The King is Dead!!!

 Recently People, Ideas & Objects asserted there may be a seven year lag in North American producers' response to increase their production deliverability. Since 2015 when their investors sent their ultimate message of disapproval, seven years is the amount of time that has passed while bureaucrats contemplated their next actions. It’s with these statements that I’m attempting to be diplomatic and giving them the benefit of at least contemplating some action. Today their perspective sees them flicking a switch to resume operations at the level they were in 2015 and since they’ve not changed, nothing else has either. I can only relate the devastation that I’ve witnessed in the ERP software market of oil and gas since I began this adventure in 1991. Producers' belief that they could use and abuse the ERP providers as the enemy, for lack of a better description, has shown the consequences of their strategy play out during the 21st century. No one’s interested in their ERP software business because no one can live with the impossible conditions that producers impose on them. The last to leave this market were Oracle and IBM in 2000 and 2005. Other than People, Ideas & Objects I am unaware of any other activity focused in this area. If it wasn’t that I thought that I had the solution to resolve the critical difficulties in the industry, I wouldn’t bother with them either. Hence my overt and gracious respect for them. 

Therefore I ask what if the service industry is in the same position as the ERP providers were in the 1990s? Back then it was a robust market with at least 20 providers, only one of which still exists. And one company holds the majority share of the market today. P2 claims to be “the world's largest independent provider of software and data solutions for the upstream oil and gas industry.” None of the participants are public companies and therefore we are unable to determine the size of the market in terms of revenues. Dun & Bradstreet have modeled P2’s revenues at $148 million for the parent company. P2’s market share in North America is dominant, somewhere between 75 - 80%. We know ERP software costs are a fixed overhead of the producers. We know that at $100 / bbl of oil and approximately 35 million boe / day the North American based producers revenues will be almost $1.15 trillion. P2 revenues will come to a whopping 0.012% of the producer's costs. During a time when there’s an alleged Information Technology revolution providing real value through disintermediation and new business models. Does this reflect that oil and gas producers are part of an industry that’s committed to accountability and transparency? Or, does it sound like an inefficient use of capital employed if alternatively producers are developing their own solutions with spreadsheet and paper based workarounds? Are P2 enjoying pricing power from their large market share? With all due to respect to P2 who have miraculously survived in an impossible market. Does this environment appear to be the organizational definition, support and foundation of what the dynamic, innovative, accountable and profitable oil and gas industry needs? 

When ERP software such as the Preliminary Specification introduces new decentralized, disintermediated business models that offer substantially more value. Where all industries find the gains in their organizational speed, accountability and profitability substantially heightened. When ERP software defines and supports the organization; what organizational support do spreadsheets and reams of paper provide? When one blogger that’s been writing about North American producers issues and proposes a solution with an innovative business model grounded in the Joint Operating Committee, markets, specialization and division of labor, Information Technology and principles of Intellectual Property as frameworks for that solution. Why are these forcefully resisted by producer bureaucrats? In turn, inaction by these bureaucrats has stolen the incremental value that should have, and is needed to be earned from oil and gas production over the past decade since the Preliminary Specification has been published. Since at least 2015 there’s been extensive financial, career and business losses realized by everyone other than the bureaucrats. These losses that People, Ideas & Objects have defined and detailed throughout these writings are known and well understood by these bureaucrats, but do they concern themselves with them or their consequences? These losses need to be added to the decimation of value that was built into the industry prior to these bureaucrats' administration, and the never ending string of annual shareholder issuances who’s value have been summarily consumed as well. The point of the exercise was to expand the reserve base. These reserves were never profitable, I would suggest they’re still not profitable, and if so their present value is well below $0.00. Can anyone look objectively at this past record of activity and tell the bureaucrats that all is forgiven? Does anyone now believe today’s industry is anything like the one in which we were involved with in 2015 or earlier? How about earlier when Houston was the center of the global oil and gas industry? 

Why are we putting our future of this industry on those people who brought us to this destroyed and decimated environment. What is it that we expect to come about from them? Is it as bad as I say? Investors and vendors in oil and gas ERP are nowhere and have been nowhere since the late 1990s. When IBM exited the ERP market in 2005 they had an 85% market share in Canadian oil and gas ERP. The behavior experienced from the producers is well known and nothing will happen while they’re in control. Initially producers just played one ERP vendor off from the other in terms of the sales price. Finally stating that xyz will give us their software for just the service contract. Without that service contract that vendor would otherwise not see another day as an organization. Producer expectations were that others, investors and bankers, would pay the freight in terms of software development costs. Then they tightened the screws. Similar choices were recently provided to the service industry when their “choice” was to sell their equipment as scrap metal or… “Hey, have you heard oil’s selling for $100 a barrel!” I’m seeing many similarities between what was experienced in the 1990s ERP market and today's oil and gas service industry. I do not see any difference in the realization of the situation on the ground by bureaucrats. They’re oblivious to any and all consequences it would seem. And most importantly I’m not seeing any change, any acceptance of responsibility or action coming out of them. Therefore what if the service industry will see the same lack of response by investors and entrepreneurs as what the oil and gas ERP marketspace experienced throughout this century?

On Wednesday I started with the quote from Sun Tzu about the Kingdom, once lost could never be established again. This toxic culture of the bureaucracy has no redeeming qualities worth keeping. Why would the producers' previous investors or the service industry representatives be interested in dealing with those that have done to them what they did to so many others. Fool me once… When a swimmer is closest to drowning is when they become the most dangerous. Seeking to grab on to anything and will take down others with them. Is this the real motivation behind the trend of last year's consolidation?

It is therefore not unreasonable to assume that we have a minimum of a seven year deficit in terms of the capacity and capabilities of the North American producers' response to the market demands for more energy. It would therefore be reasonable to assume that is the case and be prudent to execute a plan to resolve that, deal with the issues that brought this about and set the industry on a foundation that would carry this through for the long term. Then again did you hear the price of oil was over $100. The problem is that high oil prices don't stir anyone to act when they know the result will end in the bureaucrats' financial windfall at everyone else’s financial cost and probable and almost certain failure, with tomorrow's boom / bust economic lottery. The behavior of the bureaucracy and the culture of the industry is contrary to a business friendly capitalist style of environment. It is designed to comfort those that are at the top of a primary industry who deal amongst themselves for themselves. At the expense of all others. People, Ideas & Objects have suggested that has to change in the form of the Preliminary Specification. The bureaucrats have stated unequivocally, no!

Bureaucracy is a persistent cultural phenomenon. This culture of the industry will regress back to itself the moment that it can. The only opportunity we have in which to avoid these continued difficulties is to avoid the bureaucratic culture. The ability to break it and never go back has to be available in order that it, like the kingdom that failed, can never return again.  With all the momentum, power and energy in the world we would never have the ability to remove the bureaucratic culture from its perch. We do however have the tools to orchestrate its demise and these have played along nicely. Time is the force in which to do so. We have the alternative in the form of the 2012 publication of the Preliminary Specification. We have been actively developing the user community since early 2014. Producers have had the lack of financial support of the investor firms since 2015 creating an untenable situation for the bureaucracy. A service industry that I believe can not and will not respond to any stimulus while the bureaucracy remains. And a critical societal issue in the fact that a barrel of oil replaces at a minimum 10,000 man hours of mechanical labor. These are creating an overt signal to the bureaucrats their response and ability to respond to their business is beyond what they’ve proven is their comprehension and capabilities. Where the continuation of their business model is untenable and will not prosper in any 21st century environment no matter what commodity prices are realized.  

What I believe may be happening is the time for them to exit the industry is upon our good friends the bureaucrats. The producer stock prices are higher than last year and these looming difficulties are just around the corner. What compelling reason is there for this “leadership” to stay? I don’t think there is one, in fact I think the King is quietly packing his things and getting ready to abscond. Or in this case just retire. I’m therefore declaring the King is dead and the plan for the industry is the Preliminary Specification, long live the Preliminary Specification and our user community. Or is that too much?

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Conflicting Perspectives

 A Kingdom that has once been destroyed can never come again into being.

    Sun Tzu

Royalty may have a different perspective on that. And except for massive, repeated government largess to maintain and sustain an industry for a period of time, when a turnaround can be implemented. Which is what we have an example of in today’s post from the lead up to the auto industry collapse in 2008. One that was authored by the classic business issue of overcapacity which somehow got ahead of the automotive industry. We want to pick a number of lessons from this example and apply them directly to the oil and gas industry today. They include

• Overproductions precursor demands that overcapacity be built. In this Nissan example things somehow became rather disjointed. 
• Overproduction can become severe and is usually industry wide as well as firm related.
• The costs of overcapacity are amongst the highest costs a firm can incur. Performance in a firm with overcapacity is difficult if not impossible to attain.
• Oil and gas does not share the same public sympathies of the automotive industry. Would government energy related investments be made in oil & gas or clean energy?

Nissan Motors lost its independence and became part of Renault as a result of the financial difficulties it found itself in. New management was installed to deal with the issue and they determined the following. From The Guardian in October 1999

Brazilian-born Mr Ghosn has targeted Nissan's overcapacity in Japan as the main cause of its problems. He said the group was currently producing 1.28m vehicles in Japan, representing just 53% of the group's domestic capacity.

The issue with overcapacity is that all of the cost of capital employed in the surplus capacity is idled. It is non performative and a drain on the firm's productive assets. Debts and mortgages don’t stop and consume cash. The result of carrying surplus capacity also includes the cost of maintaining the incremental capacity which is an overhead cost on productive capacity. In this Nissan example their Return On Capital Employed would be diminished by unproductive plants. And the costs of the otherwise fixed plant maintenance etc overhead costs of the surplus capacity would need to be carried as an incremental variable cost in each of the lower volume of cars being produced. Reducing the firm's ability to compete in the market. 

These costs when realized are horrific and in Nissans case put the company in jeopardy to the point where it had to be rescued. Oil and gas is not comparable to the automotive industry, however they do have an overcapacity issue; it is hidden when they choose to produce at full capacity at all times. They intend in the current business model / culture to expand capacity and it is in these actions we’ll see these continued detrimental overcapacity effects in the industry. Oil and gas does not only experience the obvious horrific costs that Nissan did as a result of their overcapacity. Overproduction into a market who’s commodities follow the economic principles of price makers, creates the tragedy and financial devastation we see unfolding across the North American producer population for these past four decades. 

If this was an isolated instance of overcapacity for Nissan then they would have been subject to the same financial remedies with Renault taking over and their reduction in Nissan’s capacity. There is little else to do about this issue. However as was the case in the great depression, as was the case in the automotive industry and in the oil and gas industry it’s rarely just an isolated single firm case. Market demand fluctuations can be severe and the inability to act, or respond appropriately and quickly puts firms in financial jeopardy. In a September 9, 1999 article from just-autom.com. 

According to our estimations, there is already installed capacity world-wide for some 50.4 million cars per annum and 18.6 million commercial vehicles. Yet sales in 1998 totalled an estimated 36.0 million cars and 16.4 million CVs. That implies that there is already over-capacity for an incredible 14 million per annum cars and 2.2 million CVs, with plans in place to increase those numbers by over 6.6 million per annum cars and nearly 2.2 million CVs.

Bureaucracies move with little to no finesse and waited until 2008 when the government had to step in globally to bail the auto industry out. Thankfully 14 years ago that was taken care of and they learned their lesson! Covid has had a serious effect on the demand for vehicles with sales in 2018 at 97 million global units and 2020 at 78 million global units. A 19 million unit global overcapacity that may be temporary. It is unreasonable to compare automobiles to oil and gas. Automotive companies do not stuff parking lots full with 19 million unsold units / year, that’s not possible. Oil and gas dumps their overproduction onto the market daily. The point being made is that the cost of overcapacity is detrimental to all firms and industries. And in oil and gas, the feature of depressed prices everywhere and always, with occasional price collapses and enhanced benefit of negative prices. Chronic overproduction of oil and gas has been sustained purely through the cash flow from a capital intensive industry reporting specious profits over these past four decades. These cash flows from the prior excessive investments have sustained the industry, to the benefit of bureaucrats exclusively, yet I think these cash flows may be diminishing in terms of their ability to do so. Simply their capacity to support the demands of the industry are falling short. Producer firms' other source of capital didn’t see the government bail them out, however, investors were duped annually by bureaucrats' specious financial statements into filling that role.

I have discussed repeatedly the destruction and damage that I see in oil and gas today. This contrasts with the cheery perspectives being stated by the individual producer bureaucrats. Whichever point of view is correct will not be determined in the next few years, it is fact today, with two perspectives held by two groups of vested interests. I’ve stated that capital expenditures, dividends and debt reduction need to be funded internally by viable prosperous businesses. I should have put the caveat that the amount of capital returned needs to be adequate for the firm to maintain its capacity and capabilities of, in this case, the producer firms and the greater oil and gas economy of which producers depend exclusively upon. The service industry is an extension of the producer firm. That they are at arms length is a necessity in order to provide the geographical and technical diversity of field operations. This secondary industry will need to be purposefully rebuilt through the philanthropic resources of producers. As with everything in these bureaucracies you have to spell every detail out for them. 

In a recent Wall Street Journal article on Devon, Continental and Pioneer. Scott Schefield, the CEO of Pioneer states. 

Pioneer CEO Scott Sheffield said his company won’t divert from its strategy of raising oil production 0% to 5% a year despite high oil prices.

“There’s no change for us,” Mr. Sheffield told investors Thursday. “$100 oil, $150 oil, we’re not going to change our growth rate.”

I think this article reflects the continuation of the bureaucracies tendencies and management style. Speaking to their investors which is always a good thing but needs to be done more than just five times a year. They’re speaking to a targeted audience the words that bureaucrats believe that audience wants to hear. What these bureaucrats need to do, in my opinion, is operate a profitable business. When they speak they’re speaking to all their audiences what a profitable producer is concerned about, profitability. And to do so in the consistent message that a profitable operation is their focus. What I would have preferred to hear is. 

Although our performance has improved due to commodity price increases. Our shareholder returns remain below what we believe are necessary for a profitable operation and the performance Pioneer can achieve. In addition we feel the related infrastructure of the industry is incapable of meeting its future needs. Therefore, we will maintain the market discipline necessary to ensure that sustained profitability is generated for the long term. 

If the money needed to be invested in the industry isn’t being generated by these businesses, then the product is not being sold for the right price. Is the amount of money being generated today just a proxy on the commodity price? Then why not invest in commodities, what role is the producer organization filling? To dictate unchanging actions based on dramatically changing market dynamics is just a further continuation of the difficulties we’ve seen over the past four decades. Therefore what has changed in the mind of the leaders of these producers? Is this the team we can put on the field to win the games needed to get to and consistently win the championship? Where are they taking us? 

As it always is, it's obvious that these bureaucrats are handsomely compensated personally. Is that adequate to ensure the service industry will be there to fulfill their needs? What about the need to address the industry infrastructure, and specifically who is going to finance it? Does this in any way imply recognition of or address any of today’s issues the industry is presented with? What about the investors' demand for accountability? How much of this same old, same old is a result of the unbreakable culture of the industry that has developed over the past four decades? A culture that is defined and supported by the ERP systems the bureaucrats use. A culture that is blind and incapable of knowing “what,” “how” and “why” the issues exist. A culture of inaction and indecision. We’ll discuss this point in our next post. My last questions are, is this the time that’s needed to approach things differently, to look at how these organizations' performance can leverage the commodity price to earn additional value beyond what other producers can competitively achieve? Is this not the time to develop the Preliminary Specification?

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

The Emperor Has No Clothes

 Even with the endowment of shale reserves, our good friends the bureaucrats have deliberately sought to destroy every element of the greater oil and gas economy in North America. Inaction is a deliberate act when it spans four decades. With an endowment of riches passed to them, they’ve only managed to turn it into a wasting resource where no one but them have benefited. Based on their culture, plans, understanding and most importantly what drives them, there will never be any value generated by them. It was only last year they concluded that shale was not commercially viable. That they needed to move to clean energy and pursue that without any plans or understanding how to make any money in an industry that has never prospered for anyone, has only survived on government benefits and has a history of accountability that gets bureaucrats drooling. And they can do this without consulting anyone or putting it forward, it’s just their decree and that’s that. Producer bureaucrats have never had to account for their litany of serial disasters as they’ve always had some bright shiny object to market as the focus of their next endeavor. When the new prospects inevitably turn into a financial disaster, almost exclusively as a result of chronic overproduction, they never address the issues, they only say they’ve moved on to bigger and better things. Never have they sought to remediate their poor performing assets and turn them profitable. All of the prior decades oil and gas production was sold at prices that were not profitable. Today producers may be treading water with their costs covered due to $90+ oil, but I highly doubt it. And in our immediate future we are incapable and unprepared in every way to approach the opportunity of fueling societies needs. In what can only be described as a constrained resource environment by those who may not share our political point of view. 

I recall when I published the Preliminary Research Report documenting the use of the Joint Operating Committee as the key organizational construct in May 2004. The party was going strong in oil and gas and continued in that manner for a considerable period of time. This was the time when shale became the place to be and the shale gold rush was on. The public was inundated with the storyline of how innovative the producers had become to make shale the miracle that it was. Except in my contrarian point of view I argued in this blog that these producers were anything but innovative. They never had been and never would be, they don’t act and just sit there giving a thumbs up or down to those who should happen to spend their lives on breaking their brains solving big problems, and groveling to be heard by said bureaucrats. Only to repeatedly get the thumbs down. Such were the lives of those in the service industry and more specifically the coil tubing developers and Packers Plus. These people spent decades trying to convince producers to use their technologies but were denied at every turn. The only question I have to ask is, in oil and gas, who are the real innovators? Is it the ones with their greasy hands on the actual problems with machine shops at their disposal, or those that are sitting on the couch browsing the latest Ferrari brochures? I have no issue with wealth, I just feel people should earn it and do so by building value. Which is the absolute contrary situation here.

The fact of the matter is the history and culture that we’ve seen since the exit of the producers investors, and subsequently their bankers. Bureaucrats sitting on the couch is a satisfactory effort that is insatiable. Seven years of denial of new money has stimulated those innovative ideas throughout the bureaucracy. Ideas such as acceptance of negative $40 oil, never paying the service industry for work done in the field for 18 months. I need to give them some credit for being innovative. Why is it that I’m so critical of our good friends the bureaucrats? It's simple really, who’s responsible for all the damage done to the greater oil and gas economy? I can’t look at what has happened, particularly when alternatives were available and discussed on this blog, when the investors had given them the ultimate message of disapproval and yet, they’ve sat for all this time and continued to do nothing. Only to realize last year they needed to do something to save their lifelines and came up with the clean energy diversion and consolidation as the keys to their future prosperity. The world is moving to rapidly adopt decentralized models of organizations that are far more effective and business models that are more efficient. Yet tripling down on the bureaucracy through consolidation is seen as the saving grace of the industry? There’s the source of your industry innovation, that’s the source of where shale came from. We should wait in nervous anticipation at what innovative wonders will arrive next from these bureaucrats!

Predicting the demise of the industry as a result of chronic overproduction isn’t difficult to do. It’s a classic business issue that was initially diagnosed from 1929s great depression. What we know from that era is that the fallout from overproduction is catastrophic and felt throughout the greater economy and society in general. In oil and gas this developed through the initiation of the SEC’s Full Cost accounting regulations being misinterpreted by producers. Where they began to build balance sheets, put cash in the ground and conversely overreport profitability. That has become the cultural norm of the oil and gas business. Overreported profitability attracted too much investment inevitably causing overproduction, or as we call it unprofitable production. The consequences were initially realized by the greater oil and gas economy in the form of repeated commodity price collapses which began in the 1986 oil market. Without any remedy applied for the past four decades it was inevitable the industry's consequences would eventually spill over to a greater scope and scale of societal damage and destruction. This is the point that we’re entering now as a result of the declining capacity and capabilities of the greater North American oil and gas economy. This scope and scale is best represented in the value that society gains from oil and gas. Each barrel of oil equivalent is leveraged mechanically to at least 10,000 man hours. Therefore the U.S. is generating the equivalent man days of mechanical leverage of 38.1 billion man days, not hours, each and every day of the week. If we want to know the source of the next major international conflict, I’d suggest this may be a candidate. And remember with all that value extracted by one barrel of oil these producer bureaucrats are incapable of making a profit.

One of the symptoms of the damage we’ve experienced is the fact that the service industry is operating at 25% of its prior capacity and as a result is charging record prices for their services. The equipment, skills and people needed to run that industry at a higher throughput doesn’t exist. Therefore more capital investment will be required as the first step in that process. Past investors were witness to their investments being cut up for scrap metal. Many of those service industry companies are no longer in business. People who left the business have found work elsewhere in industries that don't offer the bust component of a boom / bust economy, but think they might be able to live with that. How this gets repaired is described in the Preliminary Specification which we published in August 2012. It addresses the specific issue of how the industry and service industry work together. Where the service industry is seen as an extension of the producer firm. Not what they’ve been alleged to be by producers as greedy and lazy when there’s not enough drilling rigs, and then quickly being forced into dropping their capacity utilization to 25% of prior years and producers slashing the service industries day rates unilaterally by 50%. Producers should consider what they would do if they suddenly lost 87.5% of their revenues, or better yet, remember 2020. The service industry is an exclusive resource of the producers that needs to be rebuilt. It exists for one reason only and that’s not to continually abuse it which is what producer bureaucrats have done. The consequences of not looking at this relationship productively will haunt them now for decades. Producers are involved in a primary industry and get paid no matter what they do. Those that are working for them in the service industry don’t. Therefore producers need to accept this responsibility and act accordingly. They need to do so quickly and begin this rebuilding process with the producer's cash. Maybe producers will understand better having some skin in the game. And none of this cash buys anything, the rule here is you broke it, you fix it. Exactly the approach I’ve taken in the development of the Preliminary Specification and our user community.

The prolific nature of shale is that the volume of reserves it exposes is dramatic, its deliverability is orders of magnitude better than anything else in North America however the decline curve is quick and steep. This is the next shoe to drop in both oil and gas in North American production deliverability. Natural gas was the first to be exploited by shale technologies and therefore it is reasonable that it’s also the first to realize the downside of the decline curve. We have two graphs from EIA that reflect its deliverability and its decline.

We see in the first graph of Monthly Dry Shale Gas Production. The period between mid 2017 and early 2020, a period of thirty months. That shale gas volumes increased from approximately 45 bcf / day to almost 75 bcf / day. A bcf / day / month increase on average. Alternatively in the second graph U.S. Monthly Marketed Natural Gas Production (2017 - 2023). The decline curve of shale is invoked with a total U.S. production of natural gas of 106 bcf / day in today’s market. And I’m suggesting that in mid 2024 will have declined to what I would suggest is 66 bcf / day. Therefore in the next 28 months we’ll see a more dramatic decline in shale production than we experienced in our best days of increasing deliverability. We can adjust the demand side relatively easily by cutting LNG sales of 12.4 bcf / day and exports to Mexico of 5.5 bcf / day. Increase Canadian imports I would suggest by up to 5 bcf / day. That still would leave 17 bcf / day that may be needed to be augmented in order to satisfy domestic demand. That’s less than the 1 / bcf / day / month increase that was previously realized; however, that is without capital and with the deprecated capacity and capabilities of the service industry. We have to recall too that clean energy is the future and maybe this will be too much of an ask. What we see here is the industry is finally running out of gas. The funding was cut in 2015 which caused the lead times in shale to stop. Think of this as no more foundations are being poured for new buildings in the downtown core. There’s still a supply of square footage coming onto the market. Yet for the market to turn around now, it will take seven years to reestablish itself to the point where its volumes increase on the basis of 2017 to 2020. 

We remain constrained by the current organizational methods. We will never be able to break out of the routines of what has brought us to this point. There could even be a few shiny objects that distract the bureaucrats' focus. Our first act in approaching these issues is to organize ourselves so that we can approach this future constructively, productively, innovatively and profitably. That’s software in the 21st century, without the software and specifically the ERP software to define and support the organization there will be no change. Therefore our lead times may be longer than seven years. Miracles do happen, yet I think they’re all used up in this industry. What we see is the beginning of the hole that the bureaucracy began digging decades ago with their inability to care or take care of business. What should happen if we extend this out further? What if we find that during the great depression the other phenomenon of the separation of ownership and management. (Prior to stock markets and corporations was the era of the merchants.) Was that when management finds the situation untenable, they exit the scene for brighter climates in other industries. Such as Continentals Harold Hamm announced "Estate Planning." What we’re told is that the bureaucrats did not allegedly foresee this, and did not sign up for it. They may realize now that their tailor has been spoofing them all along. That their humiliation is imminent and they best skedaddle so nobody sees them naked or should ever remember their names. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

The Ugly Facts

 What is the probability that producer bureaucrats would be compelled or could now be motivated to act to develop the systems necessary to better manage the industry? They’ll be on their best behavior for as long as the threat of People, Ideas & Objects and its Preliminary Specification looms in the market. Don’t get me wrong, at sixty three years of age I’m as committed as ever and will see this through, yet… My age alone shows they have little time left to wait out their inevitable return to a permanent state of their glory years. This fact may also be the motivating cause that investors and bankers see that the bureaucrats have indeed won the war. If that would be a pro or con to the bureaucracy is unknown at this time? Would finance capitulate to the bureaucrats or permanently stay out of oil and gas? There is significant difficulty throughout the greater oil and gas economy. If the aged and committed have to endure and persevere thirty one years of hardship as I have in order to have these consequences play out then I can assure you that I'll not be a trendsetter. They say the struggle is the prize and I can state unequivocally that is how I see my case. The obstinance and do nothingness of the bureaucracy has been defined and is present in these efforts. Who will step up to finance the next drilling rig, expand industries fracing capacity, propose a necessary but controversial pipeline or make the industry profitable? When bureaucrats no longer need to be on their best behavior they'll be provided with the real and substantial personal riches they've been so desperately fighting for. I can at least claim that I tried everything within my power to avoid the inevitable consequences of their actions. Actions that were as predictable as this evening's sunset and tomorrow’s sunrise, assuming the person was concerned and watching their business. Now that the damage is realized we’ll see what their fortitude looks like, what their resources are in terms of their willingness to persevere. 

Intellectual Property is a valuable asset that I’ve earned in the process of my endeavors. This struggle of mine is not without significant value being attained. What, how and why the industry, service industry and producer organizations could operate as the most profitable means of oil and gas operations does mean something. This business model is a viable, theoretical model which is a necessary and general qualification that it will work in real life. It took a brain busting effort on my behalf, one that I have the medical records (five seizures between 2009 and 2011) to prove it almost killed me a number of times. I can’t imagine what someone else is going to have to do to bring a viable, workable model to the industry to solve the bureaucrats' difficulties? Who will spend the necessary ten years or more of research to figure out the “how” the “what” and “why” that a new solution needs to operate? A solution that excludes what is contained in the Intellectual Property of the Preliminary Specification. The difficulty that IP presents today’s bureaucrats is not so much legal as it is political. Investors have demanded they see a tier 1 ERP solution used by producer firms. Therefore what tier 1 ERP provider would allow their IP to be contaminated by an oil and gas solution containing pirated IP? And what director or officer of an oil and gas producer can accept an ERP solution from a vendor who does not have all of the underlying rights to the IP in which it uses? Either way, through the constructive development of appropriate systems to solve oil and gas issues or as an IP troll, my efforts will be compensated. I find it best to keep my options open.

Nonetheless I am finding it’s becoming difficult to sustain interest in People, Ideas & Objects when there's a market of $90 oil. I wasn’t doing this to be popular, I was doing it to solve problems and to earn the IP. I do have to question whether the diminishing interest in People, Ideas & Objects is a result of $90 oil or is it a diminishing interest as a result of the fact that nothing ever gets done? We’ve seen the most opportune times for action during negative $40 oil. People within the industry can see the issues as plainly as anyone else. Where the fault lies and what the solution to it is. They too are powerless when the financial resources are never devoted to resolving these problems. Therefore what should these people do? I started in 1991 and no one’s going to go through this difficult process for the high probability that nothing gets done. I can say that I’m losing momentum in the market, which may be fatal to the initiative no matter how hard I try. If nothing ever gets done it won’t be anyone but the bureaucrats fault.

I published the Preliminary Specification in August 2012, almost a decade ago. The basis of value that we attach to People, Ideas & Objects, our user community and their service providers is the differential between the base case the bureaucrats accept. Versus what the industry needs to generate in terms of profitability everywhere and always. This profitability is calculated as $5.7 trillion over the course of the next 25 years. For example the minimum may be the $130 price differential between today’s price and that which was accepted in April 2020. Making oil and gas into what is commonly referred to as a business. In addition, we replace the expectation by the bureaucrats that investors will fund the capital costs over these next 25 years. Compared to our ability in the Preliminary Specification to pass these capital costs on to the consumer and cycle them through the producer firms as the means to finance the expected $20 to $40 trillion in anticipated capital expenditures over that same 25 year period. Determining our value proposition falls within the range of $25.7 to $45.7 trillion. If this was valid since the time we published the Preliminary Specification in August 2012 then there may have been an incremental amount of $10.3 to $18.3 trillion earned by North American producers. The question therefore is, does this quantify the level of financial damage experienced throughout the industry as represented by the producers, the service industry, those who chose careers in either of those industries, the preparedness in terms of approaching what is unquestionably the most difficult and technically challenging period the industry faces during these next 25 years? Needless to say I think it does. A profitable industry is dynamic, innovative, accountable and profitable for all concerned. When shareholders are satisfied through appropriate and accountable profitability that does not preclude the rest, it’s on the contrary. We’ve had an unprofitable industry for many decades, outside the bureaucrats, who has prospered? We mentioned the other day that Houston earlier this century was considered the center of the global oil and gas industry. I wonder what it cost in terms of effort to have earned that? I can certainly say, I don’t see where anyone earned anything for having given it away.

These are just the facts as I see them today. Our momentum is fading in relevance in the market at this time, and doing so for whatever reason. I’ve always maintained that people would remain focused on this project as long as they knew the financial resources were there and available for them to complete their work. They now know the answer to that question and the probability it will ever be available to them. I’ve also maintained that putting Humpty Dumpty back together again after people concluded that it was over would be just that. After the level of destruction that has occurred in the service industry, where Keystone XL was abandoned after $15 billion in investment and over a decade of work. None of these time and financial losses were incurred by producers themselves. People may now see that the grass may be permanently greener on the bureaucratic side and People, Ideas & Objects wisely never exposed them to any career risk by exposing them or their affiliation with us. These are the facts of the situation that I’m facing. Bureaucrats have always had complete control over the budget process and therefore what does and doesn’t happen. Throughout our thirty one years I can attest that our cumulative revenues are $0.00. We should note too the bureaucrats' satisfaction with the industry over the past four decades and the wealth of personal financial resources they’ve obtained. Times in oil and gas may never have been more promising for these bureaucrats. It’s just too bad about the rest of us. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

The Noun That's Also a Verb

 I want to clarify my argument on how People, Ideas & Objects perceive the recording and retirement of capital costs in oil and gas. I am looking purely from the financial reporting perspective of what is necessary to report a competitive, profitable offering of oil and gas’ performance in today’s capital markets. Understanding the risks associated with oil and gas exploration and production, with the extended timelines involved in the industry, today’s producers' financial reporting is the polar opposite from what would be necessary, in my opinion. There are tax, royalty and other regulatory requirements imposing a cut off between what is capital and operations, also the speed in which those capital costs are recognized and their expected return. Financial accounting determines performance and the basis of accounting in North America is standardized so that investors can evaluate firms on the basis of their criteria of acceptable risk based against their understanding of that accounting standard. Theoretically using GAAP a profit is a profit is a profit. When the accounting in oil and gas is skewed in the manner that it is, where the focus is on bringing the property, plant and equipment account to the approximate value of the independent reserves report, producers have violated the standard understanding of the investors framework. By implementing the Preliminary Specification and reorganizing the industry around the user community service provider organizations, producers focus will be on the basis of profitability everywhere and always. Profitability based on a standardized accounting across the industry that is consistent with investors understanding of profitability and performance. If the property is incapable of meeting that threshold of performance, then the producer shut-ins the property in order to maintain their corporate profitability at the highest possible level based on their production profile. Shut-in properties would therefore be the most lucrative opportunity for the producer to focus innovatively and return that property to profitable production. 

This is not the capital market that producers think it is. Today’s is a sophisticated, lightning fast and highly performative market where new industries are reshaping the economy. An industrial revolution scale of change that is reaping rewards which have rarely been available before. Where a blogger can claim to provide the most profitable means of oil and gas production. And suggests that it’s not enough to just to own the oil and gas asset anymore, where it’s now necessary to have access to the software that makes the oil and gas asset profitable. But I digress. What may have been adequate in terms of performance for the oil and gas producer in the early 1980s is no longer valid or acceptable. It’s tragic, unnecessary and wasteful. Having a lot of assets means exactly what? You own a lot of things, but never any cash. This is not a great position to be in when the opportunity to be dynamic, innovative, accountable and profitable demands so much more. We see few producers in North America able to qualify for that classification. 

The capital intensive nature of oil and gas should not be the reason that producer bureaucrats are involved in the process of “building balance sheets” or “putting cash in the ground.” Such lunacy has overtaken common sense in this industry and shows no sign of abating. It begs the question with the bureaucrats doing so well personally, is what’s really been going on? A capital intensive industry being managed through the Preliminary Specification, our user community and their service providers would seek to have the high costs of capital involved in the business passed on to the consumer in an efficient manner over an appropriate period of time. We believe that having the capital costs of the producer retired over the course of 2.5 years would provide a more competitive means in which producers would attract investors. Cycling their prior investments back into cash from the sale to consumers in profitably priced products. Enabling producers a reasonable distribution where capital costs, dividends and debt reduction each receive an equal share of that real profitability. And their capital costs would be fully funded through these internally generated cash distributions. Providing the only real and viable source of financial resources capable of meeting the needs of the horrendous capital demands of producers over the next 25 years. The industry's future capital costs are assumed to be financed by new investors which reflects the bureaucrats' speed and ability in which they can learn such important lessons as to why their investors left in 2015. 

There are two methods in which we look at the retirement of capital costs that are different from today’s bureaucratic balance sheet building. Through depletion on the basis of a more competitive offering in the 2.5 years that we mentioned. And the cutoff of where capital and operations are determined. The SEC’s requirement for producers is to ensure that their asset value in property, plant and equipment does not exceed the present value of the independent reserve report. Invoking the dreaded ceiling test with its consequential impairment of the assets that breach that criteria. If you want to know what the producer is doing and its value, look at its reserves. If you want to know how it’s performing based on the historical basis of the money invested etc look at the financial statements. Or one would reasonably assume. The highest performing oil and gas producer would theoretically have $0.00 as the amount in property, plant and equipment. That they’ve retired all of their capital costs and therefore have achieved the lowest cost producer from the real sense of the term in a capital intensive industry. This does not diminish the value of the assets of the firm as represented in the reserves report. 

The second element of our method of reducing capital costs faster, and hence recording the real costs of oil and gas exploration and production in the costs to the consumers. Is to begin treating assets as assets and operations as operating expenses. If we take a strict approach to our point of view, we see that everything in oil and gas can be classified as tangible or intangible. We’re suggesting that anything with a serial number, foundation or controllable be classified as an asset in property, plant and equipment or inventory / work in progress. Those aspects that don’t qualify should be classified, for financial reporting purposes, as operations. These would include the process necessary to cement the casing with cement. The noun that’s also a verb. Casing, drilling day rates, completion costs including fracing. If recognizing these as operations are too big a step for the producer bureaucrat to take, then these costs should at least be classified as intangible assets on the balance sheet. And therefore subject to their own, quicker I would suggest, recognition in terms of the time they remain as an asset. 

A critical review of the SEC and FASB accounting standards finds that producer bureaucrats are in compliance with the letter of the regulation governing capital assets and the inclusion of costs in property, plant and equipment. These regulations were introduced in the late 1970’s and have been used in oil and gas throughout North America since. They are the culture of the industry. That review of these requirements shows they only discuss the instance where the assets can not exceed the petroleum reserves value. There is no discussion on the minimum acceptable level of asset value a producer would attain. Why would there be? The culture of the industry has grown to the point that it has distorted the thinking of what the objective of the business is. “To build balance sheets” and “put cash in the ground” are the results of these cultural distortions after 45 years of practice. Picking up a set of financial statements of a North American oil and gas producer will tell you next to nothing about the firm other than it’s size as reflected in its revenue. After that you can apply the same formula to what the assets will be, the debt, the costs and the overall, spectacular profitable performance with never any working capital being the same percentage factors of the revenue of the producers. The only difference is the size of the producer firm as reflected by its revenue. Has the producer been effective in exploration and development of oil and gas? Don’t know. Is it a better investment than the producer firm headed by the village idiot? Don’t know. They’re not comparable and the homogeneity between each other is deceiving. Are these the principles in which the accounting profession was established? Are these the principles that the SEC and FASB were searching for when they established these regulations? Are these the basis of the investors understanding of the accounting framework they can apply their investment criteria to any industry? Absolutely not. 

The latest bright shiny object to have been floated by these bureaucrats is the term “zero net debt.” Which is supposed to mean something. A simple factor of long term debt less the current balance of all available cash. Which tells me… Cenovus is claiming their net debt in the fourth quarter of 2021 reached just $9.6 billion dollars. However, a closer read of their financial statements sees that the total liabilities listed equal $30.496 billion. It is for reasons such as this disparity that I question the validity of these claims and their motivation. Is it that they’re just seeking attention or are they looking for some kind of reward for making such statements. Or maybe it's a signal to the market that through the process of bankruptcy the only obligation they’re truly committed to is to those they’ve pledged their assets as collateral. And like their shareholders the other $20.896 billion in other liabilities are completely irrelevant when the bankruptcy comes, and therefore completely irrelevant now.

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Were Beavis and Butt-Head Elon Musk's Heroes?

 We see in Canadian Prime Minister Justin Trudeau’s response to the Canadian truckers that running away, hiding and not addressing the issues is as effective as covering your eyes, stomping your feet and yelling in kindergarten. Whether it’s politicians, the media or those that actively seek to deceive others through poor or no accountability, this tactic may have been effective at one time prior to its overuse and abuse. We are today witnessing that chickens do come home to roost. It’s a new day and there seems to be new rules coming into play, the benefit of the doubt is no longer being extended, and for those that took that opportunity in the past are no longer being given the time of day. This fourth quarter seems to be a time in which serious questions are being asked of what’s happening in oil and gas and the future of the North American producers. We’ve seen this past decade of oil and gas being more or less a lost decade and the curious are thinking, maybe it’s time to revisit the industry and approach it differently. Let’s look at the natural gas market and determine if events are shaping up to provide for a positive future as would otherwise be hoped for? 

We have three graphs from the February 3, 2022 EIA Natural Gas Weekly Update that describe different aspects of the U.S. natural gas marketplace. The first is natural gas storage volumes showing that natural gas demand remains healthy and the response by producers may have been inadequate to maintain the volume of storage that was traditionally expected. Specifically, on December 31, 2021 storage volumes were 528 BCF higher than the five year minimum and dropped in the course of four weeks to less than half that at 228 BCF above the five year minimum on January 28, 2022. The steepness of this drawdown is significant as it represents a somewhat flat footed response by producers to maintain production volumes. Mid to late March is the time in which storage begins to refill and the amount of storage that may be drawn down during the next 7 - 8 weeks may become an issue. 

Our second graph shows the total number of rigs drilling in the U.S. With this volume of activity, the question needs to be asked if this will provide the turnaround needed to meet the renewed demand and refill the probable depleted storage volumes? The apparent answer at this point is no, it will not.

Our last graph shows what appears to be a break between the response in the producer's activity level and the price of natural gas. Prices are breaking upwards while active rigs are remaining at levels that appear to be too low to have an impact.

What is the cause of this lack of response by producers? Bureaucrats would suggest that the amount of dividends and stock buyback programs are causing them to divert their cash to those causes. This is self-serving and an admission that the bureaucrats have not rehabilitated themselves from their spending addiction. Businesses generate profits that are adequate to meet the needs of the business, which happens to include all aspects of the business, and to compete in the capital markets. It's not an A / B choice, it's C All of the Above. The reason they don’t have the cash resources is due to their flat footedness and refusal to act in terms of reacting to the changing environment of their business over the past 4 decades. Bureaucrats may also claim they haven’t the field capabilities and capacities necessary to conduct the necessary level of activity, the service industry has just not kept up. Which is true, drilling companies were never successful in their diversity initiatives in the restaurant business. The fact of the matter is that while these bureaucrats were enjoying their party they didn’t pay any attention to the business. It has atrophied all of the value and as they have done throughout this protracted period they have blamed, accused and generated viable scapegoats of everyone and everything, other than themselves. The fact that industry doesn’t have the financial wherewithal and it doesn’t have the ability to conduct the field activity is true. These are symptoms of their chronic mismanagement that I’ve documented with the fallout consequences predicted would happen. They’ve had alternatives. 

Would producers be having the difficulties they’re having if they had the appropriate ERP systems? I’m not in any way blaming the current ERP systems providers. They’ve done stellar work in impossible conditions due to the fact that producer bureaucrats have wanted to and starved them financially so that producer accountability was never discovered or discoverable. The fact that investors have pointed out that oil and gas producers must obtain tier 1 ERP systems as a precondition for their return is not a comment towards the ERP providers in the market today. It is the understanding of the dynamic that producer bureaucrats have created where accountability is as impossible to determine as can possibly be achieved. 

There is a wall of common sense and logic that has betrayed the bureaucrats each and every move these past four decades. What should have been done was always circumvented by taking the short term opportunity without any understanding of the consequences it would cause. We have moved from self-inflicted crisis to self-inflicted crisis and back again in a comical act of “building balance sheets” and “putting cash in the ground.” The sad part is that it has gone on for so long that the majority believe it. It is culturally ingrained and the way they do things. They can only laugh at those that don’t follow this prescribed script. What today's graphs show about the natural gas market in North America is that it will soon be influenced by the global natural gas market. European natural gas import prices averaged $28.26 U.S. for the month of January. LNG will continue to have the effect of taking what was a continentally priced commodity and making it a globally priced commodity. 

Even with the endowment of shale North American producers will not be able to respond to the demand for production. Leaving the prospect of much higher prices being realized across this continent. Some may ask if that’s not what People, Ideas & Objects have been suggesting should be what our future should be? Hardly, higher prices are the necessary component of a dynamic, innovative, accountable and profitable industry and for all concerned. Higher prices are also the reallocation of the financial resources towards innovation. With our good friends the bureaucrats nothing of the like will occur. No one will be prospering in the industry as a result of the continued litany of decisions whose consequences were never considered at the time. Our current self-inflicted crisis is this legacy of hedging that has gone on since the April 2020 covid induced oil price crash. These shenanigans have the potential to bring the industry down quickly. 

At some point today EQT will publish their fourth quarter report. They are the largest U.S. natural gas producer and have found themselves in a bit of a dilemma when it comes to their hedging practices. EQT are not part of our sample of producers that we analyze and I am generally unfamiliar with them and their operation. After the third quarter report I only noticed that their hedging losses had dropped their net revenues into negative numbers totalling $775 million for three quarters of 2021. They’ve also recorded a net $4.3 billion current derivatives liability. Indicating this would be coming due before September 30, 2022. I don’t have the requisite understanding of the derivatives market to understand what strategy EQT is employing. It appears to me that they’re seeking to mitigate their downside risk of natural gas prices going below $2.20 and $2.32. The volume of gas under these contracts is considerable at a total of 4.5 TCF of gas over the course of next three and six years.

With respect to the derivative commodity instruments held by the Company, the Company hedged portions of its expected sales of production and portions of its basis exposure covering approximately 2,554 Bcf of natural gas and 5,146 Mbbl of NGLs as of September 30, 2021 and 1,955 Bcf of natural gas and 3,462 Mbbl of NGLs as of December 31, 2020. The open positions at September 30, 2021 and December 31, 2020 had maturities extending through December 2027 and December 2024, respectively.

With these volumes and prices over this period it is clear that EQT assumed that in an unchanging natural gas market they expected to obtain the least viable level of their perceived definition of profitability as acceptable. With the dynamic changes in the prices of natural gas, the upside of their natural gas business will be paid to others. However, royalties are paid on the price realized and at $28 the royalty will cause EQT’s net price to be far lower than the hedged price and that will be before any other capital, operating or overhead costs are recognized. I do not see this as an ideal situation. In addition, working capital of EQT is not what would have been expected of a producer seeking to mitigate its risk. They are the proud owners of negative working capital of $3.9 billion. A large part being the liability to the hedging contract, which brings up this interesting difficulty that the company may be faced with. (Note, EQT current rating by Moodys is speculative at Ba1, which is one step below the defined investment grade Baa3 of the contract.)

Certain of the Company's OTC derivative instrument contracts provide that, if the Company's credit rating assigned by Moody's Investors Service, Inc. (Moody's) or S&P Global Ratings (S&P) is below the agreed-upon credit rating threshold (typically, below investment grade), and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, the counterparty to such contract can require the Company to deposit collateral. Similarly, if such counterparty's credit rating assigned by Moody's or S&P is below the agreed-upon credit rating threshold, and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, the Company can require the counterparty to deposit collateral with the Company. Such collateral can be up to 100% of the derivative liability.

The question that needs to be asked is in the context of the next self-inflicted crisis. Where do the hedging liabilities fall in terms of the call on the resources of a bankrupt producer? If the derivative liability is invoked, what effect will that have on the company's other debt covenants?

Producer bureaucrats chose to take the least profitable opportunity by locking the firm into the hedging contract. While actively choosing to ignore the opportunity to work hard and build the Preliminary Specification and our user community to rebuild a dynamic, innovative, accountable and profitable oil and gas producer firm. An opportunity that has been available to them since 2012 and at a comparatively minimal cost to the firm, though it would disintermediate the bureaucracy. Therefore who is going to commit to be the first to fund the Preliminary Specification and our user community? And how? People, Ideas & Objects budgetary roadblocks I’ve instituted are the realities of the situation the bureaucrats have created for all participants in the tier 2 and tertiary industries supporting oil and gas. There are no opportunities for any investor returns in oil and gas ERP systems. Therefore this is my dilemma and around and round we go. No one in oil and gas ERP has made any money for investors. How would I suggest that I would? I also need to deal with the fact it is software which banks are violently allergic to. Therefore the bureaucrats have created a situation where they’ll never be held accountable or need to deal with their rolling incompetence. What I see is a lack of concern for the decisions that are made, but then they’ll muddle through. The continued waste of natural resources is tragic in the least. A close read of history will show that once organizations have been destroyed in this manner, and I would suggest that their ability to understand how to make money is their deficiency, they’ll never come into being again as viable, prosperous contributors to the greater good. It’s good to know that Beavis and Butt-Head had at least the oil and gas bureaucrats looking up to them. 

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Vision Without Action is Merely a Dream

 Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world. 

Joel A. Barker

With this quote we see the three options where the industry can be directed to. The reality of the situation as far as we know, is that People, Ideas & Objects is the only ERP solution being brought to the market. However, since 2004 when we initially proposed the solution of using the Joint Operating Committee as one of the key organizational constructs of the dynamic, innovative, accountable and profitable oil and gas producers. The issues we identified, most notably the chronic overproduction, has financially decimated the North American producers and associated infrastructure. The interests of the bureaucracy have been exposed as not an accountable, objective, responsive and profitable concern but an unaccountable, unconstrained and self-interested group who’s concern does not extend beyond their own skin. We have extended the initial idea of using the Joint Operating Committee and completed a decade of research into “what and how” the oil and gas industry’s ERP system and business model based on these need to be configured in order to succeed and ensure producers attain profitable production everywhere and always. What we call the Preliminary Specification has solved these issues and offered the benefits of a profitable industry. During this process People, Ideas & Objects incidentally conducted the disintermediation of oil and gas, a process that is and will affect all industries which challenges bureaucracies directly through far more efficient business models. Our budget was published in the first quarter of 2014, and identified clearly the scope and scale of the issues that are now plainly clear for all to see. I think that People, Ideas & Objects can not only claim to have foreseen and understood the issue, in August 2012 we were able to provide a viable solution in an innovative business model but also scoped out the implications of inaction and the scale of the issue. A scope and scale that has unfortunately been validated through bureaucratic inactivity.

We’ve now moved beyond the financial degradation and destruction issues of the producers. The financial rebuilding process will need to be financed through the higher commodity prices, such as the Preliminary Specification provides. However the recognition of these issues is not addressed by industry. The value that was handed down has now been exhausted through bureaucratic neglect. The decades of investor cash that was pumped into producers has followed. After seven years of investor withdrawal we see many events and further implications happening that prove the Preliminary Specifications validity and the destruction by the bureaucrats that was both unnecessary and highly counter productive. These will not be remedied in the short term and not by those who willingly orchestrated this destruction.    The legacy of costs remaining and value that has been extinguished will need to be a deliberate rehabilitation effort. Petroleum reserves are worth nothing if they can’t be produced profitably and profitable in the real sense of the term. The behaviors of the bureaucrats when the dire consequences of their actions became evident did nothing to change their ways. Now, with money on the table from higher commodity prices, and the potential for far greater financial resources in the future, who should we trust to manage that resource? This does nothing to suggest how the far more complex future of oil and gas will be approached. Their model is an uncompromising and culturally constrained method that can’t, won’t and will not ever change.

Once financial degradation has occurred the natural follow on consequence is the degradation of capabilities and capacities of a firm. As has happened in oil and gas, and the service industry. Cash and the inability to source adequate volumes of it, due to the lack of real profitability, and the continued specious accounting that has overhead consuming the bank account each month. The lack of any action by the bureaucrats is the key constraint to any progress. It appears to me that OPEC+ concern for the North American producers' chronic overproduction into the market no longer exists. It appears to me that commodity pricing has become more dependent on the production quota decisions of OPEC+ and its member countries than on the North American producer bureaucrats ability to deceive their investors. And in natural gas the political fortunes of those climate change truthers in Europe are living the consequences of their past decisions. Production may become profitable, even in the real sense, however the deprecation of the industry will hold off energy independence, even in the shale era, for the short to medium term. North American dependence on foreign sources of oil, and the societal implications of that may now be a reality. This being the first of many steps in which societal damage is being experienced as a result of the bureaucratic laziness and sloth identified above. 

The dynamic nature of the bureaucracy is on display most clearly in their response to the funding strike their investors and bankers began in 2015. There is no more significant message that can be sent to management than for their investors to say no. If your investors don’t have faith in you then they’ll keep their money. If you subsequently make no changes to deal with the investors lack of faith and identified issues for what is now seven years, that is very disconcerting. Particularly when the issues from overproduction have been clearly defined since the great depression, the 1986 initial oil price declined due to overproduction, the numerous repeat events of both oil and gas overproduction, the publication of a solution to overproduction in August 2012 and these investors actions starting in 2015. 

This was always the “plan” of the bureaucrats in their muddle through strategy. As part of that strategy which includes “market rebalancing,” whatever that means, capabilities and capacities of the industry would diminish to the point where the bust in the boom / bust cycle would diminish supply to the point where it would match with demand and alleged profitability would return. Where are we in this version of “market rebalancing” and is it now providing a clear and predictable future? Has market rebalancing been achieved and can we assert that it’s nothing more than the willing and deliberate destruction of the value of the industry. 

As I’ve mentioned before I can’t be convinced that all is well when the build back better balance sheets continue to balloon and profitability soars while cash and working capital evaporate. Well it's a “capital intensive industry” they’ll say. To which I say that’s correct, but producers never recognize their capital costs in terms of what the capital markets expects in returns. Capital costs are never realized or passed on to the consumer, only collected and cherished on the CEO’s balance sheet as he struts it proudly down main street. These producer firms are spending machines, not organizations and certainly not the type that could ever be confused with being a commercial operation. It’s about stellar engineering facilities with balance sheet empires that they can prove to anyone that should ever question them. These are empires built on 20 lbs copy paper 8-½” x 11” sheets. And you must never question that.

On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.

Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations 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, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined TBD and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.