What's the Motivation for Production Discipline?

 The source of all the difficulties within oil and gas today is the lack of production discipline. Producers produce everything they possibly can at 100% capacity, all of the time. In what is known as the high throughput production model, maximum volumes are used to offset the firm's high fixed overheads. Never was the question asked if this was the appropriate model to use where the commodity produced was subject to the economic characteristics of a price maker. The objective of the producer was to attain the necessary production volume in order to sustain profitability once they were able to break even above the costs of their overheads. In none of the producers did this momentum ever occur as the price of the commodities were continually eroded due to the chronic overproduction, or unprofitable production as we call it, throughout the North American marketplace causing fundamental breakdowns in the prices of these commodities. Making profitability all but impossible. Therefore accounting “methods” were adopted to make it appear as if the producer was achieving the much sought after profitability by capitalizing the majority of its overhead and interest costs. The total amount of overhead that was and is incurred is unknown and unknowable as a result of the decades of the opaque nature of the systemic capitalization and reporting across the industry. In addition, annual shareholder infusions of capital were able to temporarily offset the deterioration and destruction of value as a result of selling their products below the costs of exploration and production, everywhere and always.

This business model of the producers was augmented by the “pressure” that if they did not meet their production target increases for the year they would immediately lose favor with the investment community. This happened to many producers and the event was usually terminal for said producer. This pressure existed in order to have the producer firm achieve the size it needed to become sustainable in the shortest period of time. If the failure of one year's production volumes was not attained that showed one of two possible scenarios that were impossible to overcome in the short term. The management was no longer up to the task. Or the properties they’ve chosen would never be able to achieve their chosen momentum to sustain the organization. Both of these being clear indications of long term failure. The question therefore that needs to be asked today is; for a primary industry such as oil and gas in the 21st century, is the high throughput production model appropriate? The investors had adopted, and were imposing the production growth demand, based on the producer's “cash flow” focus as their primary factor of concern. Profitability wasn’t the issue or the purpose in this high throughput production model until such time as the producer attained the overall sustainability they sought. This is commonly referred to as the “growth model.” A damn the torpedoes and get this company built type of scenario so that we’ll have a business in the end. Once again my question, is oil and gas as a primary industry, a growth industry in the same mode as technology, biotechnology or other growth industries?

I’m not of the opinion that it ever was a growth industry. The misguided adventure of the bureaucrats focusing on cash flow was the beginning of the end of the industry. Putting the industry on this treadmill was destined to experience the fantastic destruction and devastation that would eventually occur when the commodity prices were subject to extreme price variances from small changes in production and inventory. Or the technical qualification of a price maker. The other aspect of a price maker is that new production will only be brought on stream if it’s profitable. And profitable in the real sense of profits where all the costs that were incurred in the process of exploration and production of oil and gas were accurately recorded on a timely basis. This did not happen with the capitalization of costs of every type being stored on the balance sheet for decades in order to “build the balance sheet.” I guess the ultimate objective was “to the moon.” The demise of the industry was orchestrated with the commercialization of shale based technologies across the industry in both the oil and gas sectors. Shale’s high capital demands, vast reserves exposure and rapid decline rates were toxic to the high throughput production model. Exacerbating each of the symptoms of the production discipline problem as defined here and doing so in dramatic fashion. 

Clean energy is the most recent strategy selection of the industry to deal with these issues. Although we can’t discount the fact that they may be correct this time. I have a strong personal bias and preference for other solutions. It could be argued that the lack of focus on oil and gas will diminish the supply of the commodities and therefore increase the prices and profitability of the producers. Unquestionably, and so much for supplying the consumers with a ready supply of available and affordable energy. While producer bureaucrats are analyzing and speculating on the means and methods of reduction in the atmosphere of CO2 emissions, to ensure we never cross that bridge too far of xyz parts per million, the business of the oil and gas business will continue to be mismanaged for their own personal purposes or forgotten. The scope and scale of productivity through the willful act of bureaucratic navel gazing will always turn to the obscure and irrelevant. Accusations of chronic blaming, excuses and viable scapegoats, such as I have accused them of, are rendered inert when the atmosphere is turning allegedly poisonous. 

What is the solution then? We need to focus on the problems at hand and forget about those issues that we have no influence or control over. Consumers consume oil and gas in the process of economic production, transportation and heating / air conditioning among many others. If they choose to give those up then that will be their choice. Oil and gas needs to begin profitable operations and rebuild the industry brick by brick and stick by stick from the remnants that remain. Supplying the market with abundant, affordable energy from a healthy prosperous industry. Something that it has not done and refuses to listen to their investors who demand it. Before too much more is lost in terms of the capacities and capabilities of the producers and the service industry that are absolute extensions of the producer organizations. We can’t and will not be getting to the place we need to be as an industry in order to fulfill that objective in the condition we’re in, the lack of any viable plan in place and the leadership that is off chasing the ultimate viable scapegoat to cover their lies, deceptions and inactions. As I indicated on Wednesday, even the press is mocking Exxon for its attempt to act out a rival proxy battle. Next time maybe hire actors. 

Mike Tyson said that planning was effective right up to the first punch. And that is always the case. Plans are always never what come about and without the ability to make changes and accommodate the reality of the situation you’re either really frustrated or will find that people are laughing at you. I have a plan, I’ve called it the Preliminary Specification. Lately I’ve been less frustrated and no one seems to be laughing at me anymore. You should have seen it before 2010. We also have our user community which has the full scope of authority and responsibility, what I’ve summarized as the power to make the changes and build out the Preliminary Specification as the facts on the ground dictate. I have personal knowledge of probably a dozen specific jobs in oil and gas. That doesn’t do anyone any good when there are probably 12 million people working in these industries. Our user community will be in consultation with them during their work. Without a broad and diverse user community with access to the broader industry knowledge you’ll never have usable quality software that is of any value. At the same time our plan gives people a road map, a vision of where we want to go, what we want to do and the plan or model on how things will be fixed. Throwing vast numbers of people together without a plan as to what will be done and what is needed has proven to be a bureaucratic failure in oil and gas. Our plan is the Preliminary Specification. 

What the Preliminary Specification does do however is set out in broad strokes a vision of how the industry will need to solve the issues stemming from the systemic lack of production discipline. It removes the high throughput production model and replaces it with the decentralized production model centered around the Joint Operating Committee. The legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the industry. When we move the compliance and governance away from the bureaucracy and align it with the seven frameworks of the Joint Operating Committee. As a result we achieve a speed, innovativeness and profitability that we seek in the producer firms. 

Our decentralized production model turns all of the producer's costs into variable costs based on production. If the property is not producing it will not be incurring any costs and as a result will incur a null operation, no profit but also no loss. Ensuring that the producers are achieving their highest level of profitability when they’re not diluting their profits with unprofitable properties. Saving those reserves for the time in which they can be produced profitably. And those reserves will not have to consider as additional costs the losses that would have been incurred if the property continued to incur losses. Commodity markets will find the marginal price of the commodities when the unprofitable production is removed. Bureaucrats have accused me of devising a system of collusion. Which clearly indicates their level of business understanding. If making independent business decisions based on detailed, actual, factual accounting information at the property level is collusion? I’ve misunderstood something, but then, I would also never sell oil for negative $40. Marginal prices in the commodity markets will increase for the entire market across the continent. Establishing a new dynamic in determining what production is needed in the market. And the producers themselves will have to justify the expenditure of capital costs to ensure that they’re able to achieve profitability in order to bring those into production. Introducing a new capital discipline across the industry. 

And here is the new motivation for the industry to ensure production discipline is achieved and maintained. Profits, without profits producers will not attract investors. It will be the most profitable producers that attract the most investors. It will be the producers with the greatest production discipline with the highest profitability possible in their organization. Whether that is at 20%, 50% or 100% of their production profile is irrelevant. All of their costs are variable and based on the commodity prices offered, their production profile will change to ensure that all production that is produced is profitable at all times. 

The method that this occurs in the Preliminary Specification is contained within the name of the decentralized production model. The global business community is being disintermediated by Information Technology based on decentralized business models that deliver value in fundamentally new and innovative ways. Bureaucrats themes of centralization and consolidation are the odd man out in these scenarios and are actively choosing to fight the forces of disintermediation in order to sustain their personal gravy trains for as long as possible. Even at the tragic expense of the health of the industry and all those that were and are wholly dependent upon it. The scope and scale of the damage and destruction to the capabilities and capacities within the industry will take decades to recover. Issues such as how do Schlumberger and Halliburton return to the North American market? That’s easy, producer cash, paid upfront with no strings attached. At times like these it’s best to remember that the bureaucrats say they’re fine and they thank you for asking. 

People have actively stopped laughing at me as they did prior to 2010. They don’t say the Preliminary Specification is impossible anymore. Just difficult, and question whether it’s really necessary. I certainly have given the bureaucrats as much time as I think they need. Any more time is counterproductive, costly and depreciates the value in the industry further. Now that I see the press mocking, and in a sense laughing at Exxon during their 2021 Annual General Meeting on Broadway. It took me eleven years to go from laughing stock to “huh, who would have thought!” The only question I have is does that mean Exxon and all our good friends, the bureaucrats, will need to follow the same timeline in order to regain their credibility? 

The only solution as it stands today, from a creative destruction point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industry revenues away from the development of initiatives such as the Preliminary Specification. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

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. 

Misguided Angel's or Devil's Incarnate

 I was thinking back to the 1960s when we would look towards where downtown Calgary should have been, and although only about five miles away, we were unable to see it. On windy days you might see the tops of the buildings but the full view only came on a late Sunday when traffic had been quiet for a few days. The pollution was horrific. Today you can see downtown from pretty much anywhere inside or outside of the city at any time of day of the week. Such is the nature of our environmental progress. Pollution as it was in the 1960s isn’t an issue today. Even with almost 4.4 times the population today compared to what it was in 1965. Therefore the “scientists” needed to create a new issue for the politicians to focus on. Environmentalism is what occupies the agenda in monopolistic fashion. I’m not against the environmental push, it is what resolved the pollution issue in the 1960s. A situation that would have become far worse than what we see in China today. I just don’t think it's a crisis that needs to be resolved through a fundamental remake of our economy and culture. To eliminate the pollution of the 1960’s was a constant push, but it never occupied the hysteria or priority that today’s agenda sustains. So many predictions from the “scientists” these past number of decades are concerning, especially when none of them have been validated. It appears to me to be a ruse in order for the politicians to access vast amounts of money and control from the economy. Democrats haven’t conducted themselves in any constructive manner in the past six months. Or is that six decades. 

What we’re unfortunately witnessing is big business in cahoots with the power grab of the democrats. Whether that is Delta or Coke, or any of the hundreds of other major companies that have piped in to comment and throw their support behind either pro environmental or political initiatives. Die hard entrepreneurs such as myself who believe in capitalism are reallocating the role of big business into the same category as the communists. The other consistent theme is big business’ focus on the environment as a result of CO2, which is not a pollutant. Can’t be seen, smelt or known to exist by anyone other than the most sophisticated “scientist.” Their models suggest we’ll all be dead in 12 years and need immediate triage to save ourselves. There is never any consideration that there’s a natural cyclical climate change, but they sure exploit that fact. They also seem to exploit that every person has a ready accessible hand held camera. The role of “science” here is somewhat consistent with the role that “science” has played in our lives this past year, inconsistent. The only difference is that we don’t have Dr. Anthony Fauci involved. Who is now stating that the Wuhan lab is the probable source of the virus. It is also now known that he had directed American funds, in unauthorized fashion, to fund Gain of Function research on Bats at that lab. And he is now found to have written in 2012.

In an unlikely but conceivable turn of events, what if that scientist becomes infected with the virus, which leads to an outbreak and ultimately triggers a pandemic? Many ask reasonable questions: given the possibility of such a scenario -- however remote -- should the initial experiments have been performed and / or published in the first place, and what were the processes involved in this decision?

Scientists working in this field might say -- as indeed I have said -- that the benefits of such experiments and the resulting knowledge outweigh the risks. It is more likely that a pandemic would occur in nature, and the need to stay ahead of such a threat is a primary reason for performing an experiment that might appear to be risky.

Within the research community, many have expressed concern that important research progress could come to a halt just because of the fear that someone, somewhere, might attempt to replicate these experiments sloppily. This is a valid concern.

In possibly a pertinent and related article by Virol, J. 2005; 2;69. Published online 2005 Aug 22 Entitled; Chloroquine is a potent inhibitor of SARS coronavirus infection and spread.

We report, however, that chloroquine has strong antiviral effects on SARS-CoV infection of primate cells. These inhibitory effects are observed when the cells are treated with the drug either before or after exposure to the virus, suggesting both prophylactic and therapeutic advantage.

And

Conclusion: Chloroquine is effective in preventing the spread of SARS CoV in cell culture. Favorable inhibition of virus spread was observed when the cells were either treated with chloroquine prior to or after SARS CoV infection.

We can stop the investigations into the source of the virus, we’ve found it. It was Dr. Anthony Fauci. The number one superstar hero of the media. I guess he has an affinity towards Bats. Genuinely likes the Chinese communists ability to hide things. And due to the fact that congress had shut off all funding to Gain of Function research. Fauci had to therefore indirectly fund the Wuhan Bat virus’ Gain of Function researchers into what Fauci identified as “an acceptable risk of a pandemic.” If you felt the purpose behind the corona virus was questionable. You’ve now been proven absolutely wrong. It had a decidedly positive purpose in terms of the scientific experiments that were conducted on you in order to better understand the virus. Dr. Anthony Fauci who was responsible for ensuring our safety was the father of the virus, understood that HydroChloroquine was a prophylactic and therapy, felt the risk of a pandemic was acceptable, illegally funded and conducted the Gain of Function experiments in China, hid these facts, denied that HydroxyChloroquine was an effective therapeutic and lied to us throughout the past year on a thousand different points of what the “science” involved. The cheerleading media is just as culpable. Big tech too. You and I have never been anything but experimental lab rats all this time. The government seems to want to have total control over us. For government funded lab experiments and such. Back to the point of this blog post and the issue at hand. Back on May 7, 2021, barely a month ago I stated.

Clean energy transitions are all the rage in oil and gas. Producer bureaucrats have been committing to the transition in hoards this past year in an attempt to outdo one another, please note it’s never on the basis of any performance criteria. It’s just the place to be, and if you’re not there, get your press release drafted quickly or hire a public relations firm before your Annual General Meeting. “Sophisticated” producers will have those greenpeace demonstrations and “smart” investors making their green new deal talking points well known during the Annual General Meeting question and answer period. Rallying support for the cause and the diversion of investment that must be considered a necessity when the “issue” is so prevalent in consumers' minds. Don’t fall for it. Outside of the producer firms talking points and Biden’s latest trillion dollar spending bill there doesn’t seem to be too much investment happening in the clean energy “industry.” Maybe it's all make believe? If Warren Buffet’s Berkshire Hathaway does not receive shareholder approval to file annual environmental reports. Where the voting was 75% against, I’m certain that oil and gas producers unauthorized diversion of their revenues into clean energy will be fine, don't you?  

It should be noted that electrical energy is one of Berkshire's four “Jewels” of their investment strategy and makes them the fifth largest utility in the U.S. Their electrical generation is derived 24% from the burning of coal and 32% from natural gas. Yet they can’t even get their shareholders to support enhanced environmental reporting!

The major producers AGM’s are in the bag and most of the majors passed with changes to their drive towards clean energy. Exxon lost two board seats to an unheard of environmentally focused “Engine No. 1” hedge fund of miniscule size, though with a strong team. Engine No. 1 holds 1% of Exxon common shares. Proxy fights have been impossible to achieve any success against management for decades. Just ask Carl Ichan who is famous for his battles. He doesn’t necessarily win the actual proxy fight the first time around. People don’t necessarily vote their shares, therefore they’re by default deferred to the management of the firm to vote in the manner of their choosing. These percentages are usually well in excess of 50% but short of the percentage necessary to have a ruling put in place. This precludes those that launched the proxy battle from gaining the required percentage of shares voting for those that launched the fight. Carl Ichan and other corporate raiders have other means in which to involve themselves in their targets in order to achieve their influence. Proxy battles are for show and inexpensive marketing of the Icahn brand. Therefore it needs to be asked why did Exxon management vote to have Engine No. 1 directors put in place? Or alternatively show me the vote count. For practical purposes Exxon’s share distribution is 53.47% of the float is held by 3,213 institutional investors. These shares are normally voted prior to the meeting and they’re known by management. Read the dialog of the Exxon meeting from this Forbes article and explain to me why you would think it wasn’t “play acting,” that it didn't have a “banana republic feel to it” or just good old “comic relief.” 

The Vote’ is a monumental and innovative theatrical achievement. This compelling human drama is Shakespearean in its depth and breadth while also being part musical, part improv, part comedy, and part theatre of the absurd. It even has some western partner dancing. At its heart, the play is a classic Greek tragedy with Darren Woods as the protagonist. He delivers a breathtaking and memorable performance as director and lead actor. ‘The Vote’ gets my vote as the best play of a shareholder meeting I’ve ever seen.”

The point I’m making is that Exxon’s management, as was Shell’s loss in its court case, one which will see them “forced” to reduce theirs and their suppliers environmental footprint. Appears to conveniently be directed to support clean energy investments. No discussion of performance. No expectation of performance from clean energy. Just the fact that all of the oil and gas bureaucrats can now hang their hats on this one vote and judgement to say that this was their day of environmental reckoning. Oil and gas has collapsed to the point where the press is actively mocking their attempts to deceive us. I just call them as I see them. A fundamental misrepresentation of the facts. The kind of misrepresentation that we’ve been subjected to in the other big “science” experiment that we’ve been in and were the lab rats for, “The Dr. Tony Fauci Pandemic.” They realize they can’t control us at the end of a gun barrel, therefore fear is all that’s left in their toolbox. Starting these epidemics of fear by introducing them in the schools.

This new act is nothing more than the same as before. Oil and gas bureaucrats want unfettered access to the oil and gas revenues in an unaccountable manner. And that is how all of these things start, it always starts with the unauthorized use of funds. In order to do as they like in their exploration of creative executive compensation. If they had any interest in performance they would have indicated that decades ago. Our “Betters” do not have our interests in mind. They want to tell us what’s right for us in a dictatorial style. Through lies and misrepresentations of their actions and desires for us. To take the value we’ve earned in society and to keep it for themselves. This absolutely and unquestionably disqualifies them. Political accountability must return, they work for us. Their deferral to scientists is inappropriate. We did not elect scientists to do these things to us. The media has diverted our attention away from these despicable acts and are therefore culpable too. Big technology has been instrumental in silencing other voices and provides only one side of the argument. Big business came out against the people in what was an attempt to rectify issues in the past election. None of this should be considered normal outside of the former Soviet Union. It is wholly unacceptable now. What we are witnessing is the end of what we considered the “enlightened age.” The time when common sense and logic prevailed. We can not afford the oil and gas producers taking this opportunity to feather their nests further with absolute unaccountability. Already there is talk that there will be far less drilling and field activity in North America. All the more money for the bureaucrats, and far less resources at affordable prices for us. I can see tomorrow’s headlines, “Oil and gas producers committed to clean energy, despite their repeated failures.”

The fact of the matter remains that we need to question the overall motivation of these “scientists and environmental activists. Expressed in man hours per barrel of oil we are currently leveraging each barrel of oil equivalent to produce 23,200 man hours of effort. This has been the result of standing on the shoulders of giants and building on the brilliance of those that came before us. The 21st century offers a new paradigm for building value for society. The leverage of intellectual thought. Just as we’ve mechanically leveraged the use of oil in the centuries before, we will spend our time determining how to expand our capacity and capabilities to process more and faster than ever before. In the decades to come maybe we’ll be able to double or triple the effectiveness of the number of man hours of effort per barrel of oil. Consider for a moment what would happen if we were unable to provide for the supplies demanded by our economy. The fact is it will be the largest consumer of oil and gas that will be the largest and most powerful economy in the world. Are we willing to cede that position to others willfully in pursuit of what may very well be another Dr. Tony Fauci scale lie? Oil and gas needs to refocus on the pursuit of profitability and ensure that the market is adequately supplied. Others will determine what it is they’ll do with the product and the efficiency with which they use them. When and if the climate becomes a trillion dollar market entrepreneurs will flood the area. Ours is a simple task yet the bureaucrats have capitulated these responsibilities to their greed and self interest. I say enough, one political leader will never be able to solve the myriad of issues that are suddenly upon us. We all need to start pitching in to make sure that these people are no longer successful at lying to us and misrepresenting what it is their actions have been. If we accept this, we are only inviting more of it. As I’ve stated before, in two years time which one of us will be the bigger fool, us or them. 

The only solution as it stands today, from a creative destruction point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industries revenues away from the development of these initiatives. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

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. 

People, Ideas & Objects Capital Structure

 Although there is good news for producers that bolsters their optimism for the future. The good news doesn’t last much more than an hour or two. The bad news that is announced is ignored and not considered in the topics of discussion so that “boom” can be the momentum that sweeps the industry, once again. Bad news such as the probability that sanctions will be lifted leading to an additional 1.6 mm boe exported from Iran and Nordstrom 2’s imminent completion, all but delaying the European LNG import market from developing at this critical time. We should never speak of such negatives.

Historical analysis of the past 30 years that People, Ideas & Objects have been in the market for oil and gas ERP systems, is a worthwhile exercise for determining what has happened to oil & gas and why their difficulties will continue. It has a lot to do with how the bureaucrats approach the news that I’ve laid out here. They only celebrate the short term victories and ignore the protracted long term difficulties for another day. “Another day'' never comes about because there is always more good news to discuss. Most will assume this to be a happenstance occurrence, though after decades of watching this I see a rhyme and rhythm in the methods of the bureaucrats. There is a long term strategy and plan in place. It doesn’t have anything to do with the producer firms themselves. In Calgary by the time the May long weekend comes about, the streets are cleared of gravel and the Ferrari's, Porsches, Bentleys and Lambo’s are taken out of hibernation. The number of them this year was truly amazing. Might be due to the lockdown causing a greater itch to get out. Many people noticed and commented about it. Is this maybe where the money went? I do not deny the perks of what one earns in life, I’m only suggesting that they earn it by building value. We have offered the Preliminary Specification to the bureaucrats and they have denied interest due to the fact it disintermediates them from their source of personal wealth generation. The Preliminary Specification has a value proposition in the trillions of dollars which can be readily understood how this value comes about as a result of the bureaucracies disastrous management. Bureaucrats will not invest in the producers business to enhance its profitability. What does this say about them? 

In the early 1990’s when I began this adventure it was a different business in the oil and gas ERP market. The number of ERP providers was at least 20 and it was a vibrant area with much activity. Today it’s a ghost town that resembles a decrepit old mining town that was never built to last. Only one decrepit old person still lives there with a portable generator to power his computer and post to his blog on the InterWebs. All the “big guys” were the first to move out. IBM, Oracle, PriceWaterhouseCoopers left out of frustration in dealing with bureaucrats that refused to pay for what it was they used. Alternative solutions were then financially engineered under the “consolidation” method with P2 Energy Solutions now providing the bulk of the industry with their software. We can assume they make a living however they’re on a tight bureaucratic leash. Subject to a business model that enables them to provide for whoever feeds them. What we can be assured of is the failure of the oil and gas producers and industry is also a failure of the ERP systems used by those companies in the industry. (Note P2 have done the best they could with the limited resources provided by the bureaucrats. They are good people working under impossible conditions.) If producers were using appropriate systems would the industry have failed so spectacularly? From the oil and gas bureaucrats point of view we need to ask is this a failure? In what sense would they consider it a failure?

In terms of using a first tiered ERP systems provider the producers do not have the concern that their accounting will be reliable and transparent. That is a bureaucratic positive. By keeping P2 on a starvation diet ensures that no major software developments will be undertaken by them to improve that situation, and P2 will also be the lowest cost solution. A double positive for the bureaucrats. Lets add an extra positive here as it also avoids the direct threat of disintermediation that Information Technologies are causing other industries everywhere else. After all, the bureaucrats are just trying to “muddle through” a difficult situation, not of their making! Another positive for the bureaucrats. I could go on but I think I’ve made my point. The consequences of this history and what has been experienced in the oil and gas ERP marketplace is the investors behind those 20 solutions and initiatives have walked away with their heads handed to them. A history, legacy and performance that satisfies the bureaucrats just fine. One that doesn’t hold them to the higher standard that a first tiered ERP system would instill. One that would cut through the opaque nature of oil and gas statutory reporting. One such as the Preliminary Specification which uses as its base the Oracle ERP Cloud / Oracle Fusion Applications. What they have is a history, legacy and performance that doesn’t instill the desire to have any competition to P2 being fostered and developed that would challenge bureaucrats organizationally. These methods formed an effective block towards any ERP systems development progress. That has to be considered a bureaucratic success.

We recently documented the vision of producer consolidation being orchestrated in the industry today. With all of its attributes and features that benefit the broadening and deepening of the bureaucracies. Remember bigger bureaucracies are better! We know from our research that organizational structures are defined and supported by the ERP systems that they use. They are therefore also constrained. The unchanging ways of the ERP systems the producers have used over the past thirty years are therefore testament to the establishment and security of the bureaucracy throughout the oil and gas industry. What we see today is that bureaucracies have a well defined and detailed vision of how their consolidated business models ERP systems will provide the value generation necessary for that profitable and prosperous future. These are backed up with a comprehensive and deep understanding throughout the culture of the industry on what is needed for them to make these changes. Sorry, my mistake, I keep forgetting only People, Ideas & Objects have provided these with our user community vision and Preliminary Specification. 

ERP systems providers have always been approached and managed this way, it is reasonable to expect this will always be the methods and means that oil and gas bureaucrats approach the issue of accountability and integrity of their accounting, and the development of their ERP systems. With one significant caveat. They will do so under their management and control. In other words internally, where each producer is actively involved in their own systems development. Incurring the same costs as the other consolidated producers in equal and exact proportions and with the exact features and functions. All to gain no distinct competitive advantage. Their way of conducting their business is just that near and dear to their heart. 

For myself, continuing to throw money at the wall in an attempt to secure a position in the oil and gas ERP market space would be futile and a waste of valuable resources. Seeking the volunteer efforts of people within the industry would be a disastrous pursuit as it would capture the substance of the issue and its solution, only to attract the bureaucrats attention and a waning interest in the participants. Subsequently any initiative would have died on the vine, never to be resurrected and we would have provided the bureaucrats with a list of “culprits'' they needed to attack. A new approach was necessary and one that would deal with the realities of the situation as defined here. An approach that considered what was possible in terms of the Information Technologies on offer as a result of the deployment of the Internet. That adopted the necessary and only method of quality software developments, user community participation at its core, enabled through a powerful user community vision. A new architecture, organizational structure and design that dealt with the issues and opportunities of the oil and gas marketplace. The Joint Operating Committee which is the key organizational construct of the industry, the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of “what” and “how” everything is done in the industry.

When I began this work in 2003 I was pleased that I had resolved what it was that was compelling me to work on a software solution for so long. I was never able to clearly express or articulate what it was I was doing. After September 2003 I was able to state unequivocally in my mind that I had found the key to the solution, the Joint Operating Committee. The kindest response to my declaration was “what’s the issue.” For most of the rest of the world it only confirmed what they had suspected for many years. Nonetheless it needed work. To take it from the idea of using the Joint Operating Committee and conduct the research necessary to make it a viable, workable business model. In my defence this type of work can only be undertaken by one individual. It is hard grueling work that needed to prove that both the industry and the producers could be configured and supported by software that would function and enable the producers, industry and service industry to prosper in a new model. Answering the question would it work and provide value in a coherent manner. I believe that question has been answered in the Preliminary Specification. The needs of our user community came next and we began that work as our first priority in the first quarter of 2014. Publication of our user community vision was the beginning and we have established our user community as one of the three key competitive advantages of People, Ideas & Objects. Subsequently the ripening of the situation and issues in the oil and gas industry. Issues that are currently being well defined in the financial destruction at the hand of the bureaucrats. This destruction is close to being complete, it will not stop until bureaucrats are removed through either creative destruction or disintermediation. It is here we stand today with these three necessary components of the four ingredients to put the industry back on a successful trajectory. 

The fourth ingredient is of course the financial resources necessary to complete these software developments. People, Ideas & Objects, the organization that I have assigned my copyright to commercially exploit this Intellectual Property, is unable to provide the assurance that any investor we take on would make any money in oil and gas ERP software. Banks are allergic to software in general. And small market products, being the number of saleable items / the number of producers, are of no interest to venture capital. I therefore own 100% of the copyright of this research and product as represented in the Preliminary Specification. And the majority of People, Ideas & Objects. I am patient and some would say stubborn. Money wasn’t what motivated me. I had to get these ideas out of my head so that I could live in peace. That has been accomplished and would certainly appreciate the opportunity to finish. But that may not happen. We have an obstinate opponent who has all the necessary financial resources to sustain their obstinance and lifestyle.

Newt Gingrich has a quote regarding the efforts of Winston Churchill throughout the decade leading up to WWII. Churchill was ostracised and vilified for his constant attacks on Hitler throughout the 1930s. Gingrich stated “Churchill ultimately came to power (as Prime Minister of Britain) not because his arguments won out, but because reality caught up to his arguments.” This is the method in which difficult tasks are undertaken. We may not be where we need to be yet, but the bureaucrats are farther away from where they were comfortable and once in command. What we are doing may seem impossible to most people, however they should have joined me in September 2003. All I can say is that I’m glad I’m nowhere near that place anymore. 

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. 

They Put the Viable, in Viable Scapegoat

 Last summer People, Ideas & Objects began a campaign to point out the associated personal risks to the bureaucrats of their inactions over the past decades. Highlighting the length of time the issue of overproduction had been present. Noting the date in which our solution in the form of the Preliminary Specification was published. Last week we noted how these bureaucrats have suddenly acknowledged that the oil and gas commodities are now in fact price makers! The critical and necessary change in an underlying assumption of how the industry has been operated and how this overproduction issue has existed for thirty five years. We had also been discussing the legal risks bureaucrats had placed themselves in as a result of not acting on the issue or our solution. And that by building the Preliminary Specification, it would provide bureaucrats with the ability to state “issue mitigated, nothing litigated” as a strategy to fulfill their fiduciary duties. We could see this wasn’t motivating them and therefore flipped our strategy to “nothing mitigated, issue litigated.” If they're not interested in working with us then that is their choice. What is clear now is they’ve chosen to pursue that strategy of mitigating their personal risks by implementing the price maker assumption within their consolidation business model and strategy. Although we appreciate that they appear to have begun to listen to us. The question we need to ask, on their behalf is, will it be adequate to resolve chronic overproduction?

Let me first add my two cents to the argument and assure everyone, and I am willing to provide a guarantee for this, that the consolidation business model and strategy will be effective in dealing with the chronic oil and gas overproduction issue. As we’ve seen before, as soon as the oil price dips to negative $40; bureaucratic action replaces words and some production will be shut-in without any excuses. Or was it the refineries refusing to accept any more product? This is the threshold in which they’ve proven to find acceptable before and as we note in the remainder of this post, is the cultural, systemic and bureaucratic way of their future. What I think needs to be asked is, how did this issue insidiously ruin the industry while those responsible stood by and benefited financially and so substantially?

Another question we need to ask is, outside of the expanded domain of the bureaucracy what is the purpose, vision and benefit of the consolidation business model and strategy. We have seen over the past three and a half decades a capacity to avoid the necessary actions to resolve this or any issue. There was always a readily available chorus of producers to sing in perfect harmony as to why, what and how the industry was affected and their response. These included some of their Championship winning excuses, blaming and as we described viable scapegoats such as. ‘Praying for a cold winter,” “we’re profitable,” “we’re profitable at $50, $40, $30, $20!” “market rebalancing,” “it’s all about cash flow,” “it’s OPEC’s fault,” “we can’t shut-in production as it will damage the formation,” “we’re going to apply Artificial Intelligence and Machine Learning to the business to gain improvements,” and “the government has to save us with direct support or tariffs.'' There are those that are employed in their Rube Goldberg machines that use Artificial Intelligence to analyze the global storage tanks with floating roofs to determine the current state of the market. And let us not forget the classic stand by, “muddle through.”

How is it that thirty five years have passed? It seems just like yesterday doesn’t it? Over the course of the past thirty five years how many producers, even by using their specious accounting, can lay claim to overall profitability? Of those that have existed during that period, none have earned any profits even using their methods of deferring all their capital, overhead and some interest as property, plant and equipment. Such is the Championship form of these bureaucrats. Taking the exceptional items such as Apache’s $28 billion loss in 2015, Chesapeake’s reclassification of $24 billion in retained earnings. The losses reported in 2016 and 2020 would all but wipe out anything positive from all of the prior periods to the beginning of the overproduction issue in 1986. Once again that is using their suspect accounting. We have to remember these balance sheets continue to contain disproportionately bloated balances of property, plant and equipment that are nothing more than the unrecognized capital costs of past production. Or we could restate that to read as future unrecognized losses. 

Production discipline is the issue in the market today. Granted under the bureaucrats price taker thinking, where the market magically accepts everything that is produced. How will discipline be instilled in the proposed business model of the bureaucrats “new” price maker consolidation model. According to the definition “The price maker is also a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.” What is the motivation for them to employ the necessary level of production discipline? Within the Preliminary Specification it is real profitability everywhere and always. When the unprofitable properties are removed from the production profile the producer's profitability is maximized when they’re no longer diluted by unprofitable production. This is achieved as a result of the reorganization of the administrative and accounting resources of the producers into service providers in order to achieve the variable overhead in each and every Joint Operating Committee. The granularity in the accounting conducted under the Preliminary Specification achieves the capability of each Joint Operating Committee to have financial statements prepared each month to provide this accounting information. Information that is not produced today, and is unproducable in any form whatsoever in the industry. Therefore we will need to ask the bureaucrats how will their “new” accounting achieve the necessary granularity for them to determine precisely which properties are profitable and which properties are not? We have seen through their past accounting that everything, everywhere is always “profitable” therefore this may not be an issue!? 

Hence we begin to see the prefix viable that People, Ideas & Objects always attaches to scapegoat. People always give these bureaucrats the benefit of the doubt, “they have to try it first, I guess” at which point the bureaucrat will respond “yes, we’ll muddle through it somehow.” The annual general meeting season will soon be over and the need for viable scapegoats and the acceptance of price maker and consolidated business models will no longer be of concern and will ultimately and eventually be replaced by next year's even more viable scapegoats. Alternatively price makers could be asserted to be failures and have the theory of oil and gas price maker set back in terms of its viability and acceptability in the market. “We embraced it, and it was proven to be incorrect.” Much as if they might say today “we shut-in production but still lost money.” Here’s an idea, use the two as a fatal one - two punch combination. “We tried shutting in production to increase prices and both of these theories failed when we lost money.” The existing bureaucratic culture is regressive, but a new dynamic culture inherent in consolidated bureaucracies is what is necessary to replace it? Will this be what provides the much needed production discipline?

My posts lately have taken on an enhanced level of criticism and sarcasm. The nagging question I have is when are the bureaucrats going to take on the responsibility and accountability of their past actions, and do so outside the domain of their personal concerns? Begin to undertake the obligations they hold in ensuring that affordable and abundant energy independence is achieved on this continent? I certainly am not apologizing, I am asserting that this must stop and the only solution is through the tried and tested means of economic creative destruction. The tool that has been used in these times and on the occasions when the status quo proves to be inadequate to resolve the issues it faces. The only solution as it stands today, from a creative destruction point of view, is People, Ideas & Objects, our user community and their service provider organizations implementation of the Preliminary Specification. The natural forces of disintermediation and creative destruction are being obstructed through the diversion of industries revenues away from the development of these initiatives. And therefore are unnecessarily directly supporting the status quo behaviors that have been proven to be disastrous.

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 LXVIII

 We noted in our last number of posts that in the future, unsuccessful oil and gas producers would be parking themselves in the reception area of all the major investment houses. Unable to achieve profitability through their continued support of the bureaucracy and lack of desire to be transparent or accountable by using the People, Ideas & Objects ERP system that comes about from the future development of the Preliminary Specification. While at the investment firm they’ll watch as the industry's successful and profitable producers are continually and repeatedly greeted with open arms and warmly welcomed while the producer proudly delivers another handsome dividend check. This is the alternative vision that is painted by us when we’re provided with the financial resources to proceed with building the Preliminary Specification. 

Using an innovative business model designed to ensure that the producer firms are provided with the most profitable means of oil and gas operations everywhere and always. Addressing the two critical issues that have plagued the industry for the past number of decades. Overproduction as a result of no production discipline anywhere in North America. And the pure symptom of that issue, the chronic lack of any capital discipline. Or do I have the source and symptom of the issue backwards? No one doubts the bureaucrats have feathered their nests as their one and only priority. In doing so the consequence is the size and disproportionate appearance of their “balance sheets” and the pride they show in them. The fact that they strut these things about has to be the modern equivalent of the emperor's new clothes. They are disgusting vile things that show they are heavily indebted and have never made any real or fake money. That’s right, it’s been so long now that the quality of their earnings generated through their specious accounting are being seen as inadequate and a disgrace too. 

We recently discussed the cultural trend of the bureaucrats “groupthink” that we call the “Keystone Cops.” Traveling about the continent at full tilt to the next great thing, only to find the riches really weren’t there and then immediately, in lock step, on to the next. Clean energy being the direction we’re all headed to now in an unauthorized and unaccountable manner. Clean energy has never been considered an area where investors have been provided strong accountability or where anyone has sought performance, it’s the base where the greens do their moral preening. Therefore bureaucrats anticipate a warm welcome and to be treated as the kings they believe they are by bringing legitimate, recurring revenues to the table. Iterations through each stop along the Keystone Cops route are coming faster and faster. Just yesterday it seemed that consolidations were the new nirvana that held so much promise. Strapping another equally large albatross on top of your albatross will certainly assist in overcoming any airborne issues. The destruction of Occidental through the process of acquiring Anadarko was not instructive. Occidental, one of the premium independent producers was well positioned to weather the storm and prosper however the industry developed. At the time the Keystone Cops were after the Permian and what better than Occidental to take the wealth of value they had and acquire Anadarko for an enterprise value of almost $70 billion. To make it even more real they had the stamp of legitimacy with Warren Buffett putting in tens of billions of dollars to finance it. The acquisition was made a mere 18 months ago and it's times like these that Occidental can look back, already, and say those were the good old days. But here’s a tip, don’t mention Warren Buffett’s name, I did, but I think I got away with it. 

I've been running around writing about solutions to what bureaucrats believe are invisible issues in oil and gas. Making accusations about the quality of their earnings and the value of the assets that are reported on their “big, bold, beautiful balance sheets” of producers. Their attempts to sell properties to generate the cash to make up the difference from the investors' absence haven't worked as the entire industry is having to live off the net proceeds that it generates. Which is almost nothing after the bureaucratic take. These property sales were not effective in raising any money as there was no market or cash held within the industry, however they had the effect of diminishing the perception of the value of oil and gas assets in the marketplace. If oil and gas producers began trading properties for $0.10 on the dollar they’d finally come around to reality, I thought. Therefore I believe the purpose of these consolidations was to ensure they reestablished the “asset markets” value based on evidence of the value producers had recorded in property, plant and equipment. Somebody then brought up the dusty share printer from the basement, cleaned it up and the bureaucrats began issuing share certificates to other companies as currency in the “consolidation” process. Lawyers were even thinking their days had returned. Producers then used their favorite currency, shareholder dilution, to reinstate the value of their balance sheet assets by paying full book price and more for the acquired companies. Brilliant? With the small amount of cash available to purchase shares in the first quarter being so much smaller than in 2020. The amount of shares purchased in the first quarter was $754 million in 2021 down significantly from 2020’s purchases of $1.28 billion. We’ll have to wait for the full picture to be reflected in the second quarter. This has been a long term “feature” of the bureaucrats' management. For example stock repurchases in 2019 were $3.04 billion in the second quarter for a total of $6.34 billion in the first half of that year. The point being that once reestablishing the market price of these assets of other oil and gas companies they only needed to purchase their own shares aggressively to bring that price up. This may go down as one of the hallmarks of a well “managed” business in bureaucratic mythology.

If you consider the value proposition that the oil and gas producer bureaucrats have been using. Which is also the business model they are proposing to continue with. Theirs seeks to allocate these inflated capital costs equally across each molecule of petroleum reserve that they’re able to book as reserves. Recognizing only the current production volume / the reserves volumes as the percentage of capital that is recognized in the current period. This is a reasonable and valid business model that would provide long term value for all stakeholders, in 1820. A time when incidents and accidents, events and occurrences didn’t happen over the period of time in which the thirty years those reserves remained potentially productive. Today, the industry itself is challenged with many business issues that question how and what will the future of oil and gas be even next year. Consumers are being educated today as to the real value of gasoline as a result of a pipeline cyber attack. Investors today are being treated to a wealth of options that were never considered even a decade ago. These are providing real value and a performance trajectory that is setting the standard for all investments to compete within capital markets. 

Oil and gas can’t, won’t and will never achieve the types of performance trajectory that are available in other industries today. What they can offer is substantial performance on a reliable, consistent and secure basis. Using the People, Ideas & Objects Preliminary Specification we provide for the dynamic, innovative, accountable and profitable oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. Once we’ve built the system that is. Where if the property is producing its profitable, and profitable from the real sense of the term profit. The performance trajectory of each producer will still be differentiated in the marketplace as the key capability in the market is their land & asset base, their earth science & engineering capabilities and capacities the producer is able to employ and deploy. Profitability in the real sense is not a fixed characteristic; it is a variable that is defined as anything above the threshold of costs. This is People, Ideas & Objects, our user community and their service provider organizations definition of the value proposition that we provide oil and gas. Contrast the current value proposition of the 1820’s model; which reflects a calm and serene environment, to the management effectiveness reflected in the Keystone Cops routine we’re presented with. 

Lastly we should all welcome Chesapeake back into our sample of producer firms. Reviewing their first quarter financial statements are quite remarkable. If all of our good friends the bureaucrats were considering bankruptcy you’d be crazy not to pursue it as aggressively as you could. And don’t forget to declare those $29 million pre-bankruptcy bonuses for the bureaucrats. With an increase in working capital of $1.7 billion to negative $253 million, $1.4 billion of this being a reduction in short term liabilities. Reduction in long term debt of $7.3 billion and a reclassification of retained losses of $23.9 billion to retained earnings of $295 million. All thanks to the service industry, investors and bankers being cast adrift in the middle of the Pacific ocean to experience the real consequences of the bureaucrats actions and the bankruptcy courts. The one consequence that I could see is they dropped 15,575 boe / day and now only produce 431,000 boe / day. Such is the cost. The CEO did vaporize in the first part of May. Was he pushed or did he leave? Now would be a good time to exit but there is one question remaining. Chesapeake the corporation declared bankruptcy and absolved itself of its obligations. The officers and directors did not do so, and as a result remain accountable and could be sued for their actions in causing the well quantified damage to the service industry, investors and bankers prior to and creating the bankruptcy. If only the service industry, shareholders and bankers could source some evidence such as the July 26, 1986 Calgary Herald Page 33 on newspapers.com documenting the beginning of the OPEC war on North American overproduction and the beginning of their financial demise. Or the Preliminary Specification which resolves this specific issue that was published in its final form in December 2013 to the bureaucrats. Then they might have a case against Chesapeake or any other producer in North America.

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 LXVII

 There is remarkable news in the industry. What has been denied by bureaucrats for over thirty five years is now considered the common sense, de facto logic of how the industry has always operated. Oil and gas commodities are now considered price makers. From Forbes.

To conclude, the U.S. shale revolution has been in full force for 12 years, but I think that the industry just now might be waking up to the fact that we could have much higher prices and Americans would still require massive amounts of oil and gas.

The Colonial pipeline attack just demonstrated how entrenched these commodities really are in our daily lives - not nearly as replaceable as some suspiciously insist that you think.

The definitions of both price maker and price taker are provided from Investopedia.

A price maker is an entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker within monopolistic competition produces goods that are differentiated in some way from its competitors' products. The price maker is also a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.

And

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

Given that the industry has now accepted price makers, why has it taken so long to come around to this fact? I first mentioned “price maker” in the sense of implementing it within the industry through what eventually became the Preliminary Specification on our November 11, 2008 blogpost entitled “Times Like These Call For…” Granted this was in the middle of the financial crisis and bureaucrats may have had other things on their minds, such as their deteriorating personal fortunes. That was twelve more years that I’ve been ostracised, vilified and run out of the industry for only stating what is now considered to be the common sense, the prevailing logic. Well to be honest, I’ve always been attacking the bureaucrats too. A guy has to have some fun!

What might have happened in this past decade if the Preliminary Specifications price maker strategy was operational and providing shareholders with the appropriate returns for their investment, keeping the industry intact and together. All this devastation and destruction throughout the greater oil and gas economy was not by accident. It was deliberate and a consequence of the ignorance, uncaring and self involved nature of these bureaucrats. Officers and directors who went out of their way to silence me as the Preliminary Specification is a direct threat through disintermediation to their ways and means of operating the oil and gas industry. I repeat myself again when I state that the overproduction was known to be an issue since at least July 26, 1986. I chose to do something about it in May 1991. They chose to ignore it, blame others, lie and raise viable scapegoats for their inactions. I subsequently published the Preliminary Specification in December 2013. Now bureaucrats think they have a solution with consolidations which will provide them the answer to the problem of overproduction, the cause of which is from “small producers having to pay their debts.” The lies and viable scapegoats only become more surreal. From the above noted Forbes article.

Yet still, U.S. shale gas (and oil) producers must be cautious to not overproduce.

The days of double-digit annual percentage increases should be over. 

Pioneer Natural Resources CEO Scott Sheffield thinks that the shale industry should consolidate more to maintain operational and curb volume increases from smaller producers – firms that need more production to pay down debt.

Moreover, the smaller players are less tangled in the ESG web and typically go under the radar of environmental groups obsessed with “Big Oil:” “Energy Giants Ditch Oil and Coal Projects. Smaller Rivals Want Them.”

This is nothing more than the bureaucrats' admission of guilt. The history, between People, Ideas & Objects and these bureaucrats, tells a distinctly different story and clearly defines the legacy of their management. Providing the evidence of their culpability. Thirty five years of an ever present overproduction issue staring them in the face and they did absolutely nothing. Seven years of our solution being screamed at them, and all they did was fight as vigorously as I feel they possibly could have. Now, after the wanton destruction that they caused for everyone concerned in the greater oil and gas economy. This destruction being obfuscated through bureaucratic lies, blaming, deception and viable scapegoats that makes no one believe a single word any of them says. With everyone turning their backs on these bureaucrats they now realize they’re truly alone and their only hope for survival is to enhance their revenue stream, to make themselves truly profitable. They expect that the “business model” of consolidation will lead them back onto the road of bureaucratic nirvana. This too is nothing more than an admission of guilt. If their consolidation issue is as effective as they assume it will be. Why didn’t they implement it sooner? Or is "consolidation" itself the real viable scapegoat?

You have to admit that Donald Trump's comment in defence of Jimmy Carter the other day was appropriate. Someone suggested the Biden administration was as bad as the Carter administration. Trump replied that “Jimmy Carter mishandled crisis after crisis, whereas Biden has created crisis after crisis.” How would our good friends the bureaucrats justify their existence if not for the problems they face? How many times have we heard them say that “oil and gas is so hard to manage?” What would any bureaucracy be without a long list of crises and difficulties to define why they exist? What bureaucrats are saying over these past thirty five year period is the destruction caused in their business is a result of the difficulty and complexity of the oil and gas business. I would have to add under their management. Consolidation is nothing more than the expansion of the bureaucracy. Expanded bureaucracies are good for bureaucrats, a strengthening and broadening of their domain serves to entrench them further. Bureaucrats don’t exist to solve problems, they justify their existence through the creation of them. Primarily in the effort to ensure they’re seen as the ones who are active and involved. How long do you think it will take for these dastardly “small” producers to rear their despicable heads once again, and dare to produce in a newly configured producer firm? What will be the solution for the bureaucracy when they’re faced with new production that destroys their price maker strategy? Be careful with your answer, you may just become the next viable scapegoat. The question that I’ve asked many times before is who is going to be the bigger fool five years from now, but let's change that to two years? Will it be these bureaucrats thinking as they do today? Or will it be everyone else holding the bag and counting the losses of what could’ve, would’ve and should have been, again?

The Preliminary Specification does two critical things that the industry will need to be doing on a go forward basis. Ensuring that the industry is financially robust where profitable energy independence is achieved throughout North America. Producers must be profitable, in the real sense of the term to ensure that it remains viable for all concerned. That people can plan careers and families around their commitment to the producers and there is a constant source of new and innovative companies that are being brought along in the service and oil & gas industries. And the second aspect is that the consumer not only needs to be assured of a stable supply of energy. That the energy it does consume is the lowest cost available to it. This demands the producers undertake a reorganization to establish innovation throughout the greater oil and gas economy. That is done throughout the Preliminary Specification but most specifically in the Resource Marketplace, Research & Capabilities and Knowledge & Learning modules. Innovation needs liberty and free speech not incrementally higher levels of bureaucratic malaise. Thirty five years is a long time to address an issue as devastating as the destruction of the commodity markets. Innovation in the creation of issues is not a value generating exercise. And consolidation is not an innovative approach to what has ailed the industry for thirty five years. When people can’t contribute openly, then nothing innovative is going to happen. Would this be the case in a consolidated bureaucracy? In our research we learned that innovation was not a happenstance occurrence. Organizational structures had to be purpose built with the associated industry resources aligned to support them to foster the innovation within the producers but most specifically in the service industry. This is the second element of the Preliminary Specification ensuring that the consumers are provided not only with a secure energy future, but also an affordable one. 

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 LXVI

 In reviewing our sample of producers' financial statements the contamination from consolidations in the first quarter 2021 is too prevalent to be making any reasonable decisions regarding comparisons to prior periods. As a result of these consolidations our sample size has been reduced by 1 to 18 with 5 companies participating. The acquired producer in our sample was acquired by another producer in our sample. Many of these acquisitions were material in terms of their size with the overall production profile of our sample increasing 8.9% to 10.05 mm boe / day. Debt of the producers is another telling factor that shows the inability to make any worthwhile conclusions or comparisons. It appears that banks were leaning heavily on producers to have their debts paid down. This is best expressed in their diminished working capital, making any claims of capital discipline suspect when they have no cash, no access to capital during a time while their banks are this demanding. Clearly the banks want out of the oil and gas business. Working capital of these consolidated producers was up 10.2% to total $12.85 billion. Even though the banks were drawing down many of the producers' loans, the number of companies who completed consolidations increased our sample's overall debt load by 6.5% or $10.09 billion. We anticipate further difficulties in making these comparisons in the second quarter as there have been some material acquisitions and other activities in the second quarter.

I’m still at a loss to find any detail regarding overhead. In addition, the enhanced detail we were beginning to see regarding the capitalization of interest appears to be waning. Additionally the fact of the matter is that reported overhead never made any sense to me in comparison to the real numbers when I was on the inside. I have only been asking for transparency in these numbers for many years. And let us not confuse this argument with the standard bureaucratic talking points of “overhead allowances.” They are not relevant to this conversation as the gross total of all overhead allowances across the industry or any specific Joint Operating Committee are $0.00. 

It is People, Ideas & Objects' argument that overhead is the second reason, after pricing issues, that profitability is never earned in the industry. The accounting method of capitalizing the (alleged and unknown) majority of overhead proves that its effect on profitability is material. However, it is also the key reason for the discharge of cash out of the business, with little to no cash being returned to the firm. From an administrative and accounting perspective each producer must attain a certain level of capacity and capability in these fields in order to maintain compliance with regulations etc. These capabilities and capacities are not shared or shareable in their current configurations between producers and are replicated and incurred within each producer. Nor do these capabilities and capacities form any part of the distinct competitive advantages of any of the producers. It is through the capitalization of the majority of these costs, we have alleged capitalizations are as high as 85% on average across the industry and will hold to that until we’re proven wrong with the facts. The producers current capitalization policy diminishes overheads level of materiality in the financial statements. 

Another key point that we’ve made to bureaucrats about their overhead capitalization policies is the erosion of the firm's cash resources. Which is also part of the reason that capital was demanded each year from shareholders and how working capital now diminishes each quarter. Overheads are incurred each month. The capital or cash consumed by the capitalized overhead costs are not recognized as a current cost by producers and are deferred for as long as possible. On a straight mathematical basis of property, plant and equipment / depletion is currently at 15.05 years for our sample of producers in the first quarter of 2021. In reality, due to annual capital expenditures, it may take three decades for that specific overhead incurred today to be fully realized as a capital cost and passed on to the consumer as depletion in the income statement. This is as they say in the industry “putting cash in the ground.” This is done for no other purpose that I’m aware of than to hide the scope and scale of overhead, but also to defer the discussion of what may be included in overhead. A topic we’ll leave for another day, but be assured it involves our good friends the bureaucrats. These overhead costs are not being passed onto the consumers in a timely manner as a result of the specious accounting of capitalizing a sizable volume of overhead and then not recognizing the full capital costs of each barrel of exploration and production. Hence the invested cash is not returned to the producer, it only sits in the ground for thirty years or however long it takes to be recognized. In the meantime the producer scrambles to find the cash to pay for next month's overhead as they, as a result of this accounting treatment, do not maintain what is commonly referred to as a “float” in business. We’ve pointed this fact out to the bureaucrats for many years now and there has been no change in the methods they’ve used. What is in those costs that they’re concerned about? Another question that would / should be asked is. What is the materiality threshold of the producers audit firm during their annual audit? When I was auditing it was a percentage of revenue, I don’t know what it is today, but I’m sure if we asked a bureaucrat they’d know. 

It is the deferral of recognizing the cost of capital in the exploration and production of oil and gas that is what enables producers to claim “profitability” consistently. Enhancing “profitability” at the expense of operating the business appropriately. Enhancing “profitability” to attract the investors to make up the difference. We feel that property, plant and equipment is best understood as 65% of it should be reclassified in a pro forma adjustment to depletion as we consider it to be nothing more than the unrecognized capital costs of past production. Our pro forma adjustment establishes the past performance of the firm without this monkey business. Additionally, the deferral of material volumes of overhead exacerbates this issue by deferring even more costs. But also drags the firm's cash with it as these are the monthly incurred expenses that consume cash, which are not recognized in the current period, passed onto the consumers and hence returned in a timely manner to deal with the following months expenses. When investors and bankers are abundant, this is not an issue. When investors and bankers are absent, it’s a cash crisis of monumental proportions even though overhead is just 4.33%? Why is it that when producers are faced with difficulties immediately begin trimming a percentage of their staff? If they laid off 20% then they’d only save 0.866% of revenues and profits. Do you think there’s maybe more to the overhead story than what’s being reported in the financial statements of the producers? And why has our discussion and our solution, which deals with the lack of profitability, the demand for cash from investors, bankers or working capital, been ignored and denied?

The Preliminary Specification handles overhead in a fundamentally different way. We are disintermediating the producer bureaucrats. We are using specialization and the division of labor to enhance the capabilities and capacities of the administrative and accounting requirements in the oil and gas industry. We are removing the administrative and accounting resources from the producers to allow them to focus on their key competitive advantages of their land & asset base, and their earth science & engineering capabilities. Moving the accounting and administration to the service providers that are organizations headed up by a user community member affiliated with People, Ideas & Objects. There they will specialize in one process and manage it on behalf of the entire industry. Charging each of the Joint Operating Committees for any work that is completed by each of the service providers in that production month. If there is no production from a property, then the service providers will receive no data and no work will be conducted and subsequently no billings will be sent to the non-producing Joint Operating Committees, creating what we call a null operation. Enabling producers to have truly variable overhead costs, based on production. As a result the property that is profitable, from a real profit point of view, will produce and not be diluted by the losses from the unprofitable properties. Reserves would be saved for the day when they can be produced profitably, those reserves will not have to incur the ongoing losses as incremental costs if they continued to produce and the commodity markets would have the marginal production removed from the market enabling them to find their marginal prices. 

People, Ideas & Objects ERP system includes the service providers, and user community members as principles in their organization, in preparing and providing the accounting and financial statements of each and every one of the Joint Operating Committees. Information that is not produced today. In addition to what is produced today, but with enhanced transparency and accountability. That’s maybe why we have such difficulties with bureaucrats about the acceptance of our Preliminary Specification? The accounting provided by the service providers will be standardized as the process will be comprehensively reviewed during our development to enhance these processes to their ultimate level. Therefore they will be for each and every producer standard and objective. If a Joint Operating Committee is reporting a loss at a property it will be taken as valid that it would be in the best interest of the producer, their reserves and the commodity markets to ensure that the property was shut-in for the next production month. They will know that all other Joint Operating Committees received the exact same accounting treatment as theirs and it will be incumbent upon them to ensure that they maximize profits for their shareholders. Invoking the long lost production discipline throughout North America and a new capital discipline as to what wells were drilled, where and when as the ability to attain real profitability to achieve production would be a real threshold to secure funding. Producers that didn’t adhere to these principles would not be profitable in the real sense of the term. Leaving them forever waiting in the receptionists waiting room at all the major investment houses.

It is these points of view that have diminished the bureaucrats claim to continue. Why have they refused to consider what People, Ideas & Objects suggest is real profitability? Why have they refused to account for the overhead they incur? Why have they refused to change to a method of overhead and accounting that is more transparent, detailed, standardized and objective?

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 LXV

 The first quarter 2021 reports of our sample of producers are out and I have to say that I am disappointed. There appears to be a significant regression to the old methods of reporting profit. Stuffing balance sheets by putting cash in the ground is culturally instinctive. Bureaucrats have a heritage of their past efforts, are proud of those efforts and as a result have returned to strutting their achievements down mainstreet to determine who wins the annual biggest balance sheet competition. Any recognition of the capital costs in the cost of the commodity of a capital intensive industry will have to wait once again until such time as the oil and / or gas prices turn negative. 2020 saw what I feel was a reasonable amount of depletion being recognized and the subsequent losses of almost $70 billion being reported for the year. Now, one Canadian producer has even reversed some of their 2020 depletion and reported only $0.68 of capital costs per boe for the first quarter. But of course, and why wouldn’t they? It is a simple matter of regression towards the mean, the mean of the past forty years reporting methods. It’s not that last year began to address the overcapitalization issue, it only addressed the results, symptoms and consequences of that issue. Which of course is the chronic overproduction in the industry. Leading to the April 2020 negative $40 oil prices which proved our good friends the bureaucrats couldn’t care less. We’ve moved from recognizing the capital assets of these producers over the course of 5.2 years at the end of 2020, to now 15.08 years in the first quarter of 2021. It is far better, in the bureaucrats mind, to “build balance sheets'' and “put cash in the ground” than evaluate the performance of the producer by passing these capital costs on to the consumer and recover that previously invested capital for reuse in the process. Investors can be assured that producers don’t need any cash is the message they’re sending, therefore they’ll have no cash from production, profits, investors or banks. If they critically evaluated their performance on a business basis they’d have many more losses such as 2020’s than what their massive “profitability” that 2021 is reported and shaping up to be. If only they’d realize that “putting cash in the ground” could be used as their future “bank” if they began working with People, Ideas & Objects Preliminary Specification.

My comments certainly contrast the spontaneous “boom” proclamations coming out of nowhere these days. And I resent having to be the one that looks at things critically. I would prefer to build solutions but there are irresponsible bureaucrats in control who only state “Forget about the past, that’s history, and only listen to what I say today.” Which oddly seems just like what was said each and every year before doesn’t it. But does anyone remember these types of statements from all of the producers last year? From WorldOil April 9, 2020 Entitled “Oxy Wants Financial Aid, Not Market Support, For U.S. Oil Companies.”

In a sign of how important the appeal is to Chief Executive Officer Vicki Hollub, employees are being urged to send a pre-written wish list to Congress members. Among other things, the company wants the government to “provide liquidity to the energy industry through this period of unprecedented demand destruction and unsustainable pricing until normal economic conditions return.”

Or from the same article,

“This letter lists the steps our government needs to take immediately,” Hollub said in the email to employees. “Now more than ever, we all need to inform our elected officials that inaction could result in long-lasting harm to the U.S. economy.”

I’m only rubbing salt in their wounds however, how can they now stand there and say “boom.” The quoted article reflects the difficult time a year ago when the government was the viable scapegoat at that moment. The time when they had really faced the music, as for some reason no one else they betrayed would step up and help anymore. Ultimately they were turned down and it appears, once again, as it has so many times before, taught them absolutely nothing. Which leads me to question whether it's that they don’t read their financial statements or they don’t understand them. What I’m disappointed about is how could these producers be so poorly managed? I’ve been accused of having a disproportionate sense of urgency and should be more patient. I understand that however I would ask, who is it that needs to be the patient when cash is as critical as it’s being reported. When it’s understood the bureaucrats are not focused on the business of the oil and gas business. And they’re focused on the business of their personal business and don’t have the time to concern themselves with their responsibilities as officers and directors of the producers they’re supposed to be managing. How else does a primary industry with the potential of oil and gas fall into such a state as it is currently and record the kind of performance over these past four decades? I only reviewed a few of the Annual General Meeting materials to gain a better understanding of the topics of concern and issues to be addressed and voted on. Only reviewing a few was all that I could stomach. Accountability is not something that has been expected of these bureaucrats over these 40 years, it’s not part of their culture. Being unaccountable is a bureaucratic feature of the business. Another feature of the business has always been the declining value of the stock once the AGM’s are complete. Who is it that specifies the time of the year in which stock repurchase plans can be implemented?

These reflect the culture of oil and gas is incapable, and has no capacity to change. In a world of disrupted business, the destruction authored by our good friends the bureaucrats and the uncertainty in the global economy. It’s nice to know that the producers are as well managed as they claim to spontaneously be in these times of difficulties. The wall of trillion dollar costs that include rebuilding, refurbishing and reclamation of the infrastructure and the seven crises that we’ve listed are not an issue if they never acknowledge them. “Boom” is the key word that makes it all go away and the sunshine pour in. What we listed as Crises number seven was the Biden administration. Last week we saw a hint of even further dealings to come. The Biden administration has now instructed the Fed and Treasury to figure out ways in which to write policies that are pro climate change. This has been interpreted to mean they’ll pressure banks to stop loaning money to producers. Being that the shareholders of the producers are as disenchanted as they are. That the bureaucrats are using once again their share certificates as their printable currency, this time to fuel their “consolidations.” Chronic, repeated, unnecessary and unwise dilution of shareholders is also a feature in oil and gas. Banks are already hesitant and withdrawing. Now the government wants to instill an even stronger bias against the industry. With  the comical routine of their “capital discipline” invoked in harmony by producers once more. Capital structures being diluted and leveraged far beyond what is acceptable or reasonable for anyone to glean any value from the industry. And if there was any value it would only be diluted in some manner in the future. With real profitability never seen and fundamentally misunderstood or corrupted. What would be in it for anyone other than the bureaucrats for their take off the top?

If only someone would come up with a solution to these issues and provide a means where the producers would have an organization and method that could provide them with the most profitable means of oil and gas operations everywhere and always. That is People, Ideas & Objects Preliminary Specification, our user community and their service provider organizations. But those have been rejected by these bureaucrats as too radical. It stops the bureaucrats from destroying the industry any further by disintermediating them and replaces them with the means to better manage the industry here in the 21st century with the issues and opportunities it faces. Consolidation is the answer to the problem, according to the bureaucrats. I happen to think the bureaucrats are the problem and building bigger bureaucracies through consolidation will be far more detrimental than good. 

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.