A Capital Change

 Oracle published in their Oracle Connect News Stories (March 26, 2024) an interesting article with significant productivity implications to future oil & gas producers who will be using the Preliminary Specification. The article was dedicated to the announcements of Oracle Database 23ai, for Artificial Intelligence, which is a development of Oracle Database 23c for cloud. The News Stories are under the subtitle “Bringing the Power of AI to Enterprise Data and Apps.” The article that I’m discussing today is “AI is transforming finance.”

The module this change has been written to is the Partnership Accounting module. That is where the financial statements for each producer, for each Joint Operating Committee they participate in are prepared to determine its performance. If it is profitable it continues producing, if it isn't, it will be shut-in to focus the firm's innovative resources on making the property profitable again. The change is in the method and means of how that performance reporting is generated. First an introduction from the Oracle article. 

Financial Reporting and Analysis

In the Partnership Accounting Module of the Preliminary Specification we are augmenting the discussion with Oracle Database 23ai. The following are from the Oracle article.  

AI can help automate and enhance multiple aspects of the financial reporting and analysis process. In the initial stages, it can extract relevant financial information from various data sources. It can then clean and process financial data by identifying errors, inconsistencies, or missing values and notifying finance staff of the areas needing attention.

AI can then use the data to help generate financial statements, such as income statements, balance sheets, and cash flow statements, transforming the data into reports that highlight key performance indicators (KPIs), trends, and observations. It can also help with regulatory reporting. GenAI can fill out the needed forms with data provided by the finance team for the staff to review and confirm.

GenAI can be used to produce narrative reports, providing context into the numbers by combining financial statements and data with an explanation of each. GenAI can even help prepare first drafts of 10-Qs and 10-Ks, including footnotes and management discussion and analysis (MD&A).

At People, Ideas & Objects, our primary concern is the performance reporting of each Joint Operating Committee (JOC). This performance reporting is crucial for determining the profitability of a property. Profitable properties continue to produce, guided by the reorganization to Cloud Administration & Accounting for Oil & Gas, where our user community’s service providers execute their processes in standardized and objective ways. Producing this requirement in addition to the financial statements and other reporting requirements that Oracle noted in the first quotation will be part of the understanding and responsibility of our user community when they develop the Preliminary Specification.

Currently, there are significant issues regarding the differences in the amount of capital recorded in what People, Ideas & Objects would consider for our method of using the Joint Operating Committee, today’s corporate records, and independent reserve reports. We believe the latter two records are deficient in two material aspects when applied to performance at the Joint Operating Committee:

Overhead Allocation: 

The overhead incurred to operate a property is unknown and untraceable. Overhead costs are aggregated in corporate accounts and capitalized at year-end, with allocations to individual Joint Operating Committees made through overhead allowances that cumulatively balance to zero across the industry.

Capital Definitions: 

While the costs of drilling, completion, and equipping are appropriately included under corporate, reserves, and People, Ideas & Objects definitions, there are differences in how capital is recognized. For example, in the Preliminary Specification, reconciliation will occur on a global basis, with both the producer's depletion and property, plant, and equipment (PP&E) accounts balanced to the cumulative balances in all Joint Operating Committees and done so monthly. Any outstanding PP&E balance continues to be depleted to determine the individual property’s monthly profitability. And for purposes of accounting to the SEC other costs such as the abandoned wells are to be included. Where are they included in either corporate or reserves reports?

In particular, the amount of capital recognized in PP&E differs materially, including all land and bonuses paid, and depending on whether SEC reporting uses Full Cost or Successful Efforts methods. For instance, under Full Cost accounting, the costs of abandoned wells in an eleven-well program are included in the producing well's capital. These costs should be accounted for in corporate or reserves reports, but are not.

Before deploying AI to clean up PP&E data and reported depletion, substantial analytical and audit work must be performed to establish accurate balances for each producer's Joint Operating Committee PP&E and depletion accounts. The Preliminary Specification addresses differences between individual producers within the JOC to accurately determine profitability, recognizing that each producer may have different capital balances due to varying capital and depletion balances. For example, a producer who recently purchased their interest will have different performance criteria than one who has held the interest for a longer period. These issues are managed through the Joint Operating Committees Operating Procedure and its operational decision-making framework. The Preliminary Specification specifically aligns with the seven frameworks of the Joint Operating Committee as part of our Organizational Constructs. Where producers may have determined that for a vote to pass on an initiative requires a 60% working interest threshold. With determination to produce or shut-in, in this instance, being the consequence.

Producers have assumed this substantial work load of preparing financial statements for each property, was too burdensome and unnecessary. People, Ideas & Objects approach was always one of high levels of automation of the business processes. Artificial Intelligence would be a further and welcome development. Hoards of data in the form of information are what needs to be fed to humans to make the appropriate decisions. This is the point we’ll discuss next, one in which we felt officers and directors didn’t fully appreciate or necessarily understand. Possibly unaware of the overall quality of industry information and cultural influences and their implications on producer firms.

Once again I asked ChatGPT to provide me with a drawing depicting how I saw the officers and directors approach. I call this one "A Board Meeting for the Permian."

Is it Data or Decisions?

If only producers could address the more important end of this process. They’d need to decide which that end is. We're in the deep-end now and those that are unprepared are beginning to feel a desperate need for solid ground. The demand for decisions to be made is horrendous in oil & gas. Around 2008 it became difficult to keep up with the pace of the oil & gas business. I would blame the poor quality of the data that producers had then. ChatGPT 4o had the following to say about corporate data.

Specific Trends and Statistics

IDC Report: According to IDC, the global datasphere will grow to 175 zettabytes by 2025, up from 33 zettabytes in 2018. This indicates a compound annual growth rate (CAGR) of around 27%. 

Gartner Forecast: Gartner predicts that by 2025, 75% of all enterprise-generated data will be created and processed outside a traditional centralized data center or cloud, indicating a shift towards edge computing. (People, Ideas & Objects believe the extensive use of IoT will be the cause of this.)

Implications

Data Management Challenges: Organizations face significant challenges in managing and securing this data, necessitating advancements in data governance, storage solutions, and cybersecurity measures.

Infrastructure Investment: Businesses must invest in scalable infrastructure and advanced analytics tools to harness the value of their growing data volumes.

Strategic Decision-Making: Properly leveraged, this data can provide a competitive advantage through improved customer insights, operational efficiencies, and innovation.

The rapid growth of corporate data underscores the importance of robust data management strategies and the adoption of emerging technologies to stay competitive in the digital age.

Improve decision-making

From the Oracle paper.

A 2023 study by Oracle and New York Times bestselling author Seth Stephens-Davidowitz shed light on the dilemma faced by business leaders around decision-making—and the results were sobering.

Of the surveyed business leaders...

74% believed the number of decisions they make every day has increased 10X over the last three years. 97% wanted help from data in making decisions. 93% felt that the right decision intelligence could make or break an organization. 72% admitted the sheer volume of data has stopped them from making any decision at all. 89% believed the growing number of data sources has limited the success of their organizations. 94% felt the right data and insights could help the finance department make better decisions. 

AI’s abilities around data management collection, analysis, and contextualization—just to name a few—help eliminate many of the decision-making roadblocks cited by business leaders.

Oracle’s Recommendations

Some promotional information from Oracle on what is necessary and how producers could approach these issues. 

What can companies do now to prepare for increasing AI use over time? First, aggressively automate processes to reduce transactional work. Second, train staff so they have the skills to effectively interact with AI tools, building analytical capabilities that capitalize on the technology. Giving finance staff increased understanding of AI will also be critical in ensuring the proper security, controls, and appropriate use of the technology.

“As businesses are under pressure to grow revenues while expanding margins, it’s clear that finance teams will be a driving force in that effort,” said Stirrup. “The world runs on data, and organizations that can quickly learn from and execute on it—through the right planning and analytical tools, cloud technologies, and the efficient application of AI—will be the ultimate winners.”

AI depends on data. With Oracle Fusion Cloud ERP, companies have a centralized data repository, giving AI models an accurate, up-to-date, and complete foundation of data. With a complete, cloud ERP system that has AI capabilities built-in, finance teams can get the data they need to help increase forecasting accuracy, shorten reporting cycles, simplify decision-making, and better manage risk and compliance. With Oracle’s extensive portfolio of AI capabilities embedded into Oracle Cloud ERP, finance teams can move from reactive to strategic with more automation opportunities, better insights, and continuous cash forecasting capabilities.

Conclusion

One distinct benefit of People, Ideas & Objects will be our ability to determine the data elements and their appropriate management, storage, and process requirements. While each producer must undertake this task individually, we only need to do it once on behalf of the entire industry. These substantial savings are then distributed back to industry when they’ll not have to conduct that work. This highlights a significant future management question for the industry: how will it be done?

People, Ideas & Objects offers our Preliminary Specification as an alternative to the current status quo. Producer firms, whose officers and directors have ignored this well-known Information Technology difficulty, now face substantial problems. They haven’t asked where to start or how to resolve these issues, instead they’ve dismissed our warnings. We propose a solution that will save them time, effort, and money in the long run. As a result they are not authorized to use any of our Intellectual Property. It belongs to us, and we intend to use it to rebuild the industry appropriately after current leadership abandons their posts. If they do use our IP, we will ensure they cease and reverse any of their unauthorized use.

This discussion does not address the structure of producer firms or the significant issues such as a chronic lack of profitability, lost natural gas revenues or exclusion from LNG markets. The myriad details they will face in managing and interpreting their data will cause continuous difficulties, resulting in wasted time and further financial losses. We believe they promise no future.

Our approach has always been to start with a clean slate, focusing solely on how to best manage the industry for the next 25 years, and to do so profitably. If our Profitable Production Rights seemed implausible to some, consider the future potential for those who will finance the Preliminary Specification. They’ll own Profitable Production Rights in a struggling North American oil and gas industry and will have the exclusive right to process, assign, lease, or rent oil and gas production through the Cloud Administration & Accounting for Oil & Gas system they financed.

They say you should be careful of what you wish for. In 2024, maintaining a lack of accountability to shareholders was popular at the annual general meetings once again. Investors did not act to remove the failing leadership. Instead, they’ve left them to their own devices.

Our Value Proposition: Information Technology

Before the final stretch of our campaign, we started a series in mid-January that breaks down the individual elements of our value proposition. Now that we can return to our regular writing schedule, I'll wrap up the remaining posts on this subject. You can find the previous entries grouped under the label "Value Proposition:" which includes posts titled:

• Introduction
• Capital Component
• Hyper-Specialization and the Division of Labor
• Intellectual Property
• New Growth Theory
• Markets
• Innovation

Today, we'll proceed with our discussion on Information Technology.

Information Technology and Its Impact on Business

Over the past few decades, information technology has dramatically transformed business landscapes by enhancing productivity, performance, and fostering innovative business models. As these technologies have matured and become more integrated, they promise even greater performance and productivity enhancements. A pivotal technology in this evolution is cloud computing, which introduces a cost-effective model for users by shifting large capital expenditures to manageable operating costs. This model is particularly embraced by People, Ideas & Objects in the context of the oil & gas industry, where it revolutionizes access to state-of-the-art IT capabilities at low, variable costs.

This approach extends beyond just IT infrastructure to encompass software, services, and support within the oil & gas sector, using the shared cost methodology. Our model, termed "Cloud Administration and Accounting for Oil & Gas," applies cloud computing principles across oil & gas administrative and accounting processes. This is crucial, especially in a regulatory environment where building and maintaining necessary administrative capacities is costly. By sharing costs, oil & gas producers can avoid these high overhead costs that traditionally hamper profitability.

The traditional model where each producer independently incurs these costs does not offer a competitive advantage. Instead, through our shared and shareable model, producers will achieve state-of-the-art administrative capabilities at reduced costs with lower, variable overhead costs based on the producer's profitable production profile. 

Moreover, the adoption of Oracle Cloud ERP applications in our framework allows senior management to continuously adapt to technological advancements with minimal disruptions. The Preliminary Specification, integrated into our model, will handle future Oracle upgrades and adaptations, ensuring that the producers' needs are effectively met by our user community and service providers.

Finally, our approach with Oracle Fusion Applications avoids the pitfalls of traditional ERP customization. By embedding industry-specific features into the Oracle Fusion Middleware using object-oriented principles, we ensure that our customizations are both sustainable and adaptable to ongoing changes without significant redevelopment. This methodology aligns with Oracle's best practices, accommodating rapidly changing needs that support dynamic, innovative, accountable and profitable producers.

People, Ideas & Objects Information Technology Strategy

At People, Ideas & Objects, our strategic advantages lie in our user community, research, and intellectual property—not in software development. As such, we own and manage the software code derived from the Preliminary Specification and our Intellectual Property, while contracting the software development work to Oracle Corporation. Oracle's expertise in implementing their software products ensures high-quality development, eliminating the need for us to spend years assembling and training a capable team.

Since the first quarter of 2014, we have prioritized the development of our user community, recognizing this as the key differentiator in the quality and value of our offerings. In the oil & gas industry, time is a critical resource. Therefore, focusing on community engagement and intellectual property—rather than internal software development—maximizes our use of time, resources, and expertise. This strategy aligns with our belief in the importance of specialization and division of labor across the economy.

If oil & gas producers consider developing ERP solutions internally, they must face the reality that such undertakings would require immense scale and cost, likely duplicating efforts and expenses that could be more efficiently managed through our collaborative model. Sharing development costs through People, Ideas & Objects is far more economical than what would be spent on achieving comparable depth and functionality independently within each producer's firm.

Moreover, the dissatisfaction expressed by producers' shareholders and banks in 2015 highlighted the industry's broader issues with performance, accountability, and transparency. Despite this, the subsequent inaction over the years underscores the challenges and inefficiencies of working without a unified, effective business model. Our approach not only addresses these inefficiencies but also leverages shared resources to foster innovation and accountability in a sector that demands transformation. Using Oracle will cut many years off the development time. Years the producers can ill afford.

Oil & Gas ERP and Accounting Challenges

In our extensive discussions, we have consistently pointed out that the accounting practices of oil & gas producers over the last forty years have often been questionable. Mismanagement of overhead and capital costs raises significant governance concerns, which have not gone unnoticed by the investment community. We assert that these dubious accounting practices are facilitated by inadequate ERP systems, leading to critical issues in governance and financial oversight that should have become pressing matters for boards of directors.

Despite the essential role of ERP systems in ensuring effective accounting, the oil & gas industry suffers from a lack of effective systems. Currently, there are no tier 1 ERP providers that offer systems specifically tailored for oil & gas, which further exacerbates the problem. Although SAP provides ERP solutions to some major producers, their systems do not cater specifically to the unique needs of the oil & gas industry, often resulting in inefficient workarounds.

Our involvement with Oracle began in May 1991 when we initiated a collaborative development of an oil & gas ERP system, formalized by a contract in 1992. Despite Oracle's support, my initial venture into the oil & gas ERP market ended in failure in February 1997. This failure highlighted a broader issue: competitive ERP vendors have generally met the industry's needs without sufficient financial support from producers. This lack of investment has led to a situation where the personal gain of officers and directors contrasts sharply with the industry's overall financial underperformance and investor dissatisfaction.

Our May 2004 Preliminary Research Report incorporated insights from Professor Anthony Giddens and Professor Wanda Orlikowski, who have explored how technology, organizations, and society interact through Structuration Theory and the Model of Structuration. This theory suggests that any disparity among these elements can lead to conflict and failure. In this context, we've argued that the prevalent use of outdated, bespoke ERP systems in the industry serves to maintain a lack of accountability in financial reporting, allowing corporate leaders to avoid scrutiny and keep their methods unchallenged.

While acknowledging the significant efforts of my competitors under challenging conditions, it's important to note that since May 2004, there has been a deliberate lack of support for further ERP development. This has led to a market once populated by over 20 providers now dominated by a few, like P2, who have survived by absorbing others. Meanwhile, the IT market has matured significantly, but this evolution is largely ignored by oil & gas producers in their administrative and accounting practices. Instead, they often opt to highlight the latest IT trends—like the Internet of Things, Artificial Intelligence, and Machine Learning—as progress, regardless of the actual applicability or impact on their operations.

Oracle CloudWorld 2022 and 2023 Conferences Overview

At the 2022 Oracle CloudWorld conference, Oracle unveiled significant innovations in corporate ERP systems that enhanced business process automation. A standout feature was the advanced expense report process, which allowed employees to directly allocate expenses to specific cost centers using a partnered credit card company. This process, governed by Oracle’s automated policies, streamlined approvals and minimized administrative tasks, offering substantial time and cost savings across organizations.

In 2023, Oracle took another leap forward at their conference by integrating Generative Artificial Intelligence into their platform. This development further automated complex processes, enhancing efficiency and reducing the need for manual intervention.

Despite these advancements, there remains a notable distinction between consumer-facing and corporate applications, particularly in user interface (UI) design. The complexity of enterprise applications has historically made UI development challenging. However, Oracle has initiated improvements in this area with the development of their Redwood Platform, specifically tailored for enterprise applications. These changes are promising, and I recommend reviewing two specific videos that discuss these updates further. (Here and here.)

At People, Ideas & Objects, our primary focus and competitive advantage is our dedicated user community. Since 2014, we have emphasized the importance of involving users in the development of quality enterprise applications—a rigorous and essential process. Guided by our User Community Vision, we equip our users with the necessary tools to tailor applications that meet the unique demands of oil & gas producers, ensuring optimal profitability and operational efficiency.

Our approach to resolving challenges in the oil & gas sector is defined by a commitment to quality. Partnering with Oracle enables us to stay at the forefront of technological innovation. Our user community benefits from a vast array of Oracle’s resources, including access to diverse communities of developers and user groups. Once funding is secured, People, Ideas & Objects, along with our user community and service providers, will fully leverage Oracle’s products and services to realize our ambitious goals.

'It's the Business Model, Stupid'

 It’s here that I’m adopting President Bill Clinton's election campaign slogan of “it’s the economy, stupid.” 

Adopting the candid perspective of President Bill Clinton's famed election slogan, "it's the economy, stupid," I find it necessary to express a similar directness in the oil and gas industry. I often challenge the views of producer officers and directors with a stark reality: merely owning oil and gas assets is insufficient. True profitability comes from leveraging specialized ERP software like the People, Ideas & Objects Preliminary Specification, which transforms these assets into profitable ventures. This is a crucial realization in a century where few businesses succeed in their original form.

Business Model Insights

Amazon

Consider Amazon, a company that, despite never publishing a book or opening a traditional retail outlet, dominates the book and retail industries. This dominance is so profound that traditional retail bookstores have become scarce. Amazon's model facilitates global market access for publishers by allowing them to deliver products to Amazon's cross-docking facilities, ensuring payment at the point of sale. This model not only shifts the inventory cost burden back to the publishers but also benefits Amazon by providing upfront payment, sometimes days before they settle with the suppliers. This foundational strategy has evolved into Amazon Web Services (AWS), turning their internal IT infrastructure into a significant profit center.

Amazon exemplifies an early form of disintermediation in business models, but today's industries and companies employ far more sophisticated strategies. These modern approaches offer competitive advantages that are significantly more cost-effective compared to what was once considered innovative.

Tesla

The selling of cars is less relevant to its business each day, yet highly relevant to the platform for tomorrow.

NVIDIA

An extreme example of such innovation is NVIDIA's approach as discussed by CEO Jensen Huang in a recent presentation. The new H-100 chip, he explains, fundamentally alters the competitive landscape for Cloud AI services by offering unprecedented efficiency and cost savings:

• The H-100 chip weighs 70 pounds and consists of 35,000 parts, with only 8 sourced from TSMC.
• At a cost of $250,000, a single H-100 chip can replace an entire data center, where just the cabling might cost the same amount.
• These examples underscore a new paradigm in business:
• It's not merely the industry you're in; it's the business model you deploy.
• It's less about whom you know and more about what you are capable of achieving.

In essence, the 21st-century business landscape demands innovation not just in technology but fundamentally in how businesses are structured and operate.

Our Strategic Vision

At People, Ideas & Objects, we offer a transformative choice in organizing the North American oil & gas and tertiary industries. We provide an alternative to traditional methods through our Preliminary Specification, coupled with our user-community-driven ERP system built on Oracle Cloud Infrastructure. Our system is designed to ensure that oil and gas operations are profitable under all circumstances, fostering a culture centered on preservation, performance, and profitability.

Assessment of Current Industry Practices

The Preliminary Specification emerges from a critical observation: for decades, the oil and gas industry has failed to generate sustainable value. Previous generations built considerable value, which has been systematically depleted. Despite substantial reserves, which could secure a prosperous future, these assets are rendered valueless under current management as they cannot be profitably extracted using conventional accounting, organizational means and methods.

Challenges with Existing Accounting Practices

Traditional oil and gas accounting, still rooted in practices from the 1980s, prioritizes regulatory compliance—such as SEC filings, tax and regulatory filings—over operational insight. Current ERP systems are not equipped to provide detailed or accurate operational data, leaving a gap in understanding the true performance of each asset. Instead, performance evaluations rely heavily on independent reserves reports, leading to decision-making based on speculative "what if" scenarios. These include estimating capital costs of properties based on what is possible in the market today. And commodity pricing using indirect methods like analyzing satellite imagery to gauge global oil storage levels—a practice whose relevance and accuracy we have critically questioned, especially during market anomalies like the 2020 incident when oil prices fell to negative $37 values.

The Need for a New Approach

Such outdated practices highlight a disconnect between technological capabilities and strategic application in the oil and gas industry. It is possible that these methodologies, rather than leveraging technology effectively, have inadvertently hindered the industry's progress and even led to strategic missteps such as potential collusion among producers and OPEC. Our Preliminary Specification aims to rectify these inefficiencies by introducing accurate, transparent, and objective operational insights that drive profitability and sustainable industry practices.

People, Ideas & Objects Accounting Method

The Preliminary Specification from People, Ideas & Objects ensures that producers produce only profitable properties through the following strategies:

• Monthly preparation of accurate, detailed, objective and standardized financial statements for each property, outlining actual overhead and depletion costs to facilitate profitable decision-making.
• Enforcing production discipline via capital markets; only producers who maximize profitability will achieve peak corporate competitiveness.
• Ensuring that losses from unprofitable properties do not diminish profits from profitable ones. Unprofitable properties are shut-in until they can be innovatively reworked and become profitable once again.
• Reorganizing producers accounting and administrative resources to independent service providers who hyper-specialize in specific processes across the industry, with billing directed to the Joint Operating Committee.
• If a property is shut-in, it generates no data and incurs no billable services, making all producer overhead costs variable and dependent on profitability.
• Overhead costs are immediately recovered in the month when they contribute to profitable production, rather than being capitalized as currently practiced.
• The oil and gas sector will operate as price makers with no true substitutes—highlighting their unique economic dynamics.
• For illustration: using hydro to lubricate an engine or nuclear energy on a camping trip is impractical, and even imagining Elon Musk using firewood in rockets underscores the irreplaceability of oil and gas.

Prices are sensitive to changes in product availability, with producers only initiating new production when profitable as determined by an objective historical accounting, contrasting with price taker commodities like bottled water, which face various readily available alternatives such as tap water, juice or soda.

People, Ideas & Objects Organizational Constructs

The Preliminary Specification is supported and defined by seven organizational constructs that support our culture of preservation, performance and profitability. The seven include the Joint Operating Committee and its seven frameworks, Professor Paul Romer’s theory of non-rival costs or sharing of  administrative and accounting infrastructure, hyper-specialization and the division of labor which is the only means of value generation since 1776, Information Technology to organize, coordinate and control organizations, Intellectual Property which is the legal foundation of the United States and the only means in which oil & gas will find its way through its challenging future, innovation which is structurally defined and supported in the Preliminary Specification and needs to be organizationally managed to be effective and finally markets which are the alternative replacement to the centralization and consolidation solution being suggested by officers and directors. (Each Organization Construct is highlighted in Bold and Italics)

• Hyper-specialization and the division of labor.
• To take advantage of an enhanced division of labor requires the processes to be accurately defined within the software. Principles expand productivity from the same resources.
• Our Preliminary Specification uses these principles and automation of the business process to increase productivity throughout producer firms and industry.
• Professor Paul Romer shared or non-rival costs theory applied to oil & gas administrative and accounting infrastructure.
• Non-rival costs such as these are effectively reduced when shared. Examples include cloud computing.
• Producers will no longer have to incur the redundant costs of building and maintaining independent accounting and administrative infrastructure within each producer firm. 
• Specialization has diversified the roles in some professions, or will soon, where even the largest producers will not be able to commercially staff all of the required capabilities.
• Markets offer the preferred alternative to centralized control from consolidated, unprofitable producers.
• Oil & gas producers' distinct competitive advantages include their land & asset base and coordination of their engineering and earth science capabilities and capacities. 
• Intellectual Property regarding any vendor product or service is of no proprietary value to oil & gas producers. 
• The motivation to pursue the research and development of the issues and opportunities in the next 25 years will not be undertaken by “muddle through,” consolidated producers. 
• Intellectual Property eliminates any costly “me-too” competitors and repeated unsuccessful innovations. 
• Intellectual Property is a foundation of the U.S. Constitution. It is the law.
• Service industry providers have consistently provided Innovation and were poached of their innovations by their customers who handed them to their competitors. 
• Trust, faith and goodwill in producers from the service industry is non-existent. 
• Information Technology is another organizational construct we use to define and support the culture we are building. 
• This revised culture must be built within the ERP software before it can be used.
• Distance eliminates economic opportunities such as serendipity or spontaneous order when markets are continental in their composition. 
• There is no creative destruction when the status quo controls the ERP systems development process. Limiting software developments proposed to support change. 
• Homogenization of the producer firm is epic. Incapable of discerning which is the hero and which is the zero from published financial statements.
• The industry Joint Operating Committee is the standard method of managing partnerships within North American oil & gas.
• Joint Operating Committees are the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the industry. 
• When we move the compliance and governance frameworks of the corporation into alignment with the seven frameworks of the Joint Operating Committee.
• We achieve speed, accountability and profitability in our producer organizations.

Conclusion

Once people in the industry understand the frameworks and constructs in which the systems and procedures of the systems of the Preliminary Specification operate. It will be a simple and intuitive extension of their understanding of the appropriate method to deal with the issue and opportunity they’re faced with. This is the benefit of this design. It is inherent in the way of life and business culture that has been successful in North America for many centuries. The interactions between each of the seven Organizational Constructs are logical and consistent across the industry from an administrative and accounting perspective. This extends to all of the industry and throughout the producer firms other disciplines. Everyone will be focused on generating the profits in the primary industry of oil & gas producers. This will allow those profits to ensure economic health and prosperity are the basis of the industry as the profits of oil & gas producers are a necessity for the dependent tertiary industries. 

Elimination of the wasteful and destructive boom / bust cycles that officers and directors have created will carry enormous value added benefits. Liberating individuals to work towards the research and development of new and innovative products and services that ensure oil & gas is the fuel we can depend upon for many decades to come. There is so much to be done and little time in which to do it. We face the most difficult decades of the industry's history. Have an inappropriate industrial base. Have not been able to motivate the necessary forces to act. Have an obligation to ensure the industry continues in its role to supply a secure, independent and reliable source of energy to the most powerful economy known to man. And to secure the potential of the known petroleum reserves and ensure their value is realized by all. 

I do not see these opportunities being realized today. I do not see these opportunities being realized in a consolidated industry. I do not see the plans as to how the consolidated industry will realize its potential. I do not see any of this coming about by happenstance.

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!