The Issue, Part III

 The Toll This Has Taken

The issue is best expressed as chronic, industry wide, unprofitable production or overproduction. There is an understanding by the officers and directors that the commodities of oil & gas are driven by markets that will accept anything that is produced. And therefore they always produce at 100% of their capacity. Assuming that the markets will absorb unlimited levels of production without having an affect on the commodities price and therefore they believe that these commodities fall under the classification of price takers. 

Whereas the primary characteristic of oil & gas commodities needs to be understood by producers that they are price makers. Where increases in production only occur when profitable from a reasonable, financial, and accountable basis using the actual, factual costs incurred. We've learned just in the last few years the sensitivity of oil & gas pricing to overproduction and underproduction is significant. A known characteristic of a price maker. To deny that oil & gas are price makers today is to deny the facts. 

The second aspect of this issue is the financial understanding that drives the industry. There are many false assumptions that drive decisions and the culture that has grown over the past number of decades understands no difference. 

SEC profitability

Is one method of portraying the financial statements. And only one way. It is a corporate perspective that has no basis in evaluation of performance. It distorts accounting from measuring performance to evaluating asset value. 

Recycle costs

Are not factual in terms of performance. They reflect the “what if” scenario involved in the costs and economic benefits in drilling wells etc. to release further reserves in today’s field cost environment. When the potential of tomorrow's drilling costs are stated as being profitable at $25. That does not alter the performance of the other 97.5% of the producers' properties that incurred their actual historical costs recorded by accounting. Despite what the producers press release may impute when the $25 is stated. 

Accounting is focused on the corporation

The corporation under the SEC method is reputed to be profitable. As we’ve seen all producers qualify as profitable under their method. The performance of the property is unknown and unknowable throughout the North American oil & gas producers. Their ERP systems do not capture the data necessary to measure the properties performance on any reasonable or accurate basis. As a result there is no understanding where the corporation may be losing money. Unprofitable properties dilute the profitable properties and therefore diminish the corporation's earnings. An unreasonable approach for any company to pursue. 

Overhead costs and interest are capitalized

From an overall asset perspective that is what has been allowed and for those purposes it may be acceptable. However producers need to understand the actual performance of each of their properties to make the appropriate decisions. On the basis of actual factual costs incurred, not on the basis of overhead allowances and never on their mythical recycle costs. 

Over the past decades I have focused on capitalized interest costs and overhead. The follow-on consequences in terms of cash drainage from the firm. An interesting result of these arguments occurred about five years ago. Interest costs then began to be detailed in the financial statements and scaled back in terms of the amount capitalized. I’ve also alleged that creative, excessive, executive compensation has been included in the overhead that’s subsequently capitalized. Please note however, that we have seen no change in the treatment of overhead during this period.

Cash is only consumed

The culture created from the SEC’s permitted methods of accounting have permeated all thinking within the producer firm. That accounting can and should be used for many other purposes is a foreign subject. The dedication to this principle is such that they capitalize every possible cost for the long term and the short term despite these costs draining the cash of the producers each and every month. Never including a reasonable accounting of the cost in the product as they pass them to the consumer. Investors pay for the capital costs in a capital intensive industry, consumers pay the royalties and operations.

Revenues pale in comparison to the capital asset

Over four decades of this culture's development. With no critical evaluation done outside of People, Ideas & Objects throughout this period of time. Spending became what’s known as “capital discipline.” The business performance was obscured through growth fueled by massive investor funding, fueled by investor dilution. The SEC’s method of accounting ensures any individual who has the capacity to spend money can operate a profitable oil & gas producer. Therefore the overall industry performance has degraded to the point where productivity of the asset base today is barely a shadow of what a performant industry would provide. 

Consumers are therefore subsidized by investors.

The amount of this subsidy is the majority of the capital costs of a capital intensive industry that are and have never been passed on to the consumer. Investors are left with the cost, because that is the “risk” they undertook, the officers and directors allege. Such is the thinking in oil & gas. The asset value listed in property, plant and equipment is best considered as the unrecognized capital costs of past production. People, Ideas & Objects believe it’s necessary to adjust, on a pro-forma basis, these balances by way of a reduction totalling 75% of the balance to depletion. Upon doing so, property, plant and equipment, the profitability and performance of the corporation will be accurately reflected. 

Consumers are not paying for the capital costs of the energy they consume.

The actual costs of oil & gas exploration and production being subsidized by the investors for over four decades has caused consumers to heavily consume these products with little respect for their value. This is contrary to the unique nature of the products irreplaceable and irretrievable characteristics. The limited supply needs to be better managed both on the producer side by only producing profitable production everywhere and always. Passing a healthy and prosperous oil & gas industry and sub-industries on to future generations. And consumers can make the appropriate decisions on how they choose to consume the commodities based on their appropriate prices. 

What this August 2019 graph reflects clearly is the culture and understanding of the oil & gas producer officers and directors. The level of confusion and misunderstanding of basic business concepts in their decision making is evident in this graphs presentation.

It was sourced from Lev Borodovsky who publishes on Twitter @SoberLook. Looking at this from the perception of the producer officers and directors. The 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 all of the 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 cash over several decades or more. As an alternative, for performance purposes, People, Ideas & Objects recommend in our Preliminary Specification that the producer retire all of their capital costs within the first 30 months of the properties life to provide for the reuse of their previously invested cash. Providing them with the means to meet the demands of their future capital costs, shareholder dividends and bank debt repayments, all at the same and all the time. And to better match the rapid decline rates experienced in shale. Instead of “putting cash in the ground” People, Ideas & Objects, our user community and their service provider organizations will put producers' cash to work.  

This can only be achieved if the producer is selling their commodities at a price that is above their “Breakeven point.” Which we assume in this instance that it considers an appropriate accounting of the costs of exploration, development, royalties, operations and overhead. A more timely recognition of their capital costs in a capital intensive industry that competes for capital in North America. Note that what this graph reflects is that “Well Breakeven” and “Shut-in” prices denote that at any point, and as long as the commodity price covered the royalty, operating, and remaining overhead 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 “some” cash flow. Over the course of four decades the shortfall created in systemically accepting this logic. The capital costs of exploration and development have been borne by the investors on behalf of the consumers as the majority of the capital continues to be unrecognized as the product is sold below their “Well Breakeven” price. 

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in is 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.

With the inherent value contained within each barrel of oil. With the supply possibly limited to the next half dozen generations. Why would we ever produce any oil or gas that was unprofitable? What would be the purpose of doing so? Would we not be robbing future generations of the resources they’ll need to expand their quality of life? On the one hand the costs of oil and gas exploration and production continue to escalate with each barrel of oil produced. This is due to the increased difficulty and science necessary to extract the resource. Therefore a more accurate accounting is necessary than what has been provided to the industry in the decades past. People, Ideas & Objects, our user community and their service provider organizations are designed to provide each Joint Operating Committee with a more accurate accounting of the costs of exploration and production. When only profitable production is produced it is implied that we're accurately capturing the timing and accuracy of all costs and passing them on to the consumer on a reasonable basis. Profits and innovation will be used to ensure an abundant, affordable and reliable supply is provided for the long term. Conversely, consumers paying the full cost of their energy will ensure that they’ll choose the most efficient and effective use of the resource.

What producers need to be doing is to begin informing consumers of the choices they have to make. Understand that each barrel of oil equivalent has the mechanical leverage of 10,000 to 25,000 man hours of labor. The global oil & gas daily output of 147.25 mm barrels of oil equivalent production is therefore equivalent to the daily output of 27 to 68 times the world's population of 8.0 billion people. If consumers want to rely on alternative means of energy then there will be a wholesale downward swing in industrial capacity compared to what oil and gas provides today. Without oil and gas there is probably 97.5% overpopulation and the quality of life for the 2.5% would be prehistoric.

What is clear is that the officers and directors believe that the associated risk of the business of oil & gas exploration and production needs to be borne by the investors. I see this differently. The risk of exploration and production needs to be passed to the consumer as the ultimate cost of the oil & gas they consume. That is what it cost. The risk adopted by the investors is in putting their money on the wrong horse. By knowing the difference, predominantly through the financial statements reflecting real profitability and superior performance they should be able to wisely determine who are the heroes and who are the zeros. The heroes will invest in profitable operations that recover their costs quickly and effectively. Generating the level of cash necessary to pay appropriate dividends and fund themselves. Zeros will flounder and spend investors money that generates little in terms of value or profitable production. Will soon fade into the distance as so many of the status quo producers should have done decades ago. This doesn’t happen in oil & gas because you can’t tell through the status quo financial statements that have been produced since the late 1970s, whether the producer has been effective in generating value. They’ll state they generated reserves and we see the value that they hold in today’s market when none of the producer's reserves can produce “real” profits. They’re useless. All of the producers for the past four decades have spent lavishly, recorded it as property, plant and equipment, added interest costs and overhead, and therefore whatever revenue is generated is literally profit. 

The Issue, Part II

 Why are these such issues today? The culture of the oil and gas industry is an issue due to the belief that value is generated through drilling to expose more reserves. However, this is not backed by the financial performance of these businesses. And when I say the financial performance I limit performance to just include the generation of cash. The industry became a massive call on investor funds each and every year. There never was, or is, any understanding their “business” should be self supporting. It was necessary for producers to “build the business” and this was represented by “building the balance sheet” and “putting cash in the ground” which are the unanimous callings of the producers. Spending to release more reserves is the only capability and is the sole competitive advantage of the North American oil and gas producer. The problem the producers don’t see is they’re incapable and have never produced any “real” profits from their reserves. The value invested in the industry is sitting in the ground, as invested cash, with those reserves as represented by the bloated balance sheets of property, plant and equipment. 

Reporting a sample of the overhead and only the operating and royalties as costs, which are all the costs that are left after the majority of costs are capitalized, makes producers look spectacularly profitable. The fact is everyone believed those bloated assets, profits and cash flows. Profits were not just over reported as a result of not recognizing much of the costs of oil and gas exploration and production in the current period. Producers only deplete the property, plant and equipment account on the basis of taking all of the capital costs that they’ve ever spent. Allocating these costs to the entire reserves base, and then recognizing the capital costs apportioned to the reserves produced that year. Leaving the majority of their capital costs on the balance sheet for decades at a time. People, Ideas & Objects believe that this is an uncompetitive posture in terms of the industry's ability to compete in North America’s capital markets. They need to be turning capital over repeatedly as opposed to being dependent upon outside markets. When investors and bankers have turned their back on you, they don’t forgive and forget until there are fundamental changes. Action on this basis is the more appropriate posture now and nothing will change their minds. Producers have failed and can’t compete for capital. Time to look at what investors are saying!

It’s interesting to go back and review the financial statements of the producers and find those periods in which they claimed they were highly innovative and claimed substantial cost reductions in their production. These were periods in which their total recorded depletion, year over year, was declining while their production increased. Indicating they were recognizing far less capital cost per barrel produced. Secondly the service industry was subject to steep declines in their capacity utilization and the fact that producers were only willing to pay half of what the service industry representative needed. Reducing the producers costs of their future drilling operations. Not so innovative. The service industry representatives' choice was to take the business or put their equipment into long term storage. Producers who claimed their costs were declining due to being innovative, during periods when the commodity prices declined, costs that were once $60, producers were then profitable at $40 and subsequently at $24. They were able to miraculously and retroactively reduce their costs of exploration and production by reinventing the “historical” aspect of historical accounting. Such is the innovativeness of the oil and gas producers during periods with these conditions. 

What we’ve had over these four decades was a reportedly massively innovative and profitable industry based on the chronic spending of investors' money. Spending being the only competitive advantage present in the industry. The amounts of recorded capital in property, plant and equipment are not assets, as represented in the specious financial statements of the producers, and rubber stamped by the public accountants who should have known better and done something to correct the issue. These costs are what we describe as the “unrecognized capital costs of past production.” And quantify too the amount of the discount provided to the energy consumer since none of these capital costs of exploration and production have been recognized and passed on to them. Financial statements in oil and gas “emulate the value of the firm,” I am told, they’re not what they should be, measures of performance. 

We believe any and all producers should therefore be subject to a pro-forma accounting adjustment to consider the reality of the current situation by moving at least 75% of property, plant and equipment to depletion to better reflect their performance. What we then find is that what’s left of shareholders' equity is eliminated in the industry and the majority of the bank's interests have been expended. In other words negative balance sheets. Oil and gas is a capital intensive industry implying that the majority of its production costs are capital in nature. It should therefore be predominately a capital cost that’s reflected in the consumers price of the product and that has not been the case for several decades.

The SEC defines the outer limit of what a producer's property, plant and equipment account can be, that does not mean each and every producer reaches the limit each and every year. It’s a limit, not a target. The most competitive producer would strive to profitably recognize all of their costs as quickly as they could and hold the smallest balance of property, plant and equipment. This would return the previously invested cash, assuming they charged adequate prices for their products, in order to recapture their prior investments and reflect a competitive financial performance that would differentiate them in the oil and gas, and capital markets. Can anyone today tell one producer's financial statements from another? Which one’s the hero and which one’s the zero? 

When investors are told profits are as healthy as they’re reported in the industry over these past four decades. They rush in with their money in order to capture some of those profits. More investors lead to over investment in the industry which leads to the chronic, systemic overproduction we’ve seen. This can also be described as unprofitable production. This chronic overproduction issue has existed in oil and gas since 1986 when OPEC dropped the price of oil. $10 was the price and all the North American producers had to do was to pull back production 15% in order to rectify the greater than 50% price decline. What the producers did was nothing. Except bring about the beginnings of their second cultural phenomenon. Looking under each and every rock for the responsible scapegoat and crying “oh whoa is me” in the process. In seeing this behavior, it became clear to me the configuration and structure of the producers could not reduce their production. They’re not configured for that. It would only leave large portions of overhead uncovered and profitability would suffer severely, albeit unnecessarily. I therefore set out in 1991 to build the software necessary to enable the industry to deal with chronic overproduction which was occurring as a result of the chronic over investment created by the specious accounting and financial statements of the producers. 

The Preliminary Specification provides the oil and gas producers with the most profitable means of oil and gas operations, everywhere and always. We believe this chronic overproduction situation has created 30 poorly performing years out of the last 36. With shale reservoirs it will soon be terminal to the financial, operational and political frameworks of the industry. During the most recent decades when producers were barring the door so no more investors could get in. I would ask them about their financial statements and their lack of any recognition of their costs of capital. The answer was always the same, “those are sunk costs and no one considers those.” I would then ask them the following question, so they’d gladly take more investors' money and then spit in their face by telling them last year's investment is now considered a sunk cost? I would comment as they would walk away in dismay at my questions, you do reap what you sow.

Without real profitability. Without anyone searching for value outside of the reserves being discovered. Without any critical evaluation through financial performance reporting being undertaken anywhere. The value built in the oil and gas industry in prior decades, and the investment dollars put in, have been frittered and wasted by these officers and directors. The industry is now worthless as it demands substantial capital investment in order just to operate. The cash crisis created as a result of the 2015 investor and banker withdrawal is slowly progressing towards its final demise. If we consider another consequence of People, Ideas & Objects pro forma adjustment of 75% of the property, plant and equipment account moved to depletion. The debt held by these producers is leveraged far in excess of any reasonable criteria. Producers are highly leveraged in an era when interest rates are normalizing. 

Subsequent to their investors withdrawal, the cash consumption continued, lines of credit were drawn until banks ceased their lending, more cash was consumed, properties were sold for half of their recorded value, working capital is now diminishing at a remarkable rate with nowhere left to turn. The only source of new cash was more drilling financed over 18 months by not paying the service industry bills. Decimating the capital structures of the entire service industry, destroying the trust and faith that their investors had in the oil & gas industry when they saw their investments cut up for scrap metal. Governments then began specious, woke social science experiments on a mass scale by shutting down the economy. Slashing oil prices to negative $40. Faced with capacity and capabilities in field equipment, the service industry operates at 40% of its prior capacity, unable but more importantly, unwilling and unmotivated to expand. Oil & gas commodity prices are relatively healthy but still not profitable from a performance point of view as they do not recognize the adequate capital costs of exploration and production. 

Faced with these consequences of their own making, producer officers and directors invoked their tried and tested strategy of “muddle through.” Nothing was done. The most innovative of companies, as they told us they were, sat on the couch. At some point they realized that the shale decline curve would come into play as a result of their inability to maintain their production volumes from the decline in field capacity and capabilities. This is reflected in shale natural gas plateauing and now showing indications of trending down. Shale decline curves are steep and dramatic. Therefore producer officers and directors saw the writing on the wall and declared shale would never be commercial and moved into clean energy.  

If the production profile in North American natural gas is in decline. This downward trajectory will create another issue for the oil & gas producer. Downward momentum adds another force that will be as strong as what today’s damage and destruction needs to be fought with. A doubling of our efforts will be necessary to sustain just what we have. 

This has taken three years to become a serious problem for the producers and throughout the industry without any discussion anywhere outside of People, Ideas & Objects. We see no discussion of the underlying reasons for cash being consumed by these organizations. When they never retire their capital costs. When most of the overhead and interest are capitalized. There is no short term float where the cash spent on overhead and interest are expended and then recovered in the subsequent 60 - 90 days by costing them into the price of the commodities. Therefore creating a short term cash shortfall in addition to the long term shortfalls noted above. 

These overhead and finance costs that are capitalized, in addition to the drilling, completion and equipping costs are draining the producers cash resources each and every month because they’re not adequately included in the producers commodity prices charged to consumers. Which is a reflection of how poorly these businesses are operated. Simple cash management would have shown this to be unsustainable at least 20 years ago. But they were so profitable, as we were told. People, Ideas & Objects have repeated this point for the better part of a decade and they’ve continued to do nothing. In the normal course of their operations they required outside funding to reload the spending machine annually. The cash drainage continues and no reloading has or will be undertaken. Leaving them with their limited and heavily diminished toolset of creativity and imagination. 

The Issue, Part I

 Eighteen months ago officers and directors of the producer firms were stating their unilateral shift in the direction towards clean energy. Harmonizing on the talking point that “shale will never be commercial.” Europe has taught us that listening to teenagers' apocalyptic pronouncements about the seasonal changes in the weather, and divesting of oil & gas, is dangerous. With regards to the officers and directors of the producer firms you have to ask yourself a few questions about their actions in the directions they take. What should we think now of this seasonal change in the officers and directors vision of the future? What are these people motivated by? What do they think about when they get up in the morning? Is this what passes for innovation? What direction will the wind be blowing in a few months? What characteristic other than revenue does shale provide that has attracted these officers and directors. I don’t think any of these questions have answers that involve oil & gas or that imply the officers and directors are thinking logically now.

Producer officers and directors seem fundamentally incapable of grasping basic business concepts. Cultural inertia causes them to continue to assume that whatever they produce in terms of cash be used for either dividends, capital expenditures or reducing bank debt. It is inconceivable to them that they achieve “real” profitable operations and the generation of cash to satisfy all three of these, all of the time. They have at their disposal all the authority, responsibility, resources and albeit diminished capacity and capabilities to conduct themselves in a manner that would provide them with all of the resources they could ever imagine. If only all those other people would stop picking on them.

A Polish broadcast during WWII.

“All is lost that is not saved by active effort”

Winston S. Churchill

Triumph and Tragedy, 1953

Introduction

The issue that I am finding in early 2023 is the cultural regression that appears to be occurring in oil & gas producers. Any progress that may have been achieved in terms of the investors desire to change the methods of management of the officers and directors. Quickly regresses back to the cultural norms when a hint of normalcy appears on the horizon for them. The need to change becomes less of an issue when they believe “muddle through” has been proven effective once again.

The need to shift away from this mythical, magical world that oil & gas operates in today is a necessity. The inability to look out the window to see the scope and scale of the damage and destruction authored through this disastrous management is perplexing. 

They have no field level capacities or capability to maintain the level of production they’ve obtained for the mid to long term. Drilling rig investors had to watch their new drilling rigs cut up for scrap metal to feed the staff after they were financially destroyed by the producer officers and directors. Where is their motivation to do that again? 

Producers have cannibalized their own internal processes through the attrition diet of an ongoing, almost eight year withdrawal by their investors. Nonetheless the cupboards are bare with no work in progress and no internal capacity or capability to deal with what their production profile will demand of them in order for it to be sustained. 

Their capital structures are unsupported. What could be worse than the abandonment by your investors. Absolutely nothing, and should have prompted immediate remedial management actions to rectify what the investors' concerns are. That was in 2015. 

Shale has four distinct characteristics that demand a different approach than what the current producer's culture is capable of. It is costly, prolific in terms of the reserves discovered, initial production volumes are dramatic and their steep decline curve demands costly reworks in as little as 18 months to maintain production volumes. 

In this oil & gas culture where everything is capitalized and each petroleum reserve is allocated an equal share of the capital cost no matter when it will be produced, where many of those costs will not be recognized until decades later and after many costly reworks. What will be the dynamic at play in their current method of accounting and potential production declines? It’s quite easy to see that it will be “building bigger, even more beautiful balance sheets,” “putting more cash in the ground” and specious profitability for the long term. “Muddle through.”

Over Investment Leads to Overproduction

These material consequences of overproduction started in the natural gas marketplace in 2009. Shale gas reserves were being exposed to the marketplace and the decline in natural gas prices were precipitous. Price structures were eventually damaged in a comprehensive fashion where natural gas has since traded anywhere between 9.74 to 1 and 28.04 to 1 of oil prices as opposed to its traditional heating value equivalent of 6 to 1. Closing out 2022 at 18.2 to 1. How this was allowed to happen, what efforts have been taken to rectify the situation, and why has nothing been done for 14 years? The answer was during the early days, the oil side of the business was healthy enough to carry both sides of the business. Which was true, oil prices were high enough until December 2014. During 2010, the application of shale technologies moved from natural gas to oil. Causing the same overproduction to soon begin on that side of the business. Creating difficulties on both sides of the producer firm, an issue that had never happened before.

The technical economic classifications of price makers and price takers are as follows. From Investopedia.

What Is a Price Maker​?

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

What substitutes are there for oil and natural gas? Can hydro power lubricate your engine or power Elon Musk's rocket to Mars? Will nuclear power provide the chemicals that oil and gas can? What size jerry-can can you use to carry electricity from wind or solar? Clearly there are no substitutes to oil and natural gas. And although in the hands of the bureaucrats oil and gas has not been a profit maximizer, that does not mean that it can’t be, or shouldn’t be. 

The Preliminary Specifications decentralized production models price maker strategy enables producers to produce only profitable production, everywhere and always, by establishing profitability as the only fair and reasonable means of production allocation. Another characteristic of price makers is that small changes in production volumes lead to large changes in price. We’ve seen this with the actions of OPEC+ and the Alberta government’s implementation of mandatory production cuts. If oil and gas commodities aren’t price makers then they would be price takers as the producers assume. So what are the characteristics of a price taker? Again from Investopedia.

What Is a 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.

The comparison to the bottled water market is appropriate here. New producers would be offered the same price as established providers despite the supply, demand and inventory in the market. And the ability to charge a premium during shortages would not be possible as consumers would switch to drink tap water, juice, soft drinks etc. 

Investors are concerned that shale reservoirs have created a shift in the dynamics of the oil and gas producers. Asking if shale will ever become commercial under the current business model used by these producers? Noting “shale reserves are a rapidly depleting asset.” Which accurately captures the entire scope of the problem. They can now see the assets and profitability of the producers have been overreported. The cash that fueled the industry was never internally generated. And without investors supporting the producers with annual cash infusions, the industry is not viable. Even though their working capital balances are at critically low and negative levels producers refuse to listen to anything from outside their organizations.

● Markets provide only one thing, information in the form of price. If you can produce a profit at that price then produce. Producers have overproduced into the commodity markets for thirty out of the past thirty six years (2022), despite prices indicating otherwise.

● Refusal to listen to their investors is consistent with the treatment People, Ideas & Objects have experienced over the past number of years since we introduced the Preliminary Specification​ as our solution to the industry's difficulties. The one exception is their feigned belief in shifting to clean energy investments. A world where accountability will be measured on how effective they’re saving the planet. They appeared to listen to their investors and went into action the following morning.

There is a litany of excuses that were used to assuage investors' concerns. Excuses such as “waiting for a cold winter,” “markets to rebalance,” “capital discipline,” “reducing costs through innovations,” “we’re profitable,” “Artificial Intelligence and the cloud,” “capital discipline” again, to its “OPEC’s or the investors fault,” “have to ensure alternatives don’t become viable,” “natural gas is a by-product,” “it’s the pipeline companies fault,” the “governments fault” these last two somewhat exclusively in Canada. Isn't it ironic that these same officers and directors were claiming to ensure that oil & gas prices didn’t rise too high to allow alternatives to get a foothold. Now they are the ones, in unauthorized fashion, to be responsible for destroying the oil & gas industry and taking its revenues towards “clean energy.” Premier quality individuals! We also find that “market rebalancing” is a particularly vile excuse as it has no basis in fact, and is only the willful destruction of the industries production profile to meet demand. 

It is People, Ideas & Objects belief that through a fundamental accounting change that occurred in the late 1970s. When the SEC regulated producers to use Full Cost accounting and its associated ceiling test. A methodology determining what the capital assets recorded in property, plant and equipment should not exceed. This enabled producers to compare the value of their balance sheets property, plant and equipment account to equal, with some adjustments, the present value of their reserves as specified in the independent reserves report times the current commodity prices as the upper limit. If their balance sheet assets value exceeded their reserves “value” then they would be subject to the ceiling test write down to correct any asset overvaluation. 

The perspective in oil & gas of the ceiling test was that it became the target to be achieved by each and every producer each year, not the limit. As represented in the “build balance sheets” and “put cash in the ground” calling of the officers and directors. To suggest as People, Ideas & Objects do that the most competitive producer would seek to reduce property, plant and equipment account (competitively reducing their overall cost of production) as quickly as possible became heresy and was refuted with their typical obstinance and attacks upon us. 

What was quickly discovered in the high interest rate environment of the 1980s was that interest was a key attribute of the assets value and therefore interest expenses were and are capitalized. Someone then asked about overhead with the resulting policies in which today we see approximately 85% of all overhead, including the excessive, creative, executive compensation, in the industry capitalized to property, plant and equipment. Slowly the culture of the industry became a spending frenzy fuelled by what came to be each producer's annual share offering. Fueled by specious profits that included revenues less royalties, operations and a sliver of the capital costs associated with the years reserves production over the total reserves. When this formula is applied to the high cost, prolific and steep decline curve of shale; the overproduction and specious reporting became evident to all. 

This culture has grown over these past four decades to know no difference in terms of what and how the industry generates or destroys value. The belief that drilling wells releases oil and gas reserves which are tremendously valuable. Until People, Ideas & Objects began arguing that “real” financial profitability was necessary, the industry did not care whatsoever about profits, it was about cash flow, not profits, and we were bellitted for our belief in profits. We believe oil and gas reserves are of little to no value if they can’t be produced profitably and profitably considering an appropriate financial accounting of all of the exploration and production costs, including capital, in a capital intensive industry. Where the costs of the product passed to the consumer in a capital intensive industry will be predominantly capital in nature and competitive in the North American capital markets. 

As of the end of 2022 we estimate that the amount of capital costs recorded on the balance sheets of North American producers will be approximately $1.5 trillion. Largely comprised of the high cost shale drilling that has dominated the past decade. U.S. shale based natural gas volumes produced from the period January 1, 2000 to November 30, 2022 total 262 TCF. The proven natural gas reserves estimate as of January 1, 2022 is 625.4 TCF. Representing a remaining 23.43 years of natural gas production at the average production rate of the past three years. Are we half way through the period of time in which shale gas will be with us? That is highly doubtful and only representative of what is known today. The question I want to ask is what will we have left to represent those shale gas reserves at the end of the next 23.43 years. It would seem that the cumulative shale gas production of 262 TCF didn’t generate anything of value outside the creative, excessive, executive compensation of the officers and directors of the producer firms. Who else has prospered?

In terms of oil reserves we also know that no proven reserves exist at negative commodity prices. As with natural gas, shale oil has been prosperous for officers and directors and they have “muddled through” handsomely. As with People, Ideas & Objects focus on value, shale will take significant efforts to make something of the remaining reserves and to rebuild a viable industry. Something that is well beyond the efforts and imagination of the current administration as evidenced by their inability to act, recognize the issue, take responsibility, lack of focus, business understanding and tendency to walk off the stage to other industries. We’ve also learned over the past decades that we should listen better to what these people are telling us. When they say they’re “building balance sheets” and “putting cash in the ground” we should accept that and not expect otherwise. They were telling us exactly what it was they were doing. Just as today they’ve stated that “shale will never be commercial.” Therefore why try when they can make clean energy all that it can be! Has there ever been a better time for change?

OCI Revised Organization Constructs, Part IX

 Summary & Conclusion

Culture and performance move together.

Safra Catz, CEO Oracle

It is People, Ideas & Objects opinion and hypothesis that the extent of the damage and destruction that has occurred in oil & gas is extensive. The failed business model of being wholly dependent upon outside financing to “build balance sheets” was discovered to be what it is by the investors in 2015. As a result the subsequent cancellation of new money coming in has caused producers to stumble forward on the cash flow generated from the weak assets they’ve developed. Not having to have performed at any point in the past four decades allowed the industry to become unproductive and uncompetitive. Since 2015 nothing has changed other than a steep trajectory downwards as these producers believed it was only “a matter of time before investors would rush back in.” 

The question becomes not so much about the state of affairs of the industry but what will happen in the mid to long term. Do our expectations of what this industry will be able to do in the future meet reality? Profits are the only source of capital large enough to satisfy the broad scope of industry and producer demands. What we know and understand through the development of these Organization Constructs is that they form the culture of the greater oil & gas economy. And none of these apply to the current state of producer firms. Which is best represented by stating they don’t understand they’re not profitable, they don’t know how to be profitable and are not motivated to become profitable. 

To resolve the current difficulties that plague the North American oil & gas industry demands that we organize an approach to how it’ll be resolved. That is the work that People, Ideas & Objects, our user community and their service provider organizations propose to do with input from the new oil & gas, service and all the tertiary industries involved in the greater oil & gas economy. Software is what defines and supports the organization in today’s society. Serendipity, spontaneous order and creative destruction have been hamstrung by the fact that software constrains an organization in proverbial cement based on its current process management definition. To make any organizational or process change has to be orchestrated through the software first in order to have the change take effect. Otherwise the organization will quickly regress back to the software definition of the existing process. This is the result of our dependence on Information Technology and is what we’ve called a modern day software bug. One that has cost the oil & gas industry its prosperity as officers and directors took this knowledge, never changed their organizations ERP software and therefore sealed their method of management. 

We’ve attributed the industry's destruction to chronic overproduction of oil & gas, or as we describe it, unprofitable production and excessive overhead costs. Which have both occurred systemically throughout North America as far back as July 1986. All that was necessary to reverse these difficulties was to shut-in any unprofitable production. Businesses recognize that overreported assets beget equal and commensurate overreported profitability, attracting disproportionate volumes of investors who in turn create overinvestment leading to the inevitable overproduction and the continuation of unprofitable production. This was done through a number of accounting methods that we’ve documented throughout the history of these writings. This became apparent and obvious in the downswing that began in 2009 with shale gas volumes destroying the natural gas marketplace, the oil markets experiencing the same characteristics which led to investors exiting the industry in 2015.

In terms of the categories of systems difficulties being experienced in oil & gas. The traditional cottage industry approach of cobbling together some code to build a system is woefully inadequate in terms of today's oil & gas industry needs. Yet there are iterations of these products that dominate the oil & gas market today. Products that consist of consolidations of small providers who were cobbled together for financial survival purposes in an attempt to service the producers. Or SAP’s approach of their custom integrations in each and every producer that’s purchased their system, based on SAP’s standard configuration of a manufacturing concern. Another category of systems related difficulty being experienced today is in the producer organizations who’s history extends over decades and may also have picked up a rival producer or two along the way. Their systems are best described as legacy systems that their IT departments maintain and support. 

The question I have is how will oil & gas survive and prosper in their difficult and challenging future? Which is the best approach? Or does “muddle through” get it done. The legacy applications of producers today are failing due to the organizations demands on the products are not what they were designed for. I would suggest the key issue facing each and everyone of these classifications of systems used in North American oil & gas are the age of the products, but most importantly of all, the overall producer organization has failed. 

The persistence and energy by the status quo to maintain these systems, and the fact the ERP providers exist on shoestring budgets, is remarkable. The question then becomes how do we rebuild the industry to achieve the dynamic, innovative, accountable and profitable foundation necessary? People, Ideas & Objects, our user community and their service provider suggest it is on the basis of the Preliminary Specification which in turn uses the basis of the culture as described in these seven Organizational Constructs. Based on today’s Information Technology. 

Oracle Cloud Infrastructure

The values that Oracle and People, Ideas & Objects share has always been strong. Focused on quality products and services, cultural influences such as this series on Organizational Constructs reflects and the emphasis on innovation. 

Investors ceased additional funding as a result of the betrayal they felt when producers overstated their asset values and profitability. A process that began in the late 1970s and continues today. Their accounting does not reflect the situation accurately. Producers state that their accounting is fully compliant with the SEC requirements, of which it is. Which is a liberal and uncompetitive interpretation of the regulations that has unintended consequences reflecting ill intent on behalf of the producers. Since 2015 no remedial action to change these methods has been undertaken by producers. They’re waiting for investors to return and fund their capital programs. 

Conflict between producers and People, Ideas & Objects rages at epic levels. In oil & gas this conflict is also evident in the dealings industry has with Oracle. How much of this disarray in the systems area of the producers is attributable to their desire to have an obscure, non-transparent level of accountability, as we’ve suggested. And are poor quality ERP systems, due to the lack of appropriately funding them, producers viable scapegoat that keeps on giving. Much as the producer officers and directors contend that investors need to return to fund the industry again. Producers' capacity to change has been tried and tested, and found to be inadequate. Decisions need to be made to deal with the consequences of their actions of the past many decades.

OCI Revised Organization Construct, Part VIII

 New Growth Theory

People, Ideas & Objects have taken the administrative and accounting resources of the North American producers and reorganized them in order for independent, individual service providers to be able to focus on one process and turn producers' overhead costs variable, based on profitable production. In turn none of the producer's costs are fixed in the Preliminary Specification. Creating six substantial value propositions that are tangible and clearly evident. Which include:

• Maximize producer profitability by not diluting corporate profits through the production of unprofitable properties.
• Save the producers petroleum reserves for when they can be produced profitably.
• Reserves would no longer need to recapture the additional costs of past prior losses as future profits.
• Reserves are seen as a cost free means of inventory and storage.
• Removing the marginal production from the commodity markets ensures that prices dictate market activities. 
• While shut-in producers can focus their innovativeness to increase production, reserves or cut costs of the property and return it to profitable production.

Secondly and possibly more substantially in terms of being able to build value for the greater North American oil & gas economy. Specialization and the division of labor which has proven to be the primary method of building all of the tangible value for western civilization since 1776. There’s been no other method and therefore the application of our reorganization of the administrative & accounting resources based on these principles builds value to ensure profitable operations. The ability to further enhance the industries productivity through specialization and the division of labor will add unknown, unquantified and unqualified means in which to do so. This is facilitated through our permanent software development capability, our user community, the implementation of these principles in their service provider organizations and their iterative approach to enhance the Preliminary Specification. 

We have adopted an incremental method of building value on top of these two methods through the adoption of Professor Paul M. Romer’s “New Growth Theory” of non-rival costs. In a December 1, 2001 Reason article he summarized his theory as “People, Ideas & Things.” I adopted this principle and named this initiative People, Ideas & Objects as we are object based software developers. We’ve applied “New Growth Theory” and non-rival costs throughout the Preliminary Specification and elevated it to the level of an Organizational Construct. Standing on the shoulders of giants and most specifically Adam Smith’s Specialization and Division of Labor. Professor Romer has elevated business thinking in this direction and it is a new frontier in building value for organizations through the mitigation of costs in substantial yet unquantifiable ways and enhancing the performance of those that use these methods. 

Professor Romer’s theory is the basis of how cloud computing has brought such value to our economy. Users are able to share the costs of the heavy capital investment in technology, the capacity, capabilities, resources, maintenance and support costs on a variable basis, variable based on usage. Conversely providers are able to enhance their service offering through specialization and division of labor that would be otherwise unavailable to individual organizations. We have extended this thinking to include not only Oracle Cloud ERP but to add oil & gas administrative and accounting to the managed shared and shareable resource. Eliminating the need of each producer to build, resource and maintain the necessary non-competitive accounting and administrative infrastructure they need as dynamic, innovative, accountable and profitable oil & gas producers. Providing a standard, objective and value driven service that shares the sole objective of ensuring oil & gas producers achieve the most profitable means of oil & gas production, everywhere and always.  

The capture and implementation of Professor Romer’s theories are one of the seven Organizational Constructs of the Preliminary Specification. All seven are focused on building value for the producer firms and a tangible means to do so. They are available through the Preliminary Specification, our user community and their service provider organizations in this proposed configuration. They’ll be established with a permanent software development capability and user community that will iterate on these principles to bring further value over time. 

Professor Paul M. Romer

Published in October 1990 “Endogenous Technological Change” became the foundation of “New Growth Theory” in economics that has developed and is providing value throughout the economy through its application. In a Reason Magazine interview Professor Romer was able to explain many of the points of

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a non-rival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth. S71

Professor Romer won the 2018 Nobel Prize in economics for these principles. They are an incremental value-add to the traditional specialization and division of labor that has carried that weight exclusively until now. It is this principle of sharing non-rival costs that will mitigate what we believe to be the secondary reason for the systemic lack of profitability in oil & gas. High overhead costs are currently at the corporate level and we have shifted those to charge the actual, factual overhead costs as incurred by the service providers' billings directly to the individual Joint Operating Committee. There they become a cost of the properties product that is captured in the profitable price of the commodities sale. And therefore recaptured and returned through the sale to establish a cash float to be used for the subsequent months overhead costs. Currently producers capitalize their overhead and therefore are selling their product below cost and not recovering the cash that is incurred in the monthly overhead expenses. As they indeed state they are “putting cash in the ground.” Having to source new cash to finance their overhead expenses. Each month.

By sharing the administrative and accounting infrastructure, turning these costs variable based on profitable production, and applying specialization and the division of labor to the administrative and accounting areas through the development of our user communities service providers. People, Ideas & Objects are adding real value to the North American producers in terms of resolving what can be stated as their largest impediments to profitability. Chronic overproduction, or unprofitable production as we describe it and high overhead costs. Which leads to their unique characteristic and phenomenon of “putting cash in the ground” and “building balance sheets.”   

Oracle CloudWorld 2022 Conference

It was during this conference it became apparent that Oracle was pursuing the incremental value adding process that Professor Romer defined in his paper “Endogenous Technological Change.” Augmenting their generic business processes with service providers such as banks and logistics companies with fully optimized and integrated services with Oracle Cloud ERP, just as People, Ideas & Objects are approaching the unique oil & gas attributes. Each of us has an extensive software development workload ahead. I see at least 20 years of work to be done in this area. Incrementally building value upon prior innovations. 

The best example provided during the conference was the expense reporting features that were done with J.P. Morgan, Chase. Use of their credit card for business purposes would enable the user to select the classification of the type of expense. Then Oracle Cloud ERP would evaluate the charge based on the company's policies and determine its eligibility. If eligible it would be processed and payment made to the employee or the credit card company. Eliminating the massive number of hours and costs that are incurred in the process of expense reports by organizations during the year in their current systems to a few milliseconds of processing time. Whereas the cost to the organization to use Oracle Cloud ERP is incidental in terms of the time of Oracle Cloud Infrastructure and the engineering incurred to develop the specific system. These software engineering costs are amortized across the global population of Oracle Cloud ERP customers using the feature. To a lesser extent People, Ideas & Objects provide this level of service to the North American producers for their unique oil & gas attributes. The lesser extent being a result of the smaller population of users in oil & gas that we are targeting this development and implementation towards. Nonetheless North American producers have the opportunity to realize both the Oracle and People, Ideas & Objects innovations concurrently and at substantially reduced costs due to the theories of Professor Paul Romer. 

OCI Revised Organization Constructs, Part VII

 Information Technology

The Information Technology environment and the revolutionary impact that these have had on business in the past number of decades in terms of improved productivity, performance increases and leveraging value out of new business models. The promise of additional performance and productivity enhancements are just around the corner as these technologies have now matured, are more integrated and therefore able to provide businesses with even greater value. The key technology today and the one that we’re leveraging in this community is the establishment of cloud technologies. Introducing a shared and shareable cost model across its users. This is how People, Ideas & Objects et al sees this change. Instead of incurring large capital costs to acquire capabilities, manage complex systems and maintain resources in non-competitive administrative areas of their firms. Users are able to access their needs as a monthly operating cost. The shared and shareable cost model doesn’t end there. The costs of providing those services are provided on a variable, or as used basis. The producer's users will be provided with the most recent applications and the quality of technology service and support is increased through a further definition of specialization and division of labor. People, Ideas & Objects see cloud technologies as revolutionary to oil & gas. Having oil & gas producers accessing the same state of the art IT capabilities, capacities and infrastructure at low, variable and affordable prices would enable producers to participate in the expected future performance, productivity and value enhancements that they choose to. 

People, Ideas & Objects et al sees a further extension beyond the IT infrastructure, software, service and support. We have adopted the shared and shareable cost methodology of cloud computing and applied it throughout the oil & gas administrative and accounting processes and functionality conducted in the Preliminary Specification, our user community and their service provider organizations. What we call "Cloud Administration and Accounting for Oil & Gas." If we look at the difficulties of “what, how and why” producers are consistently unprofitable. We see the high overhead costs that are incurred within each producer are what we consider to be the secondary issue causing a systemic lack of corporate profitability. Building the necessary administrative and accounting capacities and capabilities, particularly in this regulatory environment, is costly to achieve and maintain. These high overhead costs are incurred by each and every producer on an independent, isolated, or unshared and unshareable basis by each one of the producers today. These are not core strategic competitive advantages. They are not competitive advantages from any point of view or perspective of the oil & gas producer. 

Attaining state of the art administrative and accounting capacities and capabilities are not seen as a necessity or desirable part of the producer as we’ve witnessed and are unfortunately experiencing. If anything, People, Ideas & Objects' multi trillion dollar value proposition should show that the need for attention in the area of managing the business more effectively and efficiently is necessary, desirable, achievable and tangibly valuable. Our shared and shareable business model through Cloud Administration & Accounting for Oil & Gas will achieve the variable, industry based administrative and accounting state of the art capabilities and capacities. This will be done with lower, variable overhead costs based on the producer's profitable production profile. 

When we listen to customers who have implemented Oracle Cloud ERP applications within their organizations there are a number of consistent and interesting messages coming through. The first is that their roles in senior management and officers of the firms change. They begin dealing with the prospective changes that are coming in the quarterly release of upgrades of the Oracle Cloud ERP offering. These are now in the area of around 200 individual "additions" per quarter. Note, the Preliminary Specification will also have their own specific additions once operational. These additions would either be the concern of the producers senior management or as we propose in the Preliminary Specification, our user community and service providers as the two possible means of dealing with them. The majority of these additions would be handled by our user community under the People, Ideas & Objects et al model and implemented, maintained and supported by their service providers. Input from the producers, as always, being funneled through to our user community, consolidated and optimized from the producers point of view. Let’s therefore put this task in the shared and shareable category of what a senior management and officers role consists of. Ensuring effective and efficient management of the producer's processes, both from a time, effort, cost and reduction of error perspective. Which brings up an important question. Who’s in control of this entire ERP ecosystem as proposed by People, Ideas & Objects et al? It will be the new greater oil & gas economy and most specifically the new producers who our users look to for input of any and all information. Our user community are deaf, dumb and blind to any others. Our software developers are deaf, dumb and blind to all others except our user community. 

The traditional approach to having a distinct ERP system that caters to the needs of a specific industry is to customize the vendor's application to do so. The vendor application sitting on top of the ERP system. This is not recommended by Oracle, and People, Ideas & Objects have adopted their policy in our user community and service provider licenses. Stating that all customizations, as Oracle defines them, of the application are to be avoided at all costs. This certainly seems to be at odds with what it is that we’re doing. The point is subtle and is a distinctive characteristic of the Oracle Fusion Applications. Other than Workday they are the most recently written applications of all ERP systems. They were the first ERP systems to be written in the Java Programming Language which introduces the full object model to those applications. The Fusion Applications are supported by the Fusion Middleware which is an advanced Java Server with expanded ERP function and process management written by the Oracle Fusion developers. Oracle Fusion Middleware is the base of the Oracle Fusion Applications. It is also the base of any “additions” that are written to provide industry specific application capabilities to the Oracle Fusion Applications. Using the object orientation features of encapsulation, inheritance and polymorphism. Enabling People, Ideas & Objects to embed the oil & gas industry features directly into the Oracle Fusion Applications through the Middleware as “additions.” 

Oracle’s method avoids a key difficulty in the environment where the needs of the users and producers are dynamic, innovative and rapidly changing. Any system changes at the Oracle Cloud ERP, or Fusion Application ERP level are therefore not going to necessarily break any of the People, Ideas & Objects customizations that sit on top, as there will be nothing there. The new quarterly release of Oracle features will be embedded with the “additions” from People, Ideas & Objects in the Fusion Middleware and therefore, as they too are object based, updated with the new features or unaffected by them without any of our additional developer involvement unless there are some exceptions during compile time. 

People, Ideas & Objects have chosen to pursue our user community, research and Intellectual Property as the three areas of our competitive advantages. None of these involve the development of the software code. We’ll own and provide the software code that is derivative of the Preliminary Specification and our Intellectual Property. We have contracted all of our software developments to Oracle Corporation. Their services division are well versed in their products delivery through its development and are provided as a service and capable. We believe we would need to dedicate at least a half decade in order to assemble a team of the size capable to deal with this project and then an unknown amount of time necessary to turn them into a functioning capable team competent to put out the quality of software necessary. We’ve been working on the development of our user community since the first quarter of 2014. A task we’ve assigned as our priority since then and one that will differentiate our product offering in terms of quality. Time is not the commodity available to the producers at this stage. Focusing on our user community and the IP aspects of this project is a better use of our time, resources and skills. It’s also where we see we can build value for the producers and how the software’s quality is best achieved. It is consistent with our belief that specialization and the division of labor will need to be applied to all aspects of the economy and by contracting development to Oracle we can do a better, more productive job.

If producers officers and directors believe these ERP developments can be done within their organization then why hasn’t that happened? Our scope of application development in the Preliminary Specification would be considered equal to what each and every one of the producers would need to undertake if they chose to continue to go it alone in their unshared cost model. The main difference is in terms of scale and its relative cost implication. Sharing the costs of People, Ideas & Objects development is substantially less than what the aggregate of each individual producer would otherwise need to expend. To acquire just the depth of understanding and detail necessary of the Oracle Cloud ERP offerings would require the same costs being incurred and replicated across the industry in each and every one of the producer firms. And that's assuming producers had a workable, profitable business model, or have a viable model developed within the next decade. A model that does not conflict with the Intellectual Property contained here. 

I could be reading things differently regarding the producers shareholders and bankers expectations. 2015 was when they began to express their discontent with the industry at large. The industries lack of performance, accountability and transparency were identified as issues by them at that time. I, like others, would never have assumed that eight years of comprehensive inaction was a tolerable amount of time. 

Throughout our writings we have alleged the accounting conducted by producers over the past four decades, and particularly the profitability reported, is specious. That overhead and other costs are handled inappropriately. Raising serious governance issues that have now resonated throughout the investment community and elsewhere with similar concerns. This accounting allegation of ours is that the specious accounting conducted throughout the industry is best obscured through poor ERP systems. Governance over the quality of the accounting and the companies systems has become an issue at the level of the board of directors in the past few years. However, in addition to the accounting, the ERP systems that are used throughout the industry are woefully ineffective. There are no tier 1 ERP systems providers selling oil & gas systems today and more importantly, outside of People, Ideas & Objects et al no interest. There has been abundant opportunity for producers to participate in the development of these systems. SAP provides ERP software to some of the senior senior producers but SAP does not have an oil & gas based application. The workarounds in SAP to accommodate the oil & gas industries' distinct characteristics are horrendous. SAP’s specialty are large manufacturing concerns like Ford who need to interact with tier 2 and tier 3 suppliers “just in time.” To bring wheel nut part z in d volumes to production line x at y time. SAP’s sale to Ford is more profitable for them than all the revenues they could ever earn from oil & gas. 

In May 1991 I contacted Oracle to begin joint development of oil & gas ERP systems. It was in 1992 we signed an agreement to do so and I feel Oracle threw their entire weight behind the project. This is the project that orchestrated my first failure in the oil & gas ERP market in February 1997. My point here is that not only myself but all the ERP systems vendors have been doing the job that was necessary. Without financial or any other form of support from the producer firms. It’s odd how officers and directors have prospered personally, accounting is as specious as it is, tier 1 ERP systems providers aren’t involved due to the lack of financial resources, the industry is such a spectacular failure and investors and bankers are unsatisfied. 

It was in our May 2004 Preliminary Research Report that I noted the research of Professor Anthony Giddens and Professor Wanda Orlikowski. They’ve defined Structuration Theory and The Model of Structuration. Which suggests that organizations, people and society move together in lockstep. Any disparity in one of the three's progress will create conflict and potentially failure. Professor Orlikowskis model suggests that technology is part of society which of course has a disproportionate influence today. We therefore applied this research and showed that Information Technology, particularly in the form of ERP systems, was defining and supporting the producer organizations, but also constraining them. Therefore I have alleged on many occasions that the purpose behind the use of old, stale and for lack of a better description homegrown ERP systems are what the producers have relied upon and maintained to ensure their franchise was competitively unchallenged and financially unaccountable. 

This is not to disparage my competitors who have done extraordinary work in impossible conditions. Officers and directors intentionally set out since May 2004 to not support any further developments of these systems by cutting off funding to People, Ideas & Objects and other ERP suppliers. What was a thriving ERP marketplace in the 1990’s with over 20 providers leaves a dominance by P2 who are a consolidated accumulation of many other ERP providers solutions that were unable to continue profitably. And at the same time we’ve seen the maturation of the IT market overlooked by these producer firms in the administrative and accounting areas. Whereas producers have declared frequently the latest version of Microsoft Windows was moving them forward on a renewed trajectory. Unknown and undetermined at the time if it was an upward trajectory. It’s always appropriate for producer firms to state the latest IT trend as to what “sounds good” from a progressive, assertive oil & gas user of IT. These items include the Internet of Things, Artificial Intelligence, Machine Learning or whatever technology promises the biggest bang for the buck. 

Oracle CloudWorld 2022 conference

There is a clear divide in terms of the consumer facing applications from those that are provided to corporate customers. The user interface is not an area that has attracted much focus in the enterprise world it would seem. The issue appears to have been the complexity of enterprise applications makes the user interface more difficult to design and implement. Oracle appears to be making some changes in this area with their Redwood Platform for enterprise applications which they began developing four years ago. I highly recommend reviewing these two videos, here and here.

People, Ideas & Objects key competitive advantage, our priority and our focus is our user community. Establishing quality enterprise applications demands user involvement. Which is the difficult, time consuming process that we began in the first quarter of 2014. Based on a unique User Community Vision our users have the tools to build the application that producers need to ensure they produce the most profitable means of oil & gas operations everywhere and always. 

Our method of approaching the issues in oil & gas is focused on quality. With Oracle we can see they’re constantly pushing the envelope in every aspect of their products and services. Our user community will have these resources as part of their toolkit to ensure they maximize their opportunities to solve the difficult issues they’ll be faced with. And importantly they’ll be augmented with a rich and diverse level of Oracle communities of developers and user groups that will be available to assist them. Once our budget is secured, People, Ideas & Objects, our user community and their service providers will be able to maximize this opportunity with Oracle’s products and services and achieve what we’re setting out to do. 

OCI Revised Organization Constructs, Part VI

Markets

Three modules of the Preliminary Specification are “market” modules, including the Resource Marketplace, Petroleum Lease Marketplace, and Financial Marketplace modules. Each establishes marketplaces where producers can engage in the markets which they need to function. The marketplace modules mimic the three markets that producers participate in and are designed to deal with the day to day activities of each of the producers, service industry and others. Supporting them with the contractual, transaction processing and other capabilities of Oracle Cloud ERP the Preliminary Specification, our user community and their service providers in our Cloud Administration & Accounting for Oil & Gas. Enabling producers to apply their competitive advantages and strategies in the greater oil & gas economy. 

The economic principles of markets and price discovery are two of the mechanisms by which North America has advanced its overall quality of life. Adoption of these within the oil & gas industry are therefore a necessity and the Preliminary Specification will do so as part of the structures that define and support these industries. Our decentralized production models price maker strategy relies on the principle of oil & gas commodities being priced based on the price maker principle. The need for producers to produce only profitable production, after full consideration of all of their actual costs on a timely and accurate basis, is how they’ll operate with Cloud Administration & Accounting for Oil & Gas. Using all of the information contained within the commodity markets price, (production, inventory, consumption, reserves) to determine profitability and ultimately what will and will not be produced. It is these same mechanisms that are involved in every transaction involved in a free market. 

From the Preliminary Specifications Resource Marketplace module we quote from a paper written by Professors Richard N. Langlois and Nicholas J. Foss entitled “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.” they note.

The organizational question is whether new capabilities are best acquired through the market, through internal learning, or through some hybrid organizational form. And the answer will depend on (A) the already existing structure of capabilities and (B) the nature of the economic change involved. p. 21

And

If by contrast, the old configuration of capabilities lies within large vertically integrated organizations, creative destruction may well take the form of markets superseding firms. History offers many examples of both. p. 21”

And

Either way it boils down to the same common-sense recognition, namely that individuals - and organizations - are necessarily limited in what they know how to do well. Indeed, the main interest of capabilities view is to understand what is distinctive about firms as unitary, historical organizations of cooperating individuals. p. 17

In terms of the Resource Marketplace module we first need to discuss two components of how operations are conducted in oil & gas. The reliance on the field service industry providers to extend the producers capabilities and capacities into their regions of interest. If producers were to own and operate their field infrastructure it would otherwise be an impossible impediment and constraint towards progress. The second component is the history of abuse and disrespect that producers have displayed and presented to the service industry over the past forty years. And particularly since 2015 when producers recognized their financial difficulties were amplifying. The status quo long ago accepted the assumption that oil & gas is a boom / bust industry. All other industries sought to work these issues out of their businesses and industries many years ago. It is this continuing acceptance by producers that has left us with a legacy of maybe six good years out of the past thirty six. Officers and directors don’t understand this argument as they’ve experienced thirty six years of superior executive compensation. Producers assumed the service industry would adjust to the boom / bust trend in lock step with them. There is an implied assumption that the service industry, like the oil & gas industry itself, enjoys revenues as a primary industry and therefore continues business as usual during any of the bust cycles. The diversity of the service industry offerings, and their coverage across the various regions of their operations throughout North America spreads them thin operationally. As secondary industry participants they are not as resilient as the producers believe them to be. Scaling back from 1,900 active drilling rigs to 400 during 2015, forcing 50% price reductions on to the drilling operator or they would use another vendor, the producers induced a collapse of their revenue streams into the low teens in terms of percentages of prior levels, which has been devastating on the financial health and viability of the entire service industry.

Now in 2023 the repercussions of this downturn have decimated much of the service industries capacities and capabilities that were once available to producers. The largest service industry providers have left the continent as a result of the abusive treatment they’ve received. Therefore for producers to be working out the boom / bust cycle through our price maker strategy will go a long way to rectifying this issue in the long run. Profitability everywhere and always will build a stable infrastructure throughout the greater oil & gas economy. Providing a stable environment, or constant level of demand for which the service industry can prosper. 

After this and similar treatment over the past four decades investors in the service industry are unwilling to participate in the rebuilding of their much needed field operations. They invested in good faith and were abused by the producer firms. They’ve witnessed the equipment they invested in being cut up for scrap metal to pay the light bill and taxes on the shop. This was due to the producers determining they could get away with leveraging additional field activity by not paying their bills for 18 months after the jobs were completed. Producers should have enlightened the service industry representatives of these plans beforehand. The dilemma today is who’s going to provide the financial resources for the service industry to recapitalize itself and reestablish the capacities and capabilities that will be necessary for a self-sufficient and profitable oil & gas industry? The service industry feels the producers broke it, they can fix it. Maybe when they have some skin in the game they won't be so abusive.

This is what’s known and understood in the market today, it’s not news. Producers expect the service industry to resume normal operations, yet fail to consider the consequences of their prior actions. A similar example is the history of the ERP providers in oil & gas over the past thirty years. I can report there’s still no consideration whatsoever of a second chance these first tier ERP providers will be riding to the rescue of the producer firms. Why, they feel the industry is too complex, too costly and there are not enough producers to be able to negotiate their sales prices fairly. SAP is a custom implementation for each sale. The last two ERP providers left in 2000 and 2005, as documented on page 17 of our White Paper, due to the inability of producer officers and directors to pay for their software development in advance. The only method that these vendors would approach the industry. Producers have had ten years to invest in the Preliminary Specification to make their organizations profitable and accountable and to avoid this inevitable, predictable and fatal outcome but didn’t do so. Not a penny has been spent on People, Ideas & Objects at any point. The need for skin in the game is the apt approach when so many oil & gas ERP investors and vendors have been betrayed so comprehensively three decades ago and as has now been done to the service industry. People, Ideas & Objects are instilling market principles in the producer firms, that however does not imply that those who support them have the inherent trust in producers as a result of their prior actions to be able to rely on market mechanisms at this time. 

As the producers sit upon the primary industries revenues they so enjoy. They will show a thumbs down to this idea as if People, Ideas & Objects is the only vendor they’ll be faced with who has this ludicrous prepayment idea. Officers and directors actions have consequences which have been wholly detrimental to everyone else in the industry. Officers and directors will no doubt argue, rightly, this does not remind them of what markets and price discovery should look like. Correct, it's what’s necessary after the destruction of the markets they’ve caused. 

These facts on the ground are what the officers and directors refuse to consider or admit. Until they do the industry will be beset with problems. These issues need to be dealt with and I am unaware of any other solution. The need to rebuild these industries brick by brick and stick by stick must be financed by the only means now available. The primary industry revenues of the dynamic, innovative, accountable and profitable oil & gas industry. Facilitated through the Preliminary Specifications Resource Marketplace module and decentralized production models price maker strategy. Granted there will be those within the service industry that will continue to scrounge for the pennies falling from the officers and directors pockets. However, that does not create the dynamic, innovative, accountable, profitable and energy independent oil & gas industry that we need. 

The Financial and Petroleum Lease Marketplace will also implement the market's organizational structures into the Preliminary Specification and provide the organized interface necessary to access and interact within these markets. Modules in which the full transactional power of the Preliminary Specifications ERP system supports the activities within these markets. We’ll also briefly discuss the Marketplace Interface that we’re building as I believe COVID provides the opportunity to adjust one's opinion to the use of this feature. I have suffered the slings and arrows, the ridicule for it in the past and there is not much that can stand in disagreement to what I haven’t already heard. In my opinion it is revolutionary and needs to be seen in the context of the changes that occurred in 2020 - 2022. At a minimum it adds an element of serendipity to working from home. One issue that I may not have been clear about is the Marketplace Interface is a virtual representation. Users will be able to access it through any screen on any of their devices. It does not use a headset for the person.

The Petroleum Lease Marketplace module is as one could imagine. An opportunity to post, bid, purchase, sell mineral rights and producing properties in the marketplace that exists and is replicated virtually within the Petroleum Lease Marketplace module. Everything from the opportunity to participate in a joint venture to establishing the surface rights payments is fully supported by the ERP system of the Preliminary Specification. Our product sits on top of Oracle ERP Cloud which includes their tier 1, Oracle Fusion Applications that Gartner rates as the highest quality offering. These oil & gas markets include the data of the Federal, State, Provincial, Freehold and Offshore leases. An opportunity for industry to consolidate on a dynamic platform which uses proven tier 1 technologies with the constant support of the service providers maintaining transaction administration and accounting in a standard and objective manner. (Note: People, Ideas & Objects have maintained the policy, and it is written into our user community and service provider licenses. That we will maintain arm’s length distance from all royalty administrations. We are operating in the best interests of the oil & gas industry. To ensure that they are provided with the most profitable means of oil & gas operations. There will be no compromise on this anywhere within this community.) This will be enhanced with the constant iterative design and development being undertaken by People, Ideas & Objects user community and developers on a permanent basis. Whereas if a jurisdiction reviewed and changed their royalty rates at some point, in terms of either the rate or method calculated, producers would not need to concern themselves with the administrative or accounting aspects of those changes. Our user community, developers and service providers would have them covered and implement the necessary changes in the software and services in a timely and accurate manner. Producers would only need to deal with any issues regarding the revised costs of the royalty. 

Administration and accounting are not competitive advantages of the producer firms. Thankfully that is one of the statements that we’ve received no pushback on. That doesn’t mean that these areas have to be a hodge podge, slapped together system that only makes do. There’s no reason why the industry shouldn’t have achieved state of the art ERP systems within their firms. That producers haven’t, has led to many questioning not only the integrity of the accounting but also the systems that are being used by industry. This questioning should never have been necessary and implementation of tier 1 ERP systems is now an explicit demand of the investment community. Oracle Cloud ERP is the premier tier 1 ERP system in the market. 

And why is it that the issue of overproduction, or as we define it as unprofitable production, can be documented to have existed in the North American marketplace back as far as July 26, 1986? The solution we propose to the overproduction issue, in addition to aligning all of these organizational constructs which has been available since August 2012. In terms of markets, it is alleged that there is double the amount of oil needed up until 2050. This capacity overhang forces North American high cost producers to assume the swing producer role and produce only profitable production. Saudi Arabia's production costs of $3.00 and probably $0.00 capital costs and could therefore produce profitably at any price during the next 28 years. They could use the money, and markets in 2050 are too far away and unpredictable for them to sit back and wait for. 

The third marketplace module is the Financial Marketplace module. Moving to the Joint Operating Committee as the key Organizational Construct of the dynamic, innovative, accountable and profitable producer is achieved through the Preliminary Specification. In the Joint Operating Committee section we noted that the movement of the knowledge, which includes the detailed actual, factual accounting information for that specific property, to where the decision rights were held, which is the Joint Operating Committee, enhances accountability. It's here that the Financial Marketplace enhances that accountability with the board of directors' interaction with their current and prospective shareholders and bankers. A review of the Financial Marketplace modules specification would be the best source of information to capture an overall understanding of the module. With the standard and objective nature of the accounting that is conducted throughout the Preliminary Specification and the service providers. Would that satisfy some of the issues that investors and bankers have raised regarding their investments and loans in the industry? Where everything being produced is profitable and the producers are seeking to maximize their profits by shutting in unprofitable production. Would People, Ideas & Objects, our user community and service providers be helping producers satisfy their shareholders and bankers to the point where they’d begin investing in the industry again?