Reinstating Profitable Production Rights, Part II

What do the Flexible and Profitable Production Rights Licenses earn?

High levels of creative destruction in what will be the most violent form are anticipated to occur in the coming years. What revenues are generated as a result of the ownership of a Profitable Production Right License would be determined based on the negotiated share of the present value of the differential comparing People, Ideas & Objects et al’s value proposition to the status quo. What that would be and how that would be determined would be a result of these negotiations between the Profitable Production Right Licensee and the producer firm. These contracts would then be managed on the licensees behalf in the Oracle Blockchain database managing each of the specific boe’s. 

If we assume that the Profitable Production Right Licensees implemented a percentage of the oil & gas commodity price as the value in their contract. And for the purposes here we’ll assume a range of rates between 2.5% to 5% of the commodity price. A range that consists of one quarter to one half of the “real” profitability of a commercial operation. An amount where the use of the Preliminary Specification ensures commodity prices are at least marginal, and therefore higher to attain the profitable operation. A differential that has been of no interest to current producers who have left far more than that on the table for many decades. An amount that future producers would consider a cost of business. That contract would earn, if these commodity prices were capable of providing the producer a 10% profit from these prices. At an $80 price of oil, revenues of $2.00 - $4.00 per day or $730.00 to $1,460.00 per year. For natural gas it would be at a commodity price of $7 and therefore revenues of $1.05 to $2.10 per day or $383.25 or $766.50 per year / boe. The key to this argument is that these will be the costs that producers will incur to maintain their access to our Cloud Administration & Accounting for Oil & Gas software and services that provides them the most profitable means of oil & gas operations everywhere and always.

The anticipated, expected or budget price of a Profitable Production Right License has been calculated to be $390 per boe, based on the current North American production profile which includes heavy oil production and People, Ideas & Objects budget. As we’ve discussed, heavy oil producers have their own ERP systems and may not be interested in the Preliminary Specification. However they are direct, net benefactors of the price maker strategy and therefore their production is being assessed on the same basis as all other North American production. They are incapable of shutting down their production process, whose costs are consistently higher and therefore will need to secure Profitable Production Rights Licenses.

The cost of maintaining the software development and user community on a long term basis would need to be factored in when the Preliminary Specification became operational and it would not be material in my opinion. If we consider the $15 billion development costs of the Preliminary Specification in comparison to the gross revenues of the producers in 2021, our total software development and our user community costs averaged over three years would total 0.4% of a single year's oil & gas revenues. And post commercial release operational and incremental software development and our user community costs on an annual basis will be much smaller. A reasonable estimate of 25% of the build costs or $1.25 billion / yr. 

Assigning these overhead costs to the Profitable Production Rights License owners, would be an all in cost in the range of $33 to $70 / year / license. For clarity I’ll state that our user communities service providers revenues are generated through their direct billings to the various Joint Operating Committees. These costs make up the Joint Operating Committee and producers variable overhead costs and are not a cost that are part of the Profitable Production Right License. The Profitable Production Rights Licenses will have no impact on the service provider's fee structure or billing. They will have an indirect impact on the producer's ability to access the service providers through a producer's access rights to the software.

The basis of the long term support costs associated with owning a Profitable Production Right License is the support of the software development and our user community which are permanent industry based capacities and capabilities. There will be times when the Profitable Production Right’s Licensees associated production may have been shut-in, suspended or may even be abandoned. [Note, that does not imply that there would be no overhead costs being charged to the Profitable Production Rights Licensees for the software development and user community costs during these times. These overhead costs are fixed.] The important aspect of the Profitable Production Right License is that it is a contract with a producer to provide them with access to the organizational capability to earn profitable production. It is the right to produce a barrel of oil equivalent and process it through the Cloud Administration & Accounting for Oil & Gas. And is therefore reconfigurable in terms of the production it represents. Profitable Production Rights Licensees won’t have the risks associated with the ownership of oil & gas properties. Each Profitable Production Right License will have the exclusive right to process a barrel of oil equivalent profitably through our Cloud Administration & Accounting for Oil & Gas software and service. Granting the producer firm access to earn a profit on a single barrel of oil equivalent. That Profitable Production Right License is transferable at the Licensees discretion, the ownership that you gain by purchasing the Profitable Production Right is assignable, licenseable, leasable and transferable for the period of time as long as People, Ideas & Objects Preliminary Specification remains commercial. Additionally there is no implied role of a Profitable Production Right License holder to be involved whatsoever in the day to day activities of the producer or Joint Operating Committee. The product is a license of the right of access to Cloud Administration & Accounting for Oil & Gas. The producers alternative would be to continue to use the current approach that is systematically tearing the industry apart. 

Today’s producers' tactical management approach has included everything that comes into their minds. In the past few years we’ve seen $25 million in executive bonuses paid by Chesapeake the week prior to its declaration of bankruptcy. It appears that bankruptcy is the means to deal with shareholders who have become too dissatisfied with the performance of management and how producers are able to reshuffle the deck as it were. Profitable Production Rights Licenses circumvent these actions by having a clause that terminates the Profitable Production Rights License upon bankruptcy. Therefore freeing up the rights and maintaining the value in the hands of the rights owner. Further endorsing the purpose of the Profitable Production Right by enforcing the separation of ownership of the oil & gas production and the right to process that production through the organizations as represented in the Cloud Administration & Accounting for Oil & Gas. The Licensees would then be able to engage the bankruptcy trustees to reinstate the Profitable Production Rights License on terms that maintain the independent ownership of the Profitable Production Rights License as separate and distinct from the means of production. 

Why and who would be interested in purchasing these Profitable Production Rights Licenses.

The purpose in developing People, Ideas & Objects et al Cloud Administration & Accounting for Oil & Gas software and service is to generate the necessary producer profitability to deal with the demands for capital over the next 25 years. There is no other source of financing large enough to fuel these needs as the producers officers and directors past methods have failed catastrophically. Investors have stated unequivocally that they’ve had enough of these past methods and are refusing to participate further. Continued obstinance by the producers' officers and directors appears to be counterproductive with the pace and trajectory of decline only accelerating. Oil & gas in North America does not have a future in its current configuration. Change is necessary to deal with the issues and opportunities present in the marketplace. Opportunities such as disintermediation through Information Technology and the other Organizational Constructs of our Preliminary Specification. Enhancing the culture of the industry through the wholesale change that disintermediation provides. To ensure that producers achieve the most profitable means of oil & gas operations, everywhere and always.

The following are a number of different classifications of people that we believe would be interested in participating in purchasing a Profitable Production Rights License. To provide the software development revenues to People, Ideas & Objects and initiate the rebuilding process that oil & gas and all the subsidiary industries need to undertake. 

Current, past and prospective oil & gas investors

Investors want profits and have not been rewarded for their efforts since 1986. They have experienced the same obstinate, protracted battle with the producer officers and directors that People, Ideas & Objects have experienced. Their participation in the Profitable Production Rights License would provide for People, Ideas & Objects revenues to change their current and prospective holdings into dynamic, innovative, accountable and profitable oil & gas producers.

Our plan for the next few months involves investors getting involved in purchasing Profitable Production Rights Licenses in order to ensure their representative production is handled. To secure their ability to have their representative production processed through the Cloud Administration & Accounting for Oil & Gas software and service. 

Current, past and prospective oil & gas bankers

As above.  

North American based producers.

They’ll need to secure their production rights through direct purchase of a Profitable Production Rights License or engage a licensee to lease the incremental barrels they need to process their production volumes when the Cloud Administration & Accounting for Oil & Gas facility is operational.

“Muddle through” has a consistency over time and throughout the producer population. We have argued it has become the culture of the industry. In this transition to a performance based culture maybe this will be the start of a producer's competitive juices flowing.

Oil & gas producers based throughout the world.

A way to profit from North American production without the operational, financial or political risk. Both through direct ownership of the Profitable Production Right and indirectly through the most profitable means of oil & gas operations from consistent, marginal, global commodity prices. 

Current oil & gas employees and vendors

Everyone identifies with the personal risks of being involved in disintermediating an industry. It brings out the possibility they’re attacked and subject to severe, unnecessary career consequences. The number of people who are of like mind to People, Ideas & Objects is significant in volume and I have sought to keep their information confidential for their safety and personal financial benefit. User community members who are sourced from this group are part-time positions. Their commitment will be required when their service provider organizations are being formed, well into the software development phase. There is a desire throughout the industry that something is done to deal with its issues and soon. 

Would the overall population of oil & gas employees and vendors participate in the Profitable Production Rights License? Ownership of a product such as these licenses provides an opportunity for people to enhance their participation level in the industry. Having an indirect value being generated from the production of oil & gas is a risky proposition. With the transferability of the licenses to new properties and the Flexible Profitable Production License these risks are reduced. The leverage realized by these products are enhanced through the value proposition made available through Information Technologies disintermediation.

Current Service Industry representatives

Who have a vested interest in rebuilding the service industry to rebuild their trust in the producer firms. Profitable Production Rights Licenses would provide additional motivation for them to earn value in their chosen industry. Eliminating the oil & gas’ boom / bust cycle and its consequences, which are leveraged by producers to be experienced exclusively by service industry representatives. 

Motivation has been the primary issue in the service industry these past few years. Faith and trust in the producer firms will need to be rebuilt by the producers if they expect to continue with their production profiles. In a “you broke it, you fix it” application of logic. Producers will need to conduct a recapitalization of the service industry through active philanthropic rebuilding of its capacities and capabilities. Providing evidentiary proof that there will be a second, third and more paychecks through the times when producers potentially destroy their businesses once again. Something that field staff will know they can reliably base a career, family and mortgage upon, in what is currently the 21st century. Producer officers and directors should take these comments as an arms length assessment of their past management.

Our user community and their service provider organizations. 

Their participation in these software developments provides further motivation for their commitment to profitability everywhere and always. A means to benefit from a Profitable Production Rights License would be an incremental value-add to them from the value they seek to produce for the industry. Securing additional motivation in providing for the most profitable means of oil & gas operations, everywhere and always.  

Our user community and their service provider organizations are derived from the general oil & gas community. Having a direct participation in the production process is attractive to these people.

These paint an ideal situation where the associated risks and issues of the software and services development are completed on budget and within a reasonable time. They assume the appeal of the Profitable Production Rights Licenses as explained to this point. All inherent risks associated with the purchase of this product are mitigated or overcome. This implies a collective and collaborative effort on behalf of the industry in order for its success. The scale of the issue demands such. And although we’re not there yet, I believe we are close to the time in which the understanding that actions in the form of the collective and collaborative industry wide effort are necessary and will be evident to all.

Reinstating Profitable Production Rights, Part I

 Introduction

People, Ideas & Objects are reinstating a modified Profitable Production Rights Licensing method of generating the necessary revenue for the development of the Preliminary Specification and our user community. Providing Profitable Production Rights Licensees with the unique opportunity to participate simultaneously in both the North American oil & gas industry and its ERP software markets. All businesses in the 21st century will soon be software businesses. On March 15, 2022 we suspended our Production Rights initiative to pursue what we were calling our “Marshall Plan.” A means in which producers could deal directly with the issues in the industry as a result of it being elevated to the level of a political weapon in the form of the ongoing European crisis. To which producer officers and directors applied their “muddle through” strategy. The confusion and lack of coherence in the global oil & gas marketplace is evidence that all is not as it seems. 

I’ve made a number of changes to the Profitable Production Rights License and better defined the opportunities for all concerned. It is a means in which the development of the Preliminary Specification can be undertaken and for licensees to hold the rights to control who will have access to People, Ideas & Objects software and our user communities service provider services in the form of our Cloud Administration & Accounting for Oil & Gas. I’ll restate here why participation in People, Ideas & Objects et al is valuable in the 21st century. 

It’s no longer enough to just own the oil & gas asset, it’s also necessary to have access to the ERP software and services of People, Ideas & Objects et al’s Cloud Administration & Accounting for Oil & Gas that makes all oil & gas assets profitable. 

Oil & gas producer officers and directors have proven they don’t have an interest in oil & gas in their transitions to clean energy and their declaration that shale will never be commercial. A capitulation of the oil & gas business that others were responsible for building. Officers and directors have proven they don't have an understanding of, need or how to go about earning “real” profitability over these past four decades. Oil & gas producers have proven to hold a legacy and culture that is incapable of change and one that is counter to profitability and productivity. The first step in changing a culture is accepting there’s an issue. The key issue being chronic and systemic overproduction, or unprofitable production, such as natural gas is experiencing today. An issue People, Ideas & Objects et al resolves. An issue we see today in natural gas. Oil & gas producer officers and directors are not interested in being transparent in their accountability through their proven specious accounting methods and reporting, ad hoc ERP systems and dysfunctional organizations. 

At this point in time what more needs to be proven that the North American producer is a failed organization? How many more chances will they be provided with? Societal jeopardy is now in play with what I perceive is the industry's inability, over the next decade, to maintain the volumes of shale’s deliverables over the mid to long term. For example U.S. natural gas production from shale is almost 80% of its total production. With 10,000 to 25,000 man hours of mechanical labor contained within each barrel of oil equivalent, the producers officers and directors self-interest overrides all other concerns. With all that has happened between producers and their investors since 2015. With the well defined expectations of their investors. It’s difficult for me to comprehend how they can explain their desire not to invest in enhanced profitability. 

I came across this statement regarding what is defined as the Fifth Estate.

The Fifth Estate is a fundamentally different kind of power. It’s more difficult to consolidate than media, and more difficult to control than even our government divided by design. Its impact is also far more difficult to predict. This is because technology is above all things defined in terms of newness, which not only makes it disruptive of pre-existing power, but destructive of itself -- a sort of anti-power that only guarantees change. The true failsafe. Our ultimate reset. Tremendously empowering of tyranny in times of stagnation, technology is also our most powerful weapon against tyranny in times of innovation.  

         - Edmund Burke

We’ve lived through an interesting period where a transition has been taking place in the business community. One that has seen new Information Technology driven business models disintermediate the old with new, highly productive and value generating methods of conducting business. Over the past two decades the status quo has maintained control while everything in their business became distorted and value effectively destroyed. Since the 2008 financial crisis we’ve witnessed shale technologies become dominant however little to no value has been realized as a result. I see this period as the last of the “tremendously empowering of tyranny in times of stagnation.”

The oil & gas industry is not only faced with its most challenging operational, financial and political future. These three challenges demand that innovation, entrepreneurship and the principles that have brought the North American continent to dominate the global economy be put forward to resolve the industry's difficulties. The status quo is not only incapable, it has chosen not to bother, shrugged its shoulders and moved on. It is therefore a time when “technology is also our most powerful weapon against tyranny in times of innovation.” The choices we make today are how we’ll perform in 2025, 2030, 2040 and 2050. 

It is People, Ideas & Objects opinion that the status quo has failed. Since 2015 they have unsupported capital structures. Have failed to act to remediate any aspect of these issues leading to their difficulties. Have deprecated their internal Work-in-Progress capabilities. Destroyed the service industries capital structures and the motivations for their people to seek employment there, capacities are operating at 40% of prior levels. And possibly most detrimentally of all, the leadership in the industry do not concern themselves with these concerns. Instead saunter off the stage into unrelated businesses involved in “clean energy.” Taking the oil & gas revenues in unauthorized fashion, that were generated by their investors and are the only source of financial capability available to fund the rebuild of this industry.

Producers are organizationally unprepared to approach their most challenging future and have not supported any method of organizational development. Leaving People, Ideas & Objects as the only alternative in the marketplace to this failed, archaic method. The only solution that has been researched and reviewed. Constructed on the basis of performance that provides for the most profitable means of oil & gas operations, everywhere and always. To build a dynamic, innovative, accountable and profitable oil & gas producer and industry to ensure that North America attains its optimal economic prosperity through energy independence by commercializing shale. 

People, Ideas & Objects et al’s Profitable Production Rights Licensees own the keys that producers will need to access our Cloud Administration & Accounting for Oil & Gas method of profitable oil & gas organization. Or, producers could choose to remain with what usable life they have in the status quo, let that expire, and check to see what may be available then. In the meantime explain to their investors why they continue their unprofitable ways.

Profitable Production Rights License

The origins of our Profitable Production Rights Licenses were previously captured within a cryptocurrency or coin. We have deemed this to be unnecessary as the ability to lease these rights will be contractually managed within the Profitable Production Right Licensees control. The Coin was a distraction that may have tainted the prior method acceptability and with all that has happened in the crypto arena, I’ve realized that the coin was featureless for our purposes and redundant. 

In terms of implementation, what we need is the ability to write each of the Profitable Production Rights Licenses into a blockchain solely dedicated to securing the Profitable Production Rights License. We thankfully are able to do that through Oracle Cloud Infrastructure and the use of their Oracle Autonomous Database’ recent development of the Oracle Blockchain Table as described below. This will be an Oracle database within the Preliminary Specification that manages these Profitable Production Rights Licenses by controlling producers' access to the software and services of People, Ideas & Objects et al and will manage the licensees revenue and expenses on their behalf. 

Any assignments, sub-leases or transfers of the Profitable Production Right License do not override or delete the original purchaser's transaction in the database; they will write a new block on the chain, or row on the instance of the Oracle Blockchain database. Each Profitable Production Rights License is therefore aggregated through its serial number in order to determine all the associated transactions, assignments, its current ownership, and licensing of its production right to which producing Joint Operating Committee. 

Ownership and control of the encryption Key to access the Profitable Production Rights record database will be held by the licensee of the Profitable Production Right. The contract they execute with the producer for the production will be maintained in this database and form the basis of the Profitable Production Rights Licensees billing to the producer. Where the licensee holds the access rights to what we believe will become the only means to profitably organize North American oil & gas exploration, production, administration and accounting. From Oracle.

A blockchain table is an append-only table designed for centralized blockchain applications.

In Oracle Blockchain Table, peers are database users who trust the database to maintain a tamper-resistant ledger. The ledger is implemented as a blockchain table, which is defined and managed by the application. Existing applications can protect against fraud without requiring a new infrastructure or programming model. Although transaction throughput is lower than for a standard table, performance for a blockchain table is better than for a decentralized blockchain.

A blockchain table is append-only because the only permitted DML are INSERT commands. The table disallows UPDATE, DELETE, MERGE, TRUNCATE, and direct-path loads. Database transactions can span blockchain tables and standard tables. For example, a single transaction can insert rows into a standard table and two different blockchain tables.

It should be noted that Oracle Blockchain Database is not a pure implementation of blockchain technology. It does not distribute a blockchain to other servers for validation and verification of the blockchain in the event of a suspicious transaction. It is focused on higher transaction based performance than the traditional blockchain technology is able to provide. A necessary requirement for our purposes. It is managed by the Oracle Autonomous Database and will act as a gatekeeper to our Cloud Administration & Accounting for Oil & Gas. In other words the data is immutable which is the feature of all blockchains. We are using it to ensure the Profitable Production Rights Licensees security of their rights. Each of the North American oil & gas producers will need to secure adequate Profitable Production Rights Licenses in order that their organization can access our Cloud Administration & Accounting for Oil & Gas software and service to obtain the most profitable means of oil & gas operations. People, Ideas & Objects believe that once constructed there will be no other competitive options in which producers can organize themselves profitably.

Flexible Profitable Production Rights License

Oil & gas production can be variable at times. Fields can and are susceptible to decline with shale being particularly variable. There is also the market demand as we’ve seen with an overall decline of 25% worldwide consumption during COVID. Although it is doubtful to happen again it forms a baseline. Add to this the variability that the Preliminary Specification is introducing with the decentralized production models price maker strategy. And production volume variability may become more significant and difficult to predict. How would this be manageable with the Profitable Production Rights License unable to earn revenues for at least a month or more, yet be obligated to cover the associated fixed overhead costs attributable to their license(s).

Therefore we are introducing two categories of Profitable Production Rights. What has been described to this point as one category. The second category will be assigned on the basis of 33.3% of the total amount of Profitable Production Rights License and be designated as Flexible Profitable Production Rights License. These will absorb the variability in production volumes up to the 33.3% level of all production on a priority basis. Whereas each producing property will automatically be assigned 33.3% of the Flexible Profitable Production Rights License to offset any production decline. Therefore the Flexible Profitable Production Rights License indemnifies the Profitable Production Rights License owners in case of variable production volumes up to the level of 33.3% of a Joint Operating Committee total production volume. 

A Profitable Production Rights Licensee would therefore maintain their revenue streams in cases of production variability up to the extreme volumetric declines that we’ve seen in this past decade. As production is being shut-in due to the lack of profitability, this is anticipated to be a small percentage of the total output of North America. Therefore if the shut-in production is attributable to the lack of profitability and meets the following conditions. 

Where the property is being actively reworked to be put back into production. The defined purpose of the Preliminary Specification. 

Then the Flexible Profitable Production Rights License will assume those volumes as part of their overall allocation and absorb the revenue loss on any shut-in production of those properties on behalf of the Profitable Production Rights Licensee assigned to the property. Abandonment or suspension of the properties production would release all of the Profitable Production Right Licensees to seek new production elsewhere. Until such time as the production deliverability in North America dropped 33.3% below the base production volume established for the continent. Then there would be no effect on the Profitable Production Rights Licensees, only on the Flexible Profitable Production Rights License in terms of revenue loss. 

The Flexible Profitable Production Rights License is not valued below the Profitable Production Rights License in terms of its purchase price when distributed. This is a result of the Flexible Profitable Production Rights License being fully acquired by myself. I am accepting 16.65% of the overall licenses, or half of the Flexible Profitable Production Rights License in consideration for 50.0% of the compensation of my 33.3% Intellectual Property royalty portion of the Preliminary Specifications budget. The other half of the Flexible Profitable Production Rights License is in consideration for the same percentage values of the Profitability of People, Ideas & Objects. What I expect as a result of holding all of the Flexible Profitable Production Rights Licenses is to have a strong negotiating position when leasing these to the producer firms that need to secure Flexible Profitable Production Rights Licenses on one third of all their production. In the interests of transparency and accountability,  I am committing to publish the communications and negotiations that I have with producer firms regarding their securing the Flexible Profitable Production Rights they need for their production.

What do the Flexible and Profitable Production Right License earn?

Flexible and Profitable Production Rights Licensees are the exclusive customers of People, Ideas & Objects Preliminary Specification and our user communities service provider organizations. There will be no ability to access the Cloud Administration & Accounting for Oil & Gas software and services they’re building without the associated Profitable Production Right License in place to do so. What each individual Profitable Production Right enables is the means in which to process one barrel of oil equivalent / day in a profitable manner through this facility. Please note there will be an unknown period of time during development in which no revenues will be earned and no expenses incurred by either class of the Profitable Production Rights Licensees. This would not preclude the licensees from engaging the producers to ensure they have their production rights in place prior to commercial release. Profitable Production Rights Licensees revenues are earned by charging producers access fees to profitably process their boe on a monthly basis through the Cloud Administration & Accounting for Oil & Gas software and services. How those are structured will be an interesting development as we proceed.

Producers methods today have failed, have destroyed what value had existed in the industry prior to their administration and the subsequent investments made. They have not generated any value from the massive call on investors and are incapable of dealing with today’s issues and opportunities. Oil & gas producers have proven to be incapable of managing the business and are in fact failed organizations with capital structures that are unsupported. Officers and directors today are managing a capital intensive industry with reasonable cash flows that are only capable of providing for their executive compensation. There has been and will be no change from this during their tenure. It is within that statement that the value of the Profitable Production Rights can be discerned. What is the difference between a truly profitable oil & gas operation and the one that has been carried out in the industry since the initial 1986 oil price collapse? Where the North American oil & gas industry would be capable of performing against all other industries for capital. That is the value that the Profitable Production Right Licensees offer the producer firm. It is within this People, Ideas & Objects value proposition that the Profitable Production Right Licensees are leveraging their revenue stream. The exclusive right to grant the dynamic, innovative, accountable and profitable oil & gas producer the ability to organize, operate and provide for the most profitable means of oil & gas production. The methods and means of operations are described in the Preliminary Specification and cover the full scope of exploration, production, administration and accounting for the start-up to integrated producers.

Although the producers have not listened to their investors and bankers demands to accommodate their needs. It will be interesting to see the producers' argument why they’re not participating in the Profitable Production Rights Licenses for the production they have. Why are they so committed to unprofitable production or is clean energy really that attractive? 

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.