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

 Issues surrounding the recording of capital costs are complex and the implications across the industry cause many tragic difficulties. The consequences are being realized today in what I consider serious fallout in every area of the industry. Officers and directors believe these are accounting issues and will affect the accounting debits and credits and not much else. Misunderstanding the business aspect of the discussion and the underlying subtleties. Accounting is about performance. It’s not about bookkeeping or "building balance sheets" or recording the volume of cash being put into the ground. These are serious issues and the toll on the industry is plain to see. I feel we’re headed towards a grave downward step in our performance trajectory, are ignorant of what the future holds and our leadership is wandering about in and out of the industry, selling themselves as heroes to one another and have comprehensively failed everyone else. Did I miss anything?

At the same time I have not been able to convey the subtlety of the issues in coherent form to those that refuse to listen or consider an alternative point of view. They contrast my arguments with their peers at the golf club and the response they received when visiting their Ferrari dealership. "They built the oil & gas industry." They are the chosen few who find these others have leached from their achievements and efforts. Others do not appreciate the science and skill put into what they do." Theirs is a myopic view of the world where they occupy the center and will do nothing to explain their point of view to those who they feel have no ability to comprehend. I think I’ve covered it. 

One of us may be right or there may be a hybrid of the two perspectives. Oil & gas is a business first and foremost. It has not been a business since the 1970s. The culture that formed around that time does not understand the difference between what is done, what should be done or why. A capital intensive industry will always generate adequate volumes of cash that overwhelm anyone’s objective thinking. When you deceive yourself by never recognizing the capital nature of the costs incurred, everything appears to be profitable, organizations have no reasonable measure to assess their performance against, they find themselves intoxicated by their ability to achieve alleged success at every corner in anything they try. They soon lose perspective and become unreachable and unteachable. As time passes, the culture becomes intractable.

I saw what was happening to the business and the need for change in 1991. As I said, mine has been a single voice in the wilderness for the better part of that time. That’s not the case anymore, and the level of damage and destruction is clearly seen by most people in the industry outside of those officers and directors. The details of what I’ve been concerned about are evident in the solution we propose in the Preliminary Specification. This solution is discussed repeatedly on this blog and the wiki. 

Let me be clear. This is not Joe Biden's or Justin Trudeau’s responsibility. If you want to accuse them, they’ll be responsible for all the good the industry has accomplished. They have done neither. It is not the service industry. They have given everything and have nothing left to give. They have no motivation, no desire and no need to be in the oil & gas service industry. Pipeline companies are in the same boat. They are regulated companies and are therefore protected financially. It is not the fault of investors who can earn superior returns in other industries and invest their money there. Those who today see that nothing will happen after eight years of waiting for those responsible for the damage and destruction fail to act. Employees of producers who have tried everything but are powerless without leadership. It is, and always will be the leadership of the producer firms as represented by the officers and directors. There is no one else with the authority and responsibility to ensure that all contributors profit, prosper, and serve their purpose. And do not let them say they made a mistake, they didn’t know or they’re sorry. For two decades they sought others to blame, excuse and created viable scapegoats for the damages from their “muddle through" strategy. Did nothing to correct their actions. And there was an alternative for them that began in August 2003 and continues today. They did nothing but choose to eliminate People, Ideas & Objects from the marketplace and try to steal our Intellectual Property outright 5 times. 

I’ve been reading Professor Richard N. Langlois's recent book “The Corporation and the Twentieth Century: The History of American Business Enterprise.” He has some fascinating information within the book and I highly recommend it to everyone. Professor Langlois suggests the Twentieth Century Corporation benefited from primary industries such as coal, oil & gas. Oil & gas' mechanical leverage today is between 10 and 25 thousand man hours per barrel. This was realized through innovations and developments in machines and tools deployed by 20th century businesses. And on the other hand, WWI, the Great Depression, WWII, and the Vietnam War each presented organizational issues that markets were too unsophisticated and unable to approach. Government and big business therefore found a role for the bureaucracy and the question needs to be asked, what exactly is the benefit of today's bureaucracy from the structured hierarchy? Its benefits do not seem relevant since Internet-supported markets are sophisticated enough to accomplish what bureaucracies cannot. Moreover, coal, oil, and gas are unable to realize the significant gains on an annual basis that offset outright the cost of bureaucracy. This is in terms of what I think has always been bureaucracies' forte. Negative productivity. I feel it's clear we don’t want or need them anymore.

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

 Our sample of producers' second quarter reports have been published and I have to say that I’m quite surprised with the producers' outcome. There appear to be some changes in the industry. These changes reflect officers' and directors' behavior, and second, the disenchantment it has produced. What I’m stating is that all the tricks used to make producers look more attractive in the past have been resurrected and are fully employed again. The disheartening aspect of this is investors who have been patient with producers since the beginning of their refusal to give them more money. It has been eight years. Are now giving up on waiting for producers to turn the ship around. That's the oil & gas ship, not clean energy or any other industry the officers and directors may find interesting on a Monday morning. This act alone probably sealed their fate with their investors. Producers' inability to compete on the North American capital markets affects investors' commitment to the industry. Other industries are positioning themselves for substantial upside in the long term and hanging around in the deadzone with zombie management doesn’t seem to have a future. Therefore investors are walking. 

Production discipline is a key issue. Natural gas prices ranged from 25 to 1 and 40 to 1 in 2023. Not a word is heard about the absolute catastrophe this is. Natural gas prices broke down from their historical 6 to 1 pricing in 2009. What we’ve seen is another step down in 2023 of natural gas prices from the revised pricing established in 2009. This direction seems mindless. Arguing that it's casing head gas or associated gas that is the issue, they don’t pretend to look at that issue from the point of view of resolving it. At the same time they continue to see the service industry unwilling to commit the resources needed to supply oil & gas producers with their needs for the long term. Who could blame them for that based on the treatment they’ve received over the past decades? Nothing will happen until producers commit to rebuild the service industry. And that means supporting them with generous philanthropic efforts. Producers broke it, producers need to fix it. This occurs at the same time they dump natural gas as a byproduct onto the market with catastrophic losses hoping to make it up in volume, or "oil prices are healthy enough to cover the loss," or "build balance sheets,” or “put cash in the ground.” Officers and directors may find my arguments repetitive, because they are. Imagine how their investors feel about them.

In terms of oil prices, the understanding is that oil & gas is a capital intensive industry which generates strong cash flows. As a result these strong cash flows enable officers and directors to keep the lights on and the circus moving. This argument is lost on producers. Most importantly, it provides strong executive compensation. The problem is that it's not profitable. Specious accounting, which we'll discuss later, is back in vogue, and I don't mean to suggest it ever left. Oil prices are too low to be profitable. They are certainly not enough to compensate for natural gas losses. What producers fail to consider is that Saudi Arabia has two million barrels of oil per day withheld from the market at this time. Will this reduction continue? Will a recession begin soon? What will be 2024s oil price?

Only People, Ideas & Objects, our user community and their service provider organizations configured with Oracle Cloud ERP in our Cloud Administration & Accounting for Oil & Gas have a proposed solution to chronic oil & gas overproduction. Production discipline is attained in the Preliminary Specifications decentralized production model. A proposed solution we have discussed since January 5, 2007. Natural gas volumes speak of this unconstrained production nightmare. Our method uses profitability to allocate production. We can therefore ensure oil and gas production in North America is profitable. This is a strong foundational element of our value proposition. What is clear is what has been stated simply as: “Think of it this way: If you've got a leaky bucket, you're better off fixing the leak before pouring water in the top." From January 5, 2007 until today, what would be the differential between the specious cost of oil & gas production reported and the revenue received? Vs. the comparison to the actual cost of oil & gas exploration and production, what revenues should have been received to be profitable in the real sense?

In the land of what could have been. Theoretically when interest rates are low it is capital intensive, labor saving productivity that firms should invest in. Overreported capitalization due to “building balance sheets” and “putting cash in the ground” enabled producers to leverage their positions excessively during two decades of low interest rates. Adding to the difficulties of chronic overproduction or unprofitable production. Creating a future crisis due to extreme debt levels during a period of normalizing interest rates. Officers and directors have now achieved neither benefits of these worlds.

We hear in the press about producers' phenomenal efforts to reduce debt. At the end of 2016 our sample of producers' debt percentage was 55.9%. As of the second quarter of 2023 it’s 61.7%. (Our numbers include short and long term liabilities.) Here for example is their previously tried and tested method of "hysterical" accounting. From Reuters.

To get a picture of how much improved the cost efficiencies are in 2023, conventional greenfield unit development costs (development cost divided by the reserves developed have been curbed by 60%, from US$16.1/boe in 2014 to US$6.5/boe today. It is claimed that oil wells generate nearly three times more production for the same unit of capital than in 2014. 

And later in the article.

“Contrary to popular opinion, the world is investing appropriate amounts of money in fossil fuel production to satisfy demand. Cost savings mean operators can produce the same amount of oil at a lower cost…” 

The issue is twofold. Producers should not celebrate the ability to force discounts on the service industry due to officers and directors treating them abhorrently. Doing so over a number of decades deserves special recognition however. The second issue is that the statement is false. These are historical costs, not recycle costs as producers call them. Capital costs are not variable based on what can be done in the field today. That is what producers think they can show profitability at, the $6.5, but can’t compete based on their actual, factual and historical cost of $16.1. And long term readers know I have significant difficulty accepting the $16.1 / boe cost being assigned to each of the 30 to 40 years of reserves as anywhere close to what capital markets provide from other industries. What we know is that shale exposes prolific reserves and the capital costs incurred to explore and produce them are allocated to each molecule of those reserves. Shale has steep decline curves demanding costly rework and recompletions assigned to the entire reserve base. Capital costs are never reasonably realized or passed on to the consumer. They are for the sole purpose of “building balance sheets” or “putting cash in the ground.” What they cannot understand is that running a truly profitable operation would provide them with all the financial resources they could ever need. It's easier for officers and directors to wait until investors finally see the brilliance of producers' unknown and unseen plans than to do something about these issues. Yet all investors see are mice scrambling for their daily cheese.

People, Ideas & Objects proposes the following. First, the current production cost is what the replacement cost will be. Ultimately, that's the cost of replacing the product. Oil & gas are unique products in that they are irreplaceable and irretrievable. This demands a different approach if we are to manage the industry appropriately. With the decentralized production model these costs will be recognized in the product price, passed to the consumer and therefore recovered as cash to be distributed for future capital expenditures, dividends and bank debt. Profitable operations seek to realize costs appropriately and on time to fund future operations. 

At times people argue that I contradict myself, recycle costs are production replacement costs. I disagree. My arguments are that a dynamic, innovative, accountable and profitable oil & gas industry, as a primary industry, has a responsibility for the service and other industries. This is to ensure that they are healthy, well-paid, and prosperous. Cutting the price of the services because they can get another drilling rig for half price because all producers have slashed activity levels, only drops the rig operators' revenues into the low teens. Cannibalizing those that work directly for you may not be an effective long-term strategy. Secondly, recognizing the actual cost of production by competing in the capital markets for capital, demands that capital costs be recognized on a performance basis that is in quarters, not decades or centuries. Certainly competitive with other industries.

We’ve seen over the past few years our sample of producers report hedging losses of $109.7 billion. Yet as of 2023 reported hedging gains of $2.863 billion. My argument regarding hedges is that it sets the high water mark for organizational performance. It also sets the low water mark for organizational performance. So why would any of the staff do anything other than what the officers and directors do in the form of “muddle through?" Conversely you could have honed your organization to operate at the peak of perfection as a producer. However, what good are you in a sea of sludge? Officers and directors foster and enable a culture of failure and shrugging shoulders at each and every other producer firm.

In what I call their bankruptcy business model. Officers and directors at Chesapeake survived this otherwise terminal process and were rewarded with $25 million in bonuses following their bankruptcy declaration. There is only one conclusion to be drawn here: the loser is the investor. Who was the fool in the oil & gas firm management transaction? In addition to "muddle through," specious accounting, dilution by repeated annual stock issuances, and now dilution by consolidation. These are cultural, time-honored traditions. 

Officers and directors should also be commended for their actions towards innovators, entrepreneurs, and thinkers. Companies such as Packers Plus and coil tubing providers have suffered through their own persecution and prosecution by producers. Though we have not brought a commercial product to the market at this time, we have brought more ideas to the administrative and accounting areas. In terms of solving profitability related issues and value generating ideas we’ve been working on some promising leads. We’ve seen 5 attempts by officers and directors to use our Intellectual Property in an unauthorized manner. All while receiving nothing but the wrath of the officers and directors and their desire to maintain control of the sinking ship. My argument here is that these should not be seen in isolation. Others see these actions and think, I’ll shrug my shoulders and “muddle through” as well. Eliminating initiative and therefore nothing gets done.

This is the environment, the culture and the status quo of what North American oil & gas producers want to be known for. There was a video I came across that suggested Canadian producers should stop listening to their investors because what they’ve said was wrong for them. Although I cannot find the video, it was on Yahoo! I'll continue to look for it or others as it seems to have that old familiar twist we’ve seen many times before from producers. If there is a recession in our future, if the Saudis reverse their production cuts, these are all the risks we need to face on a day-to-day basis. When we assess the North American oil & gas industry it's at times difficult to get a handle on my perspective, I’ll admit. The industry operates on hope and possibility. Never accounts for the way things are or who’s responsible. To reconcile yourself to my perspective however, only asks the question, where do we proceed from here, and how?

OCI Request for Proposal, Part VII

 Innovation

The reason People, Ideas & Objects is concerned about the startup to junior sector as much as any other classification of producer is purely because the industry’s rebuilding will be done innovatively. Innovation is the basis of the Preliminary Specification. It enables People, Ideas & Objects, our user community and their service providers to achieve our two opposing objectives of providing oil & gas producers with the most profitable means of oil & gas operations everywhere and always, and providing consumers with the lowest possible cost of an abundant energy supply. Through our decentralized production models, price maker strategy, we ensure that all production is profitable. Including Exxon’s, Shell’s and that startup oil & gas firm that began this morning. And to do so innovatively to ensure oil & gas costs remain affordable. In addition, the commodities continental production profile and reserves continue to expand. Achieving profitable North American energy independence.

Enter two variables not available in prior decades and centuries. The cloud computing era coincides with the maturation of the overall technological infrastructure represented by the Internet. We are in the infancy of the Internet. Second, we have the "service" aspect of our user communities. We found that the level of innovation attributed to the small and medium sectors of an industry was as substantial as the larger sectors. Although the larger sectors contributed large amounts of total spending, their impact was no greater than the other sectors contributed. Professor Giovanni Dosi was one of the key sources of research we used to determine the framework necessary for an innovative oil & gas industry. Innovation within a science and engineering-based business is therefore an inherent part of profitable operations and consumer affordability. 

Professor Giovanni Dosi was one of our primary sources of innovation research. His paper “Sources, Procedures, and Microeconomic Effects of Innovation” September 1988, discusses and asks what are “the sources of innovations opportunities, what are the roles of markets in allocating resources to the exploration of these opportunities”?

People, Ideas & Objects research in oil & gas focused on these points: 

The main characteristics of the innovation process. 

• The factors that are conducive to or hinder the development of new processes of production and new products.
• The processes that determine the selection of particular innovations and their effects on industrial structures.  (p. 1121). 

There are two major sets of issues here: first, the characterization in general of the innovative process.

And second, the interpretation of the factors that account for observed differences in the modes of innovative search and in the rates of innovation between different sectors and firms, and over time. (p. 1121). 

Professor Dosi then states: 

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between: 

Capabilities and stimuli generated with each firm and within the industry of which they compete. (p. 1121). 

People, Ideas & Objects research in oil & gas focuses on organizational capability. Moreover, innovation depends both on the firm and the industry. Coordination of the capabilities and stimuli of both the firm and the industry would therefore need to be advanced through changes in the organizational structure of both.

Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers, and so on; (p. 1121). 

Additional issues include 

The conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulations, tax codes, patent and trademark laws and public procurement.) (p. 1121).

As People, Ideas & Objects suggest, these define an Organizational Construct that innovation demands to either flounder or flourish. As both an Organizational Construct in itself, and as we outlined in the Joint Operating Committee as a framework for that construct. What we can conclude from this definition of innovation is that it is a defined and replicable process that can be established through an organization's design. And this design can be part of the organization's ERP software that identifies and supports that organization and its industry. The Preliminary Specification accomplishes this.

Our second source of primary research material came from Professor Richard N. Langlois. Throughout our review of his work we determined the appropriate nature of the organizational design of the producer firm and the oil & gas industry. We selected specific areas of the firm or market where process and management capabilities should reside. By fully implementing the Internet and using Professor Langlois' research, which included Professor Carliss Baldwin's determination of where exactly that transfer between firm and market should occur. We designed the appropriate software tools, such as our task and transfer system. Enabling our user community to define which processes to undertake and manage in their service provider operations. Introducing enhanced efficiency in oil & gas administration and accounting. 

And building on other innovations that generate value, such as cloud computing. People, Ideas & Objects, our user community and service provider organizations can accomplish this through the introduction of our Cloud Administration & Accounting for Oil & Gas. A service that operates with Oracle Cloud ERP and turns fixed producer overhead into variable industry-based overhead. This can be provided to any producer no matter what their size or production profile. Enabling producers to shut-in unprofitable production, incur a null operation, and only produce profitable properties to maximize corporate profitability and shareholder value. A substantial portion of our published value proposition of $25.7 to $45.7 trillion over the next 25 years is attributable to introducing this production discipline. This is to eliminate the chronic overproduction, damage and destruction.

Speaking of value propositions priced in trillions of dollars, People, Ideas & Objects have started a definitive trend. ARK Investment CEO Cathie Wood suggests that innovation makes up $8 trillion of global public equity markets. She also suggests that this will grow exponentially to over $200 trillion in value in the next 8 - 10 years (2030). Moving from a 10% valuation of the total equity markets today to 60% of the global equity markets. All as a result of technology's capacity to disintermediate and the introduction of revolutionary business models that will “disrupt the traditional world order.” People, Ideas & Objects published our value proposition in 2012 and have held to those numbers. They are far less shocking and ridiculous than when initially proposed. What I would suggest regarding the oil & gas industry is that the $8 trillion in Ms. Wood’s estimate doesn’t include any innovative values from the producers. There are none. All innovation is done in the service industry. And it is undetermined at this point if any of the $200 trillion innovation estimate will be realized in North American oil & gas.

Let's set the tone for engineering and geological demands. People, Ideas & Objects have identified substantial capital cost structures that include the costs of:

• Recovery of the past property, plant and equipment account balances, or as we describe them, the unrecognized capital cost of prior production. Whereas if recognized today and these costs were passed to the consumer, would provide incremental cash flow to provide dividends in compensation for past excessive reliance on investors.
• The refurbishment of the infrastructure as it stands today. 
• The rebuilding and expansion of the infrastructure and production deliverability to attain and maintain energy independence. 
• And finally the looming and escalating reclamation costs of the industries past. 

Producers will incur these costs as a result of providing energy to consumers. Without a means of passing these capital costs on to the consumers, such as the Preliminary Specification does, they will bankrupt the industry, or their investors under the officers and directors current business model of “building balance sheets” and “putting cash in the ground.” Methods that we believe will not be recaptured in any software implementation conducted by the industry officers and directors choosing to move to SAP. Infrastructure and production deliverability expansion will be the largest costs. A dynamic, innovative, accountable, and profitable oil & gas industry presents the greatest opportunity for everyone. The focus here is on their secondary and tertiary industries. Having a dynamic, innovative, accountable and profitable business model and means to deal with these costs is an urgent priority.

The Preliminary Specification has captured this understanding of innovation and incorporated it within the innovation framework of the Joint Operating Committee and Innovation Organizational Construct. Each of the fourteen modules of the Preliminary Specification is materially affected when we identify the Joint Operating Committee as the key organizational construct. That provides us with an opportunity to incorporate this understanding of innovation into the design and reorganization of the oil & gas producer firm and industry. These can be identified by several major design processes within the Preliminary Specification. One of these ensures that innovation and its underlying processes are not repeated in separate and distinct areas of the organization each year. Repetition of failed ideas is not innovation. By building creative ideas based on prior failures, we can move forward in new directions. Another major aspect of innovation is improving the scientific basis of producer firms and the industry as a whole. Moving forward on the basis that an idea that generates a dollar today will only produce ten cents tomorrow. We therefore must increase the volume of ideas generated and incorporated into our work processes to continue enhancing our value. Various other innovation processes have been incorporated throughout the Preliminary Specification based on primary research conducted by Professors Giovanni Dosi and Richard N. Langlois. Enabling producers to earn unquantifiable trillions of dollars of increased value above what has been quantified here, for decades to come.

OCI Request for Proposal, Part VI

 Markets

The Preliminary Specifications marketplace modules include the Financial, Petroleum Lease and Resource Marketplace modules. Each replicates the three primary markets in which a producer actively participates daily. Seeking to profitably and innovatively apply their distinct competitive advantages, 

• coordinating the markets of earth science & engineering capabilities. 
• their land & asset base. 

The Petroleum Lease Marketplace module is exactly what you expect. An opportunity to post, bid, purchase, and sell mineral rights and producing properties in the marketplace that exists and is replicated virtually within the Petroleum Lease Marketplace module. Everything from the opportunity to participate in a joint venture to establishing and ensuring surface rights payments are fully supported by our Cloud Administration & Accounting for Oil & Gas of the Preliminary Specification. Our ERP product sits on top of Oracle Cloud ERP which includes Tier 1, Oracle Fusion Applications. Gartner ranks it as the best ERP solution on the market. These oil & gas Marketplace modules include Federal, State, Provincial, Freehold and Offshore leases. Industry can consolidate on a dynamic platform that uses proven Tier 1 technologies with service providers' constant support. All within a dynamic platform that maintains transaction administration, standard and objective accounting. 

This will be enhanced by the constant iterative design and development being undertaken by People, Ideas & Objects user community and developers on a permanent basis. This will be available through our Cloud Administration & Accounting for Oil & Gas service. While if a jurisdiction reviewed and changed their royalty rates at some point, in terms of either the rate or method calculated, producers would not need to concern themselves with the administrative or accounting aspects of those changes. Changes to the software and services would be implemented in a timely and accurate manner by our user communities, developers, and service providers. Producers would only need to deal with revised royalty costs and performance consequences. 

As with the Resource Marketplace module we see many changes in this oil & gas marketplace. Which I would think producers would welcome at this point as financing is next to impossible for producers and particularly the service industry. We noted that the movement of knowledge to where decision rights were held, the Joint Operating Committee, enhances accountability. It's here that the Financial Marketplace enhances that accountability with the board of directors' interaction with their current and prospective shareholders and bankers. A review of the Financial Marketplace module specification would be the most comprehensive source of information to capture an overall understanding of the module. Furthermore, the Preliminary Specification and service providers' accounting are standardized and objective. Consider if that would satisfy some of the issues investors and bankers have raised regarding their investments and loans in the industry? With the Preliminary Specification everything being produced is profitable and producers seek to maximize their profits by shutting in unprofitable production. 

The three marketplace modules share the Marketplace Interface which is a virtual representation of the markets. The Marketplace Interface demos were prepared by the underlying technologies available to us at the time and over a decade ago. Much has developed in the technological environment since. There are many points I would argue are different today, including.

• The work from anywhere and its enhanced productivity of employees.
• The co-mingling of professional and personal lives, the reduction of redundant travel times and archaic rituals has had a marked increase in the performance of white collar workers being engaged over a 12 to 14 hour day. 
• Zoom induced hell. (The demand to always be on camera.) 
• Turning cameras off for peace of mind is now a necessity to this ball and chain. All to satisfy one’s immediate supervisor's demand for command and control through continuous mandatory attendance.
• The current lack of ERP tool support availability.
• Search, contracting, buying, selling, financing, billing, paying, marketing etc. What is currently being done in the ERP area of oil & gas vs what could be done in a hybrid ERP system such as the Preliminary Specification. With a marketplace interface could not be more stark. Oil & gas is in the dark ages in comparison.
• Proliferation of bots. Both good and bad. Note, Oracle’s Cloud ERP now has “good” bots that fight the “bad” bots that may be attempting to get in. 
• “Always there” capability. 
• Establishment of permanent, virtual real estate and representation for a producer's bot’s and organization. 

Looking at the establishment of IT in other industries where technology has been embraced we can ask some interesting questions. Why is there such volume on the stock exchanges today? What are all those algorithms doing? It’s been more than two decades that they’ve existed. How can Elon Musk outperform NASA, Ford and GM? And how is it that oil & gas is generally and rightly regarded as having many of the most advanced science and engineering Information Technologies available to it? Yet its business is about to be trashed? 

North America has advanced its overall quality of life through market and price discovery. The Preliminary Specification has therefore adopted these as part of the structures that define and support the oil & gas industry. Our decentralized production models price maker strategy relies on the principle of oil & gas commodities being priced based on their ability to satisfy the economic definition of a price maker. Producers must produce only profitable production, after full consideration of all costs on a timely and accurate basis. This is how they’ll operate under our ERP system and service provider offerings. Using all of the information contained within the commodity market price (production, inventory, consumption, reserves) to determine profitability and ultimately what will and will not be produced. It is the same mechanism involved in every transaction on a free market. 

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

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

And

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

And

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

We first need to discuss two components of how I see one of the marketplaces in oil & gas. Field service providers have a role to play in extending producers' capabilities and capacities into the regions of their focus. Owning and operating their own field infrastructure would otherwise hinder progress. The second component is the history of abuse and disrespect producers have displayed and presented to the service industry for over forty years. And especially since 2015, when they realized their financial difficulties were amplifying. Their assumption that oil & gas is a boom / bust industry has been accepted by producer bureaucrats. All other industries sought to work these issues out of their businesses and industries many years ago. It is this continuing acceptance that has left us with a legacy of six good years out of thirty seven. Officers and directors don’t understand this point as they’ve experienced thirty seven years of excellent compensation. 

Producers assume the service industry needs to adjust to the boom / bust trend in lock step with producers. There is an implied assumption that the service industry, like the oil & gas industry itself, enjoys revenues as a primary industry. Therefore, it continues business as usual during the bust cycle. The diversity of service industry offerings, and their coverage across various regions of North America spread them relatively thinly. As secondary industry participants their revenues are not persistent and therefore they are not as resilient as producers believe. The collapse of their revenue streams into the low teens has been devastating.

Now the consequences of this latest downturn have destroyed many service industries' capacities and capabilities once available to producers. This decline in support since 2015 on top of the cumulative difficulties imposed by oil & gas producers for decades has created a situation where many will struggle to survive. The largest service industry providers have left the continent due to abusive treatment. Therefore working out the boom / bust cycle through our price maker strategy will rectify this issue. This is done by providing a stable environment, or constant level of demand, in which the service industry can prosper. However, service industry investors have had it for this millennium. They invested in good faith and were repeatedly abused by the producer firms. They’ve witnessed the equipment they invested in being cut up for scrap metal. Horse power is sold off to other industries to survive. This was primarily due to producer bureaucrats determining they could get away with leveraging additional field activity by not paying their bills for 18 months after the jobs were completed. As their last source of capital to keep their show running. The dilemma today is who’s willing to provide the financial resources for the service industry to recapitalize itself? This will enable it to reestablish the capacities and capabilities necessary for a self-sufficient and profitable oil & gas industry? The Resource Marketplace module engages producers and service industry participants in constructive discussions regarding the oil & gas and service industry business. 

This is what’s known and understood on the market today. It's not news. Producers will expect the service industry to dance for their dollars just as they’ve always done. If People, Ideas & Objects are correct and no one plays that game, what would be the result? I would point to the example of the history of ERP providers in oil & gas over three decades. I can report that there is still no consideration of a second chance that first-tier ERP providers may rescue production firms. Why? They feel the industry is too complex, too costly and there are not enough producers to negotiate sales prices fairly. The last two Tier 1 ERP providers left in 2000 and 2005, as documented on page 17 of our White Paper. This was due to producers' inability to pay for software development in advance. Producers have never paid for ERP systems anyway, so why start? If as suspected SAP is being turned to by producers to satisfy investors' demands for Tier 1 ERP system level accountability. Based on a September 2022 SAP conference and their 14 page brochure. SAP will ensure they’re paid each month for each producer's integration.

Producers have had over a decade to invest in the Preliminary Specification to make their organizations profitable and avoid this inevitable, predictable and disastrous outcome but didn’t. Not a penny has been spent on People, Ideas & Objects at any point. As a result, producers will be responsible for all of the costs related to the development of the Preliminary Specifications and our user community. The need for skin in the game is the apt approach when so many ERP providers and their investors have been betrayed so comprehensively. This will be the necessary approach throughout the oil and gas industry rebuilding process.

Producers sit on revenue from their primary industries. (And mostly for enhanced, innovative, executive compensation, I question what's in those capitalized overhead accounts we never see.) Officers' and directors' inactions have consequences detrimental to everyone else in the industry. They will argue, rightly, that what we propose does not remind them of what markets and price discovery should look like. Correct, it's what’s necessary after the destruction of markets. It is the rebuilding process. These facts on the ground are what bureaucrats refuse to consider or admit. Until they do the industry will be plagued with problems. And they’ll never admit it. What they will do instead is leave which is the historical action other bureaucrats have taken in other industries since 1929. Which is possibly what they’re doing in their transition to clean energy. Taking oil & gas revenues with them. These issues need to be dealt with and I am unaware of another solution. The fact is officers and directors broke it, officers and directors of the producer firms will need to fix it. The need to rebuild these industries brick by brick and stick by stick must be financed by the only means available. Oil & gas industry revenues. Producer cash generated through our Preliminary Specifications decentralized production models. With active participation in the development of tertiary industries that support the primary industry of oil & gas. Or in other words, ultimately the consumers. Granted there will be those within the service industry that will continue to scrounge for the pennies falling from the bureaucrats' pockets. However, that does not create the dynamic, innovative, accountable, profitable and energy independent oil & gas industry that we need.

OCI Request For Proposal, Part V

New Growth Theory

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

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

Secondly and perhaps more importantly in terms of building value for the greater North American oil & gas economy. Specialization and the division of labor which has proven to be the primary method of generating all tangible value for western civilization since 1776. Based on these principles, we have reorganized administrative and accounting resources to build value to ensure profitable operations. Specialization and division of labor will enable industries to enhance productivity in unknown, unquantified and unqualified ways. We facilitate this through our permanent software development capability, our user community, and their service provider organizations implementing these principles.

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

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

Professor Romer's theories are one of seven Organizational Constructs of the Preliminary Specification. All seven are focused on building value for producers and providing tangible means to do so. In this proposed configuration, they are available through the Preliminary Specification, our user community, and their service provider organizations. Creating the culture necessary for the industry to be dynamic, innovative, accountable and profitable. The culture will be established with permanent software development capabilities and our user community. This culture will iterate on these principles over time to bring further value to the industry. 

Professor Paul M. Romer

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

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

Professor Romer won the 2018 Nobel Prize in economics for these principles. It is our view that these are incremental value-adds to traditional specialization and division of labor. It is this principle of sharing non-rival costs that will mitigate what we believe to be the secondary reason for the systemic lack of profitability in oil & gas. In general, overhead costs are currently corporate. We will shift responsibility for those expenses and charge the actual, factual overhead costs incurred by service providers' billings directly to the individual Joint Operating Committee. There they become a cost of a property product and are captured in the sale price of the commodities. Through the sale, these funds are recaptured and returned to the company, which are used for overhead costs for the following month, etc. Currently producers capitalize overhead costs and therefore sell their product below its actual cost and are not recovering the cash spent on monthly overhead expenses. As they state, they're “putting cash in the ground” and building balance sheets." Constantly sourcing new cash to finance their overhead expenses each month.

By sharing the administrative and accounting infrastructure, turning these costs variable based on profitable production, and applying specialization and the division of labor to the administrative and accounting areas. Through the development of our user communities and service provider organizations. And then delivering to industry our Cloud Administration & Accounting for Oil & Gas software and service. People, Ideas & Objects are adding real value to North American producers in terms of resolving what are their largest impediments to profitability. Chronic overproduction, or unprofitable production as we describe it and high overhead costs. 

Oracle CloudWorld 2022 Conference

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

The most impressive example provided during the conference was the expense reporting features of J.P. Morgan Chase. If an employee uses their credit card for business, they can choose the type of expense to be classified. Oracle Cloud ERP would evaluate the charge based on the company's policies and determine its eligibility. If eligible it would be processed and payment made to the employee or the credit card company. Eliminating the massive number of hours and costs incurred in expense reporting by organizations during the year in their current systems. This is reduced to a few milliseconds of processing time. While the cost to the organization to use Oracle Cloud ERP is incidental in terms of the time spent on Oracle Cloud Infrastructure. As well as the engineering costs associated with the development of the specific system the software engineering costs are amortized across the global population of Oracle Cloud ERP customers using the feature. To a lesser extent People, Ideas & Objects provide this level of service to North American producers for their unique oil & gas attributes. The lesser extent is due to the smaller population of oil & gas users for which this development and implementation will be targeted. As such, North American producers have the opportunity to realize both Oracle and People, Ideas & Objects innovations concurrently and at substantially reduced costs. These are due to Professor Paul Romer's theories.

Intellectual Property

People, Ideas & Objects establish the need to rebuild the oil & gas industry and producer firms. This is due to the damage and destruction caused by producers' officers and directors. Their “muddle along” strategy has instilled a “do nothing” culture that provides a status quo existence that has not and will never change. Even the event of 2015 and all subsequent years in which investors have refused to participate further in the industry has not prompted a response or action. Where does motivation come from to efficiently and effectively conduct this rebuild? Oil & gas is one of the most advanced science and technology industries. One that demands innovation and iterative development of those sciences to ensure adequate reserves and production are provided by a dynamic, innovative, accountable and profitable oil & gas and service industry. And to ensure that it always meets the conflicting objective of ensuring consumers are provided with abundant, long-term supplies of reliable and affordable oil & gas. 

The importance of Intellectual Property in the oil & gas industry is that it will organize innovation. The most productive innovation is when it’s organized under a structure that enables the market to focus on its development. The North American marketplace established Intellectual Property centuries ago and we have reaped its benefits. The United States included copyright in its Constitution. Copyright must be published to earn it. Exposing it to the marketplace of ideas where it can be built upon and enhanced by others. It reduces the “me-too” phenomenon that oil & gas bureaucrats have created and benefited from to generate price competition in the service industry, elsewhere and to ensure everyone was rendered “blind sleepwalking agents of whomever fed them.” Is this the method that an innovative industry is built upon? With bureaucrats sitting on top of the primary industry of oil & gas and using its revenues to endow their favors with a penny or two here and there? 

The organizational structure of the proposed oil & gas industry People, Ideas & Objects et al are rebuilding will be based on Intellectual Property and innovation. Structured and based on the laws of the land. These laws will define what innovation is undertaken and what is not. Violation of another's copyright or other Intellectual Property is not allowable under the law so there cannot be any violators. A self-policing mechanism reduces the overall costs of unnecessary innovation duplication. Focusing energy and resources on profitable innovations in products and services. Providing the incentive and motivation for those with the ideas to do the hard work of making those developments. Fully protected from Intellectual Property poaching that's actively sponsored by producers, officers and directors. Which is culturally ingrained and accepted by them in oil & gas today. And to do so not just today, but always and everywhere. 

Copyrighted publications enable an understanding of how things are done. Providing the means to build upon that understanding with additional innovations. Intellectual Property therefore provides us with a strong legal structure that encourages innovation, eliminates the costly redundancy of duplication of efforts, educates and ensures the necessary legal protection to enable the motivation for the individual to do the difficult and challenging work we can all agree is the foundation of the industry. This applies across the greater oil & gas economic structure which includes all secondary and tertiary industries. The 21st century will be known for Intellectual Property leverage. Much like the last century leveraged mechanical effort. For officers and directors to avoid this or opt out is foolhardy in the extreme.

What is the motivation for people to develop their “ideas?” Are they not, just like the bureaucrats, in it for themselves and looking to siphon off what they can from the industry? Self interest is part of human endeavor. It comes down to whether or not it builds value. Self-interested officers and directors have been well compensated while the industry has been destroyed. A contrast due to the fact that they’ve not been motivated by the discovery of ways to create value. Intellectual Property is therefore not only a structural organizational component that can enable control of the innovation process throughout the industry. The participants are motivated to build value through incremental profitability, cost reduction, enhanced production deliverability or reserve expansion. It is the law, and most importantly, it is proven. The reason the United States dominates in the manner that it does is due to the fact Intellectual Property laws provide the motivational and organizational principles of how their economy and society operate. It assumes people are intelligent beings, not serfs like bureaucrats. It is productive, constructive, focused on generating value and benefits society. Otherwise why would individuals do the difficult work that’s necessary? By bureaucratic command? As a science and technology business, that is refuted to be second only to the space industry in terms of complexity. What has and what have these bureaucracies done under their business model?

Difficult work needs to be undertaken in a complex science and technology-based industry in a 21st century business environment. Oil & gas is a critical necessity for our economy and way of life. One in which the environment and organizations we are presented with today can be assessed as wholly inadequate to meet those needs both today and in the future. And what is potentially more difficult is they’ve shown no propensity to recognize any of its issues or the need to make any changes. There is a need for significant development in all aspects of the greater oil & gas economy during this rebuilding period. A method of organization will be the first element necessary for a solution. However we have to address the issue of how that organization is formed and the subsequent pieces are put in place. The need to understand “how” those involved in this rebuilding will be motivated to do this difficult work and where they can fit in is addressed in the Preliminary Specification. This is accomplished through the adoption of Intellectual Property as an Organizational Construct. This is defined and supported by the software and services People Ideas & Objects et al propose in this RFP.

People, Ideas & Objects, our user community and their service provider organizations focus on providing all North American oil & gas producers with Cloud Administration & Accounting for Oil & Gas. To ensure startup, small and junior oil & gas producers receive all the Preliminary Specification capabilities and capacities. This is due to the critical role and nature of their existence in terms of dynamism and innovation. Currently we have a market in oil & gas where officers and directors point to the startup to junior producers as causing the difficulties we’ve seen in the industry. In fact they may have become the officers and directors' most recent viable scapegoat! Our focus is appropriate, and we can ensure these producers can enter the industry with fewer barriers to entry. We do this by providing all producers with the means to generate a second source of permanent revenue from day one. A ready market where demand and coordination for the markets earth science & engineering resources will be made available through the Preliminary Specifications Work Order, Resource Marketplace, Research & Capabilities and Knowledge & Learning modules. Providing them with the cash to pay their mortgage, Internet, work from home and skip past the dog food aisle for their families' nutrition. Incorporating their experience, skills, knowledge, and ideas into the broader market for oil and gas. We also eliminate that impossible wall of never ending overhead costs that consume investors' dollars year after year. This is the base of fixed overhead of the small to junior producer. Which is and has been the cause of their demise today. It didn’t matter how advanced their technical skills were, that’s not what determined their success or failure as a startup oil & gas producer. Instead, it was if they could get past that wall of base overhead costs. 

Officers and directors know the Preliminary Specification establishes a strong foundation for Intellectual Property of individuals within the industry. This value becomes available to those original authors, innovators and entrepreneurs which is in turn marketed to oil & gas producer firms whose distinct competitive advantages include the coordination of the markets earth science & engineering capabilities and their land & asset base. This is provided through the Preliminary Specifications Resource Marketplace, Research & Capabilities and Knowledge & Learning modules that were published in final form in August 2012. From the Resource Marketplace module I summarized the points as follows.

Another key point is the tearing down of the existing Intellectual Property culture. An industry such as oil & gas is based on earth science & engineering needs. After all, it is a science-based business. If we are to expand the capabilities of science and innovation in the industry, we have to address many difficult problems. And as we progress, the volume of ideas needed will be an order of magnitude greater than what is required today. These problems cannot be addressed in an environment where there is no incentive for individuals to solve them. Addressing the motivation to solve these problems and enabling the people to earn the rights to the Intellectual Property within the People, Ideas & Objects application modules is the first step in making the necessary industry wide changes. This will turn the oil & gas industry into a more dynamic business.

With the oil & gas industry fundamentally destroyed as it is, its Intellectual Property is also in disarray. The capabilities and capacities are deteriorating as we speak. Making this an Intellectual Property gold rush in the industry, to save it from bureaucrats. However, employment contracts may have clauses that state that while working for them, any product is theirs. Consolidated producers' difficulty is that none of this is published and the act of publishing is how copyright is earned. Patents and trademarks are defensive, in that they protect what is known of Intellectual Property at a time. Copyright is offensive and allows Intellectual Property expansion through the creation of derivative works. Copyright does not secure idea rights. It only grants monopoly rights to the expression of that idea. In other words, it must be pursued and maintained as I do here. 

It is particularly relevant to consider Intellectual Property Rights in an industry that coordinates market capabilities for earth science & engineering, along with its land & asset base. These seem diametrically opposed in terms of how they function. What People, Ideas & Objects suggest is that there is no need and no benefit in having the producer firms own any of the Intellectual Property that supports “what, how and why” the industry operates. We need to address the motivation for how the industry progresses, how science and technology progresses innovatively and quickly. And address why this hasn’t been the case. 

This Intellectual Property section of our RFP Response is ripe with conflict and contradiction. We stated earlier that shale science and technology were the most advanced, yet belittled its development over the past years. The contradiction is that I’m only suggesting oil & gas producers are static. The development and implementation of shale technology would have taken place decades earlier if producers had kept up with progress in the service industry. It is there, in the service industry where all innovation and development occurs. There is no benefit to a producer owning Intellectual Property on a drill bit. And we are extending Intellectual Property deployment to the sciences of geology and engineering. What have been the bottlenecks to the further development of the industry over the past few decades? 

Business changes quickly. Intel's dominance in the market is now a constraint that causes them to lag the market in consequential ways. As the dominant processor manufacturer, it has been deemed a redundant business model. Business value is no longer in processor manufacturing, it's in their design. Contract manufacturing is a commodity business where others find profits and opportunities in that area where Intel cannot compete. In terms of design being the value, that is now the case. People should read the summary of Ampere Computing’s Leadership Team that now has one of the most powerful processors available. Oracle (a major shareholder) has moved their high performance cloud offering to Ampere processors, which Oracle’s Cloud offers today. 

This is the changing business world and there are more innovative business models. It comes down to one word, the individual. To organize society today, with its global reach, cannot be done spontaneously. There is no serendipity when individual A meets individual B 1,000 miles away on the Internet. This is done through software providing them with the means to conduct their business. Software defines and supports this organization style. Without People, Ideas & Objects none of this oil & gas vision will come about by sitting and waiting for the phone to ring. At least it hasn’t happened yet.

The question also needs to be asked: why does Apple continue to innovate consistently? Although their products are more costly, they earn in excess of 80% of the profits of the mobile phone industry. In addition, they bring incremental value to their customers through innovation. They too rely on Intellectual Property as the basis of their value. They consider themselves a software company that sells hardware to bring customer value. Software defines and supports organizations. Who would run a company that sources products from a number of countries that total 3.5 billion in population? And then snap their fingers and say “now innovate.” It doesn’t happen without software.

For producers to double and triple down on their failed vision is the method chosen to resolve the oil & gas industry and producer issues. This is done by the current officers and directors. Raising the viable scapegoat that it's the small producers who are overproducing to meet their bank payments is causing the disaster in the industry today. When officers and directors raise this argument we see the source of their own future demise. For them to admit the overproduction issue is attributable to their own actions would never cross their minds. Everything is always someone else's fault. Should they be successful in implementing SAP or other means to secure their method of organization and management this will most certainly continue.

We’ve defined our alternative vision in the Preliminary Specification. We would note that it’s in stark contrast to the clean energy vision producers and SAP are transitioning to. Disintermediation is best defined as the removal of bureaucracy and red tape rendered redundant through the Internet. Although the world is unaware of “how” and “what” the producers current consolidation driven vision will operate as, or any details, we can only speculate as to why it’s being done when all other industries are, and not by choice, finding efficiency in the decentralized methods of organization and disintermediation through technology. People, Ideas & Objects have repeatedly stated the fact that each boe provides 10 to 25 thousand man hours of equivalent labor, or 28 to 71 times the entire global population. Officers and directors capitulation of shale resources for clean energy should be seen as irresponsible when we understand that it’s the world's most powerful economy that is the largest consumer of energy. Why aren't officers and directors seeking profitability in shale? 

Due to the demands for market coordination of earth science & engineering resources in the near future, we've discussed how specialization and the division of labor are used in the Preliminary Specification to deal with these associated resource demand issues. Conceptually we have implemented the pooling concept where the ability to have the Joint Operating Committee assigned with the available technical resources of each producer firm would be how the property was managed from an earth science & engineering perspective. Pooling replaces the operator role. Establishing the second source of revenue for the producer and its supporting administrative infrastructure is in the Preliminary Specification. We have also implemented the necessary governance model to support these resources with the appropriate organizational structure. This is to ensure effective operations across the producer and each Joint Operating Committee. 

Two other interesting aspects of Intellectual Property are first, safe harbor provisions. Why don't producers turn around and sue the copyright holders? This would be an unfortunate world where “big” ruled the earth and we serfs would be the drones who were forced to comply with their every command. The safe harbor provision states that people cannot sue the copyright holder. Secondly, the division of tacit and explicit knowledge. Tacit knowledge cannot be captured or written down. Only explicit knowledge can. Therefore it is up to people to take the explicit knowledge they have secured and apply their tacit knowledge as a service. This will support their Intellectual Property and generate value. These services are as relevant as Intellectual Property itself. Just as People, Ideas & Objects user communities service provider organizations deliver our software and tacit knowledge to producer firms.

There is no question that People, Ideas & Objects user community and their service provider organizations are Organizational Constructs, market supporting institutions and a critical element of the future success of the oil & gas industry. Intellectual Property is the foundation of their formation, organization and delivery of value to the oil & gas industry. The configuration of their Intellectual Property however is fundamentally different from what is described here for the engineering and geological sciences. It is for that reason that they are given specific pages within this wiki. These pages deal with the unique characteristics of their Intellectual Property and how that is developed, implemented and employed.

OCI Request for Proposal, Part IV

 Specialization & the Division of Labor

Since 1776 the only basis for increased value generation has been the expanded definition and use of specialization and the division of labor. Adam Smith proved in his research that by reorganizing a pin factory around specialization and the division of labor between individual workers, augmented through proficiency, automation and mechanical advantage, the factory output increased 240 fold. Today the opposite is true. Software and most particularly ERP software has sealed organizations to a definition that is unchangeable through any means other than changing the software process definition. This aids producers' status quo configuration when they don’t sponsor or initiate any change in ERP software. Instead, focus on engineering tasks such as cost cutting to generate business value. If we are to meet consumer energy demands in the 21st century it will be the result of an “all of the above” energy strategy. For the next several generations the largest component of energy makeup will be oil & gas. Therefore, dealing with these issues and opportunities demands that we increase the industry's throughput substantially in order to meet the increasing demands of the North American marketplace. 

It is therefore necessary to ensure that we proceed from this point forward with the defined capability and capacity to enhance the ERP software used in North American oil & gas. And to do so to facilitate an increased level of specialization and division of labor that is iterative and constantly evolving. People, Ideas & Objects provide for this and are configured specifically to ensure this. Our business model depends on change. We generate revenues from software development changes initiated by our user communities interactions with industry. Our user community will be available everywhere and always on a part-time basis to work with our developers to make the changes they’ve identified while working in their service provider operations. These service providers will be configured to deliver the explicit knowledge captured in our software and the tacit knowledge provided by their services. Our user community members are therefore on the ground in the industry on a day to day basis in the administration and accounting of producer firms. They are the exclusive, licensed individuals authorized to change the software's Intellectual Property. Our developers know of no one else providing input. In other words, our user community members have the power necessary to ensure that the processes they manage ensure the most profitable means of oil & gas operations everywhere and always. Only our user community members own and operate service providers. If anyone in the industry wants to know who they need to resolve their issue, they only need to contact the relevant user community member. Who do they call today, or at SAP if our suspicions of the officers and directors' actions are correct and they're selecting their solution?

People, Ideas & Objects Preliminary Specification brings significant advantages to all producers. This is a solution that should be used by all producers in the North American industry. Whether that is Exxon or the producer firm that originated at breakfast. This also applies to any and all other types of secondary and tertiary industry firms involved in the greater oil & gas economy, no matter their size. While we provide advantages to junior and startup oil & gas producers, we put their organizations in a position to succeed and grow. They’ll have distinct competitive advantages over today's business model methods of organization. These are brought about through the reorganization of producer firms' administrative and accounting resources into our user communities service provider organizations. And the implementation of our Cloud Administration & Accounting for Oil & Gas service provided by them. 

The producer organizations that we define and support in the Preliminary Specification employs and deploys higher levels of specialization and division of labor. We feel the overhead costs of producers demand these be dealt with by making organizations more efficient through the application of advanced, and continually advancing, specialization and division of labor. We also turn their overhead costs from a fixed, producer based capacity and capability, into a variable, industry based capacity and capability, their variable behavior being decided upon a Joint Operating Committee's ability to produce profitable production. One of the reasons for the high overhead costs of each producer (up to 20% of revenues, not the 1 to 6% reported on financial statements) is that all of their capacities and capabilities are replicated within each producer firm in an unshared and unshareable form. Today these accounting and administrative capabilities and capacities are purpose built within each producer organization to meet the demands of the various stakeholders. They also meet tax and regulatory requirements. It is these high overhead costs that are the secondary cause of oil & gas profitability problems. Overhead costs do not constitute a producer's distinct competitive advantage.

Preliminary Specifications support a reallocation of the producers' administrative and accounting resources into individual service providers headed by members of our user community. Our user community and their service providers are independent businesses that specialize in one administrative or accounting process. They conduct that process on behalf of the entire industry as their client base. If a Joint Operating Committee produced that month, under our decentralized production model price maker strategy, we can reasonably assume it is profitable. Upon production the processes administered by each service provider will be invoked through our task and transfer network. The processes undertaken and their associated billings will be charged directly to their Joint Operating Committees. If it’s not profitable, the property would be shut-in and none of the service providers would receive any data from our task and transfer network. Therefore, no processes will be conducted and no service provider billings will be rendered. The shut-in property does not incur a profit or loss, but is a null operation. Under either scenario, overhead costs will be covered in the current period through profitable operations or by the fact that costs will be variable under the Preliminary Specification. Meaning they won't be incurred when a property is shut-in.

Producers can benefit from beginning operations in this manner. First they will reach their optimum profitability when losses stop diluting profitable properties. Whether that is at 25% or 100% of the producer's capacity. When all costs are variable, production will be profitable at any volume of their production profile. This will preserve their oil & gas reserves for a time when they can be produced profitably. Those reserves will no longer have to carry the incremental costs of losses otherwise incurred if they continued to produce unprofitably. Keeping the commodity as reserves can be seen as an affordable means of storage where the subsequent costs of production and storage are zero. Commodity markets will find their marginal price when unprofitable production is removed from the marketplace. Increasing the value of all producers' production by realizing marginal prices across their production profiles. Producer officers and directors assert this is collusion. If making independent business decisions based on detailed actual, factual, standard and objective accounting information that determines profitability is collusion, it is no wonder producers are incapable of profitability? 

During 2017 officers and directors realized their collusion claims were moot; they stated unequivocally that they could never shut-in any production, it would cause the formation to “fold over on itself” or other specious arguments. That is until they ran the oil price down to negative $40 in April 2020. The refineries had to tell them they wouldn’t take anymore, forcing production to be shut-in. After resumption of over 25% of global shut-in production, formations showed no damage. These are just some of the many reasons for the Preliminary Specification implementation. Oil & gas commodities are price makers, not price takers as the officers and directors assumed they were for all these decades. One critical aspect of a price maker is that they only bring on new production when it’s profitable. The method we’ve developed is detailed in the Preliminary Specifications Preamble. 

Our decentralized production models price maker strategy engages North American oil & gas producers in disciplined production. Achieving maximum profitability can only be achieved when unprofitable properties stop diluting corporate earnings. Therefore the need to ensure they are fulfilling their primary task of maximizing profitability becomes the predominant method of production discipline. Competing on the capital markets of the 21st century, it will be much different than previous years. With technology and other industries providing growth opportunities, for oil & gas companies to continue to assert they are in a growth mode precludes them from that competition. They are a primary industry with commodities subject to price maker principles. An industry where shale reserves have changed the game from scarcity to abundance. This will also affect producer capital allocation and capital discipline. Capital investments will only be made assuming or demanding they will be immediately profitable. Why would they invest in them if they cannot meet that criteria? This implies a very different approach to what is done in the industry. We can cast the foolishness of “building balance sheets” and the like on the scrap heap. Balance sheets are the fallout consequences of business management, not an objective or target.

Cash demands in the industry are presently one of producers' pressing concerns. A consistent theme that defines a cultural dependence on annual outside capital infusions. This is due to all producer costs outside of operations being more or less capitalized and then recognized as depletion over several decades. This includes capitalizing large percentages on overhead and interest. By not recognizing overhead costs in the current period producers can more easily declare specious profitability. However, the cash consumed in those overhead costs is not returned in the current period in the commodity prices charged to the consumer. These overhead costs will sit as assets on the balance sheet in property, plant and equipment, or as we call them “the unrecognized capital costs of prior production,” for the next few decades before they’ll be realized as depletion and returned as cash. Therefore the search for new cash each month to replenish the cash float has been the producers' issue for decades. When investors were willing, this was not an issue with the annual top up of investors' dollars being priced to cover these costs. Now the reality of their specious accounting haunts them daily as they try to find new cash sources to cover their basic overhead costs, each and every month. Working capital has been and will continue to be a crisis in the industry under the current business model. No matter what commodity price is offered. 

Basic cash management would have indicated this to officers and directors many decades ago. I wonder why they never changed these methods? (I’m sure they had their reasons! Other interested parties should ask these probing, and revealing questions.) With the Preliminary Specification recognizing overhead in the current period as part of the operation, capturing that in the price charged to the consumer, return of the cash to the producer will occur within that production month. That however assumes profitable operations are conducted and all costs are accounted for appropriately. I’m on record, and allege that hasn’t happened. Calling the producers' accounting specious and deliberately misleading. I do sometimes wonder what costs are contained in capitalized overhead that no one appears to know or question? Both in terms of their size and composition. I do know each account never breaches the level of materiality during the annual audit, but outside of that these state secrets seem to me to be the reason that officers and directors have never changed these methods despite the negative consequences they cause and the Preliminary Specifications availability since August 2012.

Our user community and their service providers are involved in the delivery of the explicit knowledge captured in our ERP software and the tacit knowledge of individuals within each service provider firm. Fulfilling the accounting and administrative needs of producers with variable, industry-based accounting and administrative capacity and capability. We are delivering these in what we’re calling Cloud Administration & Accounting for Oil & Gas. Building and leveraging the same principles of specialization and division of labor that deliver cloud computing's extreme value proposition.

With the clear objective of rebuilding the industry brick by brick, and stick by stick. This is in a style of rebuilding that involves a dynamic industry based on a decentralized, connected environment such as the Internet provides. People, Ideas & Objects et al don’t have to break down oil & gas to rebuild it. The rebuilding is necessary due to the damage and destruction the chronic mistreatment industry has experienced at the hands of the officers and directors of the producer firms. Hierarchical strata of advanced paper shufflers define future failure. To bring about an ERP system for the industry such as the Preliminary Specification provides, we must consider the opportunity of disintermediation. And People, Ideas & Objects, our user community and their service provider organizations abide. 

The nature of this rebuilding process is the cannibalization of the processes that have occurred since investors sent their dissatisfaction message to producers in 2015. Being solely dependent upon investor cash meant organization cuts were necessary. This was when the producers' sole source of value generation, the investors' annual injection of additional capital, was no longer available. Keeping production processes in place was the priority and those processes involved in the early stages of oil & gas development were subject to layoffs. Assuming that the situation is alleviated in the following year and any resources recalled. Since the inactivity and abstinence of the officers and directors has continued for eight years, we can assume that the process management has been cut well into the eighth year of the development cycle. Therefore either way, through People, Ideas & Objects or SAP, the processes will need to be redefined and rebuilt. And if a producer chooses SAP as their current system, it should be final. People, Ideas & Objects will not build on SAP's proprietary and custom implementation. Producer firms must realize the Preliminary Specification is an oil & gas implementation based on its Intellectual Property. We are not looking to support or recreate any past failed policies and procedures no matter how inert they may appear. People, Ideas & Objects expect the same from SAP in terms of respecting our Intellectual Property. In the Preliminary Research Report I think we aptly stated the "SAP is the bureaucracy."

However, bringing one of the most complex systems, Oracle Cloud ERP, into one of the most complex industries into the environment of the small and startup, or any producer, is a risky proposition to consider. How could that ever be a commercial software product? Or be provided to a commercially viable small or junior oil & gas producer? And that is the fact of the issue we are facing today as a result of the officers and directors “consolidation as a solution” or with SAP as alternatives. We need to ensure the future of the industry is in the hands of oil & gas men and women. They will knock down the barriers that stand in their way, just as so many have done before. The constraints and reality of regulatory, compliance and investment demands are real impediments to these needs. That is, if producers could not access the kind of systems necessary to operate in that environment, no matter their size, capital markets would remain forever closed. Today, this is an untenable barrier, and it will be even more so in the near future. Investors have explicitly requested Tier 1 ERP systems be implemented. Therefore all producers need to understand that the production discipline provided by the Preliminary Specification is necessary across all classifications of producer firms.

Under the Preliminary Specification a startup or junior producer would no longer need to establish the point where they’ll have to generate the full $3 to $5 million of free cash flow necessary to offset the annual base overhead of the producer firm. For administrative and accounting purposes, they will only incur the variable overhead costs of the service providers fees that they use. In addition, they will incur the costs of software development assessment by People, Ideas & Objects each year. As we noted earlier, not only are these overhead costs variable, but if they’re charged, that denotes profitable production. This indicates these costs are covered. In contrast, if the property is not producing it does not incur any overhead costs. And there are more attributes of our system that benefit the new oil & gas industry we are rebuilding. 

The Preliminary Specification also implements specialization and the division of labor across the producer firms, particularly in the earth science & engineering capabilities and capacities. As a first step in our solution for startups and junior producers, we listed this as the first step. These capacities and capabilities are becoming increasingly burdensome to each producer firm due to their unshared and unshareable nature. However, they are for different reasons than the administrative and accounting difficulties mentioned. The costs incurred to maintain these capabilities are growing as a result of the advancement of their science and technological development. This requires further specialization of the producers' capabilities, and critical competitive advantages. We believe that all producers have reached the point where the demands to maintain these capacities and capabilities have expanded beyond the usable population of these technical resources. Or will soon. With the retirement of the brain trust of the industry, and the universities not producing anywhere near the replacement number necessary, a critical shortage will soon demand that these technical resources will become too rare, too costly and too unavailable to maintain, not to mention, expand the deliverability of the North America-based industry. 

Consolidated producers will have particular difficulty managing this technical resource when entrepreneurs see the startup opportunities we’re defining here. That is, if only there was an ERP system that provided a solution for oil & gas startups to deal with the compliance, governance and regulatory environment. This would enable them to access funding! In addition to this limited technical resource supply we also believe that producers' firms are reaching a point where the costs of their scientific engineering and geology needs are beyond their commercial grasp and necessary to maintain their just-in-time operator status. Even so, a higher level of specialization and division of labor will be needed in earth science & engineering. It is the unshared and unshareable characteristics of these capabilities that we find the nascent difficulties to overcome. As operators, producers require these technical resources for a variety of just-in-time purposes. If we assume that across the industry the utilization rate of these technical resources is 75% due to organizational inefficiencies. Then by releasing that other 25% and deploying that unused and unusable capability more effectively we’ll have what I believe to be the second aspect of the solution to these pending and most certainly future difficulties. A one-third increase in capacity with higher output from enhanced specialization and division of labor, providing a good start to solving this pending critical resource shortfall.

Instead of letting another issue manifest itself as a crisis level issue, People, Ideas & Objects et al have implemented a variety of changes within the Preliminary Specification. As soon as the Preliminary Specification becomes operational, the producer firm will have two revenue streams. Their oil & gas sales are augmented by their earth science & engineering capabilities being deployed and used for revenue generation. The individuals can consult with one of the producers' own Joint Operating Committees or with other producers / Joint Operating Committees, as their clients. Due to the specialization and division of labor demands producers will need to choose to specialize or acquire specific capabilities and competitive advantages. These producer revenues will then offset engineering and geological costs incurred and charged to Joint Operating Committees or other producer clients. And through this enhanced specialization and division of labor, we achieve the same benefits of the 240 fold increase in productivity that Adam Smith experienced in his pin factory.

The second source of revenue should be seen as the starting point of oil and gas industry startup revenues. The startup's capabilities and competitive advantage will be less specialized than those of more advanced companies. The additional costs of head office operations not considered in the administrative and accounting category will be offset by these revenues. And this will apply to all producers no matter their production profile. When producers specialize in their distinct competitive advantages, and all producers including Exxon, Shell and Chevron will need to do so, the demand for outside technical resources will be required to augment their needs.

In a world where software defines and supports organizations. This is some of the what, how and why we can provide when the Preliminary Specification is delivered to all producers in the North American industry. Instead of being mere serfs as the officers and directors wish to continue treating the engineers and geologists, they’ll be able to take control of their careers from this point forward. The facility most responsible for this capability of making direct labor charges to the Joint Operating Committee is what we are implementing in the industry. This is our Work Order. Officers and directors may claim that charging labor directly is already available through their systems. Which is true, they can allocate some of these labor costs to the field. However, some are assumed to be captured in overhead allowances which the Preliminary Specification eliminates the use of. However their methods do not provide the necessary features of raising it to the point of making it a defined revenue stream for the firm. Its ability to interact throughout the industry is also a benefit. Allowing for interactions between resources and where they need them. Subject to appropriate approvals and governance. Theirs does not enable the second purpose of our Work Order system, which promotes industry-wide innovation through the establishment of working groups etc. Our Work Order system bills its costs at all times to corporate overhead, Joint Operating Committee overhead, an AFE or to a lease. Therefore the billable time of the individual engineer or geologist should be deployed within the producer 100% of the time or not be working for the producer. A fundamental component of this is requiring these people to establish their own producer firms. These firms are based on their earth science and engineering competencies, capabilities, and Intellectual Property. An industry where it will be less about who you know, but what you know and what you're capable of delivering, what is the value proposition that you’re offering? Preliminary Specification facilitates dynamic, innovative, accountable and profitable oil & gas producers, whether they are startups, juniors, intermediates, seniors, or multinational companies.