The Incremental Barrel

 It seems evident to me that the actions of certain oil and gas producers signify a clear awareness of the detrimental aspects of their overproduction. The very fact that these companies engaged in discussions with OPEC about production curtailments suggests an acknowledgment of their role in the industry’s poor performance. Their subsequent involvement in collusion, both among themselves and with OPEC, indicates a conscious decision to manipulate production levels to manage the repercussions of their overproduction, or as we describe it, unprofitable production.

A January 12, 2024 civil class action lawsuit underscores this point, naming major industry players such as Permian Resources Corp, Centennial Resource Development Inc., Chesapeake Energy Corporation, Continental Resources Inc., Diamondback Energy, Inc., EOG Resources, Inc., Hess Corporation, Occidental Petroleum Corporation, and Pioneer Natural Resources Company. 

NATURE OF ACTION

This action arises from Defendants’ conspiracy to coordinate, and ultimately constrain, domestic shale oil production, which has had the effect of fixing, raising, and maintaining the price of retail gasoline (gasoline purchased by consumers at gas stations) in and throughout the United States of America.

This lawsuit may have been a catalyst for subsequent Federal Trade Commission (FTC) investigations. On January 22, 2024, the question was raised by People, Ideas & Objects regarding the nature of producer misconduct—whether it was willful or merely negligent. It is now apparent that negligence can no longer be claimed; at the very least, willful misconduct must be considered.

Given the availability of alternative strategies in the market, such as those proposed by People, Ideas & Objects, the actions of these corporations suggest a deliberate choice to ignore business practices. This should compel Officers and Directors Liability Insurance providers to reconsider their coverage policies for these executives. Furthermore, any indemnification provided by these corporations should be deemed inappropriate by shareholders, given the gravity of the situation and the potential harm to the industry’s reputation. This situation raises significant ethical and financial concerns that could affect the industry for generations.

CPA Firms and Their Role in Industry Challenges

Accountability in the Face of Industry Turmoil: 

As we reflect on the tumultuous conditions facing the industry—characterized by a staggering $4.1 trillion revenue shortfall and profitability crises due to unsustainably low commodity prices—questions about the role of CPA firms become increasingly pertinent. The Preliminary Specification has long highlighted these critical issues since its inception in August 2012, yet there seems to be minimal actionable response from the audit sector.

Critical Audit Matters and Balance Sheet Evaluations: 

Over the past few years, CPA firms have seemingly skirted deeper discussions of financial health by employing Critical Audit Matter qualifications, which only serve to obscure further dialogue about balance sheet realities. This approach raises significant concerns about their evaluations of the complex and often inefficient Rube Goldberg-like ERP systems prevalent in the industry.

Transparency and Independence: 

The essential independence of audit firms must be scrutinized, particularly when industry reporting remains opaque and possibly influenced by internal directives from producers' executives. The pro forma compliance by auditors, often described colloquially as merely "ticking and bopping” through the process, does not suffice when the stakes are as high as they are—where investor confidence has been eroding for nearly a decade.

The Silence of Auditors: 

It is particularly telling when an industry faces profound difficulties, yet its auditors remain conspicuously silent on critical financial matters. This silence, especially concerning balance sheet issues, suggests a potential failure in the duty of auditors to provide the necessary scrutiny and oversight expected of them.

A Call for Reevaluation: 

The ongoing challenges and the material nature of these issues underscore the need for a thorough reevaluation of auditor roles and responsibilities within the industry. It's crucial that CPA firms step up to their mandate, ensuring transparency, independence, and diligence in their auditing practices to restore investor and now consumer confidence and contribute to a more stable and profitable industry framework. Investors 2015 actions should have precipitated these follow on actions from these firms by now.

Natural Gas Prices and Market Dynamics

Recent Price Increases and Strategic Implications: 

Last week's rise in natural gas prices to $2.198, spurred by a pipeline outage in the Permian Basin, should signal a critical reassessment for producers. This price movement is not merely a fluctuation but a clarion call for the cessation of unprofitable production, a concept championed and enabled only by the Preliminary Specification.

Storage and Market Rehabilitation: 

The natural gas market is burdened by an oversized storage capacity of 4 TCF, far exceeding the needs of continental producers. The historical maximum seasonal drawdown over the last five years was nearly 3 TCF. A strategic price maker approach might reveal up to 90 BCF of potential shut-in production, which could be reintroduced into the market almost immediately.

Misuse of Storage Facilities: 

Currently, producers are misusing storage facilities as a financial ATM to cover capitalized overhead costs. This misuse is symptomatic of a larger issue of cash flow management within the industry. The Preliminary Specification advocates for rigorous market discipline to ensure that only profitable production is pursued, demanding a level of accounting detail and objectivity not currently practiced by producers.

Debunking Market Myths:

The romanticized notion of markets as magical entities must be dispelled. Markets function to provide pricing information that should guide production decisions. If production costs exceed market prices, continuing production is economically irrational. This principle underpins the need for producers to adopt a more disciplined and informed approach to production decisions.

Market-Driven Production Discipline: 

The Preliminary Specification leverages capital markets to enforce production discipline. By aligning production with profitability, producers can maintain competitive standing and shareholder trust. Currently, many producers lack the necessary insights into the profitability of their operations due to inadequate ERP systems and accounting practices.

The Case for Shutting in Production: 

The incident at Kinder Morgan's NGPL Lockridge Lateral, which pushed the price last week at Waha spot price to negative $2.13, exemplifies the urgent need for production discipline. Producers must resist the impulse to increase production merely to fulfill short-term cash needs, as this behavior contributes to cyclical price crashes and long-term financial instability.

Pricing Conclusion:

The natural gas industry must transition from an era of speculative and undisciplined production to one governed by strategic, informed decision-making as outlined in the Preliminary Specification. This shift is essential not just for the sustainability of individual producers but for the health of the entire industry. Only through disciplined production aligned with market realities can the industry achieve “real” stable profitability and robust growth.

Disproving Long-Standing Misconceptions: 

People, Ideas & Objects have expressed frustration with certain actions by producers that led to recent Consent Orders. Two particular falsehoods have long been perpetuated within the context of the Preliminary Specification. These falsehoods concern the reasons our approach was initially deemed unsuitable for the industry, both of which have now been unequivocally discredited.

The Myth of an Inability to Shut-In Production: 

The first major misconception was the claim that wells could not be shut-in. This notion was dramatically disproven during the COVID-19 pandemic, a time when, under extraordinary circumstances, global producers shut in 25% of oil production capacity due to the plunge in oil prices to negative $37. This event clearly demonstrated that shutting in wells is not only possible but sometimes necessary for economic and operational reasons.

Clarifying the Impact of Shut-In Wells: 

The resilience of shut-in wells has been further evidenced by routine industry practices. Questions about potential damage from such actions were answered in the same way they are when wells are shut-in during hurricanes in the Gulf of Mexico, during OPEC production cuts, or when maintenance shutdowns occur in gas fields. The overwhelming response? No significant damage occurs, debunking the myth that shut-in wells suffer inevitable reservoir harm.

Revisiting Industry Standards and Practices: 

These call for a reassessment of industry standards and the dismissal of outdated beliefs that hinder adaptive and responsive strategies. The Preliminary Specification advocates for such strategic flexibility, emphasizing the importance of aligning operational decisions with economic realities. This approach not only preserves the integrity and profitability of oil and gas operations but also supports the industry’s ability to adapt to changing market dynamics efficiently.

It’s Collusion

Maximizing profitability through property by property evaluations using actual, detailed financial facts to determine profitability and therefore continue production, is business. Another aspect of business that those in oil & gas clearly don’t understand. The accusations leveled against us for years, that our method known as the Preliminary Specifications decentralized production models price maker strategy was collusion, was incorrect and made in bad faith. That bad faith showed itself last week when producers were found to be guilty of colluding by the Federal Trade Commission.

Conclusion

Producers should learn that the oil & gas commodities trade on a knife's edge. One incremental barrel too much or too little will begin to have a significant impact on the price. There are no alternatives to these commodities. Our dependency on oil & gas is critical to our way of life.  It supports and enables the most powerful economy in the world. Selecting who should go without the product is unacceptable and unnecessary. Yet the industry's officers and directors continue to allow it to spin out of control which will inevitably lead us to those shortages. They haven’t  been in control for many decades and their destruction was transparent enough to be hidden. It would seem that 2024 has stepped up the pace of discovery and volume. People, Ideas & Objects are handling a number of issues. $4.1 trillion in lost value. $45 billion in incremental losses each month. Audit firms that rubber stamp last year's annual report with the same verbiage that seeks to mitigate only their risk. Producers entering Consent Orders on the basis of FTC findings of collusion! Officers and Directors Liability Insurance and corporate indemnity should not be upheld for them if they continue on their path. 

In terms of natural gas pricing producers have to deal with cutting off the excess production going to storage. Until storage is better managed, natural gas prices will continue to be on a knife's edge as to what and when the direction they’re headed. What is needed is an adequate supply of gas to fulfill the needs of consumers. Selling natural gas to storage owners is a false market. It must stop by producers only producing profitable production. They knew better and were given every opportunity to do so. What they chose to do was to collude. 

Creative destruction is the process of renewal. We’re experiencing the destruction accelerating now. Progress is not linear and the same holds true for destruction. We’re spinning out of control faster each day. This is quite evident now by the inability of the officers and directors to function appropriately.

We're Going to Need a Bigger Cat

 

If you Google “pigeons” on this blog you will find the 14 times I’ve mentioned throwing the cat amongst the pigeons. It's as disruptive to the pigeons as one could imagine. Today we’re tossing another cat, however we’re going to need a bigger cat. The following is a follow-on discussion to the request I made to ChatGPT’s DALL:E to prepare the prior blog picture. That picture was a one sentence request such as this request was intended to be. Sometimes AI is all A and I.

Me: Let’s instead throw a mountain lion among the pigeons.

DALL:E That's quite a vivid metaphor! It sounds like you're suggesting introducing a disruptive element into a situation, which could really shake things up. What kind of scenario are you thinking about, or is this just a general observation?

Me: Disintermediation in an industry.

DALL:E Throwing a "mountain lion among the pigeons" by introducing disintermediation in an industry could indeed create significant upheaval. This often involves removing the middlemen or intermediaries in a market, allowing producers and consumers to interact more directly. This can lead to increased efficiency, lower costs, and more responsive services, but it can also disrupt traditional business models and challenge existing players. Which industry are you considering for disintermediation?

Me: Oil & gas 

DALL:E Disintermediating the oil and gas industry could have profound implications, as it's an area traditionally dominated by a complex network of intermediaries, including national and multinational corporations, brokers, and various regulatory bodies. Direct interactions between producers and consumers could potentially streamline operations and reduce costs, but it would require significant technological, regulatory, and logistical changes.

For instance, the rise of digital platforms and blockchain technology could make it feasible for transactions to be more transparent and direct, reducing the need for some traditional intermediaries. This could also help in managing the distribution of oil and gas more efficiently and possibly even opening the market to smaller producers or alternative energy sources more effectively.

Such a shift would likely face considerable resistance from established players who benefit from the current system. Moreover, regulatory frameworks would need to evolve to address these new business models and to ensure safety, environmental protection, and fair practices. 

What specific aspects of disintermediation are you most interested in exploring within this industry?

Me: I came here for the picture.

DALL:E Certainly! Could you describe the specific image you'd like me to create for you related to the oil and gas industry, or any other theme you have in mind?

Me: Tossing a mountain lion among the pigeons.

Former Pioneer CEO Scott Sheffield has been excluded from participation on ExxonMobil’s Board of Directors as part of a Consent Order to approve Pioneers acquisition by Exxon. The Federal Trade Commission (FTC) Consent Order was commented on by Exxon in the Wall Street Journal.

The FTC’s proposed consent order, in addition to barring Sheffield from the board, requires that for a period of five years, Exxon won’t add any Pioneer employee or director to its board, other than certain named individuals.

The FTC didn’t accuse Exxon of wrongdoing. 

“We learned about these allegations from the Federal Trade Commission,” an Exxon spokeswoman said. “They are entirely inconsistent with how we do business.”

Pioneer's response to the allegations.

The allegation is that Pioneer’s CEO Scott Sheffield, from the WSJ.

Federal regulators said Sheffield had exchanged hundreds of messages with OPEC representatives and officials discussing crude-market dynamics, pricing and output. They said that through “public statements, text messages, in-person meetings, WhatsApp conversations and other communications while at Pioneer, Sheffield sought to align oil production across the Permian Basin in West Texas and New Mexico with OPEC+.” OPEC+ is the wider group of oil producers that includes OPEC and several others led by Russia.

These are some of the facts of the case and what is not mentioned is the actions of the FTC may have been triggered by a lawsuit.

The lawsuit itself. 

Additional Facts

The arguments put forward as to the reason why People, Ideas & Objects Preliminary Specification could not be accepted by producers was:

1. It was collusion.
2. Shutting in production would damage the oil & gas formation.

Collusion

In retrospect we may be able to place the understanding of collusion by producers in the same category of how “free on board,” “putting cash in the ground” or “building balance sheets.” They understand business at such a basic level as to allow $4.1 trillion to slip out the back door while they are “muddling through” is fairly clear in terms of its actions, if you see it you'll generally know it’s collusion. What Schefield did was collusion in my opinion. 

Contrast that to what People, Ideas & Objects Preliminary Specifications decentralized production models price maker strategy does. And to allege its collusion places the allegation in the category of those that know nothing about business. What our ERP system does is provide an actual, factual, detailed, standardized and objective accounting of each property's financial performance. Which can not be performed today! Therefore if the property is capable of being produced profitably it produces, otherwise its shut-in. Allowing the producer to earn the highest level of corporate profits when losses on properties no longer dilute profitable properties. Reserves are saved for a period when they can be produced profitably and will not have to earn the incremental earnings to make up for the prior losses. When reserves are used as storage it cuts the producer's cost of production and storage. Removing the marginal production from the market allows the marginal price to be discovered. 

Why would a producer continue operations in unprofitable conditions? The recent Pioneer press release exemplifies a sense of entitlement, with claims that paint OPEC as the culprit of overproduction, driving down prices. However, it’s crucial to recognize that the dynamics of oil production are not solely influenced by OPEC, particularly when it is understood their production costs are as low as $3 / barrel.

• I was unaware that OPEC participated in natural gas which contrary to Pioneers claims, are the lowest prices in decades. Exclusively in North America! 
• It was the collective participation of the shale producers, however not Pioneer specifically, to run as quickly as possible to the new frontier of clean energy. Declaring “shale would never be commercially viable.” I don’t believe OPEC participated in the farce.
• I forget, what’s the amount of production that’s been curtailed by OPEC for the last number of years. Is it as high as 4 million barrels of oil / day?

It is these inconsistencies that are ripe throughout the Pioneer press release. It is disgusting and below the stature of a self proclaimed leader of an industry. Particularly one who is alleged to have conducted themselves in such a manner. Who have accused People, Ideas & Objects of proposing a solution that is collusive. And fundamentally destroyed oil & gas in North America. 

Shutting in Production

In my coverage over the last 19 years on this blog, I have often critiqued what I perceive as evasive maneuvers in the oil and gas industry—labeling many explanations as mere excuses, blaming or scapegoating. The recent Pioneer press release is a classic example, replete with blame-shifting that does little to address the core issues at hand. It's surprising to see an industry player actually take decisive action, as proactive measures are seldom seen in an industry culture typically characterized by a "muddle through" approach. Why does that action have to be collusion?

Let's consider the implications of operational decisions in scenarios of risk and maintenance. For instance, when a hurricane approaches the Gulf of Mexico, it is standard procedure to evacuate staff from production platforms, halting production for safety. Similarly, major production cuts, like Saudi Arabia's shutdown of 2 million barrels of oil equivalent per day, are strategic and without consequence to the reservoirs. Routine maintenance such as workovers also necessitate that production be temporarily halted.

Conclusion on Collusion: A Reflection on Pioneer’s Response

Over the past twelve years, People, Ideas & Objects has proposed the Preliminary Specification as a solution addressing various challenges within the oil and gas industry. This proposal is aimed at maximizing profitability by sharing overhead costs, similar to cloud computing models, and making such costs variable based on profitable production. Our model has demonstrated a potential to generate trillions of dollars in value over the next 25 years, ensuring the industry's profitability, energy independence, and longevity for future generations. Despite the merits, my advocacy has met with significant resistance.

Since the release of our Preliminary Research Report in August 2003, I have faced substantial professional and personal backlash. The industry's leadership, often more concerned with personal gains than collective advancement, has been dismissive of our ideas. This experience underscores a broader reluctance within the industry to adopt innovative frameworks that challenge the status quo.

But there’s more, that they would accuse me of proposing a solution that colludes, when it quite obviously asks the reasonable question of why would you produce at a loss for decades at a time? Can’t be answered even today. 

Moreover, accusations of collusion have been directed at our proposal, which fundamentally seeks to question and rectify the rationale behind sustained unprofitable production. Recent developments, such as Pioneer's engagement with major investors in 2019, highlight a reactive rather than proactive approach to the industry. Who claim now they were colluding because their investors demanded it of them as stated in Pioneers press release!

Further, in 2019, Mr. Sheffield and other senior Pioneer leaders visited with Pioneer’s major investors, including the largest pension fund managers in the U.S., and listened to their comments about the need for better capital discipline, which would allow Pioneer to generate competitive returns and free cash flow that could be used to improve liquidity and return cash back to shareholders via share buybacks and dividends, similar to other S&P 500 companies. Based on this investor feedback, Pioneer began discussing and initiating planned capital reinvestment and return of capital changes at investor conferences and on its earnings calls. These actions were solely motivated by Pioneer’s desire to meet investor expectations that the Company offer a competitive total return framework compared to other industries.

Or in other words “It’s not my fault, we only colluded because the investors were pressuring us.” The industry's reluctance to embrace responsible management and acknowledge external input is disheartening. Our proposal offers a path forward, yet it has been met with resistance and scapegoating. The ongoing challenges within the industry only reinforce the need for a paradigm shift towards more accountable and innovative management practices.

As the industry faces scrutiny and labels of malpractice, I remain committed to advocating for a solution that prioritizes innovation, dynamism, accountability and profitability. Our approach stands as a constructive alternative in a landscape often dominated by short-sighted and self-serving decisions.

These Are Not the Leaders We're Looking For, Part XXIV

 The fact of the matter is today’s oil & gas producer is tomorrow's log rolling down the hill. There is nothing being done to keep it in place, stopping it from rolling down the hill or caring if it does or doesn’t. Officers and directors are incapable of being motivated to act. What I saw as a situation that was untenable for the officers and directors is now in my opinion, terminal for the method of organization that we know of today. Consolidation of producers will be everything it’s planned and expected to be. Officers and directors can’t, won’t and will not do anything regarding the issues and opportunities they face.

People, Ideas & Objects basic assumption that shareholders need to turf the old team and its culture. Only to be replaced by the Preliminary Specifications may be the issue? Should we pursue our own direction and forget about the status quo? Offering oil & gas producer shareholders two options to choose whichever is the most viable and successful method of organization to proceed with. Providing the market with choices is the preferred route in everything we do in the Preliminary Specification. Why are we not doing so in terms of offering the choice to oil & gas investors and shareholders of the producer firms. Allowing them to mitigate their risks in terms of “what if” there is trouble down the road.

People, Ideas & Objects Have a Revelation!

We are therefore dropping the inherent assumption of ours that it is an either / or method of management and instead compete to provide the best alternative for the investors / shareholders. Allowing a choice to be made when the appropriate information is available to those that need to make the decision. I’ve certainly made the compelling argument for change and the means of the Preliminary Specification is sound and comprehensive. This past six month campaign has shown the viable nature of our value proposition and proves the overall concept. However, offering vaporware in the form of the Preliminary Specification is not enough to “throw the bums out.” 

We’re aware that overproduction of both commodities will continue as it has for over four decades. Other material issues are present and maturing where officers and directors inaction will be the result. On the other hand, the continuous demand for energy, coupled with a properly managed abundance of shale, presents an opportunity for North America's energy industry to truly realize its potential and fulfill its promise.

What Do We Have?

Everything and nothing. That would be the best way to summarize what People, Ideas & Objects have in the form of the Preliminary Specification, our user community and service provider organizations. It’s not an idea, it's a fully researched and comprehensive business model that consists of 14 modules built with Oracle Cloud ERP. Defining and supporting a dynamic, innovative, accountable and profitable oil & gas operation and greater economic infrastructure. Replacing the industry culture to one of preservation, performance and profitability.

People, Ideas & Objects have become better known for our extracurricular activities than we have been for our organization or product. We need to change this. Producers may now understand that shutting-in production is the common sense approach to the issues they’re presented with. This is only after decades of lying about it and vilifying People, Ideas & Objects that it wasn’t possible. Just as it had been for decades before that “profits didn’t matter, it was cash flow.” In 2015 they’ve caught the religion regarding profitability from their investors' demands, finally. Yet the implementation of those strategies and plans are yet to be even spoken. As we may find in a decade from now when officers and directors are mouthing the chant of “profitability, shutting-in production” and other invisible solutions they’re working on. 

The one takeaway should be the timeliness and accuracy of the Preliminary Specification in terms of meeting the industry's needs. Decades ago we’ve been able to accurately determine the results of where the industry culture was taking us. Its implications were accurately predicted in our trillion dollar Value Proposition as detailed as early as October 31, 2014. We understand the source of the issues and their resolution, the magnitude of the damage and destruction that it has done and will continue to do.

Changes 

In terms of the Preliminary Specification, the configuration and structure of our organization, with our user community and their service providers we see no changes at this time. It’s possible that I’m unable to fully consider the implications from this change as to how we operate in the oil & gas marketplace. I’m sure we’ll have to make changes here and there. We’ll take a closer look at any if we come across them and ensure that they do not disrupt the model’s implementation or performance. 

Conclusion

It was People, Ideas & Objects pursuit to provide a solution to the issues in the North American oil & gas marketplace with the Preliminary Specification. What we believed to be a material and consequential benefit to the health and prosperity of all those involved in the greater oil & gas economy. It was with that assumption that we began with our either / or choice of defining the alternatives to oil & gas investors. This was not an “our way or the highway” proposition other than a means to stop the hemorrhaging as quickly as possible. We understand now the unreasonable perspective of that position and now offer a competitive offering to determine which level of performance is the desired choice of the investors to proceed with. 

The Preliminary Specifications value proposition has been verified through our 2023 - 2024 campaign. The trillions of dollars in unrealized revenues from overproduction of commodities subject to price maker economic principles has more or less destroyed the entire commercial operations of the industry and its associated tertiary industries. The inherent value of the collective oil & gas producers is negative as it takes cash to continue operations. Performance levels have atrophied to the bottom quartile. The faith, trust and goodwill in the oil & gas producers themselves is also negative from all corners of their domain of operations. Innovation, initiative and caring about anything is comatose and on life support. The ability to make any change will be met with irresistible force that will consume the individual who tries. The latter fact proven through People, Ideas & Objects 34 years of persistence to increase profitability and performance. 

The ridiculous nature of People, Ideas & Objects budget expectations for development of the Preliminary Specification will remain the ridiculous nature of our budget expectations for development of the Preliminary Specification. The block chain method with our Profitable Production Rights also remains. It’s my opinion that proven trillion dollar value propositions will generate billion dollar operations for those who solve them. What is common sense today will be unable to be implemented in the oil & gas industry on a status quo basis. Secondly the issue of Intellectual Property is now on the table. Therefore, the $45 billion revenue losses on natural gas alone will continue for each month. If there is no sense of urgency regarding that loss, and possibly the same on oil, then there is no need to approach the Preliminary Specifications development. 

Postscript

People, Ideas & Objects are pleased to toss another "cat among the pigeons" for everyone's entertainment pleasure.

Critical Audit Matters

For many years the standard audit opinion has included a clarification of the Critical Audit Matters regarding the recording of producer petroleum reserves as property, plant and equipment. I personally believed this was inadequate to fully capture the scale of the issue and the materiality to each and every producer in the industry.  While audit firms correctly identify these matters, their repetitive nature over the years has turned them into boilerplate content that allows audit firms to bypass a thorough evaluation of the "Consolidated Balance Sheets."

In light of recent discussions initiated by People, Ideas & Objects during our six-month campaign on natural gas prices in North America and the misunderstood dynamics of the LNG market, these matters have transcended their traditional audit boundaries. They now demand scrutiny of governance practices and the management of firm assets in ways that genuinely serve shareholder interests. When we consider the staggering $4.1 trillion revenue gap we've identified—an issue far beyond mere procedural audit checks—natural gas clearly transcends its previous label as a mere by-product, elevating its status to more than just a Critical Audit Matter. (Whereas natural gas revenues realized for the period were $3.253 trillion.) I would question whether the audit firms are aware of the ongoing conflict between producers and their investors, particularly how this has left producers capital structures unsupported since 2015.

Given the drastic collapse in natural gas pricing since July 2007, where the historical heating value ratio of six to one against oil has disastrously widened to fifty to one in 2024, the collective inaction of producer officers and directors is alarming. $4.1 trillion for the period in question should not be overlooked by audit firms concerned with reserve valuation methods. Particularly when our calculations show the differential is producing over $45 billion per month. People, Ideas & Objects have argued that producers have ceased to use accounting as a measurement of performance. And are using reserves valuation as a means for accounting to value the company. Wholly inconsistent with the principles of basic accounting. This misuse of basic accounting principles is catastrophic when those reserves are subsequently destroyed as we’ve detailed here. Where it will take over 7 volumes of actual profitable natural gas production, unknown if that would ever occur under these administrations, to make up for the loss incurred by one volume of natural gas sold today at fifty to one… This is how I classify wasteful administration of assets.

Since investors halted further funding in 2015, LNG initiatives began in 2016, viable alternative solutions in the form of the Preliminary Specification have been available since 2012, yet all we seem to encounter is a pervasive "muddle through" approach. The assurance provided by audit firms that their procedures assess risks of material misstatement of the consolidated financial statements, whether due to error or fraud, appears narrowly focused. These firms successfully pinpoint minor discrepancies while overlooking systemic mis valuations that lead to annual, industry wide, multi-billion dollar losses.

These Are Not the Leaders We're Looking For, Part XXIII

 People, Ideas & Objects are wrapping up our six-month campaign aimed at instigating leadership changes within the oil & gas industry. As we summarize the key developments and discussions from this period, last week we addressed significant financial challenges in the LNG export market and the persistent decline in natural gas prices over the past 17 years leading to the $4.1 trillion revenue hole. We highlighted the missed opportunities and the ongoing issue of overproduction affecting both oil and gas commodities. Today, we shift focus to qualitative aspects, pinpointing the inaction and adherence to the status quo by officers and directors. 

The prevalent "muddle through" approach has crippled their ability to take initiative, resulting in a passive stance where value decays under their watch—a responsibility they have failed to uphold despite the clear mandate to secure and enhance it. This passivity has become a defining element of their culture, especially evident since investors withdrew funding nine years ago.

Campaign topics we’ll discuss:

• Rube Goldberg ERP systems.
• Comparing and Contrasting Cultures. 
• Rethinking Production Strategies.
• Which industry looks interesting in 2025?
• People, Ideas & Objects “Ambitious Deadlines.”

Rube Goldberg ERP Systems

Over the past 34 years, People, Ideas & Objects faced challenges, as have our competitors in the ERP system market. Producer officers and directors have historically viewed investment in ERP systems as detrimental to their preferred level of non-accountability. It’s not my intention to diminish my competitors or their products; they themselves would likely admit that with adequate funding, much more could be achieved.

The core issue I want to address here is efficiency. The Preliminary Specification incorporates Professor Paul Romer’s theory of non-rival costs, advocating for the sharing of redundant administrative and accounting costs that each producer incurs by maintaining their unique ERP systems in-house. Instead, we propose replacing these with our Cloud Administration & Accounting for Oil & Gas software and service, managed by People, Ideas & Objects along with our user community and their service provider organizations, on an industry-wide scope and scale.

If the current directors maintain their "muddle through" approach, Rube Goldberg's legacy will endure, constraining the industry’s vision and capability to just the immediate problems of tomorrow morning. Therefore, these systems suffice to sustain the performance level officers and directors have come to expect. Yet, as we questioned back in August 2003, isn't there a better way?

I want to reference a video featuring Oracle founder Larry Ellison discussing his healthcare initiatives, where he touches upon "Musk’s Law"—the necessity of addressing the entire ecosystem to effectively solve complex problems. In the video, Ellison explains that unlike competitors who may focus on automating just one part of the system, Oracle aims to automate the entire healthcare spectrum.

Starting at 52:15

Ellison states “Musks Law is that you have to do the whole ecosystem.”

Starting at 53:45 to 56:25

Asked how much of the application scope (health care) Oracle was going to approach, Ellison responded “All of it, if you don’t do all of it… (competitors) they didn’t apply “Musks Law” I don’t think they understood that the scope of the problem, that all these things to make this work you have to automate all these pieces. They never looked at it that way, instead they looked at it as they would automate this part of it. Epic’s a great company but they automate hospitals… The systems you build have to have the scope but they (Epic) don’t work with the payer side, not the public health side, not the clinical trial side, none of that. All those things are interconnected and we have to connect the dots.

Similarly, the Preliminary Specification is designed to comprehensively address the needs of the greater North American oil & gas economy, following the principles of "Musk’s Law." Without this holistic approach, individual producer firms end up spending excessive time and resources on piecemeal solutions. Musk, Ellison, and People, Ideas & Objects all advocate for this integrative perspective, though it seems we’ve yet to convince producers of the merit in focusing on profitability—the only real source of sustainable financial resources.

Comparing and Contrasting Cultures

Last week, EQT Corp. made headlines by announcing additional production curtailments for May 2024, which notably boosted their stock price in a market where natural gas prices had fallen by as much as 10% that day. This move by EQT was generally perceived positively by the oil & gas investment community, suggesting a shift towards more prudent business practices in the natural gas sector.

However, what we at People, Ideas & Objects have observed is that these shifts in position are typically short-lived. The industry culture quickly reverts to the status quo, and any new lessons or positive changes, like those demonstrated by EQT, are soon forgotten. This pattern has been a consistent theme throughout our 34-year engagement with the industry—a journey better described as an existence rather than progress.

This recurring scenario underscores why we staunchly advocate for replacing the prevailing industry culture with the seven Organizational Constructs of the Preliminary Specification. Only an ERP system that can fundamentally transform and then continuously define and support this new culture will ensure the lasting organizational change necessary for sustained profitability. The fleeting nature of EQT’s positive actions, particularly so close to their Annual General Meeting, starkly highlights the broader industry's resistance to genuine change and underscores the minimal impact of People, Ideas & Objects efforts thus far. 

Rethinking Production Strategies

We’ve learned that most of the natural gas produced in the Permian for the past few months has had negative prices. A result of the cultural impact of thinking that associated gas is a byproduct. Byproducts don’t create $4.1 trillion revenue holes. I’m not aware of the solution to the problem and offer the Preliminary Specification to identify where producers are losing money and ensuring that by effective and active management they will realize the most profitable means of oil & gas operations. Producers producing everything they have all the time is not a strategy that appears to be working. To do otherwise is resisted by a cultural persistence that must be uprooted. 

Our campaign highlighted the extensive financial damage wrought by natural gas prices as low as $1.70. If we accept that a 10% profitable price for natural gas should be priced at 6 to 1 relative to oil, this would imply a just natural gas price of $13.94 today, considering a cost structure of $12.54 and a profit margin of $1.40. To recover from losses incurred by selling at $1.70, future profitable production would need to compensate for the revenue shortfall of $10.84 per unit—equivalent to 7.74 times the current volume to make up the difference. Is that why petroleum reserves are pursued?

A price of $13.94 for natural gas is justifiable based on historical pricing models and the predominantly capital-intensive nature of the industry. The capital that has been accumulated by “putting cash in the ground” and “building balance sheets.” Unrealized capital costs of past production is what we’ve described them as. This realization has sparked both shock and dismay at the sheer waste of 764 TCF of natural gas reserves and $4.1 trillion in revenue. Now managed by an industry that can’t source any of the resources necessary to approach the most challenging future in its history. While its officers and directors blame Biden, the weather or restate (again) their commitment to capital discipline. My favorite excuse is the “We’re profitable at” series of $70, $60, $50 no $30 during oil price declines. Invoking their greatest innovation, the remake of historical accounting by collapsing their capital costs of production.

Which Industry Looks Interesting in 2025?

Declarations that shale would never be commercial. Preceded the shift in focus to other industries such as clean energy. All under the pretext of shareholder demands. Demands that arose overnight and were approached by officers and directors instantly. Yet nine years later not a word has been spoken about shareholders demands for greater profitability and accountability. 

This precedent has been established, it's been accepted, no one lost their job for recommending oil & gas revenues be diverted to clean energy. What industry will capture the interests of the officers and directors in 2025? What has to be the greatest betrayal of good governance is now acceptable?

People, Ideas & Objects “Ambitious Deadlines” 

No one is under any illusion about our ability to enforce deadlines or drive action in the oil & gas industry today. Each day, we encounter resistance from industry figures who should have taken action long ago. Setting these deadlines is not about expecting change but demonstrating the ongoing inaction. It's become a method to underscore their inertia, reminding us that none of the North American producers have reached out during this or any other campaign. This stance might seem like rubbing salt in our own wounds, but it serves a purpose. In the future, when these officers and directors finally recognize the urgency of these issues and start to panic, we'll be ready to point out our longstanding preparedness. 

Conclusion

My analysis has outlined a stark portrayal of the prevailing status quo within the oil and gas industry—an industry seemingly devoid of any residual value that could serve as leverage in confronting its most daunting challenges ahead. The leadership's governance raises serious questions about their integrity, with dwindling faith, trust, and goodwill from all quarters. Investors, service industries, and stakeholders alike feel profoundly betrayed by the leadership's pervasive and well-compensated approach of merely "muddling through."

The extent of the damage and destruction is both comprehensive and complete, necessitating a fundamental rebuild of the industry from the ground up. This necessity echoes the sentiment I first expressed in an October 17, 2008, blog post titled "British PM Gordon Brown, Gets It." The adoption of the Preliminary Specification isn’t about promoting it as the superior technology for its own sake. Rather, it’s clear that the persistent business issues we face today are the same as those identified back then, and they can only be addressed through a significant cultural transformation. This transformation is essential not only to alter the industry's trajectory but also to repair the extensive damage inflicted by its current leaders. The need for such a profound overhaul is undeniable.

These Are Not the Leaders We're Looking For, Part XXII

 As People, Ideas & Objects conclude our campaign and as producer firms begin to disclose their First Quarter 2024 results alongside 2023 Annual Reports and Annual General Meetings, we reflect on what has been accomplished during our six-month discourse. I believe we have surpassed our initial goals. The issue of producer performance has been a critical concern within the investment community since 2015. Investors are increasingly frustrated with the obstinance of officers and directors who fail to address the pressing issues and opportunities within the industry. There is a growing demand for explanations as to why these leaders allow such extensive damage and destruction to persist.

From the officers and directors, we have seen nothing but a culture steeped in excuse-making, blame-shifting, and as we describe, viable scapegoating. Apart from issuing dubious financial statements—which few find credible—no substantial changes have been made to their accounting practices. Their defense often hinges on being in "compliance with the SEC," a claim which, while technically accurate, is creatively interpreted to justify their expansive financial tactics. They use the SEC's Ceiling Test not as a guideline, but as a justification for liberal spending, seemingly unaware that operating well below the reserve value is both acceptable and indicative of a more competitive and financially prudent producer. Such an approach would ideally see the retirement of property, plant, and equipment accounts through actual profits earned, rather than through creative accounting practices.

This accounting practice being the source of the overproduction issue and systemic lack of production discipline. When assets are overvalued, profits are equally over reported, attracting inordinate attention from investors, leading to over investment, which produces the overproduction, causing the collapse of oil & gas prices that are subject to the principles of price makers. Contrast this business fact to the myopic focus on “building balance sheets.”

Our Campaigns Discussion

LNG

In October 2023, we initiated a discussion highlighting a fundamental misunderstanding by oil & gas officers and directors regarding business operations. Their limited grasp on business dynamics became clear when I uncovered that natural gas was being bought by industry outsiders at Henry Hub prices, liquefied, and then shipped overseas to fetch returns far exceeding the original gas and shipping costs. Despite the vocal support for LNG opportunities by producers, it was evident that none had realized they could directly contract LNG facilities to liquefy the gas and ship it "free on board" to international buyers. This type of transaction is commonplace across various global industries, yet it seemed to elude North American oil & gas producers entirely.

None of the subsequent contracts that were executed in the fourth quarter of 2023 and first quarter of 2024 were with existing LNG facilities. They were not with existing LNG facilities that had been approved by their owners to be built. And many had not received regulatory approval to be built. Producers had been shut out of the existing contracts and were having to move well upstream into the future to get a foothold into the “LNG opportunity.” To add insult to injury was the volume of activity in terms of seeking to contract for these future LNG facilities. Created a kerfuffle in Washington D.C. and President Biden suspended the approval of all future LNG facilities. Rendering these contracts moot. This will probably last for the remainder of his time in office, however long that may be.

Throughout the past seventeen years People, Ideas & Objects have written about the decline in natural gas prices from its heating value equivalent of 6 to 1 to trade at over 50 to 1 to the price of oil. Active rehabilitation of this market is needed to remedy this damage and is within the domain of the producers as they’re incorrect in assuming the commodity trades as a price taker. It is in fact a price maker. The development of LNG since 2016 would have been an appropriate time and a substantial growing market in which to begin that price rehabilitation. LNG volumes today are now over 12% of the natural gas marketplace and will be expanding. 

Officers and directors did not realize this opportunity. The opportunity has now passed them by and is no longer available to them. The only choice they have to make the North American natural gas market realize the appropriate 6 to 1 heating value based price is the Preliminary Specification. Establishing a fair value natural gas price in North America to eliminate the profitability of those outside the industry from continuing to benefit from officers and directors' naive sloth.

50 to 1 Natural Gas Pricing

Since July 2007 natural gas producer officers and directors have set out to systemically destroy the natural gas price in North America. As I noted in the previous section, the amount of weakness in the natural gas price requires years of active rehabilitation through the Preliminary Specification decentralized production models price maker strategy. A production discipline based on allocating production to those properties that are profitable. If a property can show through our standard and objective accounting and ERP system to produce a profit, it will produce. Otherwise it will be shut-in to preserve the reserves for a time when they can be produced profitably, the producer will maximize their profitability when profits are no longer eroded by other property losses, keeping the commodity as reserves instead of incurring the costs of production and storage of the product, reserves will no longer have to earn the additional costs of any prior losses, marginal prices for all of the producers properties across North America, commodity markets find the marginal cost when unprofitable production is removed, while shut-in producers will innovatively work the property back to profitability. Profitability is the only fair and reasonable basis of production allocation. If it’s profitable based on standard and objective accounting from the Preliminary Specification, it produces.  

We calculated and documented the impact of this pricing erosion over the course of time. From July 2007 to December 2023 the amount of revenue loss realized by North American producers stands at $4.1 trillion! These calculations are purely on the basis of the loss of pricing power due to overproduction, or unprofitable production as we describe it. The overproduction that caused the pricing to separate from the six units of natural gas heating value equivalent to one barrel of oil. We used the oil prices realized during the period. Calculated what a 6 to 1 price would be. Determined the differential between the actual prices realized, and applied the price differential to Canadian, U.S. shale and U.S. conventional production volumes. 

These are legitimate revenues that should have been earned by North American producers. In stating that, I realized that I would be able to determine the approximate revenues earned by natural gas producers during the period. Those total $3.253 trillion. Less than what they gave up. There is also the fact that nothing has been done to accept this fact, to resolve any aspect of it or to move towards any action that People, Ideas & Objects can see. We’ve stated repeatedly the amount being incurred each month in 2024 totals in excess of $45 billion / month. The only thing we have seen is for some producers to undertake defensive legal postures. 

Conclusion

What should have been done is clear to all those other than officers and directors. The amount of money that is involved here is inherently intuitive. The excess levels of capital assets recorded in property, plant and equipment may exceed $1.0 trillion alone. Capital expenditures that could have been realized through more effective cash management instead of chronic, annual shareholder dilution. The service industry would have been paid full value for the work completed. They would be well capitalized and satisfied they could approach the demanding future we all face in the next 25 years. Today they have been hollowed out of all value, faith and goodwill by the producer officers and directors through inconsiderate and pious actions over the course of many decades. Was the $4.1 trillion dollars needed by the greater oil & gas economy. Yes, most definitely. The only place it isn’t needed is in the area of creative executive compensation. Officers and directors are more than satisfied with their take so far. It's why they fight for the status quo!

These Are Not the Leaders We're Looking For, Part XXI

So Many Questions

Why would anyone choose to produce oil & gas at a loss? How could such actions be justified? Given its limited supply and critical role in our economy and standard of living, shouldn't oil & gas production always be profitable? Each barrel represents 10 to 25 thousand man-hours of labor, underscoring its immense value. Our reliance on these resources is not only crucial for maintaining our standard of living but might soon become a symbol of our independence. How should this vital resource be managed? What is available to sustain oil & gas for the long term other than profitability? The sector is too significant to continue relying on investor subsidies. Have investors been misled by officers and directors to cover the capital costs of consumer consumption? Is that a flawed business model?

Introduction

People, Ideas & Objects is committed to transforming the oil & gas culture to focus on preservation, performance, and profitability. This is spearheaded through our Preliminary Specifications ERP software, designed to address significant industry challenges, notably the lack of production discipline. This issue has led to trillions in revenue losses since the oil price collapse of July 1986—a problem persisting nearly four decades without effective mitigation. The conflict between officers and directors and People, Ideas & Objects is not just about these issues; it is that our software disintermediates oil & gas producers and therefore attracts the defensive posture we see in their leadership. 

Performance today has become the issue. It has been too long and broad of a systemic drain of financial resources into supporting the production of oil & gas. The net present value of the producers is negative as it demands cash to produce. Subsidized for decades by investors, producers have become slack in their internal expectations. Spending money is profitable according to producers' accounting methods, therefore those with the authority to do so are able to achieve any expected performance criteria. Over four decades this has eroded the expectations overall to a low level of overall industry performance. 

Faith, trust and goodwill within the industry towards the officers and directors is at best abysmal. The service industry will do nothing to develop itself after the financial abuse applied to it by producer officers and directors. It’s a simple case of fool me once, shame on you, they’re not going to be fooled again. In 2015 investors stopped funding the endless demands for capital. Most damning of all is the leadership declaring the frontier of oil & gas, shale to be uncommercial. To venture off into new industries with oil & gas revenues in hand. Some people may go as far as to call that theft, a sentiment with few detractors. Yet somehow that leadership remains today with a new ultimatum.

The inability to change and address its issues does not exist in the current business model. We pointed out at least a decade ago that the demands for cash by producers was self-inflicted. On average producers capitalize 85% of their overhead to avoid identifying and recognizing these out of control costs. However, in the process were only retiring these costs over the many decades as part of the annual depletion. Hence, leaving them with no cash float to cover the overhead costs each month. Every month becomes a renewed search for new sources of cash to fund the current month's overhead cost for the next 10 to 20 years until they’re fully recognized. Why would they do this? Why has this not changed since we first raised the point over a decade ago? Is overhead so out of control that to specify them would severely diminish their performance? Yes. Are these annual overhead items incidental, or immaterial, in comparison to the cumulative cost of drilling and completion? Why has this practice persisted for four decades without change? Is it because specifying true overhead costs could dramatically expose the inefficiencies or other activities in their operations. 

Choices

At this juncture, officers and directors face several strategic options. They can either maintain the status quo or initiate a cultural shift towards the preservation, performance, and profitability framework outlined in the Preliminary Specification. A third potential route would directly tackle profitability issues; however, despite our ongoing discourse since 2005, no substantive actions have been taken in that direction. This lack of progress suggests a fundamental incapacity for change, perpetuating a future that seems destined to follow their longstanding approach of merely "muddling through."

Last Week…

We noted how W&T Offshore had expanded their board of directors and filled the spot with the following candidate.

Mr. Buchanan has served in various legal roles as Chief Legal Officer/General Counsel/Corporate Secretary at several S&P 500 companies. Mr. Buchanan most recently served at ExxonMobil Corporation (“Exxon”) as an Assistant General Counsel from February 2023 to March 2024, where his responsibilities included handling corporate, regulatory reporting, compliance, and securities matters for the holding company and its subsidiaries. He also served as the Secretary to the Exxon Audit Committee and the Finance Committee.

Are there unfolding scenarios in the oil & gas industry that remain off our radar? Does our interpretation that these companies are shifting towards a defensive legal strategy in anticipation of shareholder litigation hold water? Are there alternative strategies that could help break the deadlock? Since launching this campaign on October 11, 2023, no producer has reached out, and the industry seems to echo a 'Borg-like' mindset, uniformly adopting the latest trends—whether it's heavy oil, shale, or the more recent shift to clean energy. This behavior, reminiscent of the Keystone Cops' chaotic pursuits, should not be dismissed as merely coincidental. Our observations suggest such patterns are indicative of deeper systemic issues, leading us to consider them in our ongoing analysis. There exists a significant legal risk for producers, officers, and directors, which forms the basis of our current analytical approach.

The Threat 

By adopting a defensive legal stance, producer officers and directors acknowledge the risks they face, which also suggests an admission of guilt. In such cases, they are compelled to remedy the issues plaguing their firms. Given the severity and duration of these issues, as well as the havoc wreaked by their past actions in the ERP marketplace, the Preliminary Specification emerges as the sole viable solution. Failure to fulfill their fiduciary duties now could jeopardize their Officers and Directors Liability Insurance, though they may have other indemnity measures in place. Either way shareholders are paying that freight.

This defensive legal posture seems to signal a threat from the officers and directors: accept the current situation, or they’ll abandon ship. 

Destruction, like progress, is non-linear. As the industry spirals further into disaster, the entrenched resistance to change by officers and directors over the past decades is likely to persist until their positions become unsustainable. At that point, we may witness these individuals seeking opportunities elsewhere, especially as the productive capacity of North American oil & gas begins its rapid decline. This tendency to flee when situations deteriorate is not new—it echoes patterns observed since the Great Depression, evolving over time. Recently, we discussed bankruptcy as a potential escape route for these leaders. However, the decline in production deliverability renders their ability to reverse the situation nearly impossible. Consider the analogy of a log rolling downhill: the best time to stop it is before it starts. After that, the only sensible action is to step aside. Why would anyone attempt to return the log to its original place?

People, Ideas & Object Perspective

The actions and statements of producer officers and directors present a clear message: it's either maintain the status quo or proceed without them. They are unlikely to fund the Preliminary Specification due to the admission of guilt it would imply. Currently, their stance is "my way or the highway," setting an ultimatum for shareholders and investors regarding the challenge to their four-decade legacy of fiduciary oversight—noticeably, without mentioning their performance.

The Preliminary Specification is not their chosen path, nor is the pursuit of profitable operations. Instead, they prefer to wield the threat of litigation without proposing any solutions, suggesting that if their approach is not accepted, they might simply walk away.

Conclusion

Are we to be held hostage to the stark choice of enduring the status quo or facing their departure? Are officers and directors effectively positioning themselves above the eject button, ready to press it if they don't get their way? They are obligated by fiduciary duty to avoid such reckless behavior. If you believe that such duty guides their actions, then one must question whether the $4 trillion in lost natural gas revenues from July 2007 to December 2023 took them by surprise. If so, why have they not addressed the ongoing losses of $40 billion per month?

We must consider whether accepting their ultimatum and leaving them in charge will lead to any improvement. The departure of current leadership could be challenging to overcome. However, if they remain and the industry continues its rapid decline only for them to eventually exit, what have we gained? Would we not be in a worse position, having allowed further degradation under their watch? These are the questions we need to confront as we contemplate the future direction of the industry. 

These Are Not the Leaders We're Looking For, Part XX

 People, Ideas & Objects are acutely aware of the challenges involved in effecting change within the industry. Our prolonged efforts have made us keenly aware of the deep-seated animosity that exists between us and the industry's leaders. Championing solutions and prioritizing profitability often renders one an outsider. I recently came across a press release from W&T Offshore that seems indicative of the stance its officers and directors are taking in response to our ongoing initiatives. Despite the expectation that they would address these critical issues to mitigate personal risks, such actions appear to be too much to hope for. On April 11, 2024, W&T Offshore announced an expansion of their board to six members, nominating Mr. Buchanan who has served in significant legal capacities at various S&P 500 companies, including a recent role at ExxonMobil Corporation. 

Mr. Buchanan has served in various legal roles as Chief Legal Officer/General Counsel/Corporate Secretary at several S&P 500 companies. Mr. Buchanan most recently served at ExxonMobil Corporation (“Exxon”) as an Assistant General Counsel from February 2023 to March 2024, where his responsibilities included handling corporate, regulatory reporting, compliance, and securities matters for the holding company and its subsidiaries. He also served as the Secretary to the Exxon Audit Committee and the Finance Committee.

This move by W&T Offshore could suggest an anticipation of legal challenges emanating from the Audit and Finance Committees. It seems they are preparing to defend against potential legal actions from shareholders and investors—a stark contrast to the proactive problem-solving approaches we advocate at People, Ideas & Objects. Our focus on addressing issues directly and enhancing profitability remains controversial to those who, paradoxically, would benefit most from such a focus.

Oil & Gas Doesn’t Need Profits?

Profitable organizations operating in competitive industries are not for the faint of heart. Organizational performance can be classified into a variety of business and government models. Government has the difficult task of motivating employees towards common goals and objectives, doing so with tight budgets across large domains. Government level performance is expected to be incapable of undertaking many certain tasks. In business there are utilities such as pipelines which are regulated companies. Although they trade on the stock exchanges they are operated under defined business models such as cost / plus where they are deemed quasi-government. And profitable operations where the organization is expected to earn its way by living by its wits. More or less. 

Oil & gas has not operated under any of these usual defined business models as I’ve summarized them. Theirs was simply spending a constant stream of investor cash. Officers and directors misinterpretation of the SEC Full Cost and Ceiling Test requirements were what aided the continuation of this business model well beyond what common sense would dictate. A highly capital intensive industry such as oil & gas will generate substantial cash flow that will sustain the organization through its boom / bust cycles. Limiting its exposure to real life consequences of their actions. Oil & gas as a primary industry slowed the flow of cash flow to the tertiary industries during times of difficulty. Life was easy and life was good for the producers’ officers and directors. Others need not apply. 

What Could Go Wrong?

Producers often misinterpret SEC regulations, viewing the Ceiling Test not merely as a requirement but as a target —to align their reported asset values as closely as possible with the independently evaluated petroleum reserves. In pursuit of this, they began capitalizing various costs including interest and overhead, aiming to "build their balance sheets" and "put cash in the ground." They did not realize that by capitalizing these costs and holding them on the balance sheet for decades, these expenses were never recognized as costs on the income statement nor deducted from profits. Consequently, profits were consistently overstated, mirroring the overvaluation of their assets. Property, plant, and equipment represent an exceedingly high percentage of all producers' asset values. A retroactive adjustment to deplete at least an additional 65% from property, plant, and equipment would provide a more accurate representation of a producer’s financial performance and health.

In fact, the most profitable oil & gas producer would be one that reports a balance of property, plant, and equipment close to zero, indicating they had earned more than they spent. The practices of "building balance sheets" and "putting cash in the ground" have not been adopted as standard accounting principles in any industry due to their obvious impracticality and the mockery they invite. These practices have led to numerous unintended consequences, including:

• Decision-making often revolves around whether spending will inflate the balance sheet size, rather than enhance real profitability.
• A culture has evolved where the mere authority to spend is seen as an indication of performance and profitability.
• Accounting practices have become distorted, focusing more on representing supposed value rather than accurately evaluating performance.

With such an entrenched culture perceived as successful, why would anyone consider adopting the Preliminary Specification? Running a profitable organization is challenging—it demands that every decision be critically analyzed and assessed based on actual facts, proven policies, and principles. Theories and innovations should undergo rigorous organizational and scientific testing to ensure their effectiveness. Decision-making should be based on more than just hearsay overheard at lunch.

Annual Meetings

The tranquil tone of today’s proxy statements, suggesting business as usual, starkly contrasts with the actual urgency of the situation. Although articulating future plans and strategies in writing can be challenging, offering a brief summary of topics for open discussion during the meeting could be a constructive and welcomed change. This is one of the rare opportunities for the company to openly communicate their intentions.

As producers venture into unrelated industries, shareholders are prompted to ratify nominees for each year's board of directors. The question arises: how have proxy statements become so entrenched in regulatory formality yet so devoid of substantial content? Meanwhile, the directors' decisions to branch out appear to be made with reckless disregard for their impact. How can oil & gas producers’ officers and directors, having once dismissed shale as uncommercial to chase after clean energy ventures without proper authorization, simply revert to shale exploration as if no errors were made? Their flip-flopping raises doubts about their commitment and strategic direction. Perhaps it’s time to suggest that they have lost their way and need assistance finding the exit.

Conclusion

The significant cultural shift outlined in the Preliminary Specification is essential to eradicate the unproductive and wasteful activities plaguing the oil & gas industry. The saying "the fish stinks from the head down" aptly describes the situation, with the officers and directors bearing primary responsibility for the current disarray. They possessed the authority to prevent these issues, were aware of the unfolding problems, and faced shareholders clamoring for change. Despite the availability of viable alternatives, they remained inactive. 

Immediate action is crucial to restore the industry's health and ensure its future prosperity. Those who had the authority and responsibility, yet chose inaction or failure, seemingly focused only on protecting their positions without regard to the industry's welfare. Therefore, it is now imperative to decide how, what, why, where, when, and by whom these issues will be resolved for the benefit of the shareholders, investors and all others.

These Are Not the Leaders We're Looking For, Part XIV

 For this last phase of our campaign People, Ideas & Objects will be focusing on a small number of producers who we feel should be sent a message of dissatisfaction from their investors and shareholders. Producers who have participated in the value destruction that we’ve been discussing. I’ve drawn up a short list of three that I think institutional investment groups can collectively put some pressure on to act to rectify what ails the industry. However, if other efforts are underway, we would not frown upon contributing.

The purpose is to establish People, Ideas & Objects with a foothold in the industry in terms of one or two companies that have paid their share of the costs of the Preliminary Specifications development and implementation. We believe with these financial resources in hand we can approach two areas that we are unable to at this time. 

• Begin the Preliminary Specifications software development process.
• Our first year is not a high cost year.
• Launch an aggressive marketing campaign to have the remainder of the industry participate.
• Initial participation establishes momentum, credibility and security to our Sales Commission program.
• Extending the program to a larger population of people.

What we need is the support of the investors that have more to gain than any other group. As we believe in our last post, the consolidation plan being pursued by producers today doesn’t necessarily include the specific needs of any stakeholder group outside of the officers and directors. What we have done is selected three producers that have certain characteristics that can make this far easier than it sounds. Our targets are large intermediate producers and for the reasons detailed below, we feel a need to fire a shot across their bow. Selection was done primarily for their high percentages of ownership by institutional investors. This eliminates the need for anyone to involve themselves in a proxy war that is futile and no one ever wins. However, if investors were to target one or two of the directors being nominated. Our recommendation would be the Chairperson of the Audit Committee. This could send the message that the status quo will no longer be tolerated. A message that would resonate across the industry.

The three producers selected are:

• Chesapeake Energy Corporation
• 102.86% Institutionally Owned. (Unknown how the factor was achieved.)
• 1st Quarter 2020 bankruptcy declared, eliminating shareholders, maintained, reinstated and rewarded the officers was the result. 
• Devon Energy Corporation
• 70.99% Institutionally Owned.
• EOG Resources Inc. 
• 92.0% Institutionally Owned.

The directors who are nominated can be voted for or against with a 50% majority. With the large percentage of Institutional Ownership these appear to be a possibility and efficiently within reason. A legal sticking point is the by-laws and regulations of the corporation. A majority vote against a director may not carry the weight we anticipate in this action. We feel this is irrelevant. For a director to continue without the support of the shareholders is possible, however, both directors and corporations need to concern themselves with the vote. 

Focusing our energy in this process may be effective and also could fail. We have about a month in almost all cases before the Annual General Meetings. This does not preclude institutional investors organizing themselves with respect to other producers. There are tangible and intangible benefits of doing so and we’ll detail some of these below. 

Investor Benefits

We anticipate these producer firms to fund their share of the Preliminary Specifications cost at the direction of their shareholder. People, Ideas & Objects Profitable Production Rights are the ownership rights that are earned for those who fund the development of the Preliminary Specification. Information regarding these can be sourced here. These Profitable Production Rights would be distributed to the institutional shareholders of these target producers. It will be in that way their motivation is aligned more closely with People, Ideas & Objects. 

We’ve recently heard natural gas “is a by-product” as a convenient excuse, method of blaming and viable scapegoat. Easily used at the drop of a hat by those that have no capacity to think, no culture involved in business or innovation but most of all no motivation or desire. 

European gas storage is higher than its ten year average. Two years into a war where natural gas supply has been a concern. With English Channel pipelines being destroyed and Ukraine being the primary source for Europe's access to Russian gas. It would appear that LNG shipments have had the effect of exporting North American producers' passion for overproduction. Which have now infected global markets with their chronic overproduction and pricing model.

And although negative $2.00 gas, as detailed in the OilPrice.com article, in the Permian is a tragedy. One amplified by the seasonal change to which storage will only now begin to fill. The real issue is the deterioration of the capacity and capabilities of not only oil & gas but also the greater oil & gas economic structure. The inability to conduct the level of operations necessary to maintain deliverability may soon be at hand. To suggest that consolidation will resolve this doesn’t deal with industry current leadership, its methods or culture. The inability to identify an issue and resolve anything is in question. Issuing press releases well after the fact is about all that they can do. Implementation is a foreign concept that officers and directors know nothing of. 

Determination of profitability was made long ago through the selection of the land, development of the appropriate adjoining properties, selection and interactions with partners, the engineering and geological work completed, the efficiency and know-how of what it takes to explore and produce oil & gas. To conduct the field operations in a competitive industry, where the capacities and capabilities are seriously diminished will only be done by those who have the idea that oil & gas exists in the minds of oil & gas men and women. This is the source of competitive advantage of the dynamic, innovative, accountable and profitable oil & gas producer we’re enabling with the Preliminary Specification. 

The Preliminary Specification uses the Joint Operating Committee as the key organizational construct. One of seven Organizational Constructs that define the culture of preservation, performance and profitability we’re rebuilding the industry upon. It is a standalone entity which eliminates the operator classification used today. That sources its engineering and earth science capacities and capabilities from the owners of the Joint Operating Committee and the market. These capabilities are focused on generating incremental asset value. The property's administrative and accounting is conducted by our user communities service providers who administer the property on a hyper-specialized, shared basis that is standardized and objective across the industry. When they are standardized and objective no producer will argue their evaluation of profitability was different than Y producers. Profitability would be the same no matter who owned the property in terms of a pure ownership classification. Only the overall profitability of the corporation, its generation of value and its holdings of Joint Operating Committees, its highly specialized engineering and geological capabilities, raw land and other intangible attributes such as who its partners are, will. Should the property not achieve profitability it can be shut-in until the time it can produce profitably. Either through innovation or increased prices.

Looking internally, People, Ideas & Objects have been able to make some changes to the methods we use to develop our software. Methods which increase our capacity and capabilities, increase our performance and cut substantially the time necessary to complete our development. When natural gas production is losing revenues on a heating value basis in the region of $40 billion / month, time is money. However, it should be noted officers and directors do not share our sense of urgency or concern regarding the identification of this being an issue, or that anything should or could be done about them. Suggesting “muddle through” to be the best option and “consolidation” to proceed. Do they deserve to have anything but this purge to be exercised against them? They have been there for too long, with no action taken, and even today an unwillingness to act, accept responsibility or identify a pertinent issue. Tell them to go.

In Summary

Producers will never pay People, Ideas & Objects as it implies guilt. Payment would amount to an admission of that guilt. You have a situation where the productive deliverability of both oil & gas may be beginning to decline and the cupboards are bare. There are no resources anywhere large or trusting enough in producers, officers and directors to even begin to approach the seriousness of the issue. Profitability is the only source of financial resources large enough to tackle the issues present in oil & gas. 

Conclusion 

Who will hold the officers and directors accountable if they continue to resist change today? A shift from the status quo cannot be achieved without first changing the ERP systems, decisions for which rest solely with the directors. 

Investors and shareholders are increasingly at risk under the continued governance of these officers and directors. The acceptance of the status quo has persisted for too long, leading to severe consequences. The value within the oil & gas sector and its associated industries has significantly diminished. Trust and confidence in leadership have eroded, and the capacity to conduct field operations is now just 25% of what it once was. Yet, officers and directors have taken no steps to rectify the problems they have caused. 

Too much patience has been exercised. If investors and shareholders still place their trust in the officers and directors, they will likely find themselves betrayed. The strategy of consolidation lacks support and transparency, and it's unclear why it is being pursued. These leaders have been given numerous opportunities over the past decades, yet they have consistently failed to substantiate their claims or justify their performance.

The oil & gas industry continues to grapple with overproduction, or unprofitable production as People, Ideas & Objects characterize it, driving prices down further. This issue is exacerbated as both oil and natural gas shale fields begin to experience industry-wide steep decline curves. This destructive cycle will persist as long as unprofitable production continues to flood the market no matter at what deliverability.

The current trend towards consolidation does not address these fundamental issues and contradicts the decentralization that the Internet enables. Why pursue consolidation unless it is to fail on a larger scale, possibly securing a more advantageous position for officers in impending bankruptcy proceedings? Who else could step in to manage these firms and initiate a fresh start with new relationships based on different assumptions? If not strategically planned, the prevailing "muddle through" mentality will continue to undermine any potential for future value.

The lack of a clear plan, visible benefits, or a strategy to remedy the destruction is alarming. This situation persists despite investor dissatisfaction, the availability of alternative ERP systems like the Preliminary Specification, and the ongoing substantial financial losses in natural gas value. The leadership's actions—or lack thereof—demonstrate a disregard for both the industry's health and investor interests.

These Are Not the Leaders We're Looking For, Part XVIII

 With this post we present a scenario of continued denial of People, Ideas & Objects Preliminary Specification by producer officers and directors. How their denial may subsequently be perceived and its implications to any Officers and Directors Insurance coverage or other form of indemnity they may have secured.

Introduction 

People, Ideas & Objects have detailed throughout this series of blog posts. A series that began on October 11, 2023 and can be aggregated by using this Notice label. To document the $4.1 trillion revenue losses incurred by North American natural gas producers between July 2007 and December 2023. We’ve also documented many other causes and effects of the officers and directors mismanagement of the industry over the past years. We discussed the risks officers and directors carry regarding their Officers and Directors Liability Insurance and the possibility of their (in)actions being deemed negligent or possibly willful misconduct. Rendering their insurance coverage invalid. They may have been indemnified by the corporation for the same reason, however this too may be invalid if the individual “ought to have done” some mitigating action.

• Reviewing the aggravating elements of officers and directors actions which caused industry damages above the $4 trillion.
• Actions of producers regarding their investors suspending further funding since 2015. 
• Satisfying investors' concerns should have been officers and directors' only priority.
• Development of substantial LNG markets missed since 2016.
• Unaware of basic business concepts that applied. Unable therefore to begin the necessary rehabilitation of natural gas prices.
• Declared shale uncommercial.
• Renounced the industry as uncommercial to justify entrance into clean energy. The most unaccountable industry.
• Diverted producers organizations and revenues towards the unrelated clean energy industry.
• Without shareholder approval.
• Abandoning those service industry and producer employees committed to oil & gas to second class status. 
• Only to return to shale with corporate consolidation as their solution.
• Realizing their mistake regarding shareholder approval, they required a reason to return.
• Consolidation is contrary to decentralization occurring in other industries in the greater economy. 
• Decentralization is facilitated and organized through the Internet.

The Preliminary Specification as a solution has been available for development and implementation since August 2012. No attempt beyond belittling its effectiveness was ever offered by officers and directors. Today common sense in the industry is consistent with the processes and methods managed throughout the Preliminary Specification and communicated for almost two decades by People, Ideas & Objects. However, producers today can not determine which properties produce their profits, if any. Shutting in production may be detrimental to producers. They are structured on the high throughput production model. Where full production is employed to cover their high overheads. Leaving some overheads uncovered when some production is shut-in. The Preliminary Specification uses the decentralized production model to turn overhead variable, based on profitable production. 

Another significant benefit of the Preliminary Specifications decentralized production model is the overhead incurred is included in the current month's production costs, which are passed to the consumer. Therefore the cash incurred to pay overhead is returned each month in a monthly cash float. Today producers capitalize 85% of their overhead to appear more efficient and to “build balance sheets.” Recognizing these overhead costs as depletion over the course of several decades, and making producers dependent on outside sources of capital. Undervaluing the real cost of production and proving once again that they don’t understand general business concepts as basic as a “cash float.” No change has been made to any producer's process of overhead management since we first raised this issue. Possibly it's not clear to them the point that I’m trying to make. Or, overhead costs are substantial and include the kitchen sink. 

Therefore only the Preliminary Specification is capable of mitigating the risks officers and directors face with their shareholders. Lawsuits by shareholders seeking to reclaim what officers and directors mismanagement lost and destroyed from officers and directors personally. People, Ideas & Objects have always stated “it's no longer enough to just own the oil & gas asset, it's also necessary to have access to the oil & gas software that makes the oil & gas asset profitable.”

Damage? What Damage? 

Here are just a few examples of the damage caused by officers and directors' inappropriate management. 

- Criticism has been voiced regarding the decision-making process of taking oil and gas revenues for investment in clean energy projects without shareholder consent, questioning the governance practices of officers and directors.

- The absence of a coherent long-term strategy, vision, and business understanding among leadership has been pointed out as a significant concern.

- Their acceptance of any financial information is a given as long as it's not a loss or objectively factual.

- A detailed analysis of public financial statements of producers reveals that capital assets in property, plant, and equipment have remained largely unadjusted for capital expenditures since before 2016, with the reported depletion rate significantly decreasing from 46.9% of revenue in 2016 to 16.5% in 2023.

- Capital assets prior to 2016 have still not been touched in terms of any depletion and won’t for at least one more year. 

- We argue that adjusting the depletion to reflect even just 2016s 46.9% would transform producers' reported 2023 profit of 18.8% into a real loss of 11.3% today. People, Ideas & Objects suggest a much more rapid depletion schedule. One that reflects the replacement cost of production, the real cost of oil & gas production. 

- The discrepancy between 2023 and 2022 revenues with the reported 22.6% revenue drop in dollar terms and a 2.68% increase in production volume is noted as producers talk but never act. “Making it up on volume” fails again. 

- The volume of profitable natural gas volumes to offset officers and directors losses is over 9 volumes to 1. “Breaking even” which is all this would accomplish is not within the mindset of “muddle through” or “it’s a byproduct” thinking. At a $87.17 oil price and 6 to 1 heating value pricing of natural gas would be $14.52. 

- The deliberate financial performance embellishment in corporate reporting points towards a need for greater accountability and transparency in corporate governance. 

- Consolidation would be helpful for officers and directors, I’m at a loss to identify anyone else. Oil & gas would continue to stagnate.

- Lastly, what is the vision, strategy and direction which consolidation will take the industry?

A Scenario

Let's envision a scenario where, as we move through the first half of 2024, the Preliminary Specification remains unfunded. In this scenario, officers and directors take no action, allowing their financial struggles to continue. Given the current market wisdom, which increasingly favors shutting in production to prevent overproduction and unprofitable output, inaction during this period could be seen as a missed opportunity to address these issues. Especially now, as producers have acknowledged the necessity of curbing excessive oil & gas production, a principle People, Ideas & Objects has championed for years and we’ve structured within the Preliminary Specification.

The challenge lies in the gap between public statements and actual strategic action, often referred to as “muddling through.” Officers and directors, who decide which Enterprise Resource Planning (ERP) systems to be implemented, effectively shape the organizational management for decades. Without a change in these ERP systems, altering the status quo is unattainable. Any ERP system that critically challenges the officers and directors' approach is unlikely to be adopted and therefore effectuate the necessary changes.

We find ourselves in a stubborn situation where those benefiting from maintaining the current state hold the reins. Without initiating ERP innovations, there is no impetus for operational change. The question then arises: how will stakeholders engage with these officers and directors in the future if their resistance persists? If this year's Annual General Meetings conclude with no changes, shareholders might have to resort to litigation.

What is the fate of natural gas producers through the year if officers and directors continue, as they’ve done in the past, leveraging bankruptcy proceedings as a fallback? Could consolidation render them even more unassailable? The difficulty of initiating change now will only amplify, escalating the risks for investors yet to realize their investment's value. Should consolidation falter under "unforeseen circumstances," bankruptcy becomes the fallback for officers and directors, leaving shareholders incurring the whole cost of this disaster when their shares are canceled.