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

 The uncaring nature of producer bureaucrats towards their business profitability has been on display for decades. The state of their business is in decline and severely deprecated in terms of its capacities and capabilities due to the long term financial damage sustained at their hands. That their business is in decline is not a concern for them and that is evident in the response we received to our July 4, 2019 white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” This paper was the most widely distributed document that I’ve ever produced and was wholly rejected by the bureaucrats. Why? When only nine months later oil traded as low as negative $40. History shows that since their rejection of the opportunity People, Ideas & Objects, our user community and their service providers were offering. Instead of seeing the effort needed to make oil and gas profitable everywhere and always, and shale commercial, we witnessed bureaucrats 2021 statement that shale was never financially viable and that clean energy was their future. I find it interesting to question what it is in these three events that reflect what the bureaucrats' motivation and desire is. They don’t want to consider making themselves “Profitable, North American Energy Independence -- Through the Commercialization of Shale,” concern themselves or even care about the day to day of their operations as they slip into negative $40 oil prices and prefer to ultimately abandon the industry in pursuit of other industries of which they have no understanding, capabilities or capacities. Maybe Elon Musk should be looking over his shoulder for his next competitors in space? The absolute shame of these officers and directors of the North American based producers!

As Russia is emphasizing to the world the importance of oil and gas, North American producers have declared they’re sauntering off into the sunset with dreams of solar panels and windmills. Seeking the ultimate environment of unaccountability in the clean energy industry that has never and will never perform. An industry where no one has generated anything of value and lives off the good graces of government largess. Where the ultimate viable scapegoat of, “we haven’t solved the commercial side of this business yet, but we’re close,” will be adequate to keep them in their familiar personal lifestyle of comfort and grace. And lastly let's recall that nothing was submitted or approved in these fundamental transitions of the focus of these producer firms. Transitions that are the polar opposite of the oil and gas business. An opposite that is best represented in the bureaucrats' decades-long allegation that they had to make sure that petroleum prices remained low enough to ensure clean energy never gained a competitive foothold. What they perceived as a looming, threatening competition in the form of clean energy and one in which they were willing to destroy their existing businesses through low prices to stop, is now the viable scapegoat they willingly invoke to justify sauntering off to. Is today’s flatfooted response to deal with North America's demand for more energy, where it seems that all of the consolidated producers have claimed they’ll not be responding in any way to increase their production, just a continuation of the muddle through we’ve seen from them these past decades? 

Overnight Germany has come around to the lack of any logic in their prior misguided multi-decade energy policies. The rest of the world seems to be waking up to the fact that oil and gas is critical to our existence as well. With war breaking out in Europe over the supply and delivery of natural gas. It will be interesting to see the final outcome of this initial conflict. Isn’t it also good to know that we have a dynamic, innovative, accountable and profitable industry here in North America? The mainstream media have been mouthing the words of any and all such nonsense for so long they don’t know what the facts are in anything. It’s their opinion that North America will just export what oil and gas we have to solve the energy difficulties of Europe. The fact that oil and gas is now the focus of the world has not and probably will not permeate the minds of these bureaucrats. The reason things are quiet on their front, with no comment about the situation may be due to their concern about looking directionless, leaderless, unknowing what to do and most of all uncaring about whatever business they may currently declare themselves to be in. It just so happens they can’t remember at the moment. It could also be a concern about what business they’ll have to shift to in the next quarter if things change again. “Probably best then just to muddle through.” If I sound disappointed with the performance of the North American oil and gas producers, I don’t know what gave it away. I obviously don’t see the opportunity in front of these producers in the fact that Russia provides the potential of such a high quality, long term viable scapegoat for them. And in terms of discussing new, sustainable, viable scapegoats, producers were quick to establish the Biden administration as another reason they’re unable to respond, while at the same time including their shareholders holding back capital from them to expand drilling but lets not forget the service industry. What they see is the crisis they’ve always depended on to “strike up the band” and get their party started. This time they know however, they’ll need to "turn it up to eleven." From World Oil. and here.

U.S. shale has a litany of complaints with the Biden administration, from pipeline permitting to leasing, and is still producing less oil and gas than before Covid-19 struck two years ago, even though prices for both are much higher. Shareholder demands to harvest the elevated prices for dividends and buybacks is the main driver for their conservatism, but executives claim a long-term commitment from the U.S. government to back fossil fuels could unlock more capital investment in fresh production. 

Vicki Hollub, CEO of Occidental

The world’s energy markets can’t rely on major growth in the Permian Basin U.S. shale patch to ease oil prices, according to Occidental Petroleum Corp. Chief Executive Officer Vicki Hollub.

It’s a “dire situation,” she said, adding that supply-chain constraints are severely limiting companies’ efforts to grow in the world’s largest shale basin. 

The Permian is also suffering from labor shortages, she said. Companies also don’t have enough rigs to support strong growth, and they’ve already used up most of the drilled-but-uncompleted wells that provided a quick uplift in growth in previous up cycles.

“The call for increased production from the U.S. at this point, especially with supply-chain challenges, can’t happen at the level that’s needed,” Hollub said. 

 OPEC meets with U.S. shale

Outgoing head of OPEC Mohammad Barkindo met with U.S. shale producers Monday night in Houston and said both groups are aligned in how they see the challenges posed to the oil industry by underinvestment.

“There’s no doubt we need to engage the investment community, the financial community, to address the encumbrances that are turning out to be obstacles on our way to access capital,” Barkindo said in an interview following the dinner meeting.

“The world is gradually but dangerously running out of spare capacity,” he said. “This is a function of the massive underinvestment in the industry in the last 10, 15 years.”

And then finally some sanity and focus.

OPEC Secretary General Mohammed Sanusi Barkindo 

It’s an oil civilization, and we cannot see, in all projections, where this will diminish.”

When asked if OPEC was concerned about losing market share if the U.S. and Canada ramp up shale exports, Barkindo said he is more concerned about meeting global demand, and at the end of the day, all oil producers are in the same boat.

It is important to now discuss my primary disagreement with how the producer bureaucrats account for the capital costs of their production. People, Ideas & Objects assert that a capital intensive industry will have a large component of the cost that is passed on to the consumer being capital in nature. Producers believe that building balance sheets and putting cash in the ground is their primary corporate objective. Theirs is a point of view which seeks to have the property, plant and equipment account emulate the value that is reported in the independent reserves report. Ours is the appropriate use of accounting as a measure of performance in the timely and accurate recognition of all of the costs of exploration and production. Their perspective is derived from their misinterpretation of the late 1970s SEC’s mandate that Full Cost accounting be used to value capital assets in oil and gas. They’ve misinterpreted this as the value must not exceed the reserves value, however they feel they need to come as close to the reserves value as possible. By doing so with all manner of spending by the producer capitalized as property, plant and equipment. We believe the most competitive and performant producers would seek to aggressively reduce the value of their property, plant and equipment account in order to achieve the lowest costs of any producer. The natural inverse of their method of overcapitalization is the overreporting of profitability in equal amounts. Leading to the overinvestment that has occurred with the systemic and culturally persistence North American overproduction that has been evident since the initial 1986 oil price collapse. The source of this chronic overproduction is easy to trace when we classify overproduction as being the same as unprofitable production. By recording literally everything that is spent as a capital cost of exploration and production, only operations and royalties were deducted from revenues with a sliver of depletion being the capital costs recognized for the years production volumes against the decades their reserve volumes will remain for that property.

And then came shale reserves. Which are highly prolific, high in their deliverability, massive in their scale of reserves over conventional reserves. Shale also has a much higher cost structure and a roller coaster ride of a decline curve. This decline curve begins as early as 18 months and can see the production deliverability collapse without substantial capital costs being incurred to remediate the decline. Only then to face the same decline curve in as little as 18 months. It is the high capital costs of the drilling of shale wells and the enormous costs of fracturing the formation that costs are so high. These capital costs are allocated across the reserves that are exposed to the well bore. And it is here, with the massive volume of those shale reserves that consume these high capital costs down to the relatively small dollar amount for each barrel of oil equivalent that is produced. It is then shale's precipitous decline curve that demands additional, extensive capital costs. Which of course is added to the capital costs of the reserves. Whether that is drilling additional laterals and fracing those or just re-fracing the existing lateral. What we know is that shale producers have been able to build their balance sheets handsomely in the shale era by putting an abundance of cash in the ground through shale operations. This accounting treatment in the financial statements is what investors, much like myself, were never able to fully appreciate, quickly learned it was as they suspected, and caused investors to begin their strike of the industry beginning in 2015. 

In 2020 the value of the reserves of the producers took a bit of a hit in terms of their value due to the prices of the commodities being severely depressed. Our sample of producers in 2020 were forced to recognize their capital costs on a more appropriate basis and that saw on a straight mathematical basis the amount of depletion being recognized over 4.0 years. Down from 7.43 years in 2019 and what we have in 2021 of 9.18 years. Who says bureaucrats are not culturally constrained. We see here that there is no desire to reduce their costs to lay claim to the lowest cost producer by continuing with the 4.0 years or lower. The opportunity to recognize greater volumes of capital costs due to the higher commodity prices is evident but not taken by any of the sample of producers. Regression back to the mean is their method of accounting operations. Nothing can, will or ever change, it is standard operating procedure.

I want to draw special attention to Crescent Point Energy and their financial statements for 2021. Crescent Point has raised $16.7 billion in their short existence. As of December 31, 2021 they had achieved retained losses totalling $11.3 billion, yes even in this specious reporting environment. In 2021 they recorded “profitability” of $2.376 billion Canadian. Which is a result of a 2021 reversal of a 2020 impairment charge to the reserves of $2.514 billion. Therefore in reality they actually lost $138 million during 2021 which in this reporting environment makes their performance disconcerting. What we now know of all of the producer bureaucrats from the 2021 financial reporting is that this movement back from 4.0 years in 2020 to 9.18 in 2021 is a simple continuation of the past, culturally this industry can’t, won’t and will not ever change. 

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. 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. 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.

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

 As the bureaucrats find they can now ease back into their couches and relax again, they’re finding that all along their couches were actually recliners! Life is good again and others' absolute care and concern for things has proven to be unwarranted. They say they’re fine and thank you for asking, and somehow they’ll continue to muddle through. They think they’re in the catbird seat and will ride out the consequences of their inaction to their ultimate personal prosperity. The message we should take from the fourth quarter 2021 reports is that the probability they’ll do anything about their ERP systems is now an exponent of zero.

What we also can determine is that the damage and destruction that is present in the industry has had the greatest impact on the service industry. This is only reasonable considering the methods used by the bureaucrats to hoard the financial resources of a primary industry within the producer themselves. Those other secondary and tertiary industries who are wholly dependent on these resources, were on their own when the bust aspect of the boom / bust economy came into play, there just wasn’t enough to go around. The effect their treatment has finally caused has been tragic and the service industry will take some deliberate, long term action in order to resuscitate it to the level necessary for a viable, profitable, energy independent North American oil and gas industry. As we’ve discussed here for the last many years, the next shoe to drop after the decline in the financial performance of the producers was the capabilities and capacities of the service industry and then it would move on to where we find ourselves today, having a broad, general impact on society. 

People, Ideas & Objects have been pointing out repeatedly the impact that oil and gas has in terms of man hours of its mechanical leverage in our extremely advanced economy. We’ve seen in many of the recent press reports that bureaucrats are satisfied with their production forecasts and will continue with their quite limited efforts to increase production. As to who consumers should turn to source their energy needs? There are 750 million barrels of oil in the strategic petroleum reserve. That’s at least two months supply! And that Russian guy, Vladimir has some extra he might want to sell. Check with him. We saw the producers were unable to source their needs to drill adequate volumes of oil and gas wells due to the lack of capacities in the service industry. This quote from World Oil quoting EOG Resources. 

Most of the best drilling rigs and fracking fleets already are under lease, Chief Operating Officer Billy Helms said: “There are not a lot of new pieces of equipment that can come into the market.”

Needless to say this quote, among other similar quotes, shot past all the other viable scapegoats used by bureaucrats these past decades, to score number one on our list of viable scapegoats of all time. I guess what we will have to do if we should ever see the mythic oil and gas service industry employee again. Is to give them a piece of our mind for messing up the producers future. It’s here in the cold hearted thickness of not being able to look past their own skin, accept any responsibility for their duty, their mistakes or to work to mitigate any prior errors that consumers can seek the comfort they need in knowing that they will be alone freezing in the dark with the half dead breaking down their front door searching for food. After all, the producer bureaucrats will be fine, pointing out your failures from a safe distance.

It’s also at this time that “things” are prosperous for our good friends, the producer bureaucrats. People will begin asking them once again what about People, Ideas & Objects and their Preliminary Specification? There was a time a few years ago when we reached the peak of our impact in the market. We had traction and were farther ahead than we are today in terms of seeking funding for the implementation and development of the Preliminary Specification, our user community and their service provider organizations. This was when the bureaucrats went to town on our solution and claimed that it would never work. That it was a crazy solution and would not be viable in the marketplace. I don’t raise this point for the petty reasons bureaucrats will accuse me of. I raise it due to the fact that this was their allegation then and it will be their allegation once more as I suspect People, Ideas & Objects are on a trajectory that will soon exceed that previous high point. 

The point is raised due to the fact that the alternative they did pursue was nothing and were shown to be uncaring and unsympathetic to the destruction and damage being realized throughout the greater oil and gas economy in North America. Even with the full knowledge of the issue as we identified for them. That which has been predicted here at People, Ideas & Objects as a consequence of the bureaucrats inaction regarding systemic North American oil and gas overproduction. Overproduction is the primary issue resolved in the Preliminary Specification, our user community and their service provider organizations. An issue we’ve noted its origins in the late 1970s with symptoms beginning to show as early as 1986. Our solution addresses these core issues and provides the most profitable means of oil and gas operations. Recall at the time the bureaucrats belittled our solution and repeatedly laughed at our focus on profits, they stated that “no one cared about profits.” Profitability is the methods and means of the operations that the Preliminary Specifications value proposition defines. One which we have stated since its publication in August 2012 that we provide the most profitable means of oil and gas operations. A value proposition whose differential to the history of the past decade of the Preliminary Specifications existence would have provided potentially a $1 trillion in incremental value add if it would have proceeded. My value propositions assertion may be laughed at now and alleged to be crazy by said bureaucrats however can be easily proven valid against the base case of their performance which includes a history of negative $40 oil and other such antics. I personally find selling oil for negative $40 to be quite crazy! Dare they take the opportunity to once again attack People, Ideas & Objects when asked about the Preliminary Specification I would hope that people remember this short bit of history and the legacy of this management's performance. One quarter's initial performance in the fourth quarter of 2021, due solely to commodity price increases, does not entitle a bureaucrat the means to regress back to their culturally destructive methods.

The inability to address, acknowledge and take responsibility for the situation we find ourselves is disconcerting. The Cheshire smiles, winks and nods between said bureaucrats reflect their imminent return to the good old days is not supported by the facts on the ground. They will feel and be emboldened and entrenched by their perseverance through these past years of their difficulty and their capacity to cling to power. They’ll feel, act and behave as if they’re invincible and be as obstinate and uncaring as could possibly be. If someone suggests there’s an issue, they will have already acted on that. If a new development arises in a discipline, they’ve implemented it already. Their capacity for dishonesty saw no depth of deception was too deep when excuses, blaming and viable scapegoats convinced at least themselves. It is the only reason I can see for their current delusion. Issues such as the small and junior producers no longer being viable will not be their domain of concern, even though they authored it. They’re consolidated and entrenched in a centralized world where every piece of paper has a home and a body keeping it warm and moving it to its final destination. 

What could have been is not what I want to think about People, Ideas & Objects as. Our job is becoming more difficult and the damage that we foresaw more tragic. The inverse to this tragedy is the personal compensation these chosen few of inactive bureaucrats are reaping now that they continue unobstructed. What I think we can show in these next few posts is the level of accountability that had been sought in the past has been for naught. Regression to the cultural ways has caused them to return to their means of accounting deception that I’ve criticized in this series repeatedly. Profitability is stellar, as reported, it's just not fully a real profitability that would stand up in comparison to other industries performance in terms of competing for capital. I do admit there are small elements of real profitability however, did you hear commodity prices are up! Profits will soon not matter again, “its reserves in the ground and they’re now worth more than last time we reported so be happy, sit down and shut up” they’ll say. That’s where we’re headed, and now we can include the consumer in these one way discussions. 

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.

Resistance is Futile

 The evidence is everywhere that the industry is flat footed in their ability to respond to the increases in demand for oil and gas commodities. What capacity and capabilities that are present in the service industry have been locked down under contract by the consolidated producers. The ability to source the higher level technical resources necessary to conduct the more sophisticated lateral drilling and fracturing necessary is currently otherwise unavailable and it is undetermined as to how it will be resolved. If you're a small or junior producer, this is how bureaucrats play nice. The bureaucracy is seeking to be unimpeachable and will have no source of competition when the dynamic nature of the only innovative, dynamic, and entrepreneurial small and junior producers are removed from the competitive environment. When people are forced in the service industry to look for work in other industries for several years they generally find it and don’t necessarily have pleasant memories of how they were treated by producer firms. There’s also an organizational atrophy that happens when the losses are as steep and deep as those that were felt in the service industry. Convincing people to return will take more than one big paycheck. Operating a consistently profitable and prosperous oil and gas industry for everyone involved for a decade is the only incentive that will have any traction. In other words the shoe is on the other foot. It’s not so much what happens in the service industry. They won’t be knocking on producers' doors to find new business. What are the producers going to do about this situation that they’re responsible for creating. Production volumes are not responding to the marginal increase in activity in 2021. There’s also this table from the EIA. 

If my bureaucratic self fulfilling hypothesis that we discussed in my last post holds. The precipitating event that started this decline was the producer bureaucrats misinterpretation of the SEC’s imposition of Full Cost accounting in the late 1970s. The SEC’s objective was to limit the assets on the balance sheet to ensure they never exceeded the reserves value. It does not specify what bureaucrats misinterpreted, that spending of any volume or type should be classified as capital in nature in an attempt to emulate the value of reserves. This started the overcapitalization, leading to the over reported profits, attracting excessive investment, leading to the chronic over capacity. The first evidence of this overproduction came in oil during the 1986 oil price collapse. A price collapse that has been experienced in both commodities many times since. I began working to rectify the issue in 1991 with the resolution being completed in the form of the publication of the Preliminary Specification in August 2012. In protest to the actions of these bureaucrats, investors finally gave their ultimate message of disapproval by stopping the flow of new money in the industry. An industry that had become wholly dependent on the new money from investors for its day to day cash survival due to its wholesale destruction of all of the industry value and lack of real profitability. Their investor exit was in 2015 a full seven years ago. This damage and destruction has now extended to all parts of the North American primary, secondary and tertiary industries in the greater oil and gas economy. 

The damage and destruction may now be complete in North American oil and gas with the ability of producers to increase their deliverability being less than what shales notoriously steep and unforgiving decline curves are imposing. Given all that has happened and the motivation of the bureaucrats' self fulfilling prophecy encouraging their chronic inaction. Time, and specifically the lag time to fix things may be defined as this seven years back to 2015 in terms of our ability to “drill” our way out of this, in my opinion. What we need to include and add to the lag time is an unknown element of time necessary for the development and implementation of the Preliminary Specification. Focus is needed for concentrating on rebuilding what is damaged. As opposed to having the existing infrastructure continue to attempt to build its way out of its difficulty. What will be the fastest way that we can recover and move forward? I believe that by putting the industry on a higher performance trajectory is what's necessary. To fiddle with the declining trajectory of the current approach is failing. Attempts to maintain it should be done of course, however the efforts to rebuild should be the priority. What could be done in the next three and half years. What could even be done in just the next year if the understanding is that this was the priority of the industry. The point where the enhanced trajectory overtook the performance of the status quo would be rapid and we would be far further ahead in the mid to long term as a result. 

What we know is; that after forty five years the issue has manifest itself into a cultural, failed state. That we have the tools and technologies, the capabilities and capacities to perform through a new medium, the Internet, that offers greater organizational performance at this point in its maturity. It is the future means of industries and operations everywhere. The transition of all industries is inevitable. There is no going back. How and when does the oil and gas industry make the transition to the new Internet based performance trajectory is the question that needs to be answered? Is the current bureaucratic performance decline temporary, or will shale's decline curve only grow steeper? The question that someone needs to answer is, when we see the damage occurring, understand the source of these issues and the culturally systemic nature of them, see the trajectory of this damage accelerating, is now the time that our flat footed response is acceptable? Or will that day when we realize it is a flat footed response come tomorrow? Therefore, someone needs to answer today, when does this become a concern?

Based on this knowledge we now know the bureaucrats are avid risk takers in letting the dice roll on a big bet to see what the outcome will be. Or alternatively they have some nefarious self fulfilling prophecy of golden riches working for them. What People, Ideas & Objects and our user community need to be is the triggering event of the industry's new performance trajectory. The action that focuses the industry on this rebuild of a new performance trajectory through the development and implementation of the Preliminary Specification. A performance trajectory to profitably exceed the dynamic nature of shale and the energy needs of the North American market. Pursuing both the status quo and higher performance organizational objectives at the same time is no longer justifiable in my mind due to the risk of a potential lag time and our position on it if it exists. The focus needs to be shifted to rebuilding what the future of the industry needs to be while we’re beginning to show some of the difficulties we could be potentially facing. There’s always an opportunity to revisit these questions again in 2023 but with 10,000 man hours of mechanical leverage at a minimum per barrel of oil equivalent, or as we calculated 38.1 billion man days that are used in our economy every day in North America. That's a big bet on essentially society's overall success or failure that bureaucrats are making. 

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.

Bureaucratic Nirvana, Defined

 I have another hypothesis, this one I think may be right, it’s not that the others were wrong, it's that these are hypotheses. In order to put this one in context we need to take a trip down what appears to be a blind bunny trail to show that bureaucrats have an ability to deceive and obfuscate behind facades of their own making. We have to go back to the quote of one Barack Obama when he was first elected. He stated “This was the moment when the rise of the oceans began to slow and our planet began to heal.” I always point to this as the time when climate change was solved and we no longer needed to worry about it. If you think like I do that bureaucracies have long expired in their usefulness and are of no value any longer, this was the point in which “science” as we knew it ended. If you were a university Professor looking for funding, for any reason really, why not just publish a paper that supported the disastrous effects of climate change in your discipline and receive the grant you asked for. After all, most if not all scientific research and experimentation is done with Federal funding. If you were to write that climate change is a hoax you’d probably starve to death. This is how the scientific community achieves the 99% scientific consensus they claim and similar to the consensus the former Soviet Union election victories were for the communists. This scientific consensus is bad enough however, now we’ve been subjected to a litany of preaching from the politicians about their need to, and our need to listen to the science. There is nothing more corrupt than a politician capitulating on their duty and deferring to science, particularly when science was developed under their political influence. We elect politicians to make decisions based on our needs, understanding all of the factors necessary to make the appropriate, informed decisions. Not to defer to one specific group and listen to them exclusively as if they are the Holy Grail. Let's call this process a self fulfilling prophecy of questionable purposes. Now, back to oil and gas. 

This past year has been a bit of a rare opportunity for People, Ideas & Objects, our Preliminary Specification and user community. We have been in a protracted battle with the oil and gas bureaucracy on the frontier of a war that has been raging throughout the economy for a few decades now. This battle has pitted one side against the other in all aspects of life and there are advocates and adversaries on both sides. The battle is ours to fight and we can’t think of a more enjoyable activity or time as what this business opportunity is offering today. The war that is raging is the one that sees the forces of centralization going against those like us that want a decentralized approach. This past year has seen through the political stage the victories that the centralists have been able to score with the Democrats in the United States and with the Liberal Party in Canada. Why do I see this as a rare opportunity? They’ve been very successful in instituting their centralized ways throughout all manner of society. What people are now seeing is their desperate lunge to seize power and control for any reason at any and all cost. What they’ve accused the capitalist, free enterprise, and entrepreneurial people focused on building value through decentralized means with new and innovative products and services for the economy and their lives, as nazi’s and every other name in the book. Have now become the means and methods in which they’re clinging to power to ensure their centralized ways continue to dominate. Shepherded by the crew of Biden, Schumer and Pelosi in the U.S., and Pierre Trudeau's boy Justin in Canada. Using physical and “scientific” barriers and force as the means to institute their control. The Democrats are formidable in the U.S. and a force to be dealt with seriously. Justin Trudeau is someone who would have difficulty organizing a child’s birthday party on his own. Let's call this the context of the decentralization battle.

The same has been stated by People, Ideas & Objects about the bureaucratic administration of oil and gas. In the past decade we’ve seen the primary focus and objectives being placed on “building balance sheets” and “putting cash in the ground” through their producer firms. These lofty goals were reached by each and everyone of the producers in the industry and they continue to display the results of their achievements on their balance sheets today. These objectives were self-serving to the bureaucrats in that a bloated balance sheet account of property, plant and equipment enabled them to easily attain an equally distorted capital structure. With investors and bankers backfilling in a multi decade easy money environment to make good on the producers alleged performance. Today the game is up with investors and bankers disenchanted as much as anyone else with our good friends the bureaucrats. Unfortunately producers have now gained the added feature of a ticking debt bomb. The only legacy feature of their spending is that they’ve valued their debt at levels that are disproportionate to what their past and current performance can achieve. In an era of higher interest rates and inflation, how many people will be seeking to store their “cash in the ground” or “build a balance sheet” with heavily indebted oil and gas producers for the next decade or two? It’s difficult to see what the outcome of this battle will be, though bureaucrats are not scoring well in the overall war. What we do know is that storing cash in the ground to justify and hide producers' poor performance over the next few decades will be more difficult.

People throughout the greater oil and gas economy have spent their careers compromising with producer bureaucrats. We know what’s expected and how to deliver that. We’ve seen now that there really isn’t much in it for us and therefore the choice is to continue to take the compromise or do nothing. This decision is easier now as a result of the history of the bureaucrats' actions over the past. A few years ago when producers were not paying the service industry for 18 months, because they couldn’t get Wall Street to give them any new money. That left the bureaucrats with few options but to do the work with the service industry and then tell them, after the fact, they changed their payment policies to 18 months. The consequence is that now the service industry is operating at 25% capacity and record field costs are being realized by producers. The decision will soon be that they’ll do the work to drill the producers shale well, however they’ll need a $10 million retainer before they’ll start. Or, they’ll do nothing. It might be surprising to the producers how the facts of their past actions are so well remembered by others. 

I do not have to assure my readers within the industry of the following, but for those of you who are outside of the inner workings of the producers. I can assure you that the bureaucrats have every element of their organizations locked down in mostly manual internal processes. They are islands unto themselves, self-sufficient in all aspects of life, except cash. I do not want to take credit for this trend to lockdown the internal processes, however feel that the publication of People, Ideas & Objects Preliminary Research proposal in August 2003 and the subsequent Preliminary Research Report in May 2004 suggested two things that bureaucrats acted on decisively and quickly. The first was to remove me as a threat to their method of organization. Second was the commentary in the report that noted Professors Anthony Giddens and Wanda Orlikowski’s research of the “Theory of Structuration'' and “Model of Structuration.” These were discussed and suggest that organizations, people and society move together in terms of their progress, otherwise failure in all three occurs. The Model of Structuration suggests that Information Technology is a component of society and therefore is a defining and supporting attribute of the three. Our Preliminary Research Report suggested therefore the use of the current ERP providers was both a defining and constraining factor in the progress of oil and gas producers. If producers needed to break out of their performance trajectory they would need to first define their organization in their ERP systems so that higher performance trajectories were supported. Or people and society would progress forward while producer organizations remained static creating the failure that Structuration hypothesized. In order to make any change to the organization demands that the change be made in the ERP software the organization uses first. Otherwise the organization will quickly regress back to the methods as defined in the software used by it. What I can assure you is that since 2004 the ERP market has been stagnant.

This is why nothing has been done in terms of ERP adoption in the industry since that time. The bureaucratic interpretation of this knowledge was that by controlling the organization, by not allowing any development of the organization to occur through their ERP providers software developments, this would ensure that their bureaucratic methods would remain uncontested and the only method available to be used. They achieved this through their ability to keep the ERP providers constrained, limited in population and financially destitute. The bureaucracy has therefore been able to comfortably constrain their organizations in the centralized methods they desire without any challenge to their ways. Budgets remain controlled by bureaucrats and based on the few fourth quarter and annual reports of producers that have been published to date, there is no change that I see in any of their methods of accounting, reporting or control. And there will be no change that will be threatening them anytime soon. With $100 oil they can see they’ve weathered the storm and their perseverance will be rewarded with the financial resources to continue on their way. Instead of investing these resources in the critical infrastructure of the industry and what it needs, they will be free once again to personally feast as if there is no tomorrow. 

Is this money going to be allowed to stay on the table for bureaucrats to determine its disposition at their discretion? Have these past few quarters of general good behavior with their investors changed anyone's minds as to what the bureaucrats’ culture and behavior will be again? If they’re not happy with the suggestion of the $10 million retainer to have the well drilled then the producer's alternative will be to operate a profitable business from the real sense of the word profit. Something that bureaucrats have proven to be incapable of understanding, refuse to acknowledge, achieve and culturally have no propensity to do. A decade of real profits will be what’s needed to offset the reputation and stink that has been attached to the bureaucrats' method of management. For all the years of blaming, excuses and viable scapegoats as to why producers couldn’t do this or that for whatever reason, perform on that higher trajectory for a decade on the basis of their own resilience, perseverance and fortitude. Until that is done the litany of blaming, excuses and viable scapegoats, the poor performance of producer firms and the value destroyed by them will be all that is known or remembered of them. And why would this change?

We now move on to the self fulfilling aspect of their prophecy. The old saying of “fool me once, shame on you, fool me twice, shame on me” is appropriate here. We’ve all been fooled by these bureaucrats in a grand scheme of their making, for their benefit. Ok, we all have the big boy pants on and can take a licken. But we’re not stupid. And although the producers have been on their best behavior in terms of recognizing the need to satisfy their shareholders for a quarter or two. That doesn’t mean it will continue when they begin to receive the money from higher commodity prices. And now that the money from higher commodity prices is being realized by these producers. Under these conditions, those that failed everyone are still in control and will be reaping the benefit of their prior failures. Continued inaction, as noted in this WSJ article, will only serve to provide them with even more of what they did not earn. Is this scenario acceptable to anyone? Particularly when we know theirs is an otherwise untenable position? Where will their motivation to act come from when it hasn’t been present since at least 2004? The less they do the more they’ll be able to line their own pockets. Is this the meaning of what they’ve been telling us with their “muddle through” strategy? Do we trust them to do the right thing when faced with this dichotomy and after knowing their history? Why after all that has happened would they be compelled to do the right thing? Particularly when they don’t know what right means, have proven to be unable to achieve it and don’t care? This self fulfilling prophecy of inaction has been what I believe to be the ultimate bureaucratic objective all along and how we can best describe bureaucratic nirvana in oil and gas.

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 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.