development will ever be funded. The extent of oil and gas’ destruction has eliminated the opportunity to provide any real business model or opportunity to the investment or banking community when the bureaucrats are so obstinate about ERP systems. Producers must have “some skin in the game,” and we need to ensure that doing so does not render us in that process to be simply “blind sleep-walking agents of whomever will feed us.” 

Part II User Community

User defined software, particularly in the ERP environment is the only worthwhile software to pursue. Users create the highest quality software as only they know what it is that they want and need. People, Ideas & Objects have provided our user community with an overall vision of how they’ll be assured of their key role in the development, implementation and management of this ERP software development. The user community holds the exclusive licenses to create derivative works from the Preliminary Specification. Our developers are deaf, dumb and blind to all others but the user community. Anyone in industry seeking changes will only need to contact the appropriate user community member. 

Part III Service Providers

Our user community members are licensed to establish a service provider organization as part of their efforts with People, Ideas & Objects. Service providers are the key to the producers ability to produce profitably everywhere and always. They’ll be providing their services and our software to the producers as a replacement to the current administrative and accounting resources of the individual producers. Establishing an industry based administrative and accounting capability that is variable in nature, turning all of the producers costs variable, based on production.

Part IV Industries Cultural Constraints

Cultural influences are difficult to deal with, particularly in terms of software development. We’ve set out to eliminate the effectiveness of oil and gas’ bureaucratic based cultural influences and these centre on two aspects of our offering. We are breaking away from the bureaucracy in our Revenue Model as noted in our budget. If we were to go forward on a pay as you go basis the bureaucracy would only solidify their influence for another generation. Secondly we are fundamentally shifting the culture of the software as described in the Preliminary Specification away from what I consider to be the “corporate model” that is in use today. And using the industry standard Joint Operating Committee as the key organizational construct. The legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. Tacking away from the bureaucracy towards the fundamental culture of the industry in the form of the Joint Operating Committee will ensure that we break from the bureaucracy.

Part V Focus on Profitability, Everywhere and Always

Who in oil and gas doesn’t believe profitability is necessary everywhere and always. We’ve now seen what happens as a result of a lack of real profitability as a result of the deliberate actions of the bureaucracy these past decades. This is the principle that is inherent in all aspects of the Preliminary Specification. We’ve endowed the user community and service providers with the same religion. I believe the lack of profitability in oil and gas will be seared in the memories of all oil and gas workers for the next generation. The Preliminary Specification further enables that and as the industries software, it will further support and define it. 

Part VI Intellectual Property

I have provided a comprehensive license to People, Ideas & Objects to commercially develop the Intellectual Property I have developed and is represented here and in the Preliminary Specification. This Intellectual Property is being maintained in its entirety and one consistent property at all times. User community members are licensed to develop it as necessary. People, Ideas & Objects are paying the user community for their IP contributions in this process. In effect purchasing their IP from them. Where the IP is once again consolidated under one roof and available to all the user community. Therefore there will be no IP trolls or cross licensing of IP between any aspects of Preliminary Specifications developments. Oracle products are licensed and made available through People, Ideas & Objects. 

Part VII         Oracle Cloud Infrastructure & IP

Unquestionably the premier technologies in the world are those that are provided by Oracle. From their database, Java, Oracle Fusion Applications and Oracle Cloud, technological superiority in the marketplace is the constant theme. At the same time we are impressing upon those in oil and gas to join our user community and develop these technologies to build a quality application. IP is the only valuable asset in the 21st century. It is as I state not enough to own the oil and gas property. You must also have access to the software that makes the oil and gas asset profitable. That is the basis of IP in the 21st century and what the user community has as their opportunity to leverage themselves into this new world. 

Part VIII         Summary and Contrast

I spelt out 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?

Speaking of producers putting some “skin in the game.” The service industry will need to be rebuilt with the resources that are the oil and gas industries revenue stream. The abuse of everyone at the hands of the bureaucrats over the past decades has shown that they too have been fooled once. The only hope for oil and gas producers is to have them put some skin in the game and therefore understand the scope and scale of the damage they’ve caused and why they need to fully participate in the rebuilding process of the service industry. No one else is going to do it for them. Recall that it was not too long ago that the producers were begging governments to intervene and save them? Even there they have no support. Those who did build the service industry, feel they already completed it once and lost everything as a result of producers' inappropriate behavior, as I’ve documented throughout this blog. People, Ideas & Objects have developed the solution as to how to rebuild the service industry in the form of the Resource Marketplace module. A solution that the bureaucrats refuse to consider, therefore why would anyone consider the pleas of the producers. Today World Oil suggests that it is now difficult to ramp up in the shale basins.

The loss of suppliers and other services this past year will cause problems in being able to get work accomplished in a timely manner,” an unidentified survey respondent was quoted as saying in the report published Wednesday.

If that’s all they’re concerned about then I shouldn’t mention that I see bigger issues for producers in the very near future. That highly technical, difficult shale well that was drilled before, learn how to do that all over again. Just make sure that you repeat all of the costly mistakes that were needed to be learned the first time and that frustrated everyone and will be highly de-motivating when you get to revisit them again. Rest assured that recent downward blip in drilling activity was just a minor difficulty and everything will be sunshine and roses, for at least this next pay period. Therefore people will know they’ll have to do the same teaching of field staff and crews, again and again. Having field operations conducted by the least experienced member of the crew will be the way things are done, again. Good luck trying to get those experienced people that did the job before back to the field. But hey, it’s all good. This will become known in the oil and gas industry as the cascading decline of capabilities and capacities. As capabilities decline, capacities are reduced, disabling enhanced capabilities from being supported financially, slashing further capacities and so on all down the line. And let’s not forget the producers will be needing to be the ones stoking the pipeline with cash to make it all work, albeit very poorly. Invoke the log rolling analogy at this point and seek out that brave volunteer looking to test their suicidal solution of having a means to stop that log. 

A comprehensive review of our series entitled How People, Ideas & Objects Will Achieve Success is recommended. It’s interesting to note that it's not so much about the software is it? The name People, Ideas & Objects is derivative of Professor Paul Romer’s “New Growth Theory.” A theory for which he won the 2018 Nobel Prize in economics. In his paper “New Growth Theory” it accurately described the work that needs to be done in oil and gas and other industries. Traditionally, economic growth was facilitated by capital investments in transportation, communications or financial services. What was being learned late in the 20th century was that these were becoming less effective as the drivers of economic growth. Romer’s New Growth Theory suggested that new criteria of how economic growth is developed and facilitated had begun. These criteria were summarized simply as people, ideas and things. As object based developers I changed things to objects to represent the software aspect of what we're doing to develop and facilitate growth in the greater oil and gas economic structure. The critical aspect of this development is the people and their ideas. That is how the world will develop and prosper for at least the next 50 years. Oil and gas could join in that future if we could remove these bureaucrats. It’s a far different world, especially the one we’re heading to, we need to get there, and our major impediment is the destruction that bureaucrats and politicians are putting in front of us for their own self serving purposes. It’s a time for change and a new dynamic, one that is profitable and prosperous for everyone concerned. 

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. 

Google v. Oracle Supreme Court Decision

 The Supreme Court of the United States ruled yesterday in the case Google LLC v. Oracle America Inc. that Google would prevail in Oracle’s 2010 lawsuit regarding Google’s use of Java in the Android operating system. Citing that it was “fair use” for Google to have copied the API (Application Programming Interface) of the Java Programming Language. I don’t think that the Justices were fully aware of the consequences of their decision and stated categorically that their assumption was that Oracle’s copyright of Java was valid. And therefore their ruling only applied to the API and did not violate their understanding of copyright. I believe that this separation of copyright and API is valid and will hold copyright holders to the same rights and privileges they’ve always had. The consequences of this decision will have significant implications towards software developers, developments in general, software in general and the software user overall. An important consideration in this discussion is that most object oriented software code is freely accessible, subject to the license requirements upon download. Signing the license and downloading it are your agreement to uphold these requirements which state that the Java Programming Language is free to use, however, any revenues generated from those derivative works would be subject to a royalty payable to Oracle. Oracle has received payments from every other developer on this basis but not Google. 

It came down to what the definition of an API is and what is it for. In the past programming code was procedural and all aspects of the software application including menu items, features and variables were all included in the one holistic software code base. Think of the computer just processing through a loop of code from beginning to end and then starting over and over. The issue was when software became more capable and usable bugs creeped in and caused the application itself to become unusable. Limiting the upside in terms of software developments capabilities. Java built upon the concept of object oriented programming that was introduced a few decades earlier. It was conceptually that each of the components of a program were broken down to the individual features and implemented within one object. Think of building a program with Lego bricks. Therefore isolating the bugs and issues to the objects that were unable to function as desired. Each object is unaware of any other object's existence however can access other objects capabilities through methods and other features of the programming language. Packaging of a comprehensive feature set of objects into a framework for others is one of the desired capabilities of object oriented programming. The calling of Java is write once, run anywhere. The redundancy of having to rewrite the same code over and over again in procedural programming was a major hindrance to the development, quality and speed of the deliverability of software applications. 

Object reusability became the focus of all developers. If you could access a framework that conducted the necessary work you needed, all you needed to do was access that framework’s API. The API provided the doorway to the published code of the framework that someone spent a significant amount of time and money developing. The code had become tried and tested, was generally what was needed and because it was object oriented, was extendable by any object based developers, and here’s the necessary requirement, through the license of the frameworks copyright holder. The API they were providing was a doorway to facilitate ease of use and understanding in how to use the framework. What the Supreme Court did yesterday was to effectively eliminate the copyright protection on the API. Saying Google’s use of the API was fair use is ridiculous when the Justices also indicate that Android had provided over $42 billion in revenue to Google. This is wholly inconsistent with the concept of fair use. Fair use doesn’t permit the generation of revenues off others' works. The API doorway will now be effectively closed. It will be replaced with a drawbridge, and a moat will be built around the framework for any developer to enter. Partial compensation will probably be necessary as a down payment to sign the license and access the framework. Licensing will be far stricter. 

One of the consequences of this is the object oriented programming languages will cease to be as effective in developing software efficiently, effectively and affordably. Royalties will be higher to access the frameworks and content of those who own valuable copyrighted material. Think Microsoft, IBM, Google and all of the other software companies that were proponents of Google in this action. Content will be king and everyone will have to pay dearly for it. Developers work will be more constrained as access to the necessary frameworks will be a legal process that precedes their access and possibly have to pick through the copyrighted materials themselves to find what it is they’re looking for and how to use it. Ease of use through the API isn’t available. 

Oracle is our technological provider. We use the entire Oracle product suite as the technology base of the Preliminary Specification. This includes Java, as well as many other products written in Java. It is reasonable to assume that much of this code may also be licensed from other software providers who are allowing licensed access to Oracle for its use through their API. I anticipate this will affect our development of the Preliminary Specification in detrimental ways. As the copyright holder of the Preliminary Specification we own that content and it is unaffected by this decision. We will not be publishing any API’s at any point. We also have expectations that our costs will escalate due to the superfluous legal necessities this unnecessarily causes. Our ability to access API’s for our convenience will be a doorway that is no longer open to us. And as object based developers this will have a time and monetary impact on our development. 

It is therefore at this time. A time in which we are asserting maximum pressure on the producers for them to act and fund the Preliminary Specification. That an amendment to our budget is necessary. We are therefore adding an additional $1 billion cost to the development costs as a result of the Supreme Court's decision. Based on the allocation of our margins this will require an incremental $3 billion be added to our budget for a total of $15 billion U.S. I am also cautioning, as the effects of this decision become more clear, our budget may be further clarified and amended. 

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. 

The Tragic State of Affairs, Part IV

 I want to clarify People, Ideas & Objects position on the subject of bureaucrats knowing or unknowing about the issues the producers were facing in their marketplace. There was at no point in the past that I can see in which they acted to correct the situation they were involved in. Their spending machine was in place and they were personally benefiting from the methods in which they managed these producer firms. Issuing more shares and financial statements that made what they were doing look like a functioning operation. This, in my opinion, was their only concern. The currency that enabled them to conduct these operations was the annual dilution of their shareholders through repeated recapitalizations in capital markets. Consistently cutting off their shareholders' opportunity to realize the equity value of their organizations leverage. Many were overtly aware of the game plan, others may have been oblivious to it. Knowing or not, the accounting that was conducted purposely made it impossible to know. That however is not the concern as it was occurring nonetheless under their watch. One in which they were the ones that had agreed they would personally compensate anyone who may have experienced a loss through their negligence or misrepresentation. They were the only ones with the responsibility, authority and ability to make the necessary changes and they chose instead, for reasons I’ll detail later in this post, to “muddle along” and “do nothing.” There is now no way in which they can avoid the consequences of their actions. With litigation beginning, mostly in the form of class action lawsuits, it’s going to be a long drawn out period of misery for these bureaucrats who will have their attention averted to their personal legal concerns. Not rebuilding the oil and gas industry as their top priority, or towards their new found hobby of clean energy. Wandering about with a feigned inability to comprehend the situation, no plans or strategies, it's best to ask again, why do we need them?

Shareholders were the ones that were relied upon to keep the engine of the bureaucrats spending machine moving forward. Think of the spending machine as the activity that occurs above the table. Shareholders understand accounting from the point of view of investors. The purpose behind the SEC, other accounting regulations and regulators is to have a conceptual model that every investor can use to compare businesses in one industry against those in another industry. When they’ve understood that model and relied upon it to earn value in their holdings they begin to understand the implications of the accounting structure that exists in North America and why it's there. Audit firms support the investors' knowledge with a hands on review of the management and are there to report that the management's reporting is consistent with those accounting regulations and their audit opinions reflect that. This overall framework adds an efficiency to the capital markets that is tremendously valuable for organizations seeking capital. Investors can defer to this accounting framework and their inherent understanding of the system that all organizations comply with. They can therefore limit the scope of their review to checking that this system is in place, and the financial statements are consistent with the style and quality of investment that they’re looking for. Without this the capital markets would be constrained as if they were in the 1600s. With each investor having to turn over each and every rock in each and every potential investment opportunity. It is this knowledge and understanding that the bureaucrats in oil and gas used and abused to ensure that readily available spending power was always on hand. 

It was in May 2004 that the bureaucrats interpreted People, Ideas & Objects Preliminary Research report in a unique and totally self-serving manner. It was in that document we noted Professor Anthony Giddens theory of Structuration and Professor Wanda Orlikowski’s model of Structuration. Establishing that software defines and supports the organization. Changes in the organization must be made within the software first in order for organizational changes to take hold. Otherwise the organization will regress back to what the software defines and supports. The oil and gas bureaucrats read this as the ticket to ensure that they would be able to maintain their self-serving franchise indefinitely by not making any changes to their ERP software. Which is what has happened since 2004. Therefore no competitive organizational construct such as the Preliminary Specification has been able to challenge the bureaucracy throughout this critical period when the bureaucrats have starved all of the ERP providers of cash. Again please read page 18 of our White Paper “Profitable, North American Energy Independence -- Throughout the Commercialization of Shale” for a history and more detailed review of why the events listed there are of significance to the points being made here. Once read, it’ll be important to ask, why is it that the oil and gas industry doesn’t have a purpose built solution based on a first tiered ERP platform? Such as the Preliminary Specifications use of Oracle. By adopting the solutions of the existing ERP markets offering, and not sponsoring any further ERP developments or enhancements it has provided two critical attributes to this overall strategy of the bureaucrats. 1) It has enabled them to approach their tasks with the leisurely pace and sense of urgency we’ve seen them approach the oil and gas industry. 2) Sub-par accounting is an excellent excuse when ultimately challenged. Therefore sub-par accounting is what was produced on a deliberate basis. The question therefore would be, if the Preliminary Specification were operational as proposed in May 2004 would this crisis have happened? Would the bureaucrats have been able to survive at that time? Untended gardens tend to get out of control. Attempting to reclaim them with hand tools might be done before the winter, at which time starvation will have set in. However, there are mechanical and other methods of clearing the area and starting over that are more productive and less costly. Generally more satisfying too. 

I have documented the poor quality of accounting and at the same time noted the quality of the accounting and administrative people in oil and gas. It is their diligence that they’re able to slug through these systems that produce very little in the form of information. No property is able to state within +/- 20% of what the profitability or loss of the operation is. No one knows what the overhead costs are in the industry, as these costs are where the skeletons, or as we describe it creative executive compensation, is buried. 85% of overhead is capitalized in general and in 2020 our sample of producers incurred overhead of only 5.62% of revenues, up from 5.11% in 2019. (Note, I am a highly skilled auditor and I once again offer my services to review any of the producers G&A in order to determine the accuracy of my statements, then we would not have to rely just on my experience regarding the 85% capitalization policy.) Cutting staff has been all the rage in these producers which has enabled them to save them hundreds of millions of dollars, as they’ve consistently claimed. How when the base of overhead is so low? Consolidation of operations offers similar synergies for similar reasons. Same question. If the focus and concern of the producer bureaucrats is to reduce the overhead from 5.62% to 4.25%, a 1.37% increase in profitability, then I could accuse them of being simple minded. However in 2020 our sample of producers produced a loss of $69.2 billion dollars. Which again, please the bureaucrats insist, keep your eyes focused above the table during their presentation. 

In the last installment of our New Cost Structures, Part IV blog post we detailed the many crises that are, or will soon be upon the bureaucracy. They are;

1. The constant and chronic overproduction and oversupply of both oil and natural gas. Or as we define it, unprofitable production.
2. The effect on demand as a result of the corona virus both in the short and long term. 
3. A looming debt crisis and higher interest rates. Adversely affecting producers due to the fact that the account of property, plant and equipment is severely overstated. Overstated when People, Ideas & Objects suggest a pro forma 65% reduction in depletion and impairment of that account is necessary, therefore producers are vastly over leveraged. 
4. OPEC as the lowest cost producer with their surplus capacity of over 7 mmboe / day. A reduction in their production due to the virus, with additional capacity available. 
5. The declines in the capacities and capabilities of the oil and gas industry itself but most importantly in the service industry. With Schlumberger and Halliburton seeking better opportunities outside of North America and BJ Services bankruptcy these capacities and capabilities will need to be purpose built by oil and gas producers with their revenue streams. 
6. The litigation risk to bureaucrats as we’ve detailed in the blog. Both as a distraction of the leadership of the industry and as a scar on the industry's reputation.
7. The current Biden / Harris administrations focus on the environment, dirty oil and clean energy. Keystone XL was cancelled while in development. After all legal and regulatory requirements were fulfilled. What justification can be claimed in shutting down private operations in that manner? What else is possible?

I’m of the opinion that any one of these crises would be adequate to hold the attention of the leadership in any industry. This has become an untenable list documenting the chronic failure of “muddle through.” There’ll be no muddling through this. Our late January blog series of New Cost Structures documented many new trillion dollar costs which will have to be carried in the next 25 years. The expectation that investors will line up and empty their pockets for their producer bureaucrats to spend and enhance their own personal empires isn’t creating the calling that it did in the past. One of the reasons has to be is the financial statements of all of the producers are abysmal. They reflect the insides of that engine of the car stopped at the side of the road, the one that was trailing oil for the past two miles. “Well that’s certainly not going anywhere” investors will say. To add the extra trillion dollar costs on to that business model which is now as transparent as the bureaucrats is a bit of a stretch. A business model People, Ideas & Objects have documented throughout our writings that saw the majority of the capital costs paid by investors and only operations being paid by consumers. The questions that need to be asked as a result are rather obvious and may be worthwhile to ask in May’s Annual General Meetings. What are these bureaucrats doing today, what is the plan to deal with these costs and the crisis that are listed here, and where is it that we go from here? But let's be leary of anyone in those meetings asking if the overhead will drop to 4.25%. If bureaucrats could answer those questions sincerely and with a solid plan in place, a plan that was better than the Preliminary Specification I’d retire. That’s not going to happen and I’m looking forward to being gainfully employed for at least 25 more years. There is also one question that’s beginning to linger in the minds of the bureaucrats. It reflects the focus of their domain of concern and how it never flows outside of their skin. Who is going to bail them out?

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. 

The Tragic State of Affairs, Part III

 How does an officer or director of an oil and gas producer contrast their organizational performance over these past decades with the writings on this blog going back to December 2005? Why did they follow their destructive strategies and plans instead of building solutions such as the published works of the Preliminary Specification in December 2013. A software and services solution that deals specifically with the primary, and most significant issue the industry has ever faced. An issue that has been present every day since at least July 1986? The magnitude of value lost can only be assessed in the trillions of dollars over this period of time yet the best we ever received was the harmonic reply of the bureaucrats saying “muddle through.” New readers of this blog would like to know! Looking out across the oil and gas landscape, just visible and smoldering in the distance, leaves people asking the question, why did this happen? The simple answer is, and this will only confirm what most people within the industry know and understand, stuffing one’s pockets is a full time endeavor. Fiduciary duty be damned!

What People, Ideas & Objects have been seeking to provide the oil and gas industry is to build ERP systems that would meet the needs of a dynamic, innovative, accountable and profitable oil and gas industry and producer. Page 18 of our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale” details the state of affairs and history of ERP systems providers in the industry. To understand the situation today a complete read of why today’s ERP marketplace is the dead zone, and why it’s been that way since the mid 1990s is due to the treatment, but let's be honest and call it abuse, the bureaucrats have applied to the ERP systems providers. It is my opinion that the ERP market was the initial testing ground for producers to learn how to treat vendors poorly in order to better “control costs” in all areas of oil and gas operations. For an understanding of what that abuse consists of, just review the principles that they’ve used to “motivate” the ERP systems providers which has led to the beginnings of a very similar and comprehensive destruction in the service industry. The initial stages of which are accurately depicted in this World Oil article. There would be no sane individual that would invest their money in oil and gas ERP systems. Which leads me to believe that may have been what motivated me. I’ve always said you don’t have to be crazy to do this job, I just find it to be a distinct competitive advantage. Did you need to be crazy in 2005 to see the future of the industry under its current strategy and management was terminal to its existence? I don’t think so. Morally and ethically challenged? Most definitely.

As a follow on question to this never ending dissertation of mine, when will the rebuilding and focus on profitability begin? When will producer bureaucrats seek to prove to the world that they are worthwhile managers of the industries resources and finances? Turn the industry around and begin rebuilding it? The first aspect of that change would require them to have clearly identified the issue. And therefore you see that we have many more miles to go before we’ll ever reach any worthwhile destination in the North American oil and gas industry. Clean energy is already well established as the next stampede into the trend / place to be / must have / bright shiny object to focus attention away from any of the other failures that were most recently the trend / place to be / must have / bright shiny object. Why invest outside of oil and gas? Clean energy has a new category and class of investors that have never been exposed, and have no history of the bureaucrats' behaviours that the old investors eventually became wise too. The use of the oil and gas revenues to fund and support the clean energy business is not questioned or assumed to be an issue by those that feel that this money is theirs and will continue to use it in any way they happen to feel. And here’s the part that bureaucrats cherish the most, failure’s an option! It would be considered an unauthorized betrayal of the past shareholders investments, investments that created those oil and gas revenues that are now being diverted into areas that are unproven. As far as bureaucrats are concerned this would show that I’m making wild claims as I did back in 2005 at the beginning of this blog. 

I’m aware what it is that makes me hold these bureaucrats in absolute and complete disgust these past few months. Something happened that made me feel they are completely beyond redemption and they are unworthy of ever being trusted and respected again. How can they sit for decades and author such destruction, at such high and detrimental costs to everyone who is involved in the greater oil and gas economic structure and continue to do nothing? And here’s the kicker, then just slide on in to clean energy? If clean energy is where they want to be then let's send them there. To hustle and fight for every penny and dime with no revenues to pay for anything. Let them suffer and sacrifice building brick by brick and stick by stick like everyone else has had to do. Just as the rest of those involved in the oil and gas industry will be doing to rebuild the oil and gas industry with those oil and gas revenues. Get bureaucrats to do some difficult work, take risks and sweat as a result of some physical exertion. However, not ever with oil and gas revenues on call.

There were two occasions in these past five years when People, Ideas & Objects were generating momentum behind our initiatives of building the Preliminary Specification. On each of those occasions the bureaucrats intervened into the discussion and suggested that the Preliminary Specification was too radical and would never work. Exhausting our work and killing its momentum. The bureaucrats difficulty today is that it is clearly evident that something needs to be done. Their method of management has failed spectacularly and their focus on clean energy is recognition of that. What they suggested was too radical in the Preliminary Specification is unproven however it is a business model that works in the form of a 200,000 word, overall solution. Something that took ten years of research to conduct and I would assert the only viable model the industry currently has to choose from. The transition to clean energy can only be considered the most radical suggestion ever to be spoken by any human being. Getting out of oil and gas and into unproven technologies through the use of oil and gas revenues as a subsidy is far more radical than anything considered in the Preliminary Specification. People, Ideas & Objects, our user community and their service provider organizations see a viable, dynamic, innovative, accountable and profitable oil and gas industry, producers and service industry once the bureaucrats are removed and their authority stripped from them. For them to be giving up on oil and gas is the most radical thing imaginable. This is the point in which they’re irredeemable from. I suggest that the existing shareholders rip these revenues from the bureaucrats and use them to rebuild the oil and gas industry in the vision of the Preliminary Specification. That’s the alternative that I think should be on the table. The industry in its current configuration is on a steep downward trajectory with no effort to abate the decline and destruction to the financial, operational or political frameworks of the industry. Let’s take the bureaucrats at their word. They’ll not only “muddle along” but have declared they gave up.

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. 

The Tragic State of Affairs, Part II

 The one thing that People, Ideas & Objects have been able to prove over the past fifteen and one half years throughout our writings on this blog is our general concern for oil and gas. And the fact is the bureaucrats don’t care about the business. So if we talk about the tragedy that is the current state of affairs of the oil and gas industry the audience we are speaking to is everyone else as it's always been. All of our attempts to convince the bureaucrats of their need for action have been in vain and I really don’t expect any of that to have changed. Although bureaucrats have been put in personal financial and legal jeopardy. Enough jeopardy to materially impact their quality of retirement and the value of their personal holdings. Their ability to act remains in doubt and by giving them the benefit of the doubt, that they would act at some reasonable time and in some reasonable way, would be foolhardy on our behalf at any time. To be clear it must be difficult for bureaucrats to understand and appreciate the difficulties they’re in and to finally realize that they’re alone and their situation has become untenable. The speed of business today is blisteringly fast. The speed of the issues of the oil and gas producers officers and directors are facing are far greater than what humans could handle. Their organizations are dinosaurs in terms of what is possible. I am in no way soliciting sympathy for their cause. The traditional strategy they’ve employed would have seen them exit their role in the organization and avoid the fallout. I’m thinking they left this one too late and are unable to do so at this time. They’re trapped for all intents and purposes. If they should happen to leave the producer firms, they’ll lose control of the leverage they have in managing their personal legal and financial risk. . 

Enough of the bureaucrats, let's talk about the details. The past couple of months we’ve been able to document the demise of the industry in a number of series here at People, Ideas & Objects. They’ve painted a picture of the industry as it stands today from my point of view and although some may feel it’s a unique point of view. It defines a steep downward trajectory that accelerates unabated each and every year. My assertion that this has been in place for four decades can provide an understanding of the momentum behind its current trajectory. Much like a log rolling down a hill, catchable in its initial stages, becomes progressively more difficult as time passes. The future of the industry is what concerns me and how do we get to the point where the North American continent can consistently and profitably produce oil and gas to achieve and maintain energy independence. Where consumers are provided with the lowest possible cost of energy that keeps their economy as robust and growing to maintain its dominant position in the world. Imputing that producers would be dynamic and innovative in order to attain their profitability. Where the next six generations, or however long, of oil and gas exploration and production are maintained in a profitable and healthy greater economic environment where everyone can benefit and grow. To hand down an industry that is healthy and prosperous to each new generation for them to continue as the situation demands. 

We have suggested that the current environment that exists is the greatest difficulty that the oil and gas industry has ever faced. Not one area has been left undamaged by the inactions and purposeful ignorance of the bureaucrats. People throughout the greater oil and gas economy are the ones that have lost the most. They trusted the bureaucrats, and to a large extent many still do, the sting of betrayal is sometimes hard to accept. However, once the betrayal occurs there is no going back to the trusting relationships that existed before. Either the people who were betrayed will leave or the bureaucrats must go. It’s a simple choice. 

What is it that the bureaucrats are offering? I don’t know. I can not discern that they understand or appreciate their own organizational difficulties or much beyond their own skin. It is therefore fair and reasonable to project that more of the same will be happening. With the current trajectory there’ll be no volunteers willing to step in front to die for the cause. I suggested the producers were too far gone for the Preliminary Specification to get involved in the producer's business during July 2019 in the publication of our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” Maybe more people will now see my point. A fundamental rebuild of the organizations within the industry are what is necessary through the development of the Preliminary Specification to define and support the organizations necessary for a dynamic, innovative, accountable and profitable oil and gas producers and industry. Where we provide the most profitable means of oil and gas production everywhere and always. An appropriately researched solution based on the fundamental culture of the industry, the Joint Operating Committee. The legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. A ten year research effort that defines what the industry and producer firms would need to look like and how they would operate to adopt that organizational construct. The Preliminary Specification is the result of that research which is a 200,000 word, 12 module definition of a workable business model that functions in the way that a 21st century industry and organization needs to. 

And what is it that we now know about the bureaucrats that I honestly did not know at this time last year and only learned in the summer of 2020. It was in my June 2, 2020 blog post that I discussed a nuance and dynamic of officers and directors liability insurance that was at best brief. The logs to my blog blew up. It was one of many comments in the post and therefore I didn’t know specifically what it was that attracted all the attention. That is until Reuters told me on June 9, 2020 in their article entitled “Shale Companies Look to Bolster Insurance for Officers and Directors.” My naivety and stupidity hit me all at once. For decades I’ve been detailing the consequences to the industry and producers of the bureaucratic inactions. That's where I was being foolish. Bureaucrats don’t care. We can say with perfect clarity they’re only in it for themselves and the fact that they felt personal financial risk and legal jeopardy was the only cause to immediately upgrade their insurance. It also made me realize I had to change my focus. 

What proof did I have that this issue has been evident for four decades? Another good question that I’d never answered directly and one that I relied on my own understanding of the history of the industry. Therefore I set out to prove the overcapitalization leads to the commensurate over reported profits, which leads to investors rushing in to capture those profits, leading to overinvestment which produces overproduction. And as we further defined overproduction as unprofitable production. These are simple basic business principles. Then I stumbled in the most circuitous route imaginable upon a newspaper article in newspapers.com (paywall) that hit all the high notes. A set of July 26, 1986 Calgary Herald page 33 articles that document the desire of OPEC to work within the greater oil and gas market to deal with the consequences of low oil prices. The first article is entitled “OPEC Minister Can See Economic Destruction” and its opening paragraph is. 

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

But in Kuwait, the United Arab Emirates petroleum minister said OPEC has no alternative but an oil price war until rival producers agree to reduce output. 

This coming from 1986, which I assume means the overproduction was well in place for OPEC to have raised it as a concern, as they did in the article, as the justification for the war they had declared on North American producers, and the reason for flooding the market with oil till the price hit $10 U.S. I then noted that this was documentary evidence of these chronic business symptoms, that were discussed above, going back to at least 1986. I then noted the Preliminary Specification as a solution was published in December 2013. A solution that I have been working on in several different iterations of software companies since May 1991. The North American producers response to this, as it has been every day over the past four decades, was to continually increase production in a declining price environment, creating losses that would be offset by new investors being called upon annually to make up the cash shortfall. Shareholders that had been motivated by specious accounting that reported profitability throughout this time. 

If I, who am too thick to understand that bureaucrats only work for their own interests, could see the problem in 1991 and eventually develop a solution by 2013. Why couldn’t the bureaucrats just read the Preliminary Specification? But they did. I have a multitude of evidence of the interactions that People, Ideas & Objects has had with producer bureaucrats since the publication of People, Ideas & Objects Preliminary Research Report proposal in August 2003. This was the founding document that proposed the use of the Joint Operating Committee as the key organizational construct of a dynamic, innovative, accountable and profitable oil and gas industry and producer. The basis of the research undertaken to develop and publish the Preliminary Specification in December 2013.

Putting two and two together. If the issue was evident on a global basis in July 1986 why was no action taken by the bureaucrats for the past 35 years? We’ve seen in the shale era a further deterioration of the business into natural gas and last year's obscene oil prices. Yet, nothing but excuses, blaming, and viable scapegoats from the bureaucrats as they “muddle through.” Creative executive compensation however has placed oil and gas companies bureaucrats in the top three in terms of all industries. 

Shareholder litigation against the producers, and specifically the officers, has therefore begun. Exxon and Apache are currently the subject of several proposed class action lawsuits seeking certification. The SEC has begun an investigation into Exxon and is sending subpoenas to many of the shale producers. These investigations and lawsuits are either directly or indirectly on point to the issue of overcapitalization through to overproduction. The SEC investigated and prosecuted PennWest for the capitalization of operations and royalties which subsequently destroyed the organization. Clearly the SEC’s message was not heard by all the producers during the PennWest case and I’m not of the belief that this time the investigations and prosecutions will stop at a single firm. They’ll need to make an example of a much larger population of producers in order for the concept to stick. The point I’m making is that the bureaucrats' reliance on “our policies are within the guidelines and regulations” is nothing more than a viable scapegoat used for the past few decades to justify their overcapitalization of these costs. The SEC never issued any guidance stating that what has happened is acceptable. Basic business practices state that this would never be acceptable. Bernie Madoff’s prison sentence of 125 years states that this type of practice is never acceptable. That the culture of the oil and gas industry has developed to where this is acceptable by producers, by their CPA firms who are allegedly there to safeguard shareholders from such ludicrous actions, to such a scope and scale, for this long is going to go down in history as a primary failure of bureaucracy. 

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. 

The Tragic State of Affairs, Part I

 Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards de­struction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. No one can stand aside with unconcern: the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

-- Ludwig Von Mises

Professor Mises died in 1974 and should be excused for his sexism. Nonetheless this is what I consider my personal motivation in pursuing this task. Which allows me to ask what the bureaucrats motivation has been over these past decades other than personal financial gain. Their lack of professionalism has extended to all aspects of their positions. They were the ones that were responsible for the greater oil and gas economy. Oil and gas being a primary industry and therefore must take on a greater role in all aspects of the greater oil and gas economy. One where they understand how those revenues were earned and who exactly it is that’s responsible for making them happen. That begins with the drilling rig owner down to the clerk at the corner grocery store. What was it that we could have expected they could have done about the chronic boom and bust cycles that these bureaucrats literally sat through uncaringly mouthing the words “muddle through?” Lets not forget they had control of the revenues so they were fine. No one else had the authority to make the necessary changes, to look at the situation critically and evaluate why this was ever acceptable? It is not, and it certainly should never have been accepted in the 21st century. Yet here we are with the economic bust that defines them all. A full blown depression by anyone’s standards and one in which those in industry who were dependent on oil and gas, and in turn oil and gas can’t function without, really don’t care what it is the bureaucrats do from this point. We’ve all learned that they’re in it for themselves and are entrenched in those positions, spewing orders to everyone with the accusations of greed and laziness in everything they see and everywhere they look except in the one place it truly exists, the mirror. 

Everyone is now laughing at the North American oil and gas bureaucrats. Everyone now understands how the destruction has been carried out and who the winners were and always will be in their system. They’re not laughing so loud that bureaucrats can hear it, but people are now snickering behind their back. Bureaucrats tried to take this recent oil rally as a guide to the next boom phase. “We’ve seen this before, now is the time to capture the future.” they’ve always said. Except there was no commensurate hopping on the wagon this time. I’m not saying no one believed them, but absolutely no one believed them and how dare they try that same stunt again! The script is old and doing the same things again and again, expecting different results… How many times have they tried this routine? Producers shares did rally quite handsomely, however not as well as GameStops have. When playing in the shallow end of the bottom, sometimes the feeders will take a quick gamble. That does not imply they’ll be lining up to fund the next rounds of trillion dollar spending binges or have the wherewithal to do so. What the real investors see is an exit strategy that they never thought previously possible. It’s just like Christmas, they can now leave with some value and wash their hands of the bunch. Those producers who think they can maybe raise some capital off this new found strength should consider they’ve just priced themselves out of that possibility. They’re now too expensive and have clearly defined how far the downside can be. 

In contrast to my dire presentation there are the sycophantic media selling their share of the bureaucrats' story in this renewed “optimistic” environment. You have to be an optimist to be in oil and gas. There is never any doubt about that, but read this article in Forbes and ask yourself is this what’s really going on and is it possible? Are we just able to pick ourselves up, dust ourselves off and resume exactly where we were so many decades ago?

OPEC+ made their opinions known recently. Stating that they could increase the price of oil at will without a commensurate production increase from the North American shale producers. I’ll bet that stung a bit didn’t it. They didn’t laugh, they’re too solemn to engage in that sort of thing. What they know and understand is the extent of the damage that the North American oil and gas industry has sustained over the past number of decades is well past the remedial opportunities to deal with it. They know that to move forward with what exists today is not going to happen. The analogy of the car at the side of the road in the middle of nowhere, that has spewed oil from the crankcase for the past two miles isn’t going anywhere. And just as the bureaucrats continue to try, our car at the side of the road will soon have a dead battery too. The cupboards are bare, the service industry is unable to provide a compelling reason or valid business model to the investment community that will attract anything. Sound familiar? They’ll wait until the producers resurrect themselves, prove they can be consistently profitable and can pay for the work they want done. In cash, up front which will include the cost to build new capacities and capabilities. People only laugh after all the cash is gone, which occurs soon after the betrayal that’s been perpetrated on them. They lose trust, they don’t believe and they don’t need anymore promises or threats. They’ve been destroyed by them, it's time to pick up and move on with their lives and make what they can of what they have. Producers need to think in terms of generations, not immediate like just hitting the lights. And that's what OPEC+ knows that the producers are too thick to realize. The only resource the North American greater oil and gas economy has is a substantial, but diminishing, revenue stream of oil and gas sales to fund and rebuild the industry infrastructure that has been laid to waste. 

With the Biden-Harris regime fully installed now, any substantial investments made in oil and gas will at best be dormant for the next four years. Therefore why bother, says John Q. Investor. With the aptitude for change by the bureaucrats and status quo regime there is probably more downside in the wind for any investment anywhere in the North American oil and gas industry. The Keystone XL decision shows the Biden-Harris regime may be the most unstable and unreliable anywhere in the world at this time. And if something should happen to change from the Biden-Harris regime in the next four years, things will only go down hill further and faster. A very risky proposition. Maybe they could have kept a good relationship with the Trump administration and looked forward to that continuing in 2024. I can assure you that will never happen. Leadership has failed within the bureaucracy, and leadership has failed the American political system. It's time for everyone to re-read the quote in the first paragraph of this blog post. Relying on leadership now will continue to fail as no one person can conduct all of these impossibilities. It's up to the people in society to become active to make the changes in their lives and stop taking things for granted. Stop allowing these bureaucrats and politicians to take what is not theirs and destroying what is ours. Or give up. People, Ideas & Objects is wholly reliant on the individuals who make up the user community and their service provider organizations to make the transition to a dynamic, innovative, accountable and profitable oil and gas industry and producer. There is no one individual that can lead the charge. Individuals making up the difference in their daily lives must be the reason that oil and gas is rebuilt and the American political system doesn’t continue down the road that it is on. 

The overcapitalization issues are not difficult to comprehend. They’re covered in accounting 101 and make up what is considered basic business sense regarding accountings two key principles of timing and the accuracy of an organization's cost. The impact of shale is also inherently understood. The manifest failings of these two issues over the past had significant influence over the cultural development of the industry. A cultural division has grown over time where the accountants ability to assert the business issues doesn’t exist. The release of reserves value through further drilling is the business and the only business as far as the culture of the industry is concerned. The nuance of recording and reporting the accurate timing and recognition of capital costs of exploration and production are not a topic of discussion when “everyone” is following the SEC’s regulated requirements and are “building their balance sheets” faster than “we” are. This is how the goals and objectives became “putting cash in the ground,” “building balance sheets” and any number of other misguided adventures but never profitability, performance or productivity. 

The perfect example of this cultural distortion is none other than the Anadarko acquisition by Occidental. It is here that Occidental paid an enterprise value of $68.3 billion for the assets of Anadarko. It is these assets' history that had performed on Anadarko’s financial statements to the tune of $695 million in lifetime earnings. We have to remember that over the prior four decades the method of accounting in oil and gas was to recognize as much cost as possible as a capital asset in property, plant and equipment. The limiting factor to what can be recorded in that account is the valuation of the petroleum and natural gas reserves. If they, subject to a handful of discounts, were higher than the account of property, plant and equipment then all was well. (In 2020 Occidental was recording significant impairments to their property, plant and equipment account. I guess the reserves didn’t hold up.) Therefore the race was on to reach that reserves value by cranking up the spending machine by each and every producer in each and every year they were in business. Throwing in overhead and interest is still done today. Royalties and operations didn’t fare as successfully and some producers are no longer with us as a result. The point of increasing the capital assets in this manner has the equal and exact amount of increased profitability reported. Therefore the $695 million in lifetime profits is more accurately stated as significant losses. If that were the case then the producers would be incurring significant cash drainage! Which highlights the importance and need of the annual shareholders issuance that became the cultural expectation that solved the accounting deficiencies described here. When the deception of false profits are attracting new investment then the world spins on the axis of those who issue such specious financial statements. It does not, however, say positive things about those who pay the full price for reserves that never performed, and by the looks of it, never will.

What are Anadarko’s “real” lifetime earnings? No one knows but I think Occidental is beginning to find out. How could such a large $70 billion transaction be undertaken on this basis? The full year 2020 Occidental has successfully drawn down their debt from $84.4 billion immediately upon the acquisition in the 3rd quarter of 2019 to $61.4 billion. Revenues were down $5 billion from 2019 and Occidental recorded revenues of $16.261 billion for 2020. Creating a loss of $15.675 billion. Sure it’s all covid, however I’ve noted everything was well within Occidentals hands and they did not need to run the oil price to negative $40 or continue to produce through March and April at under $20. Just out of curiosity, why would you? And who’s fault was it for the loss and selling of that production into that market? The one thing about the virus in 2020 is that it gave the bureaucrats a viable scapegoat that lasted almost the entire year and did solicit some sympathy in some quarters. Therefore an overall successful, viable scapegoat, but it's 2021 now. What it appears to me is that Occidental paid for the future revenues of Anadarko to make the acquisition. What else defines this lunacy? And what are the prospects of this once great company? But then again, pick up any oil and gas producers report over the past decade and you’ll see the same behavior, the same performance with the same results. It’s old school. 

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. 

Critical and Final Decision Time

 It is now time for our good friends, the oil and gas bureaucrats which are the officers and directors, to make the most consequential decision on behalf of the industry. And to do so before May 31, 2021, the time in which producer firms need to proceed with the developments of the Preliminary Specification, our user community and service providers. That would enable People, Ideas & Objects to set a September 1, 2021 start date. A time in which to remake their producer firms and the oil and gas industry in the dynamic, accountable, innovative and profitable vision of what People, Ideas & Objects have defined in our Preliminary Specification. “Muddling through” has been incapable of dealing with the issues and opportunities that are ever present. The speed in which the industry is able to act and react, in addition to the loss of capabilities and capacities have been on accelerating downward trajectories. There is much to be done internally within the industry to shore up the infrastructure and begin operating in what we can all agree will be a far more challenging environment. 

The ERP systems in use today have been established to support and define the bureaucracy, at the bureaucracies direction, and we have detailed the history and motivation behind keeping those systems operational. Seeking to offset the threat that People, Ideas & Objects Preliminary Specification disintermediating the bureaucrats into full and permanent retirement. Just as every other bureaucracy in every other industry has, is or will face. The current ERP marketplace, as detailed on page 18 of our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale,” has not been able to support the oil and gas producers. With the existing, conflicted and self interested bureaucrats “muddling through” with inappropriate systems we are now entering an environment in the next half decade where the methods, speed, opportunities, issues, people, capabilities, capacities and a large variety of other variables will become comprehensively unmanageable within the current oil and gas industry. What we also know is that the wholesale destruction of the industry over the past decade has not stimulated the bureaucrats to even bother getting up off the couch. Any assumption that they’ll do anything about leaving the industry in better shape than now would be foolhardy. Bureaucrats are seen as not concerning themselves with their own producers businesses profitability or any of the issues that led to the 2015 investors strike. It is the same old, same old. That’s not good enough and will not be adequate for such a difficult future ahead for all of us. 

What appears to be happening and is being actively pursued in all industries is that Information Technology is fundamentally remaking all industries. These are predominantly in the planning stages with the goal of optimizing the IT environment to benefit the business materially by the year 2025. Leaving little time for action for the producers to act in their best interests, or alternatively, the bureaucrats can do nothing, mark their calendars for their December 31, 2024 retirement and resume their well worn position on the couch until then. The systems that are in use in oil and gas today are not doing the job as evidenced by the fact that the industry has fallen into such a financial disaster. Systems define and support the organization, bureaucrats wanted their bureaucratic franchise defined and supported, and that is what the systems providers were paid to do. They were more than willing to remain “blind sleepwalking agents of whomever would feed them.” Something that we have incorporated into People, Ideas & Objects business model to avoid. The compelling argument today that I find tosses the cat amongst the pigeons in terms of what 2025 will be like is the prediction by Oracle that there will be a five fold increase in the volume of data. For me that raises many concerns as to how an industry can function outside of a highly sophisticated IT environment. This increase in data is attributable to the implementation of the “Internet of Things” concept which is consistent with the needs of the oil and gas industry and the Preliminary Specification. For bureaucrats, they begin salivating at the size of the prospective growth of their empire and the difficulty that will be created in attempting to remove them at that time. Just a contrast in our two perspectives. 

Time has become the critical resource for all concerned. With billions and indeed trillions of dollars of value being wasted annually as a result of oil and gas’ “management” by the bureaucrats, time takes on an exponential value. I’d say time to the power of 10. There is also the question of the source of our energy resources being independent or foreign. They’ll need to come from somewhere. Someone explain to me what the bureaucrats plan is in the next five years to resuscitate the industry, infrastructure, service industry and its infrastructure and all the things we’ve discussed in the past number of years? I’m sure it will be an excellent document, as all committee based products are. Staffed with all the “right” people to ensure that the bureaucracy is made whole. After all one hundred years of bureaucratic history would never lead anyone astray. 

In our White Paper I stated I couldn’t do anything for the bureaucrats, they were too far gone in my opinion to save. Does anyone doubt that now? We are at a critical time where the Preliminary Specification may fail as it will be too late, as there will be little to no industry left in North America. Laugh all you want, bureaucrats have been enjoying the laughs here since 2005, and yet here we are in 2021! Is a total industry collapse necessary as the precursor to any rebuilding effort? Have we not learned anything from our history? Are we unable to invoke change? After May 31, 2021 I’ll have to assess the situation again. I see OPEC+ is of the same mind as I am. They don’t believe the North American producers will be capable of increasing deliverability in the $60 plus oil price environment. And therefore will continue to essentially ignore those who foolishly destroyed the market before, the North American bureaucrat. This achievement by our good friends the bureaucrats deserves our recognition and we’re therefore announcing another People, Ideas & Objects Participation Ribbon for each and every bureaucrat. They’ve now acquired a mighty handsome collection! Here’s a quotation from World Oil.

A round-up of data on shale drillers shows they’re sticking to their pledge to cut costs, return money to shareholders and reduce debt. If they stay the course, it would validate the OPEC+ alliance’s high-stakes wager that it can curb output and drive crude prices higher without unleashing an onslaught of supply from U.S. rivals.

These Information Technology issues being presented are being seen as a further existential threat to the deliverability of North American energy independence. The current U.S. administration and the man on the street will be cheering this on from the sidelines. Such is the world that bureaucrats have created. Nonetheless fewer people will be jumping in to help the industry as it sheds deliverability and is seen as a dying source of “dirty” energy. That is until it's too late and their sad reality bites. IT is also providing the opportunity to remedy all of these problems and get the ship back on course and sailing profitably again. Time being the critical resource of which the industry has none of. Only the Preliminary Specification, our user community and service providers can deliver a solution to the market on a timely basis. The only guarantee of success will be the level of participation that we’re able to receive from the industry as a whole. We can’t have people sitting back on the couch waiting for someone to deliver them from their mistakes, it’s a simple matter of leadership. Lead, follow or get out of the way. Industry therefore has to have some skin in the game. That means they have to use their primary revenues to begin this process and fund People, Ideas & Objects, or wait until June 1, 2021 and see what I come up with. Get on with it or continue to play the “Royal” victim like some Princesses do. 

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 LXIV

 The fourth quarter 2020 earnings of the producers continued the downward trajectory that we’ve seen over the past decade. This downward trajectory is in almost perfect symmetry with the trajectory of care and concern expressed by the bureaucrats involved in this business. How this approach continues with these difficulties with no recognition of the critical issues is beyond me. The belief in the effectiveness of “muddle through” is absolute. There was however an interesting trend that appeared in the fourth quarter. Just before the release of the earnings report there would be an announcement of a merger, divestment or acquisition of material size. These of course were designed to distract from the performance issues presented in the financial statements. Very effective I have to say. And for the first time I can remember in my life I’ve experienced two major producers, Occidental and Pioneer, claim the dog ate their financial reports, would not make their deadline and needed more time. That is they were unable to meet their previously announced deadlines and extended their release an extra week due to the Texas energy crisis. I’ve seen it all now.

All of our sample of producers that have issued audited financial statements have included Critical Audit Matters (CAM). (Definition provided below.) We expect the rest of our sample’s CAM’s will be seen in the annual reports and we expect to see all of them include the same CAM associated with the amount of depletion recognized in 2020. The industry has essentially been put on notice by the SEC that it is investigating Exxon and all the shale producers regarding their valuation of oil and gas reserves / assets. This being the issue that People, Ideas & Objects believes has led to the distortions and disruptions in the financial performance of the industry and a major contributor to what has caused its financial difficulties since 2015. It is an intrinsic part of the bureaucrats culture of “muddle through,” “building balance sheets,” and “putting cash in the ground.” That over reported asset valuations lead to commensurate over reported profits, which attract disproportionate investors which lead to excessive over investment in the industry causing overproduction of oil and gas commodities. These have been taken to obscene valuations and are represented on any and all producer balance sheets by their disproportionate size of property, plant and equipment. It is our belief that audit firms should have been dealing with this issue four decades ago. Their acceptance of the bloating and “building of balance sheets” and the culture of “you have to put cash in the ground” while on their watch makes them culpable and these CAM’s are the beginning of these audit firms house cleaning. A key issue that we’ve resolved within the Preliminary Specification, by our user community and their service provider organizations. Just one of the many issues which this community of software and services were designed to, and indeed, resolve. In addition we establish a solid footing for innovation within the industry. 

Critical Audit Matters

The Board is issuing this concept release to seek public comment on potential changes to the auditor’s reporting model based on concerns of investors and other financial statement users. Auditors, as a result of the performance of required audit procedures, often have significant information regarding a company’s financial statements and the audit of such financial statements, that is not today reported in the standard auditor’s report to the financial statements users. This information might be useful to investors and other financial statement users and could lead to more efficient markets and improved allocations of capital.

One of the more difficult aspects of the outsized nature of property, plant and equipment is the capitalization of overhead and interest that has occurred since the 1980s. Today the detail regarding interest costs is enhanced even further in 2020s fourth quarters reporting. With most of our sample producers now participating in the full disclosure of the treatment of interest costs. Many also reduced the capitalization of interest to zero in the fourth quarter. The detail of what and how interest costs are handled compared to many of the prior periods is very informative. I however still wonder why we never get any level of detail with respect to overhead costs? Overhead costs are capitalized on average by 85% in the industry. It's as I’ve repeatedly stated this is based on my knowledge and experience only. If any producer bureaucrat wants to educate me on what their specific practice is, I’m open to consideration of their facts. My email address is provided below and I see no harm in their being the first to do so! Although interest rates are very low, bordering on negative at times. The interest costs being incurred are becoming material to the producers for two reasons. 1) The revenues being generated are certainly not what they were, particularly in light of the soon to be incurred costs of rebuilding, refurbishing the infrastructure across the continent, and lets not forget the reclamation costs. All of these and more of the expected incremental costs of oil and gas exploration and production process were detailed in our series entitled New Cost Structures. If it is as we suspect that the valuation of these assets are becoming more suspect throughout the regulatory environment. Precipitating more rapid write downs in the future, leverage will quickly become an issue to the banks. 

But the interest paid will become more significant as the rates potentially go higher. The second point on interest rates becoming material is that since the November 3, 2020 election the ten year bond rate has increased by 113.67%. I assume the declared revisions to monetary policy by the Chairman of the Federal Reserve, being the democratic party's attitude of who cares about the debt, is having an effect on the market's perception of interest rates. This trend of increased interest rates, on top of the massive and detrimental effect that write downs will have on leverage may need to be sold as a feature in oil & gas and not a bug. People, Ideas & Objects identified the potential of escalating costs of money and bank leverage as potential crisis # 3 in our series New Cost Structures. We should anticipate this feigned attempt at honesty and transparent reporting to dissipate fairly soon as the demand for profits, real or otherwise, and the ability to produce them will require all the CFO’s tools to be on the table. That will demand the capitalization of interest to begin again, and the process of transparency will need to become more ghost-like. 

I don’t think at times producer bureaucrats fully comprehend the consequences and implications of the issues that I write about. Except I know they know better. Just for those bureaucrats that like to feign the inability to comprehend the tragic aspect of these CAM’s towards their future. They should ask the following questions, have all of the write downs been satisfied? Is the SEC satisfied now? Why have hundreds of lawsuits, some specifically citing the reported SEC investigation launched against Exxon, been started? Will the SEC look for the one scalp that will establish the example for all of the market to respond to. Just as they did with PennWest in September 2014 with their fraud charges for the ineligibility of capitalizing royalties and operating costs. The SEC has done the single violator example once now, it’s only reasonable that the industry did not take PennWest as an example to clean up their act beyond correcting the capitalization of royalties and operations. Therefore the SEC may feel they have to take the process further and extend their sample beyond just Exxon. The knowledge that subpoenas have been sent to other shale producers reflect only SEC fact finding inquiries at this time. Nonetheless, whatever happens with the SEC, the producer bureaucrats may not want to wait until the knock on the door before action is taken. Remember, “issue mitigated, nothing litigated” as expressed in our January 11, 2021 blog post. In addition their bank leverage is going to be increasing due to the reduction in assets as a result of audit and SEC regulatory actions. As it was quickly learned with the demise of PennWest and the prosecution of fraud of its officers by the SEC, capitalizing royalties and operations needed to be reversed quickly throughout the industry by all of the producers. Over the course of the time that we’ve been analyzing our sample of producers, which has been since the third quarter of 2016, the leverage of producer firms is getting more disproportionate by the day. A trend we see accelerating uncontrollably now. How much longer will the banks tolerate this erosion of their risk profile? 

If we take the proceeds from revenues less commodity purchases, transportation and production costs which make up the core of the costs of the producer we come up with the gross profit. These values are never in line, in my opinion, with what a productive, profitable oil and gas industry should be conducting. If we take our sample of producers for the 2020 year. Some may think the 2020 year was exceptional which it was. However these are all variable costs and would be the same percentage of revenues at whatever volume of production. Our sample of producers produced a gross profit of $51.6 billion in the 2020 calendar year. How inadequate the revenues of the producers is reflected in the overall loss of $60.7 billion, as reported based on the specious financial statements that I repeat chronically overreport profitability. This is usually where I’m told oil and gas is all about cash flow.

When considered over the life of the firm. A properly managed enterprise will produce x profit. The amount of that profit is dependent on the management of those assets and should be considered widely variable based on the quality of its management. It is also reasonable to assume that the life of those assets will produce, under an appropriate manager's hands, a similar profitability each and every reporting period. What can happen however is that the assets can be leveraged at any point within their lifetime to generate a reported profitability that boosts the earnings in the short term in order to enhance their position and standing in their community as a good manager. This may have been real valid profitability. Or it could have been specious accounting that did not recognize all of the costs associated with the reality of the situation. This latter situation creates a shortfall in cash that demands the necessity to be augmented in time with outside sources of cash to cover the alleged “profitable” periods that generate no cash. Over time, a firm such as this will have all but extinguished the opportunity to generate these false profits and be subject to the fact, as is the case in oil and gas, the property, plant and equipment account is disproportionate to all else and as a result will need to be drawn down much faster that would otherwise be necessary to correct the historical imbalance. Therefore creating losses that will be equal to the excessive profitable amounts reported on the basis of the falsity of those earnings reported earlier. 

Wise and astute readers may suggest that the fact that profitability was reported without cash will be offset by the periods in which losses will be reported with the generation of cash. And this would be the case in an appropriately managed enterprise. However, as we see the industry was not appropriately managed when the earnings were massaged to the short term, the softness of the management who believed they were superior managers were in reality pikers. Their best day would be to possibly manage the assets as a zero sum game. Which is what they’ve sort of been telling us for a few decades now. We must not have been listening or misunderstood their language. For me to understand or envision how they’ll suddenly become the requisite super-managers that are required demands that I assign a probability of 0%.

As was inevitable at some point, producers will be reporting greater losses than our model for the industry would have reported. Yet remain reporting significant losses under any basis of their management. This becomes inevitable over time as organizations grow older. The young organization may create the opportunity for the greater volume of the deferral of the depletion. As the organization reaches mid age, the amount of depletion begins to increase in excess of what “would have been” required due to the need to catch up with the need for more appropriate reporting. 2020 seems to be the definitive time in which we’ve crossed over that threshold. 

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.