Revisions to the Preamble Part 4

 Lower Costs of Exploration and Development

People, Ideas & Objects et al’s next component of our competitive advantage of providing the oil & gas producer with the most profitable means of oil & gas operation. Is the lower costs associated with field work done for exploration or development. This would also include the field operations on producing properties covered by a workover or AFE.

There have been many past complaints from oil & gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct these. Everyone would agree that a more productive environment needs to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This was and is the position of People, Ideas & Objects at the time of the original publication of the Preliminary Specification in August 2012. Since that time we’ve seen the inverse situation develop where I suggest producer bureaucrats actively sought to destroy the service industry of which they’re mutually dependent upon. If it was done for any other reason I can’t imagine what that would be, as the scope and scale of this damage has been comprehensive. 

• The damage began by scaling back field activity levels to 25% of what they were. 
• Subsequently seeing the nature of service industries survival instinct they were easily exploited by producers by demanding 50% discounts. Field operators subsequently realized 12.5% of prior revenues.
• When capital sources were unavailable to producers they used the service industry to fund their field activities and paid them on an 18 month accounts payable basis. 
• While financially desperate, due to the long term consequences of these producers' activities, the service industry sold equipment such as horsepower and cut up their equipment for scrap metal in order to survive financially. 
• Bureaucrats were fine and they thank you for asking. 

In either era a recognition that the service industry provides producers with the geographical and technical diversity necessary to operate anywhere in North America needs to be realized by producers. As of 2022 destruction of the capacities and capabilities are comprehensive and complete. Additionally, the capital structures of the service industry are non-existent as a result of the treatment they’ve received and therefore producers will need to purposely rebuild the service industry on the basis of their good faith contributions. They broke the industry, they’ll need to rebuild it as no one else will volunteer themselves for this style of expected sacrifice and suicidal capital investment. The belief that if producers had something invested in the service industry then they’d have some respect for it and may think twice about repeating these past actions.

This process can also begin by developing the Preliminary Specification and implementing the changes within it to start the overall industry rebuilding which is a necessity. ERP system providers were subjected to the same treatment the service industry has been in the past five years. However, we were a few decades ahead in terms of the abuse and we can pin the reason for this on ERP softwares consequential increase in higher levels of financial accountability of said bureaucrats' actions. When ERP software defines and supports organizations, today’s oil & gas bureaucrats unaccountable methods are defined and supported in the ERP software they use. Without any activity whatsoever in this ERP market since the exit of Oracle in 2000 and IBM in 2005, the coincidental financial demise of the industry and associated benefit to said bureaucrats is not accidental.

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry. These collaborative interfaces are designed to deal with the one issue that is systemic throughout oil & gas. That issue is the manner in which the producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to the producers own best interests. After decades of this producer activity, what people understand is that the time and effort necessary to develop a new idea is not worth it because the oil & gas industry will only seek to share it with the innovators competitors. Therefore they don’t undertake the time and effort necessary to develop the idea. No new ideas are coming into the service industry at a critical time when the science in oil & gas is becoming paramount. Realize that the innovation in oil & gas is generated through the service industry. Horizontal drilling, coiled tubing and fracing for shale wells with initially Packers Plus packers suffered through the lack of support and respect from producers before they were finally implemented. As much as bureaucrats claim that they’re innovative we need to ask a simple question. Would an innovative industry earn only 5 good years out of the past 36? Or is “muddle through” as they’ve consistently claimed their true strategy?

Adding to this problem is the producers will not hire anyone for field operations that are not of a certain size and scope deemed “capable” of handling the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations? Or in 2022 where the producers deer in the headlights look speaks volumes. The governing rule of the service industry is they broke it, they can fix it. If new investment does come back into the service industry it won’t be in the next decade. The capital structures of these firms have been damaged far worse than what the oil & gas producers have experienced. It will be incumbent upon producers to rebuild this industry, of which they are wholly dependent upon, brick by brick and stick by stick. With their own money on the basis they’re rebuilding the capabilities and capacities they so foolishly and carelessly destroyed. 

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil & gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. Having the oil & gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. Apart from funding the rebuilding costs which is a separate issue. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. These are what are necessary for both an innovative oil & gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. It's a simple matter that the oil & gas industry reaps what it has sown. Professor Giovanni Dosi notes that investments in innovation are for the purpose of profits. That reasoning applies in this instance in that the innovation will reduce the time, effort and costs of field operations by finding a better way in a competitive environment. Dosi notes in “Sources, Procedures and Microeconomic Effects of Innovation.” 

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

Producers need to create this profitable environment for the service industry. Producers are the primary industry that receive 100% of the proceeds from oil & gas. They need to understand that a share of those proceeds are earned by those in the secondary industries such as the service industry who they are wholly dependent upon. Treating the service industry like leeches and cutting their funding during the bad times doesn’t instill the partnership relationship that provides producers with the 100% of those revenues. Establishing a profitable oil & gas industry everywhere and always would go a long way to help smooth the revenues of the service industry but also the producers themselves. Eliminating the boom / bust mentality that should not exist in a proper 21st century industry. Enabling them to better deal with their staffing and development. Without the service industry sharing in the success of a dynamic, innovative, accountable and profitable oil & gas industry. Neither can or will stand alone successfully in the 21st century. 

Earth Science and Engineering Resources

Our competitive advantages of providing the oil & gas producer with the most profitable means of oil & gas operations everywhere and always, has our focus on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model that’s employed by the bureaucracy today. There are many aspects of this component of our competitive advantage, however, they’re all generating their profitability for the producer firms through innovation, specialization and the division of labor.

In the area of innovation we look to the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification to highlight the processes that are managed there. Focused on the development, documentation and deployment of capacities and capabilities within the producer firm. It is in these modules that the markets availability, sourcing, research and development of those earth science and engineering capabilities are funneled into the Joint Operating Committees for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables these innovative producers to participate and sponsor working groups to research and study various earth science and engineering based projects. Designed to eliminate the bureaucracy and the inherent difficulty in managing the accounting and administrative logistics for the ad hoc nature of these working groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next few decades the demand for these resources will outstrip supply due to retirements and the inability to bring on any increase in the numbers of new recruits. There just isn’t that percentage of the population that has the aptitude for geology or petroleum engineering. The need therefore to deal with the resource constraints is a problem that the industry must resolve and the Preliminary Specification has used specialization and the division of labor to do so.

One of oil & gas’ key difficulties is what People, Ideas & Objects et al call the hoarding issue. Each producer is building the capabilities and capacities within their firm to deal with any and all contingencies at any time. This hoarding of earth science and engineering resources, when taken across the industry, builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities and capacities necessary for their producer firm on a just in time basis, these critical resources are unnecessarily constrained. The solution that’s provided within the Preliminary Specification is what we are calling the Pooling of these technical resources. Each member of the Joint Operating Committee commits the technical resources, based on their unique specialized capability, to the property. Any deficiency is made up from outside technical service providers or other producers who can provide the additional earth science and engineering capabilities for a fee and organized through the Work Order system to charge, bill and pay for these costs.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter aspects of geology and engineering work. Much of this work can be turned over to newly formed technical service providers who are organized on the basis of providing a specialized service to the industry. Organized around a process or skill that is common or generic and could be specialized to a high level if the scope and scale could be brought into the picture. Leaving each producer firm able to focus on a specific high level technical specialization which forms the basis of a second revenue stream for the producer and expands the science and technology available for enhanced innovation. 

It is reasonable to assume that industry will turn to specialization and the division of labor to deal with these resource restrictions. However, without the Pooling concept being a critical element of that solution, the scope and scale of the producers domain of earth science and engineering capabilities, because of the demands being generated from enhanced specialization and division of labor in the marketplace, will most certainly create further shortages in these resource bases due to their hoarding issue. Leading to chronic unprofitability due to the enlarged scope and scale of specializations necessary for producers to cover off in order to attain all of their operations capabilities and capacities demands. 

In a few years having each producer conduct all the earth science and engineering necessary for all of their properties will seem like a business model from the dark ages. Decentralized business models are eliminating centralization through efficiencies in every industry. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the current and looming limited resource base. It is the earth science and engineering capabilities that form a critical part of the innovative oil & gas producers competitive advantage along with their land and asset base. The Preliminary Specification enables the firm's resources to focus on the specialized research and development of “knowledge, skills, experience” and ideas, and the deployment of those in the properties that are held by the firm. This is the appropriate posture for a profitable oil & gas firm, and another component in how People, Ideas & Objects provides the oil & gas producer with the most profitable means of oil & gas operations everywhere and always.

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 & gas industry with the most profitable means of oil & 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Preamble Part 3

 Accounting for Capital Costs

Allowing producers to have their balance sheets bloated with capital assets that are never written down. And as a result, their income statements realize only small portions of the real costs of capital incurred in the exploration and production processes leaves the investors waiting for a return of their capital from the industry. Although the bureaucrats may report profits. They really are just the gross margins of the producer firm. The actual overhead and capital costs of the property are never moved to the income statement. The repeatedly stated purpose has been to “build balance sheets” and to “put cash in the ground.” The overhead of the producer is capitalized to the balance sheet and sits there for eternity to pass. The net result of this process is the producers look spectacularly effective in their operations. Their assets continue to grow as long as they spend money from banks and investors. Their profits are high no matter how successful they are from an engineering or geotechnical point of view. However in terms of really producing anything of value, the investors have learned absolutely, oil & gas has been a lost cause since the late 1970s. 

Having high asset values on the balance sheet provides no one with any value. In a capital intensive industry, the oil & gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do you assess the effectiveness of their capital deployment? According to the bureaucrats you need to look at the firm from the point of view of the capital assets life, or reserve life index, or in this example generally ten years. I feel the horse has bolted from the barn and locking the gate after that decade has passed is useless. Investors need to have a more timely gauge in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit for quite a while longer. Instead of this generic, cultural method, People, Ideas & Objects suggest separating the distinct capital costs incurred to maintain and expand their deliverability. That the total current capital cost in the fiscal year has always contained the costs necessary to both maintain and grow the deliverability of the firm. Or in other words these costs which are easily identified based on their activity should either be capitalized and depleted, or seen to be incurred as operations. As a result the future producers' size of their capital assets account in the form of property, plant and equipment will be much smaller and we suggest depletion would be larger than what is necessary to maintain and grow the deliverability of the producer.

Justification for the different accounting treatment by separating the maintenance and expansion of the production profile in this manner exists in the looming debt crisis that is now threatening. Producers' erosion of their capital structures has limited investment capital remaining after serious losses have occurred. Bank debt is supported predominately by property, plant and equipment account balances as many producers have limited, to negative working capital. Based on their financial statements these producer firms are therefore highly leveraged going into a rising interest rate environment. However, their issue today may be an exaggerated leverage position on the basis of the overcapitalization that we’ve been discussing and the potential that the maintenance capital costs of holding the production profile constant would be better represented in the current period as operations or prior periods depletion. The leverage of these producer firms would therefore be vastly understated based on their current financial statements. Reflecting the real status of their capital structures. The justification for the proposed separation of maintenance and expansion accounting treatment coming about based on the highly concentrated nature of oil & gas being a capital intensive industry. Indicating that the costs passed to the consumer would be predominately capital in nature.

Measurement of a firm's assets and the timing of their movement to the income statement is a key principle of accounting. I think the public accountants and the SEC have caused a distortion in oil & gas accounting from recognizing performance to one in which the objective was to recognize value. Leading to the investment community essentially subsidizing the oil & gas consumer by funding the capital expenditure programs of producers with no expectation of any return on investment. The consumer paid for the royalty and operations. This has to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $20 - $40 trillion in capital investments that is alleged to be necessary with nothing but disgruntled investors will not be successful. Investors now realize producers are well capitalized in terms of their assets on the balance sheet. But they never made any real money. 

The extraction of value from the oil & gas industry as a result of these accounting methods dictated by the SEC may be difficult to comprehend. It is believed by producers that having big asset values on the balance sheet of their firm is the ideal situation. With People, Ideas & Objects argument being counter to this, these capital costs should be recognized by moving them to the income statement as soon as possible. Which has large implications in terms of the value that is generated in the industry. Currently all of the costs of exploration and production are “stored” on the balance sheets of the producers. These costs have generally never been recognized on a timely basis and since this is a systemic, industry wide, multi-decade issue, this practice has created serious distortions in the oil & gas industry. By moving these costs from the balance sheet to the income statement you will either incur a loss, such as what the industry would have done. Or the commodity prices realized should have been adequate to cover all of the costs of exploration and production, returning the invested capital in the form of cash. Which industry hasn’t done and have therefore been desperately dependent on investor's to cover the annual cash shortfalls incurred from their overproduction of a commodity that follows the economic principle of a price maker and their phenomenal capacity to store capital on their balance sheets.

Initially, without fully recognizing the costs of exploration and production, the oil & gas production appears to be highly profitable. Which attracts more investment leading to more capital costs which then increases the productive capacity of the industry which “appears” to also increase its profitability. In reality none of the investment dollars are being returned to the business in the form of cash when these capital costs are not recognized in a timely manner. Therefore the investors and bankers are once again tasked to make up for the annual cash shortfall of the producers created when the commodity prices are unable to cover the all of the costs of exploration and production in the business. The business is still incurring these costs, however the accounting is reporting that these costs are ballooning assets that hold some mythical value for the producer bureaucrat. When in reality they should be recognized as capital costs being passed to the consumer in a capital intensive industry. 

Doing this for four decades and the hollowing out of all measures of value from the industry will be complete. Producers have been reporting profits when in reality, if all of the costs were considered, oil & gas has been a lost cause, supported by investors for decades. Today’s residual infrastructure does not have the capital structure or financial base, or the performance capabilities, due to its chronic overproduction as a result of the chronic overinvestment systemically collapsing commodity prices. Then, add shale!

Through People, Ideas & Objects our user community and their service providers this accounting will change significantly when we implement the Preliminary Specification. With the decentralized production model enabling the price maker strategy for all oil & gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. During times of high prices they will be able to bring the previously shut-in production back on to meet consumers demand. Or alternatively they will be able to apply their innovations to increase their deliverability or reduce their costs and therefore return the property back to profitable production. The determination of what the costs of that property will include is the capital costs on an accelerated depletion schedule in comparison to what the bureaucrats have implemented. This will bring the costs per barrel much higher and into the territory of what it actually costs for exploration and production in North America. Requiring higher commodity prices for the producers to meet the criteria of profitably producing any property and therefore fulfilling the “swing producer” role in the market.

At some point in every industry this transition has to be made. In the beginning the build out of the industry has to be undertaken by the investment community. Then when the assets of the industry mature, it is time to earn the profits from what has been developed. Oil & gas is a mature industry. The bureaucrats continue to consider that it is other people's money that they need in order to fund their operations and “build balance sheets.” This is inconsistent with reality. Oil & gas is a primary industry that should be providing the investment community with a return on the invested capital from the annual profits earned. Instead the bureaucrats let the assets sit on the balance sheets for eternity and never let these costs flow to the income statement. This subsidizes the consumers of oil & gas by having the investors pay to park the capital costs on the balance sheets in some misguided business objective. Never allowing the capital costs of a capital intensive industry to pass to the consumer in the commodity price realized. The prices of the commodities never adjust to the real costs of the industry where the costs escalate with each incremental barrel of oil equivalent produced. This being the result of the greater difficulty in producing each incremental barrel.

Understanding the significant role and value that oil & gas has in society is not being considered. It is reasonable to ask what right do we have to squander these resources from future generations? We should act responsibly and ensure that we can account for the profitable production of these commodities everywhere and always but also ensure that we pass a viable and prosperous, greater oil & gas economic system on to the next generation. Both of these issues are raised as a result of the bureaucratic mismanagement. Who when asked to account for these actions will lie, which is a strong word so let me restate that. Mouth in harmony bold face lies. When did historical accounting costs ever go down? Only in oil & gas during times of declining commodity prices. Recall those times when producers who were profitable at $70 were suddenly able to be profitable at $55 oil prices, then at $40. Miraculous I know and a feature previously unknown about historical accounting. Bureaucrats have it covered with “recycle costs.” Which are nothing but the cost estimates they receive from what they can beat out of the service industry “if” they should happen to drill a well, or frac a well in the depressed commodity price environment. The discount is printed right there on the drilling firm's letterhead!

Under the changes from People, Ideas & Objects methodology the makeup of a producer's balance sheet will change. From having a dominant position in terms of fixed assets, low and zero cash balances with negative working capital positions. To have high values of liquid investments, positive cash and working capital with much smaller amounts of property, plant and equipment. They will be financially much healthier. They will be able to dividend out large portions of their earnings back to the investment community. Pay down debt. Fund their own capital expenditure programs. And maybe best of all they’ll be more dynamic with the financial flexibility to act in the most profitable manner. All as a result of finally realizing the real cost of oil & gas exploration and production!

It will be the recognition of depletion of the capital expenditures in the 2 1/2 to 3 years that will dictate North America's oil & gas prices. Properties that carry the higher overall costs of exploration and production per barrel, due to their large balances of capital, will be depleting these balances to each barrel of oil equivalent produced. If we are realizing all of the properties capital costs in the first 2 ½ to 3 years of production from the property. Under People, Ideas & Objects price maker strategy it will be these properties that have to meet the criteria of being profitable and determined if they are produced or shut-in first in a low commodity price environment. Those properties that have exhausted their capital cost balances will be able to produce large profits no matter what the oil & gas price is in the marketplace. This brings about a fundamentally different capital discipline when capital is being deployed that must meet this profitability requirement immediately in order to produce. And a new appreciation as to where the value lies in the firm. Instead of where the asset balance is the largest, it will become which properties are the best performers and how to make that the case in each of the other properties of the producer. However, it will generally be the work done from a capital nature of the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil & gas prices will have to reach to bring on the past three years production, or the one incremental barrel. In an industry that has the elasticity of supply and demand characteristics that the oil & gas commodities have, (it is a price maker commodity) it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model. Or producers will diminish their corporate profitability with production from unprofitable properties.

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach the limit of their independently evaluated reserves valuation. However, the bureaucracy has taken this limit as the standard in terms of what “should be” or even as a target of what they should use as the valuation for capital assets. This, I believe, is unreasonable when producers have culturally taken the limit to the extent of the SEC’s allowable at each and every producer firm and done so each and every fiscal year. Bloated balance sheets provide no value to anyone. Many producers have had asset values that exceeded the lifetime possible revenue streams of the organization which invokes the dreaded SEC Ceiling Test. We note it would be the most competitive producer who would have exhausted their property, plant and equipment account, zero being the limit that the SEC demands on the low end. It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the producer firms administrative and accounting resource to offer North American producers a Cloud Administration & Accounting software and service. They will use a much more aggressive 2 ½ to 3 year method of realizing the capital assets for the purposes of pricing calculations. If the producers choose to follow that in terms of financial reporting that will be their choice. It is in this way oil & gas prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through our decentralized production model. And the investors can freely invest in the oil & gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit. Assuming they’re able to explore and produce effectively and competitively from an engineering and geotechnical point of view.

Just as earnings and assets are overstated in oil & gas we believe the same is the case for cash flow. Analysis of the capital expenditures of the producer firm sees that not all of the capital expenditures are dedicated to increasing the firm's production profile. The reality of oil & gas is the ever present decline curve, particularly in shale. Should we look more critically at the capital expenditures of a producer and determine which dollars were spent in maintaining the production profile, and those dollars that were spent in expanding the production profile? 

This goes to the heart of the issue of capitalizing everything under the sun. If capital expenditures are to maintain the production profile why would they not be considered operating costs? If they were, they would reduce operating cash flows substantially in the current period and more accurately capture the activities and value that the firm is engaged in. This would immediately revalue the company's market capitalization in today’s environment. These reduced cash flows would better relate to the state of the industry and producers would have to realize increases in revenues from price increases to better evaluate their firm on a cash flow basis. The motivation of the dynamic, innovative, accountable and profitable producer under the Preliminary Specification would therefore be to ensure they were realizing the full value for their petroleum reserves. As opposed to the past four decades which has become a matter of increasing producer value by spending and capitalizing the costs excessively. We need to evaluate the producers on a more equitable means of cash flow and no longer on the basis of these boosted management numbers. In a capital market such as what North American producers compete in, let's see them compete.

As we can see everything in oil & gas accounting has been and is skewed to overvaluation. Assets, cash flow and earnings all are affected by the policies that are in place within the industry. This industry “norm” has enabled producers to believe that they are productive, contributing members of society when in fact they have been a financial disaster. It is only after four decades of this accounting treatment that the evidence of the level of destruction now being experienced is apparent to all. Essentially the value that is contained within the entire industry's infrastructure, that is the entire producing infrastructure in North America, isn’t worth anything as it is a cash flow drain with catastrophic losses. Producers are operationally consuming value. The only measure in which to turn the industry around from this point is to increase the revenues of the producers to record commodity price levels for a sustained period and maintain “real” profitable operations everywhere and always. These revenues would then be able to remediate the destruction that occurred and finance the rebuilding efforts throughout the greater oil & gas economy. Investors and bankers have invested in good faith, now own an industry that is a drain on their resources, and have indeed subsidized the consumer for their energy needs for these past four decades. The amount of this consumer's subsidy is accurately reflected by the balance in the property, plant and equipment account on the producer's balance sheets. The future capital demands of the industry are well beyond what the capital markets are willing to undertake. The only solution is to operate the oil & gas producers as a profitable business from the real perspective such as the Preliminary Specification, our user community and service providers. Bureaucrats have proven they don’t understand business and are unwilling to learn but most importantly unwilling to listen. Opting out of any reasonable continuation of their administration. 

Oil & gas is a capital intensive business. The way it has been run into the ground is the capital was raised, spent and sits for generations on the firm's balance sheet for an eternity. Turning the capital over repeatedly into cash for reinvestment is never considered. It has always been believed that you just raise more money each and every year. Spend that, and then add it to the pile of assets that are depleted over the decades if not centuries which those petroleum reserves remain. Producers have to begin to turn these financial resources over in a much quicker fashion in order to compete within the North American capital markets. By doing the above, recognizing that most of their capital expenditures maintain their production profile, having those capital expenditures recorded as operations will return that capital back into cash within the current fiscal period. That is with the one big qualifier. If the firm is run like a profitable business and not an engineering exercise. It employs the price maker strategy of the Preliminary Specification and realizes the prices that make the producer a truly profitable operation. 

Now that we’ve established our accounting for capital costs methodology is different from the status quo. I want to reiterate the value proposition we have in providing the oil & gas producer with the most profitable means of oil & gas operations everywhere and always. Through the decentralized production model, and the accounting methods we’ve discussed here we’re able to generate $5.7 trillion in additional profits over what the bureaucracy would provide in the next 25 years. By accounting for the capital costs of the industry in the price of the commodity we are reusing the cash resources of the industry to fuel the capital expenditures that will be used by the industry. Providing a return on investment back to the investors. If the expectation is that the industry will be spending $20 to $40 trillion in the next 25 years. People, Ideas & Objects et al are providing, at a minimum, $25.7 to $45.7 trillion more value to the greater oil & gas economy than what the current bureaucracy has traditionally provided.

I’ve mentioned in a prior section of this Preamble that basic cash management was and continues to be an issue in the methods used by producers. What’s happening in the process of capitalizing most of the producers' costs other than operations and royalties is the cash is being consumed in the process. This generates the need to have continual outside financial support where investors and bankers were called upon to reload the bureaucrats spending machine. Money only went out. As the overhead and the excessive capital costs we’ve detailed above are incurred and held as property, plant and equipment for decades, the basic overhead costs of the operation are not covered by what would traditionally be considered in business to be a “cash float.” Paying the costs of high levels of overhead and subsequently large percentages of these are capitalized, drains cash. The amount of depletion over the course of the past four decades of this accounting treatment became the method by which producer bureaucrats were able to “profitably” fit their costs within what they believed to be a price taker commodity. As time has passed (beginning in the early 1990s) the drop in value of the producers capital structure did not generate the financial resources to pay for these monthly overhead costs of office rent, salaries, etc and therefore the cash was never being replenished on a monthly basis from the prices charged to the consumers. If producers were to price all of their overhead costs directly within the commodity price such as what we do under the Preliminary Specifications price maker strategy, these commodity prices will recognize the full cost of exploration and production and therefore be adequate to reestablish that cash float in a time frame no longer than within the quarter. Eliminating producers' overall demand for outside capital on a chronic emergency basis. 

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 & gas industry with the most profitable means of oil & 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Preamble Part 2

 Our Decentralized Production Model & Price Maker Strategy

What we've experienced over the past four decades in North American oil & gas is unique in all organizations and of all business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to the North American producer. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population and will continue to be without an effective means and method of production discipline being imposed. The history over this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares in the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. This allowed an unnecessary flexibility in the financial statements that created distortions since that time. Simply, shifting the accounting from an evaluation of performance to one of value, hence the producer's foolish objective of “building balance sheets” etc came about. This is the mindset of our good friends, the producer bureaucrats who are the directors, CEO’s, CFO's and COO’s and any other officers. What we know of business is that overreported asset valuations lead to commensurate amounts of overreported profitability. Leading to investors rushing in to capture those profits and hence the process of overinvestment begins. Overinvestment in the productive capacity of the oil & gas producers leads to overproduction of commodities that are subject to the economic price maker principles and characteristics. Causing a collapse of commodity prices throughout this past four decade period. The first commodity price collapse that we can document was during the summer of 1986 when $10 oil prices decimated the industry for the better part of a decade. This is counter to the cultural and bureaucratic belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

Price taker

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

As evidence supporting People, Ideas & Objects claim of price taker characteristics I make the following argument in our User Community Vision. Bureaucrats interpret substitutes to be; if they don’t produce others will, therefore substitution is everywhere. This is not what substitution means though. Does it mean that Elon Musk could make it to Mars if he replaced rocket fuel with a hydro dam? Or could we use wind energy to lubricate our crankcases? How about storing nuclear fuel rods in the convenience of a jerry can as you travel outdoors this weekend. And if you’d be able to return alive from your weekend adventure you might make it back to the office in that new solar panel, or pine bark suit you just bought. Alternatively if bottled water ceased to be produced people would switch to soft drinks, tap water, juice or other substitutes. Any overproduction of bottled water would see inventories swell and the price remain the same, as would the price of the last bottle of water found anywhere in the world.

The connotation of the economic term price maker has caused producer bureaucrats to conclude this is collusion. We argue otherwise when the Preliminary Specification uses the Joint Operating Committee and will produce detailed, actual, factual financial statements for each property. Producer firms will definitively know the “real” profitability of each of their properties. A task that is not done today and more importantly can not be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability. Saving their petroleum reserves for a time when they can be produced profitably. Keeping their production and inventory costs lower by not incurring the costs of unnecessarily producing and storing unprofitable production. Ensure their reserves don’t have to recover the incremental costs of their losses as additional earned profits. And most importantly ensure that the marginal production is removed from the commodity markets allowing them to find their marginal price. While shut-in the producer can apply their innovativeness to return the property back to profitable production. People, Ideas & Objects and our user community are the appropriate business approach to the chronic and systemic overproduction of oil & gas and the persistent obtuseness of the producer bureaucrats, not collusion. Without “real” profitability there is only waste and deterioration as we’ve experienced these past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated.

The definition of collusion is provided by Wikipedia. 

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is overt, on the other hand, is known as tacit collusion, and is legal. 

By definition then the Preliminary Specification price maker strategy may fall under the category of overt or tacit collusion. Which is legal. Each of the producer firms will be making the independent business decisions of whether or not to produce at each and every one of the many properties that they own. Those decisions will be made on the actual, factual accounting that provides the information for that decision. The decision is to make a profit, if the property is shut-in due to unprofitability it will incur a null operation, no profit but also no loss. Achieved when the Preliminary Specification has made all of the producers costs variable based on profitable production. The decision to avoid a loss of corporate financial resources and assets, in the form of petroleum reserves, when producing an unprofitable property at a price that does not cover the marginal cost, in the long term perspective of marginal cost, (as per Wikipedia “analysis is segregated into short and long-run cases, so that, over the longest run, all costs become marginal,”) is a rational business decision, not collusion. This also for the first time in the history of the industry enables the producer firm to indirectly control their overhead costs based on their profitable production profile.

The following graph was provided by Les Borodovsky from @SoberLook. What this graph is representing is the status quo perception of costs and how management of production is handled in oil & gas.

Looking at this from the perception of the producer bureaucrats. Their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $18 to $23 in capital costs are based on an allocation of their capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their investment over several decades or more. This is further exacerbated when shale exposes prolific reserves, however demands additional capital to offset steep decline curves to maintain deliverability. 

As an alternative, People, Ideas & Objects recommend that producers retire their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. In turn providing them with the means to meet their demands for future capital costs, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the costs of operations and reasonable retirement of their capital.

This graph reflects the Well Break Even and Shut-in prices of the producers current position. At any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money and will continue to produce. What they’re stating is acceptable is they may not be breaking even, but they’re generating what they interpret to be cash flow.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

To avoid the allegation of collusion bureaucrats would have us believe that they were operating the industry within the law today. Losses of catastrophic proportions have been realized, displacing the financial resources of each and every producer over the long term is normal business for the bureaucrat. Imposing the destruction of their firm's assets and the capacity and capabilities of the oil & gas and service industries is the price that therefore needs to be paid as it’s accepted as a “boom / bust” business. This is unnecessary and unacceptable when the Preliminary Specification is available to operate the business as a business.

The inverse situation is provided by the Preliminary Specifications decentralized production models price maker strategy during the times we find ourselves in during 2022 in North America. In an environment where the Preliminary Specification was operational, higher commodity prices would bring about higher production volumes that would meet the threshold of profitability and therefore incremental shut-in properties would be returned to production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable means of oil & gas operations. The organizational objective is to satisfy the consumer demand for energy on the basis of abundant, affordable and profitable energy. The value proposition of a barrel of oil equivalent is in the range of 10 to 25 thousand man hours of equivalent effort. Going without is not possible in the most advanced society with the most productive economy. Yet, just as producers were forced to shut-in production as a result of almost negative $40 oil prices, they are required to bring on any previously unprofitable production that would have been shut-in under our system in order to satisfy demand. Who should we look to now to provide the oil & gas that’s needed? Apparently not the bureaucrats. Operating the industry profitably, everywhere and always, would have enabled them to maintain the capacities and capabilities of the greater oil & gas industrial economy. That People, Ideas & Objects were subjected to abuse and punishment for this and other content contained within the Preliminary Specification is evidence that bureaucrats knew better, that our alternative was available and it was a threat to the bureaucrats method of management. They will need to live with their legacy of inaction.

What bureaucrats were able to do was run the entire industrial complex into the ground over the past four decades and completely destroy large percentages of the service industries industrial capacity, eliminating their capital structures. Go find a willing drilling rig investor or banker of a few years ago who subsequently saw the drilling rig they invested in cut up for scrap metal while producer bureaucrats whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. The rule is “you broke it, you fix it.” Producers used and abused the service industry and now they’ll be needing to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse again, everyone else had their fun and don’t trust the producers. Maybe when they’ve had to rebuild it they’ll respect it. In 2022 producers not only don’t have any previously shut-in capable production, they haven’t the capacity or capability in terms of the means to meet the market's demand for energy. Whether it's a failure to make any real profitability or to meet the market's demand, we can certainly count on our North American oil & gas producer bureaucrat to fail. 

With the costs associated in exploration and production, and particularly shale reserves, it's no surprise that producers have reported losses on operations. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing, subsequent financial losses, destruction of the producers reserves and greater oil & gas industrial capacity. The reason for this chronic overproduction is the producers have to generate the revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the producer firm being incurred whether there is production or not, and as a result, makes their operation a high cost operation at any level of production. At lower production volumes, it skews their earnings and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even in spite of significant financial loss or the inability to meet market demands. Although some producers report overhead costs of less than 2% in many instances this is not representative of the situation. We believe based on our experience that overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in the financial statements of producers. Please see the section of this Preamble under our Value Proposition sub-heading regarding cash for more detail on overhead.

In the Preliminary Specification the decentralized production model is employed which enables the dynamic, innovative, accountable and profitable oil & gas producer to implement our price maker strategy. This decentralized production model has been defined by Professor Richard N. Langlois as:

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. 

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses in the capitalist system follow these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the profitability of the property, will determine if the property produces. That is how the oil & gas industry needs to deal with the low commodity price situation that it occasionally finds itself in. The inverse of this is also relevant when commodity prices rise, producers will be raising production volumes by returning their shut-in properties to the market. Shale based reserves will always overwhelm the oil & gas commodity market with flush production and deliverability that are driven by its prolific nature. Production discipline based on profitability can only be achieved through the reorganization of the industry and producers based on the Preliminary Specifications decentralized production model and detailed in the Specialization & Division of Labor section above. Where overhead costs are made variable and producers are using the facility we’re building of Cloud Administration & Accounting. Which enables our price maker strategy to provide for the producers and industries profitability and in turn ensure the consumers are always provided with an abundant, affordable, reliable yet profitable source of their energy. 

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 & gas industry with the most profitable means of oil & 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Preamble Part 1

 People, Ideas & Objects, our user community and their service provider organizations competitive advantage and value proposition is that we provide the dynamic, innovative, accountable and profitable oil & gas producer with the most profitable means of oil & gas operations, everywhere and always. We suggest it is no longer adequate to just own the oil & gas asset but also have access to the ERP software in the form of our Preliminary Specification which makes the oil & gas asset profitable. Setting the foundation for the industry to obtain the objective of profitable energy independence on the North American continent. We do this by providing the Preliminary Specification, an oil & gas ERP software solution that supports a business model that defines the following characteristics of how our software defines and supports the dynamic, innovative, accountable and profitable North American oil & gas producers.

Adoption and integration of the Joint Operating Committee as one of the five Organization Constructs of People, Ideas & Objects and our user communities Preliminary Specification. It is the industry's legal, financial, operational decision making, cultural, communication, innovation and strategic framework of its operations. The Preliminary Specification moves the compliance and governance frameworks into alignment with the seven frameworks of the Joint Operating Committee enabling speed, innovativeness and profitability in the North American producer firms. The four other Organizational Constructs include specialization & the division of labor, markets, Intellectual Property and Information Technology. Each of these establish a legal, cultural or structural component of understanding and knowledge for our software developers, our user community and their service provider organizations, to the producers and the service industry to operate within and adapt. Aligning these Organizational Constructs within our Preliminary Specifications ERP software provides a resonance with the law, principles of economics and opportunities, particularly from the use of Information Technology such as we have done in extending the conceptual model of Cloud Computing to be offering North American oil and gas Cloud Administration & Accounting in the Preliminary Specification.

In addition to the commercial focus of profitable production everywhere and always. People, Ideas & Objects et al provide an overall vision of how the North American producer will face their most difficult and challenging period of the next 25 years. The demand for capital will be high due to the need to establish and maintain profitable energy independence on the continent. To deal with the rebuilding, refurbishing and reclamation of the infrastructure. Ensuring our energy consumers maintain the most powerful and efficient economy through the abundant, affordable and reliable oil & gas that is profitably produced. Ensuring they realize their full value proposition of the energy produced of 10 to 25 thousand man hours per barrel of oil equivalent.

Setting out tomorrow seeking to “muddle through” by “building balance sheets” and “putting cash in the ground” has turned out to be a financial catastrophe that was hidden by specious accounting over the past decades. A financial failure that has precipitated operational destruction throughout the secondary industries leading to an inability to meet the market's demands. However, the bureaucrats are fine and they thank you for asking. 

Specialization and the Division of Labor

Our focus on the areas of specialization and the division of labor and how these tools will move the producer firm to higher trajectories of productivity and performance, and therefore reduce the costs of exploration and production in the industry. The need to introduce new and innovative methods, business models and efficiency will be inherent in the culture of the industry, not something that should be resisted as People, Ideas & Objects Preliminary Specification has been forcibly resisted for more than a decade. An elementary, yet highly effective example of specialization and division of labor is provided through this quotation from On Liberty by Thomas Paine.

In order to gain a clear and just idea of the design and end of government, let us suppose a small number of persons settled in some sequestered part of the earth, unconnected with the rest, they will then represent the first peopling of any country, or of the world. In this state of natural liberty, society will be their first thought. A thousand motives will excite them thereto, the strength of one man is so unequal to his wants, and his mind so unfitted for perpetual solitude, that he is soon obliged to seek assistance and relief of another, who in his turn requires the same. Four or five united would be able to raise a tolerable dwelling in the midst of a wilderness, but ONE man might labour out the common period of life without accomplishing anything; when he had felled his timber he could not remove it, nor erect it after it was removed; hunger in the meantime would urge him from his work, and every different want call him a different way. Disease, nay even misfortune would be death, for though neither might be mortal, yet either would disable him from living, and reduce him to a state in which he might rather be said to perish than to die.

What we do know is that today we stand on the shoulders of giants and benefit from a very sophisticated and complex specialization and division of labor. Today everyone in oil & gas has attained skills from education and training, and gained experience from years of working within their chosen field to conduct specialized work. To disrupt this in any fashion without a full understanding of the global aspects of how specialized this work has become would cause failure. At the same time, with the current corporate model proving to be unsustainable, the focus has been on cutting costs. Cutting too deep could have greater implications than what was intended. The point is, to move to a higher level of specialization and division of labor will not be done, and can not be done, without significant and deliberate forethought. The principles of spontaneous order, serendipity and creative destruction have failed to provide any capacity increases in the past decades. We believe software is responsible, or more specifically, the lack of software development capabilities are responsible for constraining organizations. Oil & gas is at least a continental based economy. To organize this in a productive, profitable, specialized manner and divide the labor efficiently without the assistance of the Internet and deliberate forethought will limit our ability to progress.

Secondly we have to consider the role of software in society today. If we intend to move to a higher level of specialization and division of labor. Then the software that we use, and particularly the ERP software, is going to have to define and support those changes. Therefore we are not only going to have to deliberately plan the next level of specialization and division of labor, we will need to build the systems that define and support it first within the software, before the implementation of any changes or benefits will be seen. This is one of the defined benefits of having the software development capability of People, Ideas & Objects, our user community and their service provider organizations. To conduct any form of organizational change demands the software be changed first in order for it to support the revised process. Otherwise the organization will quickly regress back to the process that is defined in whatever software is used. What People, Ideas & Objects considers a modern day software bug. 

Review of the Preliminary Specification shows there is a defined restructuring that takes place throughout the modules based on a higher level of specialization and division of labor of the industry. The oil & gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, land, legal and minor support staff. And that’s it. The rest of the producer's administrative and accounting needs are provided by our user communities service provider organizations. Moving the industry from a reliance on the producers fixed cost administrative and accounting capabilities to a reliance on the industries variable cost administrative and accounting capabilities. Variable based on profitable production. And each of these service provider organizations are focused on one process, or one element of a process, that is organized and specialized across the industry. So for example, there would be a royalty payment service provider organization that handles all of the industries Texas Railroad Commission royalty payments. Ensuring producers were always paying the lowest amount allowable of their royalty obligation. Where the cost of the royalties, and the incidental billing cost for the royalty service provider is billed directly to the appropriate Joint Operating Committee. Not the individual producer. Therefore eliminating the fixed nature of the operators administrative and accounting costs, and replacing them with the variable nature of the Joint Operating Committees administrative and accounting costs. As without production the variable royalty payment process would not be invoked, no service would be rendered, no costs incurred and no billing. Please note this demands the termination of the use of fixed overhead allowances as the variable, actual overhead will be known at each of the properties. Enabling an accurate accounting of the properties performance based on all of the actual costs of exploration and production. 

There are many advantages of moving to a system or methodology such as the Preliminary Specification. Cost and efficiency are just some of the reasons. The costs associated with the royalty payment service providers organization would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process the industry's royalty payments, and only royalty payments, that specific service provider would become specialized and reduce their time and effort in doing so, yet increase the quality of administering these tasks to a small component of the costs today. In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the royalty payment and other administrative and accounting processes in the industry subject to this type of analysis, complete with the software development capability and our user community of People, Ideas & Objects, similar results in productivity could be attained and continue to develop. All economic growth that has been achieved anywhere in North America since 1776 is a result of the economic principles of specialization and the division of labor.

When we consider the current corporate models attempts to provide the producers administrative and accounting needs for all that falls within their domain. And the understanding that is necessary to support those administrative and accounting tasks. The ability to build and maintain that capability and capacity is costing each and every oil & gas producer their profitability. What will come to be seen as an archaic business model will be the way in which the industry is operated today. It has to because it is unsustainable and a more effective and efficient business model based on higher definitions of specialization and division of labor will become the norm through the adoption of the Preliminary Specification. The industry's survival requires it. What we are doing is moving from a reliance on each of the producers' fixed cost administrative and accounting capabilities to a reliance on the industries variable cost administrative and accounting capabilities. Eliminating the costs of each producer incurring these non competitive capacities and capabilities in house. This is our shared and shareable model that we are building on the conceptual model of Cloud Computing by providing what we are calling Cloud Administration & Accounting.

When we consider the next aspect of this change, our decentralized production model, this assures that we offer the most profitable means of oil & gas operation, everywhere and always. As without the software and development capabilities to define and support a higher level of specialization and division of labor, change will not happen. Software is sealing organizations in proverbial cement eliminating spontaneous order and serendipity’s effectiveness in today’s software driven organizations. This will need to be resolved by establishing the software development capability contained within the Preliminary Specification if the North American based producers are to be able to attain and then sustain profitable energy independence.

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 & gas industry with the most profitable means of oil & 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Abstract

 People, Ideas & Objects Preliminary Specification provides a comprehensive vision of the future oil & gas industry, producer and service industry provider. The Preliminary Specification is a cloud computing-based, thirteen module ERP software system that defines and supports the Joint Operating Committee, three marketplaces and three other organizational constructs of the dynamic, innovative, accountable and profitable oil & gas producer. Our solutions competitive advantage is that we provide the North American oil & gas producer with the most profitable means of oil and operations, everywhere and always. Establishing a foundation for future North American energy independence.

Our vision is comprehensive and is detailed in the approximate 200,000 words contained here within the modules of the Preliminary Specification. Our software defines and supports a structured reorganization of the industry and producer firm. Through our decentralized production model, we implement a price maker strategy that converts the industry from a cash flow focus to one of profitability everywhere and always. Once the industry is profitable we then deal with the resource constraints of the earth science and engineers through our Resource Marketplace and Research & Capabilities modules. It is through specialization and the division of labor that we are able to expand the throughput of the industry from our constrained resource base. Similarly the devastation realized in the service industry is a real constraint to production deliverability and needs to be purposely rebuilt by producers. Then and only then would we be able to approach the objective of achieving energy independence in oil & gas in the Canadian and U.S. marketplaces. Establishing the industry on the basis of profitably and removing the resource constraints of engineers & earth scientists, service industry capacities & capabilities that exist today are the necessary precursors to achieving energy independence. That vision is what the People, Ideas & Objects Preliminary Specification achieves.

For the record People, Ideas & Objects call the CEO, CFO & COO, their directors and any other officers of the producer firms bureaucrats.

It is reasonable to look to energy independence as an overall objective. The shale reserves provide for that. However, the way in which the industry is managed makes that objective unreasonable and unattainable. Bureaucrats have destroyed the financial, operational and political foundations of the industry. Today we see the producers have lost financial and operational control within their organizations but also within the service industry of which they are solely dependent upon. Who provide these producers with the geographical and technical diversity necessary to carry out their operations in the field. We now have producers who are unable to function operationally but also unable to meet the demands of their consumers. 

Without significant capital to restructure and increase industry throughput. The current bureaucracy is unable to achieve energy independence. They’ve never been concerned with earning profits and proven their inability and desire to catch the religion of real profitability. Without establishing the industry on a foothold of profitability first and foremost. There is not enough capital in the universe to achieve energy independence in North America while remaining in the hands of these bureaucrats. 

The next twenty-five years in oil & gas will be the most dramatic in its history. The demand for energy will ensure that prices remain high. Yet with the abundance of shale reserves ensures the costs of providing that energy is much higher than the costs of conventional reserves. And with many people joining the middle class we need to consider how the industry approaches this new energy era. Does anyone believe the current bureaucracy, with the financial destruction they’ve caused in the marketplace today, will be the solution? Does that future involve an Information Technology perspective that is just a cost, or should it be a vision such as the Preliminary Specification provides today?

The key to providing this solution is that the Preliminary Specification is based on five organizational constructs that include the industry-standard Joint Operating Committee. The legal, financial, operational decision-making, cultural, communication, innovation, and strategic framework of the industry. When we take the compliance and governance frameworks of the hierarchy and align them with the frameworks of the Joint Operating Committee we attain a speed, innovativeness, accountability and profitability that is desired in our oil & gas organizations. The other Organizational Constructs include the reintroduction of specialization & the division of labor, establishment of markets, use of Intellectual Property laws, and Information Technology as foundational to the producer firms and industry operation. 

After all, as you will see, we are not talking about minor changes to the floor plan of accounting. We are exercising wholesale changes to the oil & gas industry by adopting the Preliminary Specification, and fully utilizing the Joint Operating Committee and the other Organizational Constructs. Change that is as significant as that which is represented by the changes in energy prices, the global energy demand structure, shale reserves and IT leveraged change or disintermediation. Based on the research of Professor Giovanni Dosi and as People, Ideas & Objects have applied to the oil & gas industry, he asserts that the makeup of industries and companies is attributable not only to the endogenous force of competition. Innovation and imitation also make up the fundamental structure of an industry. “Market structure and technological performance are exogenously generated by three underlying sets of determinants.”

Each of the following three determinants are evident in the marketplace of an oil & gas producer today, as reflected in:

• The structure of demand.

Satisfying the demand of the global energy marketplace is critical to the advancement of all societies. American, western, Chinese and developing societies face real challenges in sourcing adequate long-term sources of energy. The long-term demands on the energy producer over the next 25 years have never been greater.

• The nature and strength of opportunities for technological advancement.

The nature and opportunities for technological advancement lead one to believe mankind has never faced the level of opportunity and acceleration that is possible today. The industrial mechanization of the past 100 years combined with the prospective mechanization of intellectual pursuits combines to markedly appreciate the value of human life. The availability of abundant, affordable, reliable and profitable energy will be critical elements of this advancement.

• The ability of firms to appropriate the returns from private investment in research and development.

The oil & gas industry is moving closer to its earth science and engineering principles. Innovation, research and development in both the producer firm and the service industry are and will become more commercial in nature. It is on the basis of the success or failure of these factors that will determine the success or failure of the producer firm within the industry.

The role of software in society is becoming more pronounced. Today we are still in the beginning stages of what can be done. For an industry such as oil & gas to continue without the software development capabilities that People, Ideas & Objects are proposing, and the organizational structure focused on the Joint Operating Committee, North American based producer prospects look dim. People, Ideas & Objects claim that we provide the innovative oil & gas producer with the most profitable means of oil & gas operations, everywhere and always. And we do. First by providing our software in the most cost effective manner. That is, charging our subscriber base for the one-time costs of our software developments on a shared and shareable basis. A fundamentally different value proposition coincidental with the value of Cloud Computing. To the assertion that we are establishing a Cloud Administration & Accounting software and services capabilities and capacities in North American oil & gas. And secondly, that in order to attain a higher level of economic output requires that the oil & gas industry employ higher levels of specialization and division of labor. To organize that specialization and division of labor in a continental economy requires the use of the software specified in the Preliminary Specification. There are no other means by which to organize a higher level of specialization and division of labor. Serendipity, spontaneous order and in many ways creative destruction have ceased to function. The bureaucracy has now proven its inability to change or accommodate the speed of the marketplace. Therefore our claim to be the most profitable means of operations is valid. The only manner in which to move from the high levels of organizational methodology we currently enjoy is to design and support a more sophisticated specialization and division of labor. And that is detailed in the Preliminary Specification. We need to take control of the production of the software in order to take control of the means of energy production. That is what People, Ideas & Objects user community-based software developments are about. Thirdly, our development of the decentralized production model, as detailed in the Preamble, provides the oil & gas industry with the capability to allocate oil & gas production on the basis of profitability throughout the industry and obtain “price-maker” strategies. For producers bureaucrats to continue to assert that oil & gas commodities are subject to the economic principles of “price takers” is a continuation of their foolishness and sloth. Production discipline provided from the Preliminary Specification is the necessary mechanism in the prolific and costly era of shale-based reserves. Otherwise, the industry and producers will continue to lose money due to their many decades-long behavior of chronic overproduction and oversupply in both oil and natural gas.

When it comes to undertaking a large project such as People, Ideas & Objects Preliminary Specification. And we have budgeted the project at $15 billion in its initial commercial release. Is a need to maintain a sense of urgency for the people involved through to the end of the project. As we know, most people will remain motivated as long as the money keeps flowing. So how do we ensure that the money keeps flowing? It is through the fact that we provide the most profitable means of oil & gas operations that we can motivate the producers to maintain their sense of urgency in keeping this project funded and moving forward to its conclusion. The alternative is the current bureaucracy who have effectively eliminated themselves from consideration. In the future, it may not be enough to own the oil & gas assets. It will also be required to access the software that makes the oil & gas asset profitable, that is the importance of software in today’s society. Our value propositions monetary value over the current bureaucratic offering is valued in trillions of dollars for the next 25 years and provides the greatest return over any other investment industry could choose. 

From the thirteen module Preliminary Specification, there is an overall vision of how the innovative oil & gas producer and the Joint Operating Committee would function in this new energy era. I had two comments made to me when I wrote the Preliminary Research Report. The comments were that “this solves every administrative issue in oil & gas for the past fifty years” and “it's an entirely new discipline.” Both were related to the significance of using the Joint Operating Committee as the key organizational construct of the innovative oil & gas producer. What I think that we can say as a result of completing the Preliminary Specification is that both of these comments underestimate the significance of using the Joint Operating Committee. What we’ve discovered is that the Preliminary Specification certainly resolves the administrative and accounting issues when the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks are aligned with the compliance and governance frameworks. However, when it comes to the operational concerns of the oil & gas industry, it also provides the frameworks and means to solve those problems too. And although People, Ideas & Objects have used them to highlight today's operational issues they will also provide solutions for tomorrow's issues and opportunities.

Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale in many instances can not be managed within the organization but needs to be managed through the forces of creative destruction in the greater economy. Producing natural gas at a loss was the beginning of this process. We have now seen natural gas producers continue to lose money for more than a decade. Yet nothing was done to address this issue. At the height of the issue, we saw the bureaucracy pray for a cold winter. Solutions to the problem have not been discussed or provided, outside of People, Ideas & Objects, and the low natural gas price issues remain unaddressed in late 2020. The fact is bureaucracies can’t, won’t and will not ever change. Over the early years of the natural gas price declines the relatively higher oil prices were able to cover many of the sins in the natural gas marketplace. For the past seven years, low oil & gas prices have put the industry and many of the producers in financial jeopardy due to both sides of the business's poor performance. An anomaly that hasn’t happened before. We believe these are the beginning stages of the forces of creative destruction. People, Ideas & Objects offers the Preliminary Specification, our software development capabilities, user community and service providers as an alternative organizational structure for the oil & gas investor to instrumentally rebuild the industry. 

A time of dynamic change driven by the organizational changes focused around the innovative Joint Operating Committee. How can a firm that has been developed in an era of cost control transform itself into a dynamic, innovative, accountable, profitable and earth science & engineering capability-focused producer? In many cases the will to do so might exist, however, with the speed and unforgiving nature of the business cycle not much time will be provided to those that attempt the transformation. We see in this world the capital markets reflecting many interesting phenomena since the financial crisis of 2008. To suggest any trend or definitive result from these would be premature. It's just a different world in terms of being an oil & gas CEO or CFO than it was before 2008.

The Preliminary Specification includes in its definition Oracle Corporation’s technologies. If you read or review any of their material it has a decidedly technological and engineering focus. If you mention the Joint Operating Committee within their organization you can hear it echo for a week and a half. They really have no fundamental understanding of oil & gas, and only a basic understanding of business. They have become very specialized in what they do and the products they sell. Such is the nature of the division of labor and specialization. What People, Ideas & Objects are therefore doing is filling a “gap” or creating a sub-industry in providing the business understanding of the oil & gas industry to the technologies of Oracle Corporation. This “gap” or sub-industry between the oil & gas industry and Oracle is something that is needed because the two are unable to speak coherently to each other, they need an interpreter, and that is People, Ideas & Objects, our user community and their service provider organizations and the Preliminary Specification.

McKinsey Consulting suggests that large populations will be joining the middle class in the next 25 years. This will have a dramatic effect on the levels of demand for energy. If the oil & gas industry fails to respond to these demands due to the bureaucracy's lethargic ways, will anyone note that there were alternatives proposed?

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 & gas industry with the most profitable means of oil & 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to our Material Balance Report

 As the Material Balance Report is contained within both the Partnership Accounting and Accounting Voucher modules they are part of a much larger system. Which of course these two modules are parts of an even larger system. Therefore the overall context of the environment in which the Material Balance Report operates in is unavailable if this is the first exposure by the reader to any part of the Preliminary Specification. Those who may be unfamiliar with the production, marketing, revenue and royalty processes involved in the oil & gas producer firms may not appreciate the subtlety of our Material Balance Report. 

The next post on editing and rewriting will be the Abstract.

The Material Balance Report

The Material Balance Report is an Accounting Voucher that is unique and has the following characteristics. It is designed to provide automation to the production, revenue, royalties, marketing and other processes of the producer firms and Joint Operating Committees. It is this type of specialized use of an Accounting Voucher that our user community should consider applying to other situations when contributing to the Preliminary Specification.

What is proposed in People, Ideas & Objects Material Balance Report is that for an Accounting Voucher to close it must balance the financial debits and credits, but must also from a volumetric perspective material balance, system balance and partnership balance. Each of these volumetric perspectives are accessed through a different “mode” within the voucher to make the necessary changes to correct any volumetric imbalances or errors from that specific perspective.

The Joint Operating Committee is a thing that exists as a result of legal agreements and in the minds of oil men and women. It therefore doesn’t “own” anything or incur any costs. All of the charges to the joint account must clear in the month they’re incurred to the producers involved. It is the same situation for the volumetric information. The Joint Operating Committee "Accounting Voucher" balances to zero in terms of costs and volumes each month by clearing its charges to the partnership and royalty owners of the property. Clearings are done after the balance. That does not guarantee that the facility will remain in balance. Adjustments and amendments to the Accounting Voucher may occur. These may happen and they can be subsequently balanced and cleared to the partnership accounts in the same manner as before. And that is on an automated basis. The point of the exercise is that you have the business of the Joint Operating Committee captured in the Material Balance Report which is an integral part of the Accounting Voucher. Essentially all three are the same thing, the Joint Operating Committee, Accounting Voucher, and Material Balance Report. An integrity of reporting that is embedded within the accounting systems that are as rigid as debits must equal credits.

We now discuss the contracts regarding the petroleum products produced from a specific Joint Operating Committee. Contracts that would include marketing for gas, oil, natural gas liquids, or contracts for charges for gathering, processing etc. If a stream of product was flowing through a facility, then a contract for processing or sale would be attached to it. The ability to attach the contract to the stream would enable the Accounting Voucher to establish the associated accounting for the gathering or processing of charges / sales for that stream. These charges (invoices) or sales (receipts) are generated in automated fashion by the Preliminary Specification.

The Accounting Voucher is for lack of a better term a template that is built upon as time passes. Each month as the property changes, these changes are captured within each Accounting Voucher and the template is renewed each month with the accumulation of the properties history, the data from the Petroleum Lease Marketplace and other modules. If a new contract was added for the production from a new well, then that contract stream and the new well would be represented in the next and every month's Accounting Vouchers. The Accounting Voucher template documents the changes in the property over time. Providing the base for the subsequent automation of the business processes to be established, tested, debugged and deployed.

Critical to the “definition and design” of transactions is the fact that these transactions are balancing themselves out. If the debits and credits were not in balance at the end of the day, then the automation of the systems and the accountants would not be doing their jobs. The same could be said for the volumetric reporting. If in the Material Balance Reports was out of balance (call this material balance), or were not balancing the inputs and outputs to other Material Balance Reports (call this system balance), or the internal accounting of those volumes to the partners, royalty holders and others were out of balance (call this partnership balance) the accountants and systems would not be doing their jobs. Simply the process of closing the Accounting Voucher will need to consider not only the balancing of the debits and credits from a financial point of view. They will also need to ensure that the material, system and partnership volumes reported in the Material Balance Report are also in balance. Without these systems in balance, the Accounting Voucher will not clear or close.

This imposes another rather strict provision on the quality of the information that is accepted into the People, Ideas & Objects Accounting Voucher module. Precluding the acceptance of a voucher due to the inability to balance a volumetric requirement holds the system up for what is a common occurrence. What if the volumetric information is unavailable in a timely fashion? What if the information is part of the normal amendment process? Then we are left with the traditional accounting methods of dealing with these types of issues. An accrual of the volumes in order to achieve the balancing necessary should be able to be processed in the current month. Most production processes are amended for up to 90 days. These accruals would then be automatically reversed in the following accounting months Material Balance Report. What is different from existing systems is that we are enforcing the systems to volumetrically balance. Not just inputting key variables but imposing and enforcing the facts of what actually happened at the Joint Operating Committee, and if it is subject to a comprehensive Construction, Ownership and Operation agreement, what is agreed to be accounted for before the close of the Accounting Voucher. And by that I mean specifically, from the point of view of either dealing with the contractual arrangement as dictated by the governing agreements as the determining factor for the means of production allocation. Or if the agreement refers to the chemical composition as the basis of production allocation, both of these methods will be available in the Material Balance Report of the Accounting Voucher in an either, or and mixed environment.

The difference may be subtle but the implication is significant. Locking the volumetric balancing, over the long term, into the Accounting Voucher itself enforces the system to follow the volumes as produced and processed. Once this is achieved a certain level of unimpeachable integrity is achieved regarding the production data and the automation of detailed processes based on those volumes can begin and be assured to be based on the facts of the facilities and assets data and information captured in other modules. Any subsequent amendments will correct the record.

There are many aspects of this system's management of these processes that are unique and necessary. The reason they have not been undertaken has been the broad scope and scale of the development undertaken is comprehensive and beyond what the technology could have provided. It is certainly from a budgetary perspective beyond the scale of what any individual major producer would undertake as the value gained would not be there for the individual producer to incur the entire cost, and most certainly well beyond the standard approach of an oil & gas ERP software development solution provider. People, Ideas & Objects are aggregating the North American producers budgets to make these available through our ERP software and the service provider organizations. Turning the cost of oil & gas administration and accounting, which includes the ERP systems development, into a Cloud Administration & Accounting capability for North American based producers. Those with a comprehensive understanding of these processes will fully appreciate the points that I’m making and the implications involved. My understanding of these processes is comprehensive, I know it can be done and we’ll do this correctly. That this undertaking may be one of the most comprehensive features of the Preliminary Specification. Therefore it is done on the basis where the costs of development are shared and shareable, or non-rival, and driven by a user community vision such as we have. Therefore there is substantial value in terms of cost savings to each producer with untold value through application of the specific attributes of People, Ideas & Objects value proposition. 

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 & gas industry with the most profitable means of oil & 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. Please join our community on Twitter. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.