OCI Preamble, Part III

 A Culture of Performance

Today’s Oil & Gas Culture

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

Having high asset values on the balance sheet provides no one with any value. People, Ideas & Objects describe these costs as the “unrecognized capital cost of past production.” Which accurately defines the amount of the subsidy consumers have received from oil & gas investors. In a capital intensive industry, the oil & gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do we assess the effectiveness of their capital deployment? According to the officers and directors we need to look at the firm from the point of view of the capital assets life, or reserve life index, or in most examples ten years. I feel the horse has bolted from the barn and locking the gate after that decade has passed is useless. Investors need to have a more timely gauge in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit on the balance sheet for quite a while longer, with much of those capital costs permanently stranded in abandoned properties. 

Instead of this generic, cultural method, People, Ideas & Objects suggest separating the distinct capital costs incurred to maintain their production profile from those capital costs incurred to expand their deliverability. Total current capital costs in the fiscal year has always contained the costs necessary to both maintain and grow the deliverability of the firm. What we are suggesting is that these costs which are easily identified based on their activity should either be capitalized and subject to depletion, or in the case of maintaining the production profile seen to be incurred as operations. As a result, the future producers' size of their capital assets account in the form of property, plant and equipment will be much smaller and depletion would follow the 30 month timeline to ensure the industry remained competitive on North American capital markets.

Justification for the different accounting treatment by separating the maintenance and expansion of the production profile on this basis exists in the looming debt crisis that is now threatening. Producers' erosion of their capital structures reveals that limited investment capital remains after systemic, chronic and serious losses have occurred. Bank debt is supported predominately by property, plant and equipment account balances as many producers have limited, to negative working capital. Based on their financial statements these producer firms are therefore highly leveraged going into a rising interest rate environment. However, their issue today may be an exaggerated leverage position on the basis of the overcapitalization that we’ve been discussing and the potential that the maintenance capital costs of holding the production profile constant would be better represented in the current period as operations or as we refer to, a pro forma adjustment needs to compensate for up to 75% of property, plant and equipment as the “unrealized capital costs of past production.” Leverage as reported by these producer firms would therefore be vastly understated based on their current financial statements and reflects a far more dire condition in terms of their capital structures. This reconfigured balance sheet being some of the justification for the proposed separation of maintenance and expansion production deliverability of the capital expenditures accounting treatment. 

Measurement of a firm's assets and the timing of their movement to the income statement is a key principle of accounting. Producers have interpreted the SEC’s ceiling test requirement to be the target that they’ll need to reach each and every year. When in fact what the SEC has defined is the absolute outer limit of what is acceptable. Since this was instituted in the late 1970s it has established the culture throughout the industry that is captured in the farcical claim by producers of “building balance sheets” and “putting cash in the ground.” Turning the oil & gas producers accounting from recognizing performance to one in which the objective was to recognize value. Leading the investment community to subsidize the oil & gas consumer by funding the capital expenditure programs of producers.

This will need to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $20 - $40 trillion in capital investments that is alleged to be necessary with nothing but disgruntled investors will not be successful. Investors now realize producers are well capitalized in terms of their assets on the balance sheet. But they never made any real money. And other than the paper thin balances of property, plant and equipment on the producers balance sheet there has not been any value generated and certainly no performance.

Theoretically the most competitive oil & gas producer would seek to have zero costs recorded in property, plant and equipment. Which would have large implications in terms of the value that is generated in the industry. Currently all of the costs of exploration and production are “stored” on the balance sheets of the producers. These costs have generally never been recognized on a timely basis and since this is a systemic, industry wide, multi-decade issue, this practice has created serious distortions in oil & gas. If producers were moving these costs from the balance sheet to the income statement on a timely basis they would have incurred far larger losses with the majority of the industry reporting negative capital structures. And indicated to the producers the commodity prices realized were inadequate to cover all of the costs of exploration and production. Which industry hasn’t done and have therefore in the past been desperately dependent on investor's to cover their annual cash shortfalls. Investors were actively recruited through the specious overcapitalized and over reported profits of the producers financial statements. 

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

Doing this for four decades results in the hollowing out of all measures of value from the industry. Producers have been reporting profits when in reality, if all of the costs were considered, oil & gas has been a lost cause, supported by investors for decades. Today’s residual infrastructure does not have the capital structure or financial base, or the performance capabilities, due to its chronic overproduction as a result of the chronic overinvestment systemically collapsing commodity prices. An even greater detriment is the culture in the industry is systemic, four decades in the making and knows no difference. Then, add shale!

The Performance Culture of People, Ideas & Objects

Through People, Ideas & Objects our user community and their service providers, producers accounting will change to instill a culture of performance throughout the industry when we implement the Preliminary Specification. This change will be orchestrated through the competitive nature of the producers seeking to provide the most profitable means of oil & gas operations to their shareholders. With the decentralized production model enabling the price maker strategy for all oil & gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. During times of high prices they will be able to bring the previously shut-in production back on to meet consumers demand. Or alternatively they will be able to apply their innovations to increase their deliverability or reduce their costs and return the property back to profitable production. The determination of what the costs of that property will include is the capital costs on the 30 month accelerated depletion schedule in comparison to what the officers and directors have implemented. This will bring the costs per barrel much higher and into the territory of what it actually costs for exploration and production in North America. Requiring higher commodity prices for the producers to meet the criteria of profitably producing any property and therefore fulfilling the actual, as defined “swing producer” role in the market. Providing the cash resources necessary to expand the deliverability or replace production at the current cost of exploration and production. 

Another key implication of this change is that the determination of which producer is performing and those that are not will be evident. Although producers will be reporting profitability irrespective of the percentage of their production profile. If they have 50% of their properties shut-in due to the inability to produce profits, then they’ll be reflecting they’re performance in terms of return on investment and return on capital employed is poor. Today assessing which producers are performing and which are not is next to impossible. 

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

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

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

It will be the recognition of depletion of the capital expenditures in the 2 1/2 to 3 years that will dictate North America's oil & gas prices. Properties that carry the higher overall costs of exploration and production per barrel, due to their large balances of capital, will be depleting these balances to each barrel of oil equivalent produced. If we are realizing all of the properties capital costs in the first 2 ½ to 3 years of production from the property. Under People, Ideas & Objects price maker strategy it will be these properties that have to meet the criteria of being profitable and determined if they are produced or shut-in first in a low commodity price environment. Those properties that have exhausted their capital cost balances will be able to produce large profits no matter what the oil & gas price is in the marketplace. 

This brings about a fundamentally different capital discipline when capital is being deployed that must meet this profitability requirement immediately in order to produce. And a new appreciation as to where the value lies in the firm. Instead of where the asset balance is the largest, it will become which properties are the best performers and how to make that the case in each of the other properties of the producer. However, it will generally be the work done from a capital nature of the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil & gas prices will have to reach to bring on the past three years production, or the one incremental barrel. In an industry that has the elasticity of supply and demand characteristics that the oil & gas commodities have, (it is a price maker commodity) it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model. Or producers will continue to diminish and eliminate their corporate profitability with production from unprofitable properties.

To emphasize the point here. If a conventional property that has been operational for decades is able to attain the same commodity prices that shale properties require. Then the profits of the conventional property will be substantial. However, what is the replacement cost of the barrel of oil produced? The financing of that replacement barrel will not be at the cost structures that existed decades ago or in the drilling methods and conditions. They will be far more expensive and the financing of those will have to come from the consumer, no one else is going to be deceived into delivering the funds. Therefore the amount of cash that needs to be returned for all production no matter its source has to be able and capable of funding the replacement of that barrel in its current cost and operating environment. 

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach the limit of their independently evaluated reserves valuation. However, the officers and directors have taken this limit as the standard in terms of what “should be” or even as a target of what they should use as the valuation for capital assets. This, I believe, is unreasonable when producers have culturally taken the limit to the extent of the SEC’s ceiling test allowable at each and every producer firm and done so each and every fiscal year. Bloated balance sheets provide no value to anyone. We note it would be the most competitive producer who would have exhausted their property, plant and equipment account, zero being the limit that the SEC allows on the low end. 

It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the producer firms administrative and accounting resource to offer North American producers a Cloud Administration & Accounting for Oil & Gas software and service. They will use a much more aggressive 2 ½ to 3 year method of realizing the capital assets for the purposes of pricing calculations. It is in this way oil & gas prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through our decentralized production model. And the investors can freely invest in the oil & gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit. The basis of evaluation will turn towards the producers ability to explore and produce effectively and competitively from an engineering and geotechnical point of view.

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

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

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

Oil & gas is a capital intensive business. The way it has been run into the ground is the capital was raised, spent and sits for generations on the firm's balance sheet for an eternity. Turning the capital over repeatedly into cash for reinvestment is never considered. It was always believed that they just raised more money each and every year. Spend that, and then add it to the pile of assets that are depleted over the decades if not centuries which those petroleum reserves remain. Producers have to begin to turn these resources over much quicker in order to compete within the North American capital markets. By doing the above, recognizing that most of their capital expenditures maintain their production profile and having those capital expenditures recorded as operations, will return that capital back into cash within the current fiscal quarter.

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

OCI Preamble, Part II

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

The perception of the producer officers and directors is that their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $20 to $23 in capital costs are based on an allocation of their capital costs across the entire reserves of the property. We’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their investment over several decades or more, or even if at all. This is further aggravated when shale exposes prolific reserves, however demands substantial incremental capital to offset shales inherent steep decline curves in order to maintain deliverability. 

As an alternative, People, Ideas & Objects recommend that producers retire their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. In turn providing them with the means to meet their internal demands for future capital expenditures, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale in order to compete on North American capital markets. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the actual, factual costs of exploration and production. And to reuse their cash repeatedly on this basis and not every second decade. 

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

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph numbers, is the point at which the property would be shut-in would be at the breakeven point and below. (Note that our breakeven point would be higher due to the competitive recognition of capital over a thirty month period.) 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 everywhere for all producers. When all producers continually produce below the breakeven price for four decades it exhausts the value from the industry on an annual and wholesale basis. Which I believe occurred some time in the 1990s and since then, times were only “good” when investors were willing.

To avoid the allegation of collusion officers and directors would have us believe that they were operating the industry within the law. Losses of catastrophic proportions have been realized, displacing and disrupting the financial resources of each and every producer over the long term. Today the financial, operational and political frameworks of the industry are in tatters. This is considered normal course business operations for the officers and directors. Imposing the destruction of their firm's assets, the capacity and capabilities of the oil & gas and service industries is the price that they believed needed to be paid as a consequence of its acceptance of a “boom / bust” business by way of “muddle through.” This is unnecessary and unacceptable when the Preliminary Specification is available to operate the oil & gas business as a business.

The inverse situation is provided by the Preliminary Specifications decentralized production models price maker strategy during the times we have found ourselves in during thirty of the past thirty six years in North America. In an environment where the Preliminary Specification will be operational, higher commodity prices would bring about production volumes that would meet the threshold of profitability and therefore previously shut-in properties would return to production. The enhanced commodity prices would allocate the necessary financial resources to search for innovative means for exploration and production. Providing the dynamic, innovative, accountable and profitable North American producer with the most profitable means of oil & gas operations, everywhere and always. 

The organizational objective is to satisfy the consumer demand for energy on the basis of abundant, affordable, reliable and profitable energy. The value proposition of a barrel of oil equivalent is in the range of 10 to 25 thousand man hours of equivalent mechanical leverage. Going without oil & gas is not possible in the most advanced society with the most productive economy. The oil & gas producers value proposition to their consumers is therefore by far the most substantial of any other business. 

People, Ideas & Objects feel that oil & gas has a unique characteristic that needs to be recognized and adhered to. These commodities are valuable and limited in the long run. How do we ensure that we can prove to future generations that we used our share of these resources appropriately. The first way is to show that all of them were produced profitably everywhere and always. And secondly by passing along a profitable, viable, efficient and effective oil & gas and service industry. To do otherwise would be unwise and unjustified. Most of all it is unnecessary when the commodities follow the principles of price makers. Consumers are aware that the only effective way that they’re going to have secure, reliable and affordable energy independence in North America is when producers are profitable. Why this hasn’t been done is a question that needs to be answered by those that have not done this, and had the alternative in the form of the Preliminary Specification available in hand.

Yet, just as producers were forced to shut-in production as a result of almost negative $40 oil prices and refineries refusing to accept feedstock, they would find compelling reasons to return any property that contained shut-in production back on production in order to satisfy consumer demand and to do so profitably. Operating the primary industry of oil & gas profitably, everywhere and always, will enable them to maintain the capacities and capabilities of the greater oil & gas industrial economy. That People, Ideas & Objects were subjected to abuse and punishment for this position and other content contained within the Preliminary Specification is evidence that officers and directors knew better, that our alternative was available and it was refused as it disintermediated the officers and directors method of management and personal compensation, they’ll now need to live with their legacy of inaction.

What officers and directors were able to do was run the entire oil & gas industrial complex into the ground over these past four decades and completely destroy a large percentage of the service industries industrial capacity, eliminating that industry's capital structures and any faith, trust or goodwill between them. Go find a willing drilling rig investor or banker of a few years ago who subsequently saw the drilling rig they invested in cut up for scrap metal while producer officers and directors whistled their uncaring and inconsiderate tune of “muddle through.” It is now incumbent upon the producers to provide the financial resources to rebuild the service industry. And do so on a philanthropic basis. The rule is “producers broke it, the producers need to fix it.” Producers used and abused the service industry and now they’ll be needing to provide the money and backbone involved in the rebuilding effort, otherwise they’ll only use and abuse the service industry after they’ve rebuilt it again. Maybe when producers have had to rebuild the service industry themselves, putting some skin in the game, they’ll respect it. 

With the costs associated in exploration and production, and particularly shale reserves it's no surprise that producers have consumed the cash that is generated and any that is provided from investors and bankers. What is surprising is that producers have done nothing over this period to mitigate the overproduction that has caused the decline in pricing, subsequent financial losses, destruction of the producers reserves and greater oil & gas industrial capacity. And here we find the motivation as to why these methods continue. 

The reason for this chronic overproduction is the producers have to generate the revenues to cover the out of pocket costs of the overheads they incur in the “high throughput production” model they employ. This model has these overhead costs of the firm being incurred whether there’s production or not, and if any percentage of their properties are shut-in it makes their operation a high cost operation at any level of production. At lower production volumes, it skews their earnings and overhead costs appear out of place. Therefore this behavior of producing at capacity should be expected to continue on both the oil & gas sides of the business. Even in spite of significant financial loss or the inability to meet market demands. 

Although most producers report overhead costs of less than 2% in almost all instances this is not representative of the situation. We believe based on our experience that overhead costs range between 10% and 20% of revenues. These itemized amounts are never detailed or discussed in the financial statements of producers. If they were itemized the disproportionate and creative levels of executive compensation would be evident. Overhead costs are capitalized across the industry in the region of 85% to avoid the necessary accountability for these costs. Avoidance of accountability is the motivation for doing so, the consequences of these actions are as follows, and it should be noted People, Ideas & Objects identified this anomaly in excess of a decade ago. Yet nothing was done.

When all of the overhead is capitalized to the extent that it is in oil & gas it creates that giant sucking sound around the producers bank. Overhead in most businesses is recognized and passed to the consumers of the firm's products. In oil & gas it is capitalized. Therefore the “cash float” that all businesses have to have in order to finance these costs doesn’t function or even exist when overhead is capitalized. Producer cash is essentially stored on the balance sheet for decades and is passed on to the consumer at some point. When that will be remains a mystery. The industry phenomenon of a working capital deficiency was traditionally filled by the astute budget manager providing the amount of next year's capital expenditures in the prospectus. Without support for the capital structure, no profitability earned and fundamentally inadequate revenues generated as a result of the decades long industry wide overproduction, we should understand the quality cash management skills being applied in the industry. When the business is a spending machine, what would you expect?

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

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

Production discipline is attained through this process when the producer realizes that their maximum profitability is obtained through producing only profitable production everywhere and always. Therefore producers are incentivized to adhere to the principles of the Preliminary Specifications decentralized production models price maker strategy. Just as all businesses in the capitalist system follow these principles since the great depression of 1929. The individual decisions of each oil & gas producer, based on an actual, factual accounting of the profitability of the property, will determine if the property produces. That is how the oil & gas industry needs to deal with any low commodity price situation that it occasionally finds itself in. 

As properties begin to lose money in a period of declining prices, incremental properties are shut-in each month as they too may become unprofitable. The inverse of this is also relevant when commodity prices rise, producers will be raising production volumes when they attain profitability from higher prices and return their shut-in properties to the market. Shale based reserves will always overwhelm the oil & gas commodity markets with flush production and deliverability that are driven by shale's prolific nature. Production discipline based on profitability can only be achieved through the reorganization of the industry and producers based on the Preliminary Specifications decentralized production model as detailed in the Specialization & Division of Labor section above. Where overhead costs are made variable and producers are using the facility we’re building in the form of our Cloud Administration & Accounting for Oil & gas software and service. Which enables our price maker strategy to provide for the producers and industries profitability and in turn ensures consumers are always provided with an abundant, affordable, reliable yet profitable source of energy. 

The effectiveness of our method is reflected in our logic. Producer profitability is maximized when losses on properties no longer dilute profitable properties profits. Reserves are held for a time when they can be produced profitably. And those reserves costs will not have to carry the incremental costs of any losses that would have occurred if the property continued to produce unprofitably. Keeping the oil & gas as reserves reduces the producers costs of production and storage of the excess, unprofitable production. Commodity markets find the marginal cost when unprofitable production is removed from the marketplace. Marginal prices for not just the unprofitable production but all production. While shut-in any unprofitable properties will form the producers work-in-progress where they can innovatively approach methods of raising production volumes, reducing costs or expanding reserves. Using profitability is the only fair and reasonable method of invoking production discipline. If it’s profitable it produces. It should be noted here that the Preliminary Specifications service providers will be providing a standard, objective method of accounting process management. Therefore any producer that finds a property is unprofitable, it will know that shutting it in is the best remedy as the assessment of unprofitability is the same assessment that all other properties were evaluated under. 

OCI Preamble, Part I

 People, Ideas & Objects, our user community and their service provider organizations competitive advantage and value proposition is that we provide the dynamic, innovative, accountable and profitable oil & gas producer with the most profitable means of oil & gas operations, everywhere and always. We suggest it is no longer adequate to just own the oil & gas asset but also have access to the ERP software in the form of our Preliminary Specification which makes the oil & gas asset profitable. Setting the foundation for the industry to obtain the objective of profitable energy independence on the North American continent. People, Ideas & Objects propose to build this with Oracle, through Oracle Cloud ERP, and deliver to North American producers through our Cloud Administration & Accounting for Oil & Gas software and service.

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

In addition to the commercial focus of profitable production everywhere and always. People, Ideas & Objects et al provide an overall vision of how the North American producer will face their most difficult and challenging period towards 2050. The demand for capital will be high due to the need to establish and maintain profitable energy independence on the continent. To deal with the rebuilding, refurbishing and reclamation of the infrastructure. Ensuring our energy consumers maintain the most powerful and efficient economy through the abundant, affordable and reliable domestic oil & gas that is profitably produced. Ensuring they realize the full value proposition of the energy produced of 10 to 25 thousand man hours per barrel of oil equivalent. Setting out tomorrow, seeking to “muddle through” by “building balance sheets” and “putting cash in the ground” has turned out to be a financial catastrophe, hidden by specious accounting over the past decades. A financial failure has precipitated operational destruction throughout the secondary industries leading to a potential inability to meet the market's demands for energy. 

Industry demands for capital to fuel this future is untenable for any and all sources of capital. Producers have a reputation of unreliability with the investment community. Financial statements continue to be distorted and reflect no capital structure to speak of. Have never been capable of generating the required profitability to generate the profits to meet their capital demands and possibly the most detrimental characteristic of all, have no propensity to make the necessary changes. Profitability is the only means of capital large enough to fuel the needs of this industry's future capital demands. Only the Preliminary Specification provides the necessary structural changes to generate the industry wide profitability.

These are the areas that provide the most significant value increases for the dynamic, innovative, accountable and profitable oil & gas producers. 

Specialization and the Division of Labor

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

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

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

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

Review of the Preliminary Specification shows there is a defined restructuring that takes place throughout the modules based on a higher level of specialization and division of labor of the industry. The oil & gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, land, legal and minor support staff. And that’s it. The rest of the producer's administrative and accounting needs are provided by our user communities service provider organizations through our Cloud Administration & Accounting for Oil & Gas software and service. Moving the industry from a reliance on the producer's fixed cost, administrative and accounting capabilities to a reliance on the industries variable cost, administrative and accounting capabilities. Variable based on profitable production. And each of these service provider organizations are focused on one process, or one element of a process, that is organized and specialized to manage that process across the industry. 

For example, there may be a single royalty payment service provider organization that handles all of the industries Texas Railroad Commission royalty payments. Ensuring producers were always paying the lowest amount allowable of their royalty obligation. Where the cost of the royalties, and the incidental billing cost of the royalty service provider is billed directly to the appropriate Joint Operating Committee. Therefore eliminating the fixed nature of the operators administrative and accounting costs, and replacing them with the variable nature of the Joint Operating Committees administrative and accounting costs. As without profitable production the variable royalty payment process would not be invoked, no service would be rendered, no costs incurred and no service provider billing. This requires the termination of the use of fixed overhead allowances as the variable, actual, factual overhead cost will be known at each of the properties. Enabling an accurate accounting of the properties performance based on all of the actual variable costs of exploration and production. 

There are many advantages of moving to a system or methodology such as the Preliminary Specification. Cost and efficiency are just some of the reasons. The costs associated with the royalty payment service providers organization would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process the industry's royalty payments, and only royalty payments, that specific service provider would become specialized and reduce their time and effort in doing so, yet increase the quality of the service of administering these tasks to a small component of what the costs are today. 

In Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the specialization, division of labor and use of mechanical leverage that he made in the process of making pins. Having the royalty payment and other administrative and accounting processes in the industry subject to this type of analysis, complete with the software development capability and our user community of People, Ideas & Objects, similar results in productivity may be attained and continue to develop in terms of leveraging intellectual pursuits. All economic growth that has been achieved since 1776 is a result of the economic principles of specialization and the division of labor. The advancement of machinery employed in this process is how these changes continued to provide value to society. Today the application of software towards automation of our processes will yield similar benefits to what was realized in prior centuries from machinery.

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

Our Decentralized Production Model & Price Maker Strategy

When we consider the next aspect of this change, our decentralized production model, this assures that we offer the most profitable means of oil & gas operation, everywhere and always. What we've experienced over the past four decades in North American oil & gas is unique in all organizations and of all business history. Although we learned during the great depression the economic consequences of overproduction, and experienced its consequences in oil & gas since the 1980s, no one seems to have explained it to the North American producer. Oil & gas overproduction in North America has been systemic and chronic throughout the producer population and will continue to be without an effective means and method of production discipline being imposed. The history over this period is stark and clear. In the late 1970s the SEC imposed its Full Cost Accounting and associated Ceiling Test requirements on producers trading shares in the American market. These requirements allowed producers to record costs in property, plant and equipment as assets up to the limit of the present value of their independently evaluated petroleum reserves. This allowed an unnecessary flexibility in the financial statements that created distortions since that time. Simply, shifting the accounting from an evaluation of performance to one of value, hence the producer's foolish objective of “building balance sheets” etc came about. This is the mindset of our good friends, the producer officers and directors. What we know of business is that overreported asset valuations lead to commensurate amounts of overreported profitability. Leading investors to rush in to capture those profits and hence a process of overinvestment begins. Overinvestment in the productive capacity of the oil & gas producers leads to overproduction of commodities that are subject to the economic price maker principles and characteristics. 

It is this reason that has caused the repeated and systemic collapses of commodity prices throughout this past four decade period. The first commodity price collapse that we can document was during the summer of 1986 when $10 oil prices decimated the industry for the better part of a decade. This is counter to the cultural belief that oil & gas commodities are price takers. These definitions are from investopedia.com

Price maker

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

Price taker

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

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

The connotation of the economic term price maker has caused producer officers and directors to conclude this is collusion. We argue otherwise when the Preliminary Specification uses the Joint Operating Committee and will produce detailed, actual, factual financial statements for each property. Producer firms will definitively know the “real” profitability of each of their properties. A task that is not done today and more importantly can not be done today. And therefore producers will independently decide to shut-in their unprofitable properties to ensure they attain the highest level of corporate profitability. Invoking the necessary industry wide production discipline. Saving their petroleum reserves for a time when they can be produced profitably. Keeping their production and inventory costs lower by not incurring the costs of unnecessarily producing and storing unprofitable production. Ensure their reserves don’t have to recover the incremental costs of their prior losses as additional earned profits. And most importantly ensure that the marginal production is removed from the commodity markets allowing them to find their marginal price. 

While the property is shut-in the producer can apply their innovativeness, another Organization Construct of the Preliminary Specification, to return the property back to profitable production as soon as possible. People, Ideas & Objects and our user community are the appropriate business approach to the chronic and systemic overproduction of oil & gas and the persistent obtuseness of the producer officers and directors, not collusion. Profitable operations in a capitalist society do not necessarily denote collusion. Without “real” profitability there is only waste and deterioration as we’ve experienced these past decades. Without investors and bankers who were duped by these specious financial statements, there was no sustainable value generated, only destroyed.

The definition of collusion is provided by Wikipedia. 

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

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

OCI Abstract

 People, Ideas & Objects Preliminary Specification provides a comprehensive vision of the future oil & gas industry, producer and service industry provider. The Preliminary Specification is delivered through our Cloud Administration & Accounting for Oil & Gas service. A fourteen module ERP software system that uses Oracle Cloud ERP which defines and supports the Joint Operating Committee, three marketplaces and five other organizational constructs of the dynamic, innovative, accountable and profitable oil & gas producer. Our solutions competitive advantage is that we provide the North American oil & gas producer with the most profitable means of oil & gas operations, everywhere and always. Establishing a foundation for future North American energy independence.

People, Ideas & Objects vision is comprehensive and detailed in the 375,000+ words contained within the modules of the Preliminary Specification. Our software defines and supports a structured reorganization of the industry and producer firms. Through our decentralized production model, we implement a price maker strategy that converts the industry from a cash flow focus to one of “real” profitability everywhere and always. Once the industry is profitable we then deal with the resource constraints of the earth science and engineering talent through our Resource Marketplace, Research & Capabilities and Knowledge & Learning modules. It is through specialization and the division of labor that we’re able to expand the throughput of the industry from this constrained resource base. Similarly the devastation realized in the service industry is a constraint to production deliverability and needs to be purposely rebuilt by producers. Then and only then would we be able to approach the objective of achieving energy independence in oil & gas from the Canadian and U.S. marketplaces. Establishing the industry on the basis of profitably and removing the resource constraints of engineers & earth scientists, service industry capacities & capabilities which exist today are the necessary precursors to achieving energy independence. The vision of what Oracle, People, Ideas & Objects Preliminary Specification, our user community and their service providers set out to achieve.

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

Without significant capital to restructure and increase industry throughput. The current officers and directors are unable to achieve energy independence. They’ve never been concerned or capable of earning “real” profitability. Without establishing the industry on a foothold of profitability first and foremost. There is not enough capital in the universe to achieve energy independence in North America while remaining in the hands of these officers and directors. 

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

The key to providing this solution is that the Preliminary Specification is based on seven organizational constructs that include the industry-standard Joint Operating Committee. The legal, financial, operational decision-making, cultural, communication, innovation, and strategic framework of the industry. When we take the compliance and governance frameworks of the hierarchy and align them with the frameworks of the Joint Operating Committee we attain a speed, innovativeness, accountability and profitability that is desired in our oil & gas organizations. Our other Organizational Constructs include the reintroduction of specialization & the division of labor, establishment of markets, use of Intellectual Property laws, Innovation, Information Technology and Professor Paul Romer’s “New Growth Theory” regarding non-rival costs. Each construct establishes and contributes to setting a new cultural foundation to the producer firms and industry operation. A culture based on performance and profitability.

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

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

• The structure of demand.

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

• The nature and strength of opportunities for technological advancement.

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

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

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

The role of software in society is becoming more pronounced. Today we are still in the beginning stages of what can be done. For an industry such as oil & gas to continue without the software development capabilities that People, Ideas & Objects are proposing, and the organizational structure focused on the Joint Operating Committee, North American based producer prospects look dim. People, Ideas & Objects claim that we provide the innovative oil & gas producer with the most profitable means of oil & gas operations, everywhere and always. First by providing our software in the most cost effective manner. That is, charging our subscriber base for the one-time costs of our software developments on a shared and shareable basis. A fundamentally different value proposition coincidental with the value of Cloud Computing. To the assertion that we are establishing a Cloud Administration & Accounting for Oil & Gas software and services capabilities and capacities in North American oil & gas. 

And secondly, that in order to attain a higher level of economic output requires that the oil & gas industry employ higher levels of specialization and division of labor. To organize that specialization and division of labor in a continental economy requires the use of the software specified in the Preliminary Specification. There are no other means by which to organize a higher level of specialization and division of labor. Serendipity, spontaneous order and in many ways creative destruction have ceased to function. Officers and directors have now proven the producer firms inability to change or accommodate the speed of the marketplace. Therefore our claim to be the most profitable means of operations is valid. The only manner in which to move from the high levels of organizational methodology we currently enjoy is to design and support a more sophisticated specialization and division of labor. And that will be detailed and managed through the Preliminary Specification. We need to take control of the production of the software in order to take control of the means of energy production. That is what People, Ideas & Objects user community-based software developments are about. 

Thirdly, our development of the decentralized production model, as detailed in the Preamble, provides the oil & gas industry with the capability to allocate oil & gas production on the basis of profitability throughout the industry and obtain “price-maker” strategies. For producer officers and directors to continue to assert that oil & gas commodities are subject to the economic principles of “price takers” is a continuation of their failure. Production discipline provided from the Preliminary Specification is the necessary mechanism in the prolific and costly era of shale-based reserves. Otherwise, the industry and producers will continue to lose money due to their many decades-long behavior of chronic overproduction and oversupply in both oil & natural gas.

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

People, Ideas & Objects are actively disintermediating the oil & gas industry and as a result have created the adversarial position this role demands. Therefore we have come up with an innovative method in which to fund our budget which we describe as “Profitable Production Rights.” Which provides the license holder of the Profitable Production Right the ability to simultaneously benefit directly from both participation in oil & gas and the Information Technology industry. Profitable Production Rights licensees hold the exclusive rights to access People, Ideas & Objects Cloud Administration & Accounting for Oil & Gas. Therefore any producer in need of an organizational method that includes the software and services will need to have secured the appropriate amount of Profitable Production Rights to process their production, etc.

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

Changing the innovative behavior of one producer carries a scope of change that is as broad and as diverse as is contemplated in the business world. Change at this scale in many instances can not be managed within the organization but needs to be managed through the forces of creative destruction in the greater economy. Producing natural gas at a loss was the beginning of this process. We have now seen natural gas producers continue to lose money for more than a decade while the Preliminary Specification was available to be developed. Yet nothing was done to address this issue. At the height of the issue, we saw the officers and directors pray for a cold winter, abandon shale and reorganize as clean energy producers. Solutions to the actual problems have not been discussed or provided outside of People, Ideas & Objects, and the low natural gas price issues remain unaddressed in early 2023. The fact is officers and directors can’t, won’t and will not ever change. Over the early years of the natural gas price declines the relatively higher oil prices were able to cover many of the sins in the natural gas marketplace. For the past nine years, low oil & gas prices have put the industry and many of the producers in financial jeopardy due to both sides of the business's poor performance. An anomaly that hasn’t happened before. We believe these are the beginning stages of the forces of creative destruction. People, Ideas & Objects offers the Preliminary Specification, our software development capabilities, our user community and their service providers as an alternative organizational structure for the oil & gas investor to instrumentally rebuild the industry. 

Producer officers and directors have a propensity to collectively race into the “next big thing” in terms of their capital investments. Abandoning their prior “next big thing” investments with little thought or concern that they’ve never attained commercial success. Just as sheep they move from failure to failure in lockstep with one another. 2021s producer declaration that shale would never be commercial was quickly followed by their new focus and direction on clean energy. This after decades of low oil & gas prices being justified by the excuse that it was necessary to ensure alternatives didn’t get a competitive foothold. Only to shift the producers oil & gas revenues, generated by prior oil & gas investors, to clean energy in an unauthorized manner as they would have otherwise run out of “next best things.” 

Today the landscape is littered with the destruction and damage that has been authored by officers and directors and comments such as clean energy is their future does nothing to support a robust industry. Raising issues such as it should clear out the last remaining holdouts who were firmly committed to petroleum engineering and geology at the university. Any possible new investments in drilling rigs or frac capacity will have added just one more to the thousands of reasons never to invest in the service industry when producers are this abusive. And shown those trapped in an oil & gas career not to start a family or take on a mortgage in such an insecure economy, but to continue to look for work in other industries first. The positive from all of this is the officers and directors are fine and they thank you for asking. With consistent cash flow they’ll continue to provide themselves with the healthy compensation they’ve been able to “earn” over these past decades. These officers and directors are the only people who have benefited financially from oil & gas which to them is a feature, not a bug. 

I’ll only point out here that overproduction was the root cause of the Great Depression. Oil & gas overproduction has been the method of destruction for four decades. The first of possibly dozens of resulting commodity price collapses occurred in the summer of 1986. This Preliminary Specification was originally published in August 2012 and deals specifically with oil & gas overproduction. And on July 4, 2019 People, Ideas & Objects published our White Paper “Profitable, North American Energy Independence — Through the Commercialization of shale.” Which was widely distributed and received the thumbs down from our good friends, the producer officers and directors. Their absolute response came nine months later in the form of negative $40 oil prices. Only to declare shale would never be commercial and to move on to clean energy with oil & gas revenues. Our conclusion is the only conclusion one can discern from this. The officers and directors don’t appear to understand business, or maybe it's just the oil & gas business they don’t understand and they don’t know what business it is they’re in. 

A time of dynamic change driven by organizational changes focused around an innovative Joint Operating Committee. How can a firm that has been developed in an era of cost control transform itself into a dynamic, innovative, accountable, profitable and earth science & engineering capability-focused producer? In many cases the will to do so might exist, however, with the speed and unforgiving nature of the business cycle not much time will be provided to those that attempt the transformation. We see in this world the capital markets reflecting many interesting phenomena since the financial crisis of 2008. To suggest any trend or definitive result from these would be premature. It's just a different world in terms of being an oil & gas CEO or CFO than it was before 2008. And early 2023 appears to continue with wars, market surprises and disruptions that affect the producer firms.

It was in late 2022 at the Oracle CloudWorld Conference that Oracle accelerated the value that firms gain from ERP systems. Introducing advanced, integrated services that established reductions in costs and time of any firm that used their products. Examples include their integration with J.P. Morgan Chase Bank which enables users of the bank's credit cards to designate the destination of the charge within their companies accounts. Oracle Cloud ERP would then verify the charge was consistent with the company's policies and process the charge to J.P. Morgan Chase Bank on the basis of its eligibility. This eliminates the costly and time consuming task of filing expense reports that each of their staff need to undertake, and the time for others to process and review the expense reports. Considering the impact across the firm for the entire year, what this innovation and integration will yield in terms of gains include greater productivity in terms of time, lower cost and an overall reduction in everyone's frustration.

Oracle has not stopped there. This is a major initiative of theirs and what I see as the focus of their firm's future developments. What they have is the world's premier tier 1 ERP system. This is the route in which to leverage that value further to bring about the most customer value. These features are available globally and for all industries who chose to use their products. As People, Ideas & Objects have chosen to build upon Oracle Cloud ERP we will be providing these services to North American oil & gas producers. Oracle's developments will be incremental to the specific oil & gas attributes that we’re building to deal with the issues and opportunities of the oil & gas industry. Providing People, Ideas & Objects, our user community and their service providers the chance to build similar, unique time and cost saving attributes.

A New Direction

 I can remember how I felt back in 2007, 2008 and particularly throughout 2009. The evidence of the economic difficulties were being experienced broadly across all industries and the need for oil & gas to act to build the Preliminary Specification was beginning in my opinion. The Preliminary Specification was three to five years from being completed, I was four to six years into its content creation and had an immense amount of work left to do. The feeling that I was late and would fail to deliver on time was weighing heavily on me. Fast forward a decade and a half, we appear to be headed for more serious economic difficulties, ones that will devastate most businesses and the great majority of those who did not react appropriately to 2008s warnings. Artificially low interest rates over the past two decades have given license to those who thought they were producing value, such as oil & gas producers. The bill always comes due for these periods and the banking situation in the U.S. is showing me that time has arrived. Therefore the consequences of those actions by those who did not understand and ignored the lessons of 2008 will now have to be paid. 

Unfortunately there is little that can be done now. Other than the slim possibility that businesses and individuals are able to rapidly pay off their debts by selling assets at today's market values and do so quickly, otherwise they may be too late and will have no choice but to face the music. Times such as these, that are best described as capital asset deflation, little can be done to stop what’s about to happen. The world has a total of $300 trillion U.S. dollars of debt. This is measured as 349% of global gross domestic product. As interest rates rose the cost of holding the debt should have been offset by selling the assets associated with it before the assets went underwater. Generally speaking that’s too late now and whether interest rates continue to increase or decrease or hold doesn’t matter. It’s out of the regulators and the U.S. Federal Reserves hands. The market will be setting the terms and conditions from this point forward. And interest costs will become more of a burden as the assets pledged for the debt will no longer generate adequate income or compensate for the amounts of outstanding debt. Therefore investors and bankers will be wanting higher interest rates to cover their losses. Which turns this into the downward spiral until we can restart the process once again. Why the Fed had to have two decades of ultra low interest rates will be a question for the history books. An answer that may be provided a century from now. 

For me the sense of urgency that I felt in 2009 returns to bring the Preliminary Specification up to date. A process that I started around this time last year. And then restarted again in October 2022. The restart being the result of the changes that Oracle made to Oracle Cloud ERP which I feel are so significant that they must be included in the Preliminary Specification to provide an understanding of the general business functionality and process management through Oracle, and People, Ideas & Objects will build the oil & gas attributes to work seamlessly with Oracles. The higher levels of automation, specialization and division of labor will be noted throughout our writings to get a better feel for the significant advance Oracle has and will be making in the future. People, Ideas & Objects are very excited about what Oracle is doing and are pleased that we can build upon the value that Oracle Cloud ERP is bringing to all industries.  

I think the one industry that is poorly prepared for the Capital Asset Deflation we’re heading into is North American oil & gas. They operate a capital intensive industry, which they’ve made far worse by “building balance sheets” and other such nonsense, and will therefore be experiencing greater exposure. Producer debt levels are commensurately higher due to over reported asset values and their inability to ever make any “real” money, their capital structures being unsupported and seemingly oblivious to basic business principles. I have no doubt though that those paper thin, well built, “balance sheets” will prove their worth in this storm the producers are heading into. 

Therefore my argument is going to be drowned out by the screaming and yelling of those who are about to find out how bad oil & gas has been managed. I have a job to do to get the Preliminary Specification in the best shape that I can for the time that I feel we’ll be called upon. I feel a sense of urgency to get this completed as my priority. Time spent on this task will mitigate the amount of time that will be spent overall in terms of delivering the Preliminary Specification to market and reduce the amount of any confusion, errors or omissions. Therefore as of today the reviewing of the Preliminary Specification will continue as my priority.

The other task I’ll be concerned with is the promotion of the Profitable Production Rights Licenses as the means to fund the development of our software and our user community. I’m a bit disheartened however that my career in terms of screaming at bureaucrats may only resume in another life.

Operations Management Module, Part X

 Performance Evaluation

This last sub-section of the Operations Management module brings together an advanced toolset that producers and Joint Operating Committees can use to develop and test new criteria for better performance. The combination of the Analytics & Statistics, Performance Evaluation and Artificial Intelligence module within the Operations Management module is advantageous due to the combination of the financial, operational and technical data and information. This data being the engineered and documented data that is the output of the process of building the Preliminary Specification and establishing the objective and standard qualities necessary for its unimpeachable nature of what is presented and understood by its users.  

Working on the performance aspects of the producer and Joint Operating Committees the user of the Operations Management module doesn’t need to be making decisions that are based on bad data or information. The reliability and understanding of the conclusions made are only as good as its data and the information quality that exists, its consistency and what users believe the data represent. To suggest that Artificial Intelligence will be of any value when the data and information that it uses is questionable, is only the latest iteration of an Information Technology widget as the solution to a business problem. People, Ideas & Objects approach to Artificial Intelligence is fundamentally different. 

As I indicated in the Pro-forma Worksheet section of the Performance Management section of this module. The use of decision making based on factors outside of the framework of the accounting system, which is imposed when using the Pro-forma Worksheet, would lead to incorrect assumptions and hypotheses. This is of particular concern in using the Performance Evaluation section to make the performance based decisions on the actual, factual data but not using the strict interpretation of the financial accounting system and therefore leading to incorrect decisions being made on clean data nonetheless. However taking the SEC’s perspective is not how innovation is developed. New and creative perspectives and ideas need to be developed and understood for their stand alone value in order to see their worth. Once proven in the Performance Evaluation section, testing the theory in the Pro-forma Worksheet would then provide its business understanding and implications. 

This is the point of divergence between what the investors believe they see in oil & gas, and what it is the officers and directors are producing. The SEC sets out through its coordination with accounting standards bodies and the audit firms to provide a generic understanding of financial accounting in North America. Such that when an investor analyzes an annual report from company A in industry B, they’re able to use the same understanding and apply it for comparison to company C in industry D. They then will be able to make the appropriate decision as to where to invest their money for the optimum return. When company A in industry B has gone off the cliff in terms of the generic understanding of financial accounting, have begun using their own criteria to make their performance exaggerated, then investors appropriately feel betrayed. 

The purpose for this use of a standardized reporting system is substantial. It eliminates the need for each and every investor to spend the time to review each and every document of each potential investment they consider. When they understand the general framework of how the North American reporting system operates, they can defer to it and not have to spend the time reviewing the details at great cost to themselves and at the same time incur an unacceptable cost for the firm to be catering to each and every potential investor's question, their concerns and needs. Markets operate on information. Information in the form of price, when the understanding of how that price is generated then the market is able to operate efficiently. 

It is the implications of the changes that are being made within the Pro-forma Worksheet that need to be considered in all cases. It is doubly so when the mixture of many changes being made may have an overall negative effect on earnings that need to be avoided. Or the changes that generate any detrimental consequences need to be removed. When producers have the ability to see what their investors in oil & gas understand. Adjust their decision making to ensure profitability everywhere and always, the consequences of those decisions being made will be able to avoid future difficulties and errors with their investors. 

Analytics & Statistics, Performance Evaluation Modules

These two modules consist of the tools that are able to provide their users with the ability to perform statistical analysis on the data and information they’re authorized to access in their domain. The Performance Evaluation module is for the Joint Operating Committee and Analytics & Statistics provide the same tools for the producer firm as a whole. The difference is the domain of the data and information is constrained in the case of the Performance Evaluation to the members of the Joint Operating Committee.

The means to build a library of tools to use personally, as a team, a Joint Operating Committee or producer firm is available in each of these modules. The use and reuse of these formulas will assist in providing accuracy, understanding and value to each organization. The domain of an individual's data would be prescribed by their authority and responsibility within the organization of concern, and managed by the Oracle Autonomous Database role definitions.

Artificial Intelligence

ChatGPT has demonstrated the concerns that I have about Artificial Intelligence and its value. Producer firms have been using Artificial Intelligence in their organizations for up to three years now and I am unable to notice any marketable increase in their performance. I often tell people who seem so enamored with AI, the ones that were all over Facebook, that they should go write a software program. Find out how difficult it is to actually conduct anything serious in technology and then reconcile their vision of AI with that reality. 

Our approach in the Artificial Intelligence module is one of cost mitigation in this initial phase of the introduction of the technology. The costs and resource uptake involved in Artificial Intelligence is high. As with innovation the costs need to be controlled and monitored effectively with the appropriate organizational means. In People, Ideas & Objects Preliminary Specification AI is a shared and shareable resource due to its high development costs and the demand for high cost, quality resources that may in fact be displaced from productive activities. If each producer sets out to incur these costs on their own we’ll find the other factor consistent in today’s AI implementations. There are currently only 1% of these initiatives that are considered successful. 

Separate and distinct from the Analytics & Statistics module. Artificial Intelligence in the Preliminary Specification is a shared and shareable resource that is available to the Producers and Joint Operating Committees to use. Based on the development of a packaged, proven number of algorithms that are tried and tested before availability. Artificial Intelligence is potentially a powerful tool that can add significant value to a science based industry such as oil & gas. However, each and every producer throwing extensive resources at this unproven technology will, I believe, maintain its unproven nature. Ensuring that it never will become an effective tool when it fails to deliver any value at significant cost. With the high cost of AI and its success rate below 1%, sharing the costs of the infrastructure of these non-competitive resources, producers will be able to deploy it as they discern its value. 

Therefore if we provide a means in which the contributions of a service provider were available, where collaboration across the industry as to the application and use of the AI algorithms, what are the possible enhancements etc. The need to control the costs and share in its success / failure can be managed once across the industry instead of at each individual producer. When and if the success and value of the AI resources should break out into a meaningful and highly valuable discipline the industry will be able to take advantage of what it has learned in this initial phase, turn it into a competitive advantage and build from there the individual capabilities in-house what is deemed necessary. If it is deemed a success there would be an initial infrastructure in place from the collaborations and markets established through these service providers and therefore something in which to build upon. Today there appears to be only science fiction. 

There have been too many times that we’ve been led to believe that some whiz bang IT product was going to make the world spin to the left. AI appears to be today's approach. People, Ideas & Objects approach is to initialize the technology within the science and technology based industry of oil & gas, control its costs through the Organizational Construct of making it a non-rival cost, or part of Professor Paul Romer’s “New Growth Theory.”   

Operations Management Conclusion

Producers within oil & gas are faced with an interesting dichotomy. One in which profitable operations are the only acceptable means of production everywhere and always from this point forward. Much has been wasted in the past decades and the capital structures of the producers are unsupported. Damage and destruction is extensive and only a comprehensive rebuild of the industry and its secondary industry based on the Preliminary Specification is able to resolve the existential organizational issues facing the producer officers and directors. Continuation of “muddling through” does not appear to be capable of dealing with these issues or resolving the most difficult future the industry has ever faced. The other side of this dichotomy of providing profitable oil & gas operations everywhere and always is that the consumer needs to be provided with reliable, secure, abundant and affordable energy resources. With the objective of North American energy independence being fulfilled for the remainder of the 21st century. With 10 to 25 thousand man hours of equivalent manpower contained in each barrel of oil equivalent. The supply of this resource is a necessity to our civilization.

We’re not going to get there with the chronically unprofitable production of the past four decades. The investors have bowed out and the only source of capital large enough to fulfill the task to fund these capital demands is the profitability of the industry. In other words the oil & gas business in North America is going to have to be operated as a going concern. Only the Preliminary Specification has the plan in which to make that happen. We have no right to pass an industry on to the next generation until we can prove that we’ve produced the resource responsibly. Which means all of it was produced profitably. Each barrel of oil equivalent should be profitable from the “real” sense from this point forward as the resource is irreplaceable and is the blood of our economy. If we lose the script now it would not be difficult to foresee foreign sources of oil & gas demanding North America to play second fiddle to China, Russia or others in terms of our supply demands? 

People, Ideas & Objects Operations Management module is designed to provide producers and Joint Operating Committees with a means to monitor and control their operation. Establishing a sound base of data and information necessary to ensure that decisions and actions are conducted with precision and profitability in mind. Where the financial, operational and technical data of the producer or property are available for use. Technologies involved in the Internet of Things are deployed and operational to the advantage of these users. And resources are deployed based on the budgets and plans that are generated and set through this module. The Operations Management module is the aggregation of and accumulation of the efforts that are being undertaken in the Preliminary Specifications other 13 modules and presented in a format where the information can be used effectively for profitable decision making.