"That Jarring Gong," Part XII

 Introduction 

We return refreshed and ready to continue our campaign to raise the financial resources People, Ideas & Objects needs for the first year's budget. This is an opportunity to take decisive action before time further erodes industries issues and opportunities. Our initial budget is relatively modest, with a goal of $10 million USD to commence the Preliminary Specifications development while securing additional funds for subsequent years.

In this post, I will attempt to capture and represent the current state of affairs in the North American oil and gas industry. The systemic issue producers face is the chronic overproduction of oil and gas. Commodities that follow the characteristics of economic price makers, leading to significant price erosion from overproduction. We believe the root cause of this issue lies with the leadership of the oil and gas industry, specifically the producer officers and directors, who are directly responsible for trillions of dollars in damages that could and should have been avoided. This was their opportunity and obligation. As it remains for the future.

People, Ideas & Objects use a representative example from 2022 and 2023 in the North American oil and gas marketplace as it relates to this century's shale production. This example illustrates the magnitude of monetary and reserve damages and losses. We believe the issue of chronic overproduction began in the late 1970s and first manifested itself with the 1986 oil price decline. What 2022 and 2023 capture is an acceleration in the destructive cycle driven by producer officers and directors seeking a purpose in their lives and in their roles. In doing so, they have proven to be irrelevant and damaging to the financial and operational health of the industry, demonstrating a clear lack of understanding of their responsibilities.

The Issue

To understand the scope and scale of incompetence, corruption, and negligence of the officers and directors in the oil and gas industry, we only need to consider their actions in recent years. The unanimous declaration that shale will never be commercial and the announcement of clean energy as the new frontier illustrate their misguided approach. They claimed they needed to remain competitive with clean energy and justified keeping oil and gas prices below the alleged costs of alternatives. They made this switch by trying to use oil & gas revenues, without shareholder support, understanding, or competitive advantage, treating these factors as mere technicalities. 

Declaring shale uncommercial has only led to further degradation of natural gas prices due to chronic overproduction. The heating value ratio of 6 to 1 for oil deteriorated to over 50 to 1 in early 2024. Export markets began to form with sizable capacity for shipping LNG to foreign markets, allowing producers to experience global natural gas prices. However, officers and directors were preoccupied with inspecting solar panels and laying off reservoir engineers. While North American natural gas prices averaged $4.50 in 2022 and 2023, Japan and the Netherlands experienced prices exceeding $50 at times. The cost to refrigerate and ship was approximately $8.00. Today's average North American natural gas price is in the low $2.30 range.

In late 2023, People, Ideas & Objects determined that North American producers did not realize these foreign prices. They sold their natural gas at the Henry Hub to unknown purchasers who then refrigerated and shipped the LNG to Japan and the Netherlands, realizing the price differential. None of the producer firms did this themselves. Evidence of this was the rash of producers rushing to secure LNG contracts for "free on board" shipments to foreign markets, signing for contracts on unapproved and uncommitted facilities beginning as early as 2028. Locked out of existing LNG facilities by those who exploited the producer officers and directors naivety.

The fact that producers' officers and directors did not understand the principle of "net back pricing" or "free on board" highlights their lack of general business knowledge. This ignorance is evident in their decades-long declarations of "building balance sheets" and "putting cash in the ground." This nonsensical approach includes their current posture of waiting for investors to return from their 2015 hiatus. They do not understand that losing the support of their capital structures should have been their primary focus, as foreign a concept to them as realizing natural gas prices in Japan.

Consider this: while others established contracts to refrigerate and ship LNG to foreign markets, capturing hundreds of billions of dollars per year, oil and gas producer officers and directors declared in perfect harmony that shale would never be commercial. They then diverted corporate resources to unauthorized clean energy businesses, eagerly awaited the return of their investors, subsequently found clean energy not to be “commercial,” returned to shale and focused on consolidating larger positions in the Permian shale—the least profitable due to high costs and steep decline curves.

Companies like Conoco actively participated in the LNG business with substantial investments in facilities on the Gulf Coast, Australia, and Qatar. This continued focus on bright, shiny, highly engineered facilities over the business realities of oil and gas raises the question: why would a producer invest in LNG capacity when its value is realized through a sales contract? Or is this news to them?

The Opportunity

I have had the opportunity to put forward an alternative to the status quo method of oil & gas organization and operation in the past number of decades. The Preliminary Specification disintermediates the greater North American oil & gas economy. It sets in place user community defined ERP software developments to deal with the issues and opportunities that are ever present in oil & gas today. It is comprehensive in its vision and designed to replace the failed culture with one that is structured to provide producers with one of preservation, performance and profitability. Making all North American oil & gas production profitable everywhere and always. As economic price makers, oil & gas will follow the characteristic that new production will only be brought on stream that is profitable. Ensuring our claim is valid. 

Oil and gas exploration and production have demonstrated that the easiest and lowest-cost production is extracted first. Consequently, all oil and gas E&P is subject to increased costs due to the greater effort required to retrieve incremental barrels of oil. People, Ideas & Objects believe the replacement cost of produced oil, reflecting exploration and production costs in a rising cost environment, must be recognized by consumers at the time of consumption. This financial recognition will provide the resources necessary to replace what is produced today. A dynamic, innovative industry will be required to expand deliverability beyond current capabilities and to control costs. Enabling this capability in North America is a core function of the Preliminary Specification.

We achieve this by implementing the only reasonable and fair means of production discipline across the industry. If a property produces profitably, it will continue; otherwise, it will be shut in and added to the firm's Innovation Work-in-Progress Inventory until it can return to profitable production. Production discipline is realized through capital market discipline. Producers need to compete for capital in North American markets against all other industries. If they continue to perform as they have, they will continue to have no access to capital. Shutting in unprofitable production ensures that no losing properties dilute the earnings from profitable ones, maximizing overall profitability. This approach also safeguards assets, as reserves are held until they can be produced profitably, minimizing storage and production costs and avoiding incremental losses that must be recovered in the future.

Profitability will replace the “muddle through” complacency of today’s industry. The current industry's performance is abysmal, and returning it to the commercial, profitable status of the 1960s and 1970s is beyond the mindset of today’s officers and directors. They are unable to understand these perspectives because they cannot identify the issues and opportunities they face, which stem from their indecision about which industry they want to invest their time and others' money in.

Conclusion

This melodrama has flip-flopped repeatedly over the past two years and on many fronts, revealing a consistent, failed business model throughout the industry. Our interactions with producers highlight this issue. When I began People, Ideas & Objects, my focus on profitability was met with ridicule. "No one cares about profit," they said, showcasing a clear lack of common sense that is evident in all of their thoughts and actions.

On July 4, 2019, I published our white paper, “Profitable, North American Energy Independence -- Through the Commercialization of Shale” which they refuted by claims that shutting in production would damage the formations. Ten months later, faced with negative $37 oil prices, 25% of global production was cut. Our method of commercializing shale, initially alleged to be flawed, was subsequently proven necessary and effective. This led to the producers' capitulation on the commercial viability of shale, indirectly admitting that the uncommercial nature of their business was a significant issue. Choosing to ply their trade in the “clean energy” industry of which they have no competitive advantage or understanding.

Since then, they have focused on radical changes to resume shale, to consolidate, and when those efforts inevitably fail, then what? This is disqualifying. Too many opportunities have been granted to these officers and directors, who have proven at every turn that they are incapable of effectively managing the industry. If the damage and destruction caused by their inaction and incompetence ended there, I might agree with those who suggest leaving them alone to wallow in their filth. However, that is not the case.

• Producer officer and directors were dishonest about the viability of the Preliminary Specifications shutting-in of production.
• When forced to shut-in 25% of global production, they subsequently stated no formations were damaged.
• “Others” continued to secure deliverability capacity of LNG out of the Gulf of Mexico “free-on-board.”
• Producer officers and directors declare "shale will never be commercial" and saunter off to clean energy with oil & gas revenues in hand. 

Oil and gas play an outsized role in North American society and are crucial for maintaining our economic standard of living and political influence. Without energy, particularly oil and gas, we cannot compete with those who have it. Those who do have it may soon understand this and compromise our economic and political influence to provide us with the energy they believe we need. Is that the point when we ask the officers and directors for their plan? Or are we already crossing the point of no return regarding our capabilities and capacities on the continent? The faith, trust, and goodwill in these officers and directors vanished long ago. It must be the cash they keep putting in their pockets that keeps them showing up so persistently. 

An Update to the Partnership Accounting Module

 This is an update to the Partnership Accounting modules AFE section. It deals with the generation of AFE numbers, and other numbers such as Vouchers, Leases, Work Orders etc are developed through use of the Java Programming Language developments designated as Data Oriented Programming or DOP. 

The AFE

One area we have not discussed in detail are the processes around the Authority for Expenditure or AFE. I will break the AFE discussion down into two parts. One is here in the Partnership Accounting module. The other can be found in the Research & Capabilities and Knowledge & Learning modules. What we’ll discuss are the Partnership Accounting aspects of the document. Later, we’ll examine the “capabilities deployment” elements in the other modules. 

As with any interface in the Preliminary Specification users will have the opportunity to right click on an item and pull up a contextual menu item called “Create an AFE.” The system will have intelligence and be able to generate elements of an AFE template with the information that a user right clicks upon. For this scenario, let's assume that a user clicks on an image of a well. The system will then populate the new AFE template with the information for that well type and the partners in that Joint Operating Committee. Suggestions were made that another lateral and frac job be done to increase shale gas production through the well bore. And the user populates the AFE with the appropriate account codes to account for the budgeted costs of those operations. (Note: Due to the extensive work done during development of the Preliminary Specification it should be anticipated that the industry would have access to a global chart of accounts.) Budgeted costs were worked out with a number of vendors that users were working with who have developed some enhancements to the re-entry and fracing of multi-lateral wells. Producers consider these innovations significant, and the costs make them potentially valuable additions to well profiles. 

To present the AFE to partners, users have asked them to join others in the “Marketplace Interface” at the vendor's facility to view a presentation of their enhanced tool. All confirmed attendance. At the end of the presentation users who are authorized members of the Joint Operating Committee digitally sign the AFE. This releases the document to the other partners. (All with data elements consistent with their data naming conventions. Global AFE #’s, account #’s, etc.) Cost estimates and timeframes that this can be done for the one well, the poorest performer in the facility. Users also submit engineering and geological analyses of why they think the formation will perform well for the proposed work. 

Within the AFE document itself there is a collaborative interface for partners to discuss issues and opportunities related to the document. During the month this discussion focused on how the existing lateral could be protected from damage during the drilling and fracing of the second lateral. Several partners expressed concern that the program did not do enough to ensure no damage occurred so a supplemental was raised. After the supplemental there seemed to be consensus among the Joint Operating Committee members that the risk was worth the effort. All participants digitally sign the AFE. 

As part of the collaboration, the producer firm determines who is available to participate. A team is set up to manage the engineering and geological aspects of the program. These people's time on this project can now be charged through the Work Order system with the appropriate Work Orders created. The account codes for vendors for that AFE will be able to accept charges. Cost overruns were not expected as an arrangement with the vendor for a fixed price was agreed. 

This is a scenario of how the firm will raise an AFE and have the members of a Joint Operating Committee approve / disapprove of / discuss it. Within producer firms there would be automated routing of the document to the various internal departments for approval. This could be done simultaneously as multiple people can read, process and approve one electronic document at the same time. Therefore accounting, production and exploration could each approve the AFE on the same day, eliminating the time-consuming paper shuffling that normally occurs. Even within each department the various people who need to see and sign off on the information can do so.

This document routing will be conducted at each producer participating in the Joint Operating Committee. Each partner has access to the AFE documents collaborative interface. This discussion is available to those who may have questions in the future as to why decisions were made and for what reason.

To clarify some of the similarities and differences between the AFE and Work Order in the Partnership Accounting module of the Preliminary Specification. And to point out a significant difference in the People, Ideas & Objects systems documents which differ from those ERP systems that operate in oil & gas today. 

Another aspect of how both the Work Order and AFE are unique in the People, Ideas & Objects system compared to other systems today is the manner in which documents are stored. Everyone has experienced the difficulties that multiple copies of files edited by different people create. A disappointing and troubling problem with electronic files that would be a disaster for documents. No one can have different electronic versions of a document. Therefore there can only be one copy of the document used by everyone. (Exclusions for backup etc.) However, since it's digital, multiple people can use the same document at the same time, as long as everyone is presented with the same, most current version.

The most effective example of a system that uses this exact manner of file management is Google Docs. Users have access to a list of files in which they grant access to and can edit the same file. Other users in Google Docs can be seen editing the file in real time. Any conflicts in editing those files are resolved by users while reviewing. The file remains as one complete edited file presented to each user at all times. With a history of prior versions available for review. There is no need for someone to take edits from many files and put them into one file as is the case with Microsoft Word or Excel. 

Instead of files People, Ideas & Objects will present users with documents like AFE’s and Accounting Vouchers that they have authorized access to. They and others will be able to view, edit and delete based on their authorization level and be assured that only those documents exist. No other more or less advanced copies are being worked on elsewhere. The amount of time and energy saved by knowing just one document exists is satisfying and highly productive. 

We have discussed many times that the People, Ideas & Objects application modules are moving the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. By doing so we recognize and adopt the industry culture in its many forms. The change we are implementing is the removal of bureaucracy. When it comes to the AFE process there is little in the current process used by companies that is not representative of the industry culture. It is optimal that People, Ideas & Objects and our user communities capture that culture in these software developments when developing the AFE process.

One area that we will enhance the AFE process is through the elimination of the "Operator" designation. People, Ideas & Objects operates on the concept of pooling the resources of the partnership represented on the Joint Operating Committee. This is done to help mitigate technical resource shortfalls, particularly in earth science & engineering disciplines. As a result of this pooling an AFE will be available to any participant in a Joint Operating Committee to post charges. Those charges could be for their staff who are working on the project or for costs they incurred on behalf of the project. 

With each producer potentially contributing unequal shares to the joint account or AFE during a month, or over the course of an AFE’s term. They can either over- or under-commit their participation. Therefore monthly equalization will need to be a necessary part of the reconciliation of the AFE accounts. For example, if one of the partners pays for the drilling day rate, and their working interest share is only fifteen percent, they would have paid in excess of fifteen percent of the budgeted AFE. In a case such as this, the producer would be compensated to the point where their contribution does not exceed the approved total amount of their obligation.

All of this is consistent with the industry culture today. What we propose is aligning this culture within the Joint Operating Committee and its other eight frameworks. With the Joint Operating Committee being the key Organizational Construct there are six other Organizational Constructs that bring other cultural elements in as supporting institutions. We are not resisting this well ingrained highly functioning “inertia” as Professor Langlois calls it in his paper with Paul L. Robertson, Institutions, Inertia and Changing Industrial Leadership. (Please note all subsequent references in this module are to this paper.)

Inertia is the focus of this paper. As is explained in more detail below, inertia has two major functions in the cycle of punctuated equilibrium. Inertia results from, and in a sense embodies, the best feature of the stable phase of the cycle because it is based on the learning process in which producers determine which procedures are most efficient and effective. Once people are satisfied that they know how to do things well, they have very little incentive to look for or adopt new methods. In the words of Tushman and Romanelli (1985, pp. 197, 205), "those same social and structural factors which are associated with effective performance are also the foundations of organizational inertia..., success sows the seeds of extraordinary resistance to fundamental change." Inertia also provides the tension, however, that leads to the (relatively) short, sharp shock of the revolutionary period (Gould, 1983, p. 153) because the pressure required to displace a successful but inert system is considerable and takes time to accumulate. When there is little inertia, change can be assimilated in a gradual and orderly fashion, but an entrenched system may need to be vigorously displaced. p. 3.

I began with a discussion of the industry culture and how the inertia of the industries' routines and capabilities made for formidable obstacles to progress. Thankfully we are not focusing on changing cultural inertia in the oil & gas industry. We are trying to disintermediate the bureaucracies and change the systems to recognize the culture, routines, capabilities and inertia of the Joint Operating Committee. Making it a central part of all that is done in the industry. With a focus on bringing accounting and administration into the fold. This does however require the retirement of bureaucracy. 

And institutional change, we argue, can often take place through the more or less slow dying out of obsolete institutions in a population and their replacement by better-adapted institutions - rather than by the conscious adaptation of existing institutions in the face of change. p. 6.

The bureaucracy does not sustain its own inertia. It is a forced or contrived existence that serves a few within the organization. These needs can be taken care of by the Joint Operating Committee. I’m thinking of the command and control, budget and finance functions. What we have said we are doing with the Preliminary Specification is moving to the natural and cultural form of organization of the oil & gas industry, the Joint Operating Committee. Making the transition from the bureaucracy's forced means to the Joint Operating Committee's more natural way will not be a problem. Until...  

Another aspect of capabilities that has recently received a great deal of attention is organizational culture. In practice, not all organizations may be equally able to cope with change, as existing patterns of behavior involving both executives and subordinates may be resistant to change. Organizations develop collective habits or ways of thinking that can only be altered gradually. To the extent that a given culture is either flexible or consistent with a proposed change in product or process technology, the transition to the new regime will be relatively easy. If, however, the culture is incompatible with the needs posed by the change and is inflexible, the viability of the change will be threatened (Robertson, 1990; Langlois 1991; Camerer and Vepsalainen, 1988). p. 9.

And the proposition that this transition will occur has been threatened by the bureaucracy. They hold the budget and have exercised it by not providing funding towards People, Ideas & Objects. In this regard, the bureaucracy is self-serving and looks after its own interests. The abandonment of the industry's future is now evident in these actions. The responsibility for all damages and destruction falls to the officers and directors. What will the situation be like in five or ten years? Will their methods continue? What will they do now when it is clear they’ve failed? 

Teece neglects the negative side of Nelson and Winters analysis, however, and fails to note that the inflexibility, or inertia, induced by routines and the capabilities that they generate can raise to prohibitive levels the cost of adopting a new technology or entering new fields. Such inertia can develop to the extent that existing rules are both hard to discard and inconsistent with types of change that might otherwise be profitable. p. 10.

McKinsey Consulting suggests that large populations will join the middle class in 20 years. This will have a dramatic effect on the levels of energy consumption. If the oil & gas industry fails to respond to these demands due to bureaucracies' lethargic ways, will anyone note the Preliminary Specification was proposed?

Whereas major competence enhancing innovations may, in time, be assimilated, the creation of entirely new organizations may be needed to deal with innovations that undermine the capabilities or competencies of existing firms. p. 11.

Enhancements Through Data Oriented Programming

Recent technological advancements in the Java Programming Language, defined as Data Oriented Programming, have introduced new capabilities to People, Ideas & Objects, particularly in creating an AFE (Authorization for Expenditure) number. Traditionally, AFE numbers were serially assigned to meet unique requirements and fulfill database primary key demands. This method provided no intuitive understanding of the AFE's purpose; users had to pull the document to discern its details. 

What if the AFE number could inherently imply its purpose and provide intuitive understanding? For example, a prefix letter such as D, C, or E could denote Drilling, Completion, or Equipping, respectively. This could be followed by 24, representing the year it was raised, another letter designating the geographical region, one more for the targeted formation, and finally, a three-digit serial number. This system would allow users to sort through work based on various criteria, providing intuitive AFE numbers to members within the Joint Operating Committee.

This example highlights a potential enhancement, but our user community will be responsible for expanding the concept for AFE numbers, as well as Voucher numbering, Lease Identification, and other naming conventions within the Preliminary Specification. Implementing this has been challenging and previously considered taboo in systems development. However, Data Oriented Programming now enables us to make these changes. 

As database developers, we use Oracle Autonomous Database, deferring system processing and management to the database. However, generating field attributes in the way we propose has not been possible outside of multi-column primary keys, which often lose their intended purpose in translation.

Data Oriented Programming in the Java Programming Language aligns perfectly with our focus as database developers. Using Oracle Cloud Infrastructure and Oracle Fusion Applications, predominantly written in Java with ample use of SQL and PL/SQL, these features offer significant benefits. They facilitate creating the type of data we discuss here and allow us to manage AFE numbers as primary keys effectively. More details on these features are available in the following pages.

Postscript, applying this to the chart of accounts will also apply. Prefixing the account number with A, L, S, R, E, breaking the account number from there and imply further meaning from their.

• Data Oriented Programming in Java - v1.1
• Model Data Immutability and transparently - DOP v1.1
• Model the data, the whole data and nothing but the data - DOP v1.1
• Make illegal states unrepresentable - DOP v1.1
• Separate operations from data - DOP v1.1
• Wrapping up DOP v1.1
• Bonus: Why update DOP to version 1.1

Revenue Update

During my time off, I realized that my previous approach to imposing deadlines for raising the first year's budget was flawed in several ways. Firstly, treating it as a traditional fundraising effort, akin to raising debt or equity, was inappropriate since the Profitable Production Rights represent People, Ideas & Objects' revenue stream. Secondly, as with any firm's revenue stream, there should be no time limit or closing date imposed on participation. I had mistakenly attached undue significance to securing those funds, equating it with the potential failure of the organization. This perspective is neither predictive nor anticipated, especially at this advanced stage of addressing the issues in the oil and gas industry.

What People, Ideas & Objects needs to do with our Profitable Production Rights is transition to a commercial, successful operation, moving away from the project status. Most importantly, we need to leave behind the outdated thinking that limited our approach. This shift in mindset will better align with the realities of our business model and the industry's needs.

"That Jarring Gong," Part XI

 Who’s Accountable Now?

Reflecting on past market failures in oil and gas ERP software development and implementation, it became clear that unaccountability is the producers' strategy. The software I was developing and selling from 1991 to 1997 offered enhanced accountability with granular data and transparency. This same realization likely led Oracle and IBM to exit the oil and gas sector in 2000 and 2005, respectively, and explains why SAP still doesn't offer a dedicated oil and gas system. They have no vision or plans; it's just an implementation that reinforces the status quo. Consequently, no significant systems development has occurred in oil and gas since our work in the early '90s. Competitors in the ERP software market have done phenomenal work to hold their companies together in a hostile environment with producers, operating on shoestring budgets as "blind sleepwalking agents of whomever will feed them."

The accounting on top of these poor systems is opaque. Capitalizing costs, aggregating accounts for “simplicity,” and focusing on the corporation make management information and performance reporting non-existent. This accounting can't change materially if the software remains static, which it has under current administrations. ERP vendors focusing on accounting and administration, both rightly seen as producers' non-competitive advantages, diminish the drilling budget. Therefore getting the job done has been prioritized over addressing system design or accountability issues. There’s no time or budget for systems or enhanced accountability. If suggested, it signals that accounting and administration have too much time or budget and they need to have budget cuts administered.

Another element that isolates officers and directors from reality is the Officers and Directors Liability Insurance, which has become standard in corporations. How much does this insurance indemnify producers' officers and directors from personal litigation risk? And have producers further eliminated accountability by paying the insurance premiums? And where is the risk if producers further indemnify officers and directors if insurance finds certain actions beyond their coverage? Has this allowed vision, strategy, and direction to fall from their priorities? Has it enabled a collegiate, collaborative dynamic where the operating strategy is best described as "muddle through?"

How do we see comprehensive market failures such as shale gas volumes eroding the price structure to such a degree? How do we see the market expansion opportunity from LNG developments slip through the producers fingertips with nothing but an oops? Where the basis of business knowledge and understanding have been reduced to such elementary levels as to be unrecognizable. Or shopping adventures in unrelated industries. They’ve never been held to account and it shows.

There are alternatives for officers and directors to choose from. In recent years, use of bankruptcy has evolved as a method to eliminate disheartened shareholders and associated difficulties. Directors may be temporarily gone, but officers often remain through the process, those that get along becoming the incumbents in the recapitalized organization. Officers can even declare "bankruptcy bonuses" just before the big announcement. When officers and directors of North American corporations follow this pattern accountability is lost, and unaccountability is prioritized. 

Accountability has been lost due to the deliberate desire of officers and directors to avoid it.

Without Accountability

I've painted a grim picture of the North American oil and gas industry. We're heading in a direction that is neither positive nor beneficial to anyone. I believe officers and directors will soon bail to find prosperity in other industries, leaving the industry in shambles for others to clean up. They will exit in a stampede, ensuring no one remembers their names, providing them with the escape they desire. Oil and gas producers are definitely heading in one direction and only one direction. Active involvement and action are needed by almost everyone in the greater oil and gas industry to right this ship and get it back on its journey. Leadership may be the first tragedy to occur from a chronic, systemic, and purposeful lack of accountability.

Regaining accountability within the industry has to be a primary target of any steps forward. This can only begin with a fundamental reorganization and rebuilding of the industry based on a new vision of how, what, and why we’ll do so. Without a shared understanding, we’ll be floundering in the dark and spend endless hours recreating what has already failed. In today’s society, organizations are defined and supported by software, most specifically by the ERP software they use. Without this organizational rebuild, we will regress to what exists already. Accepting the vision of the Preliminary Specification is a choice that needs to be made to proceed. Any new ERP system will have to come up with an original idea, spend a decade researching how, what, and why it would work within the producer and industry, and importantly, avoid the Intellectual Property of People, Ideas & Objects. Officers and directors have “muddled through” long enough, leaving the decision to the only qualified choice: the Preliminary Specification. Time is wasting, and it is the only resource the industry has in limited supply.

The depth of distrust, sense of betrayal, and feeling of being played for fools by producer officers and directors will not be resolved by them. Those individuals will be dealt with separately. Participation in the rebuilding process will be voluntary, but nothing will be done on a good faith basis. It's time the oil and gas industry had some skin in the game and financed the rehabilitation and rebuild from the primary revenues that only the producer officers and directors have benefited from. This needs to be done philanthropically and out of the goodwill of what is left of the producers. Maybe if the producer firms have some skin in the game, they’ll learn there is more to what makes an industry successful.

Nothing else in the industry will be done without profits. The cupboards are bare. The volume of capital expenditures necessary for the rehabilitation, refurbishment, reclamation, and expansion of North America's oil and gas industry is far in excess of what it has faced in the past. For the next 25 years, the record of fiscal performance of the officers and directors will need to be proven otherwise. The need to generate the “real” value that will fuel all of this has to be earned by oil and gas producers. There is no one else that will volunteer to do it. Volunteering will have your capital incinerated. Competition from the capital markets offers NVIDIA, Tesla, Apple, and many other opportunities that investors will find far more appealing. Oil and gas and the service industry now have financial performance records, and investors know who’s at fault. The producer's efforts in the next 25 years will need to prove that record wrong and compete in the capital market.

Capital Destruction 101

One major issue that People, Ideas & Objects identified and resolved in developing the Preliminary Specification is the inherent conflict between the corporate producer and the partnership represented in the Joint Operating Committee. The Joint Operating Committee holds operational decision-making authority, exercised through the Operating Procedure, with a threshold for decisions. If a decision is made to drill a well, the designated operator undertakes the drilling on behalf of the Joint Operating Committee. The conflict arises when the Joint Operating Committees operational control is transferred to the producer firm, where the knowledge and capabilities reside. Accountability is lost in this process.

Let's assume the well fails. Who is accountable for that failure? How are the successful attributes defined? This is where the problem of “muddle through” comes into play. Besides being the operational decision-making framework, the Joint Operating Committee is the legal, financial, cultural, communication, strategic, and innovation framework of the partnership represented in all oil and gas operations. The Preliminary Specification addresses this by moving the Compliance & Governance module and therefore the accountability frameworks into alignment with the Joint Operating Committees seven frameworks. It also moves the Knowledge & Learning module to the Joint Operating Committee, ensuring that combined knowledge, accountability, and operational decision-making authority are together in one property where the domain is known to all, and performance is the focus and objective.

In the coming weeks, an amendment will be written to all the modules in the Preliminary Specification. Every decision and requirement will be noted by the individual who created it, along with who is responsible and accountable for it, including their name and contact information. This way, when the source of an issue is identified, and the success or failure can be pinpointed, the individual accountable can be apprised. This is not for retribution but for learning and development, benefiting both the individual and everyone involved in day-to-day operations.

People, Ideas & Objects believe there has been no accountability at the field operations level due to this conflict. As a result, “muddle through” has become the culture, persisting as individuals progress to officer and director positions within the organization. If they never learned the value and process of accountability in their career, they certainly won't begin learning it as officers and directors.

"That Jarring Gong," Part X

 Torts

Let’s begin by refreshing our memory as to what’s involved in Tort law.

A tort is an act or omission that causes legally cognizable harm to persons or property. Tort law, in turn, is the body of rules concerned with remedying harms caused by a person's wrongful or injurious actions.

If someone were to sue an officer or director of a producer firm for willful misconduct, a tort, then to succeed would demand the following:

To win a tort case, three elements must be established:

• 1. The defendant had a legal duty to act in a certain way.
• 2. The defendant breached this duty by failing to act appropriately.
• 3. The plaintiff suffered injury or loss as a direct result of the defendant's breach.

It is People, Ideas & Objects' contention that producer officers and directors did breach their legal duty of care to act in their shareholders' interests. Since 2015, shareholders have been unable to influence officers and directors to act appropriately, leading to material losses during the structural breakdown of natural gas prices. As of December 2023, this has resulted in $4.1 trillion in revenue and/or gross profit losses that would have otherwise been realized. Alternatives were proposed in the marketplace to mitigate these specific issues; however, producers chose not to address them.

People, Ideas & Objects also assert that producer officers and directors may have misrepresented the facts of their situation by promoting their financial statements as representative of their performance. Their arguments over the past decades about “building balance sheets” and “putting cash in the ground” are not performance-related and are antithetical to the going concern concept. Corporate strategies of “muddle through” have been broadly adopted, eliminating the innovative and competitive structure of the industry. Sitting on one's hands and doing nothing is considered the natural complement to spending being profitable. People, Ideas & Objects began discussing these and other issues as far back as our March 19, 2006 post entitled “Petro Canada Earnings.” That discussion stands up today and represents their focus and drive then and now.

People, Ideas & Objects Argument

Throughout this period, from that early 2006 post to today, one theme has driven our work: chronic and systemic overproduction of oil and gas in North America on an unparalleled scale. Overstated assets lead to an equal amount of overstated profitability. Let's call that the “motive.” Overstated profitability leads to investors rushing in to capture those earnings. Let’s call that the “means.” This overinvestment in productive capacity leads to overproduction and further erosion of the economic “price maker” characteristics of oil and gas.

The “opportunity” is detailed coherently in the March 19, 2006 blog post entitled “Petro Canada Earnings.” Their officers and directors made out handsomely in the 2005 year, even though their profits were down a billion dollars from the prior year. Such is the way it goes. This is only to document the annual lottery and benefit that has come to be expected by officers and directors. At the same time, we have consistently raised the issue of overhead and noted that 85% of it is capitalized to property, plant, and equipment. Spending is profitable, first of all. Second, capitalization hides the details. We have noted the nature of these overhead expenses and how they are beyond reasonable when it comes to the officers' and directors' burden.

The consequences of their overhead policies and the difficulties they cause include their working capital. Cash is consumed in the capitalization process, leaving producers seeking new money to cover overhead each month. Yet no action was ever taken, as covering their “overhead” costs appears far more important than the cash resources to the firm. This “cash” issue is detailed as early as our “Is It Naivety” March 28, 2019 blog post. Yet “muddle through” was their approach in dealing with working capital drainage?

“We’ll Be Profitable at $XYZ”

Unconcerned with much of anything that has to do with reality, producer officers and directors soon realized that what they said through the producers' non-officers or directors' staff to the press could be excused. This became the means to present the idea that producers were working hard, innovating, and ensuring they maintained their hard-earned profitability during times of rapidly declining commodity prices.

From August 2013 to February 2016, crude oil prices declined from $102.15 to $23.58. This was not of concern. Producers remained profitable throughout the period, declaring profitability at every price point: $80, $60, $40, down to $23.58. At no point was there any accountability or justification made to support these claims.

The difficulty is twofold. First, the majority of any real savings were due to the abuse of the service industry. Cutting industry activity levels in half caused pricing softness in the drilling and fracing firms. Then, deep discounts averaging approximately 50% ensured the service industry's revenues dropped to 25% of what they were a few quarters ago. These revised pricing estimates made it onto the purchase orders and into the capital budgets of the producers. Future costs were reflected here and factored into the "what if" scenarios conducted on the reserves reports. Their objective was to minimize capital expenditures and materially increase bookable reserves through proposed spending.

What we have is commonly referred to in the industry as "recycle costs." These costs have nothing to do with the historical accounting costs that will actually show up when reported. When well over 95% of the capital asset inventory is operational and carries historical costs, why would producers quote the potential, possible, or even imaginary level of profitability from "recycle costs?" This is a difficult question to answer as to where it should be classified: Is it part of means, motive, or opportunity?

What’s My Point?

This is the culture of the North American oil and gas industry, a culture shaped by the SEC’s 1970s Full Cost method of accounting. This method allows companies to lump all expenditures into property, plant, and equipment, shifting the purpose of accounting from measuring performance to reporting value. Assets could be reported up to the limit of the petroleum reserves' value, incentivizing spending to reach that limit. The only concern was the “ceiling test” write-down, which required an impairment to be recorded when asset values exceeded reserve values, bringing assets back in line with reserves. Thus, the ceiling test marked the point where a producer was swapping investment dollars for even smaller amounts of output.

Most of the time, this made the industry appear profitable the more it spent, leading to "muddle through" as the only competitive differentiator between oil and gas producers. Today, the industry's commercial performance sits at about 25% of what is necessary to sustain itself. For decades, it has hoodwinked investors with specious financial statements that have no basis in reality, performance, or validity. These statements, however, do show the industry is “well built” and has lots of “cash in the ground.”

The culture in the industry knows no different. Considering that the most competitive posture would be to have no assets valued in property, plant, and equipment (because they earned abundant profits to recognize those costs) is not part of their thinking. The officers and directors are the ones responsible, accountable, and in control of the firm's resources to ensure this did not happen. They have ignored shareholders' calls for action since 2015 and have disregarded market offerings such as People, Ideas & Objects that could remedy these issues. Therefore, they are responsible to their shareholders for the losses incurred, starting with the $4.1 trillion in revenue losses from natural gas price structural degradation.

Making Our Case!

From October 11, 2023, to May 1, 2024, People, Ideas & Objects presented our case through 44 blog posts under the “Notice” label, focusing on lost revenues and opportunities in natural gas over the past. We documented the revenue loss attributable to the deterioration of natural gas price structures since 2009, where the traditional heating value of 6 to 1 fell to as much as 50 to 1 in early 2024. Comparing the differences in value between 6 to 1 and realized gas prices, we identified $4.1 trillion in revenue losses and a lost opportunity to rehabilitate this pricing structure through LNG market expansion.

I am frequently confronted by those who believe these opportunity costs are tertiary to the industry's pursuit. I argue these are not opportunity costs; they are the responsibility of the officers and directors to maximize and realize shareholders' asset values. This is value leaking out of the bottom of the bucket, not a mere possibility. These concerns fall well within the domain of what an oil and gas producer should pursue and are necessary to make shale commercial. Distractions toward clean energy and a focus on “building balance sheets” will cause such leakage to occur.

These are not unknown unknowns. They are within the control and fiduciary duty of oil and gas producers. Addressing them requires only the most basic business understanding. The misguided culture of idle navel-gazing and pretense, driven by "muddle through," has led to these issues being neglected. Failing to address them in the market, while pursuing other unrelated, unprofitable industries where oil and gas producers hold no competitive advantage, constitutes willful misconduct based on misrepresentations to shareholders.

Officers and Directors Liability Insurance may be canceled due to this litany of purposeful degradation. Insurance firms may successfully accuse producers, officers, and directors of willful misconduct on many levels.

• Late 1970s the SEC regulates oil & gas producers to adopt Full Cost accounting. Officers and directors misinterpret this as license to overstate asset values.
• As noted, overstated assets create equal amounts of overstated profits. Attracting investors seeking the enhanced profitability, overinvestment therefore leads to overcapacity leading to overproduction, or unprofitable production.
• Oil & gas are “price makers” from an economic perspective. No readily available substitutes, small changes in supply / demand have enhanced impact on prices. 
• Oil overproduction is documented in a July 27, 1986 Calgary Herald article causing oil prices to collapse from $30 to $10.
• Deliberate SEC overstatement of assets formulating a culture of “spending is profit” and “muddle through” begins in oil & gas.
• Misrepresenting financial statements based on value, not performance.
• Corporate strategies begin to incorporate bankruptcy. Chesapeake declares a $25 million pre-bankruptcy bonus, and returns officers to manage the new organization. 
• Natural gas prices began their permanent structural degradation in January 2009.
• Preliminary Specification published in August 2012
• Publication provides proof officers and directors knew of market alternatives.
• Investors suspended further support of oil & gas producers' capital structures in 2015.
• People, Ideas & Objects published a July 4, 2019 white paper: “Profitable, North American Energy Independence -- Through the Commercialization of Shale.”
• Receives broad distribution yet producers refute the Preliminary Specification as unworkable as shutting-in production will damage formations. 
• April 2020, ten months after the publication of our white paper, oil prices hit negative $37.00. Subsequently 25% of world oil production is shut-in.
• August 2020 producers capitulate on the viability and commerciality of shale. Transition to pursue clean energy in an unauthorized corporate redirection. 
• Undertaken throughout the industry.
• Producers shale interests are disposed of. Such as Shell’s.
• Oil & gas service industry realizes they are no longer a concern to clean energy producers.
• Resumption of 25% of global oil production, producers report no damage to any formation was reported anywhere. 
• Realizing the unauthorized nature of their transition to clean energy and shale appearing better in the rear view mirror. Producers return to oil & gas.
• People, Ideas & Objects ran our “Notice” series of blog posts documenting in detail these points and calculating the $4.1 trillion revenue losses in natural gas prices. 
• Interestingly SAP sales to oil & gas producers have increased markedly since October 2023.
• SAP will sell you an oil & gas ERP system. However SAP does not have an oil & gas ERP system.
• During this period People, Ideas & Objects realized the unbelievable waste being generated in LNG exports arising from the comprehensive mismanagement of LNG.
• Producers did not understand and did not implement the appropriate means to sell natural gas beyond the Henry Hub as their point of sale. 
• All the export sales of natural gas that was shipped via LNG was priced based on Henry Hub prices. Not their ultimate point of sale in either Japan / Korea or the Netherlands.
• Paying for the refrigeration and shipping costs would have provided them with the opportunity to rehabilitate the domestic natural gas price back towards its 6 to 1 heating value factor. 
• Upon publishing our finding the industry undertook rapid action to sign agreements to do exactly that.
• However, contracts were not for existing facilities. Not for facilities under construction, or facilities that had received regulatory approval, or facilities that had achieved the point of approval for the decision to build the facility!
• The volume of these contracts was so significant that President Biden announced that no new LNG facilities would be approved during the remainder of his administration. 
• This and other callosal blunders by officers and directors shows the catastrophic breakdown and cataclysmic failure of their administrations are not happenstance, isolated, inconsequential or acceptable. This is disqualifying, and those responsible need to be dealt with urgently.
• Personally I find the capitulation of the political landscape of the oil & gas industry to the politicians, the environmentalists and others abhorrent. Playing the victim, silence and whining that so and so did such is comprehensively unacceptable. Standing up and selling the value the industry provides is the last thing on their minds. They are weak, afraid and their opponents understand this. While at the same time expressing an extreme lack of care and duty towards their shareholders.

The Consequences

Shale has to be the greatest endowment of value known to mankind. It is undoubtedly the reason that the North American economy will be unconstrained in its ambitions in the 21st century. Shale was mapped out by the U.S. Geological Survey in the late 1800s. The service industry is responsible for the development and implementation of the methods, procedures, tools, and equipment that made production a reality.

However, shale has been fundamentally destroyed by the officers and directors of North American oil and gas producers. They have capitulated on this endowment, and we should hold them accountable. The immense value represented in shale oil & gas and the amount produced cannot be accounted for anywhere. Investors are disenchanted and have stopped supporting the producers' capital structures. The service industry is but a shadow of its former self, heading at light speed into a black hole. No one wants to work in oil and gas as a career choice, and those remaining are there for the money and benefits. Yes, shale has been mismanaged.

Officers and directors do not deserve the time of day based on this record. They knew what was happening, were apprised of alternatives, refuted them with untrue statements, and abandoned the industry to pursue the most unaccountable, unprofitable, and uncommercial path known to man in the clean energy industry. People, Ideas & Objects have proven they consistently fail to grasp the most basic business concepts. Opportunities such as LNG market development have been left to others to siphon off that value. There is no previous example of failure as comprehensive and tragic as what has occurred in oil and gas today. It is incomprehensible how officers and directors have ignored their investors' lack of support since 2015. There is no more critical message that can be sent to a firm!

But that’s not all. What happened to the value built before the officers and directors arrived? Where is the additional money taken from investors? What about all the money invested in the service industry? Where is the cumulative value of all those careers spent working diligently to ensure the industry was profitable, secure, and reliable? There is nothing left for anyone now. Most of it was wasted while those responsible, accountable, and in control ensured everyone knew they were in charge. And the vision they propose today is consolidation? This is counterproductive to all other decentralized initiatives successfully implemented in the last two decades. The Internet may be the one opportunity for the industry to get back on its feet, yet they want to use the old Soviet Union's methods—a method that shows they will be more obstinate and stuck in their ways than before because they’ll have more bureaucratic control.

Conclusion

The tragedy will ultimately unfold when society's economy and political influences are dictated by those who supply North America with its oil and gas. North America is the most powerful economy and the largest consumer of energy. Few see the immense amount of oil and gas being shipped in pipelines, ships, tank cars, and trucks. They don't realize the global consumption of 100 million barrels of oil daily, nor do they see what’s in their vehicle's tank until they pay for it and feel the cost is too high for the little they received. They believe that covering their roof with solar panels or seeing windmills across the landscape will replace oil and gas, failing to grasp their insignificance.

I’m asking for a choice to be made. We either go with those whose performance is what we know, and live with them, “accepting the reality that all countries are the same and paying our fair share for once.” Chanting their woke agenda along with them. Or we change to a dynamic, innovative, accountable, and profitable oil and gas industry with People, Ideas & Objects Preliminary Specification, our user community and their service provider organizations. 

Time has been wasted and the point of what I have been writing about is as plain and obvious to anyone who cares to look. We can document the destruction of the producers' officers and directors; however, if we continue without any action from here, it will be more than this small, select group of individuals who will be responsible for the tragedy that we realize. 

"That Jarring Gong," Part IX

 Enough is Enough!

This thought has been lingering in my mind for a few months, and the final catalyst was an article by former United States Attorney General Bill Barr in the Wall Street Journal. His thoughts resonated with me, supporting a decision I wasn't sure would find much backing. However, it's clear that there are others who share this sentiment. Recently, Elon Musk made a similar move by banning Apple devices at his companies due to Apple's use of OpenAI. Inspired by this, I’ve decided to implement a new policy within People, Ideas & Objects: no Microsoft software, hardware, or services will be used in any capacity within our organization, our user community, their service provider organizations, or among our developers. This strict avoidance is rooted in a longstanding concern I’ve had about Microsoft. Those who know me understand that I’ve never purchased their products and never will. Now is the time to take a stand and say enough is enough. Security has never been a priority for Microsoft, and this cultural flaw is something they seem to neither recognize nor address.

The Issues

I've long questioned Microsoft's contribution to the market. Where is the "innovation" that Bill Gates and Steve Ballmer claimed to bring to their products? The only notable attempt I recall is "Bob the Human Interface." Since its inception, Microsoft has stifled original market innovators by underselling and overinvesting in their marketed product capabilities, eventually overpowering and outperforming competitors. The first significant instance of this was with Lotus 1-2-3, the pioneering spreadsheet software. Similarly, several word processors like WordStar and WordPerfect were pushed out by the eventual dominance of Word and Office. Microsoft also set its sights on the operating system interface, trying to emulate Apple's 1984 innovations. Windows eventually became usable with the release of Windows 97, setting the industry standard. Another example is the IBM OS/2, a joint initiative with Microsoft, which was abandoned by Microsoft, leaving it to fade into obscurity.

The time has come to acknowledge these issues and take a definitive stand. We will move forward without reliance on Microsoft, focusing instead on technologies and partners that prioritize security, innovation, and integrity.

One Man’s Opinion

After Steve Jobs returned to Apple, it became the only firm I’m aware of that has come back from a near-death experience to once again prosper. Microsoft, on the other hand, has faced challenges with its product innovations, such as the Zune, Internet Explorer, Nokia smartphones, and Bing, indicating that the game has changed for them. However, Microsoft’s Windows operating system remains the only OS that users continue to pay for, including upgrades, while Linux and Mac have been free for at least a decade. Despite this, Microsoft has a sufficient number of customers willing to pay, enabling the company to acquire promising startup technologies and large companies like Nokia, LinkedIn, and GitHub, thereby maintaining a significant market presence.

Today, Windows and Office continue to sell well enough for Microsoft to position itself as a leader in the Information Technology marketplace, or so they believe. None of their current products were initiated internally or developed through their own initiative. Recently, they purchased a $10 billion interest in OpenAI and announced their own AI service, which will apparently use Microsoft cloud installations exclusively. Microsoft is investing heavily in this capability, despite their AI efforts already lagging behind competitors.

If we critically examine Microsoft's history and ask what is uniquely theirs, it's challenging to pinpoint anything significant. C# was intended to replace Java, but security issues have plagued their products. Windows is notorious for viruses, and .Net's basic security model is fundamentally flawed. Security is certainly not their forte unless Microsoft's competitive advantage lies in security breaches.

Three Examples of Behaviors

Example 1: Amicus Curiae in Supreme Court Case #18-956

Microsoft's behavior often reveals intentions that may not align with fostering innovation. For instance, their Amicus Curiae brief in support of the petitioner in the Supreme Court case #18-956, Google vs. Oracle, demonstrates a stance that might seem counterproductive if Microsoft were truly innovative. They argue that the Federal Circuit's decision threatens innovation by impeding fair use in software, crucial for collaborative processes and the development of new technologies like cloud computing and the Internet of Things. However, their position may primarily protect their own interests in maintaining control over software elements rather than genuinely promoting progress in the software industry.

The Federal Circuit’s decision threatens disastrous consequences for innovation. Software production today is often a highly collaborative process in which many different players participate. The industry’s current practices developed in reliance on decades of court decisions permitting robust fair use of functional software elements. Those cases accommodate the practical need for third parties to access and reuse functional code—like the software interfaces at issue here—to ensure the availability of programmers and to facilitate interoperability across myriad software platforms and hardware devices. Innovations in hardware (such as the “Internet of Things”) and software (such as cloud computing) have made that once-stable body of law increasingly critical. After hearing the evidence, the jury understood those considerations and concluded that Google’s fair-use defense was valid. The Federal Circuit’s reversal of that verdict as a matter of law threatens fair use’s vitality and extinguishes the necessary “breathing room” for the ecosystem of innovation it protects. This Court should grant review to ensure that copyright does not impede, rather than “promote,” “the Progress of Science and useful Arts” in the software context. U.S. Const. art. I, §8, cl. 8.

Example 2: Java and Intellectual Property

The purpose of object-oriented programming, exemplified by Java, is to reuse objects instead of rewriting them, addressing the inefficiencies of procedural programming. Java's framework allows developers to leverage pre-existing code, enhancing efficiency. However, Google have utilized this framework without compensating Oracle/Sun, the creators of Java. Google's use of 11,500 lines of code to access the Java API in Android highlights this issue, exploiting Java's efficiencies without adhering to fair use principles intended for minor, personal purposes, not for generating billions in revenue. This undermines the incentive for creating such reusable objects and frameworks, as the original developers are not compensated for their intellectual property.

Access through GitHub (a Microsoft 2018 $7.5 billion acquisition.) to all the world developers code is the purpose of what Microsoft were after and friend of the court comment regarded. This has been repackaged as “Co-Pilot” taking others IP and selling the derivative product as an AI feature that allows Co-Pilot to write software code based on the understanding of the Large Language Model learned from GitHub. 

In a screenshot shared on X, Kukoff highlighted detailed allegations concerning the development of GPT-4, suggesting that its closed-source nature primarily serves Microsoft's proprietary commercial interests. The screenshot included a quote attributed to Nadella, made during the November 2023 controversy surrounding OpenAI.

Nadella reportedly remarked that it would not matter if OpenAI ceased to exist, emphasizing Microsoft's possession of intellectual property rights, computational resources, and data necessary for AI development. “We have all the IP rights and all the capability. We have the people, we have the compute, we have the data, we have everything. We are below them, above them, around them," stated Nadella, as per Kukoff’s post.

Example 3: Concerns About Big Tech Dominance

Some may argue that Microsoft is in it to win it, however their behavior has become an issue in my mind. Secondly this article of two time United States Attorney General Bill Barr’s raises similar concerns to People, Ideas & Objects however on a much larger scale.  

Big Tech’s playbook for expanding its dominance is familiar. Once these platforms establish monopoly or near-monopoly power in their primary markets, they enter and gain competitive advantages in adjacent markets. As a House Judiciary Antitrust Subcommittee report found, Big Tech companies have frequently “invested” in emerging firms and technologies in adjacent markets, integrated or bundled these products with their dominant platforms, and then provided a leg up to their offerings by giving them superior access to their platforms.

Big Tech companies can thus pre-empt the normal evolution of emerging markets. Rather than evolve into their own solar systems, adjacent markets become mere satellites of the dominant firms. This not only allows tech giants to absorb new domains but also prevents the emergence of new rivals with technologies capable of disrupting the platforms’ dominance.

The strategy is intentional. Internal deliberations at dominant companies have sometimes shown that a significant reason for investing in adjacent technologies is to throttle threats to the companies’ core platforms and instead turn them into “improvements” that can insulate the firms from competitive challenges.

Microsoft had a policy that captured this in the phrase “embrace and extend” which appropriately some are adding the term “extinguish” to. The warm embrace that OpenAI is feeling these days will soon have their “innovations” meet the same demise as Mitch Kapor’s did. From the WSJ article.

One reason Big Tech companies have become so powerful is that regulators have been asleep at the switch over the past 25 years and allowed them to gobble up emerging firms before they posed a competitive threat. We can’t repeat these mistakes and must carefully scrutinize investments by dominant platforms on the front end so that governments aren’t left trying to undo the harms when it isn’t feasible.

Google’s Android

Eric Schmidt was Chairman and CEO of Google from 2001 to 2011. In August 2006, he was elected to Apple’s board of directors but resigned in August 2009 due to conflicts of interest. The first iPhone was released on January 9, 2007, and the first Android phone was released in September 2008. Notably, both Sergey Brin and Larry Page were mentored by Steve Jobs. As mentioned in Walter Isaacson's authorized biography of Steve Jobs, Jobs felt betrayed by these three and referred to the Android phone as a product that "stole from Apple’s iPhone."

These events are part of a broader trend in the tech industry where large IT companies preempt competition. This behavior is highlighted in Bill Barr's Wall Street Journal article. Steve Jobs' ability to bring the iPhone to market was rooted in work he began at NeXT after separating from Apple in 1985. This work involved the Objective-C programming language, an object-oriented language based on C. From 1985 to the iPhone's release in 2007 and continuing, Jobs and his team built the objects and frameworks necessary for Apple's phones, which remain proprietary to Apple and cannot be copied.

Java, which began in the early 1990s on the other hand, is a programming language available to anyone who signs a license agreement, which includes paying royalties on commercially derived products. For Google to compete with Android against Apple's Objective-C framework, Sun Microsystems developed Java in 2007 would have demanded that a comparable framework be well-established. For Google to build a competitive framework from scratch would have taken at least a decade, as did Apple’s and Sun’s, making Google's Android not timely or viable in the market. Thus, Google opted to use Java, signing the license but never paying for it. Oracle sued and initially won, but Google won on appeal in the Supreme Court.

Adobe

Adobe has also been making controversial moves regarding the licensing and ownership of creative works. Their revised “End User License Agreement” grants Adobe an unlimited use license to all creative works produced with their software. While users retain ownership, Adobe claims unlimited usage rights. This means that if your work appears across the web, it’s because Adobe has the rights to use it.

In contrast, People, Ideas & Objects compensates its user community members for their work during development. We purchase the Intellectual Property rights from each user, ensuring all IP is centralized and can be licensed back to the community for further derivative works. This approach is vastly different from poaching user content for AI or other purposes.

The Other Alternative

As People, Ideas & Objects are eliminating Microsoft's software, hardware and services from any use in the People, Ideas & Objects domain of the Preliminary Specifications development. We feel we reduce the risk of introducing security risks that are unnecessary. Linux and Macs as Unix systems don’t have virus protection needed. If a user authorizes software that does damage, then they’re responsible. However nothing will enter unknowingly as an executable and begin causing havoc without the authority of the administrative level user first. 

Conclusion

If AI is as dangerous as some predict, it is important to recognize that these technologies are essentially advanced algorithms with increased speed and impact on society, making their rise inevitable. Their potential impact is significant due to these capabilities. Former Attorney General Bill Barr's article raises valid concerns, particularly about the culture at Microsoft. Microsoft's culture has historically not fostered an internal drive to develop innovations and products independently. This trend is unlikely to change, and they may continue to leverage their cash and strategic methods for their own benefit in substantial ways. It is not the AI technology itself that is concerning, but rather the corporate culture, as highlighted in Barr's article.

"That Jarring Gong," Part VIII

 When OPEC, as announced, returns 2 million BOE/day to the market in 2025, the potential losses for North America could be substantial if they do not compensate for this increased production. We can make some assumptions based on the recent behavior of natural gas prices. In the short term, producers' alleged voluntary production cuts totaling approximately 5% led to a 91% price increase. This raises the question: will officers and directors aim for a new low in oil prices, perhaps even below the negative $37 record? We also have this century's record of overproduction of natural gas and the $4.1 trillion revenue loss we documented in late 2023. Matching that may be a worthwhile target.

North American producers are high-cost, swing producers, with the obligation to ensure "real" profitability in their oil & gas production. In contrast, the Middle East's conventional reserves benefit from much lower capital costs and significantly higher daily well productivity. Their investments are profitable based on vastly different economics compared to North America. Middle Eastern conventional fields can sustain high production levels for decades, exemplified by Saudi Arabia's Ghawar field, which has been the world's largest since 1948 and whose capital costs were retired long ago. Meanwhile, North American producers face substantial capital costs that are yet to be expended. 

Before any forward progress can be made, accountability for past actions and the industry's failures must be addressed. People, Ideas & Objects foresee a convergence of several aggravating factors making the conflicts and contradictions in 2025 difficult for the "muddle through" crowd to manage.

2025

Replacement Costs

As with natural gas production, People, Ideas & Objects contend that the replacement cost of each barrel of oil in North America is around $150. Consequently, natural gas, on a 6-to-1 basis, should command a price of $25. These figures are what I derived from the financial statements of the producers; I didn’t spend the money. It has always been our claim that oil and gas have been unprofitable. Comparing these replacement cost values to their selling prices clearly illustrates the industry's destitute state today. These are the replacement cost values that we believe oil and gas should sell for. They represent the costs for oil and gas sold today, which must generate the financial resources to replace the commodity. This is the minimum necessary in my opinion, as it doesn’t contribute to the expansion of reserves, only replacement. It will cover the costs of exploration and production, but not discovery.

The State of Affairs

What condition is the North American oil and gas industry in? It could be that it's in the eye of the beholder. In my view, it’s in absolute shambles. I don't think any other industry has managed to carry itself this far without being forced to take radical, remedial action and rebuild itself. It being one of the most capital-intensive industries in the business world, it therefore generates ample cash flow to continue basic operations. Fumes have fueled the service industry and suppliers. Producers, as a primary industry, have played every game on those honest, hardworking people who were subject to their mischief.

There used to be a willing supply of investors who believed the financial statements that producers were issuing. Financial statements that, for all intents and purposes, have not changed in any form or fashion since investors realized they were being deceived in 2015 and suspended all further equity investments. "Muddle through" has not been able to remedy the shortfall in terms of what investors brought to the table and to keep the appearance of prosperity continuing. The best example and most dire consequence of this “muddle through” approach is the impact on the service industry.

Who Needs the Service Industry?

Field operational capacity has plummeted to 30% of what was available before 2015. There was a brief resurgence, pushing capacity to 50% between 2017 and 2020. This was when producers discovered the true meaning of accounts payable, and the service industry worked for free. Not paying bills for 18 months is not standard business practice, but that’s what North American producers did. Then COVID-19 hit, exacerbating the situation and leaving the service industry in desperate need of help. Unwilling to part with any primary revenues they controlled, producers abandoned the service industry to fend for themselves. Cutting up equipment for scrap metal and selling horsepower to other industries became necessary, though unprofitable. Service industry investors watched in amazement as producers failed to realize the long-term consequences of their actions. Producers fooled the investors in the service industry for sure. I wonder how they'll fool them next time?

Nothing has been done to mitigate the damage from investors walking away from supporting the industry. Nothing has been done to mitigate the damage to the service industry. Oil and gas producers remain insulated and isolated from immediate cash needs. However, the second half of 2024 reveals a troubling trend in the oil and gas industry: capitulation is running through the service industry. The writing on the wall has the distinct producer grammar, font, and writing style. This history since 2015, when new investor dollars to oil and gas producers were cut off, shows that producers passed down this burden to the service industry. Let's call that the service industry's short and mid-term history. Producers' long-term history reflects a boom and bust mentality that detrimentally affects the service industry.

The capitulation within the service industry is evident. It's not about the loss of the capital structure of service firms, which were damaged beyond recognition post-2020. The capitulation I’m seeing is that the industry has never been truly prosperous for operators. Any money made in good years is quickly eroded during bust years. The capitulation I’m seeing is of the going concern.

The producers' solution to the problem of the day: consolidation is causing the concern I believe. The number of customers, in terms of oil and gas producers in your geographical area, is dwindling. A 300-mile drive in every direction may contain only ten producers, soon to be fewer. Dealing with producers who knew everything about your billing practices and doled out work on the basis of throwing bits of food to the hungriest competitors was already difficult. Now, there'll be markedly fewer producers. One supplier will gain the business of the consolidator, while another loses it. The culture of treating service industry providers as "greedy and lazy," only taking a producer's cash, reflects a lack of business knowledge regarding "free on board," "building balance sheets," and "putting cash in the ground." This foolishness stems from a culture beginning in the seventies that hasn't accepted a single challenging argument. You reap what you sow, gentlemen. Repeated warnings of this day’s arrival if action was not taken. And now in 2024, actions are being taken by others. 

The Endowment of Shale

There is no question that shale is the abundant energy source needed to drive the economic and political needs of the 21st century for North America. However, many issues are associated with this new resource. As with all oil and gas, the easy and least expensive reserves are gone. What remains will require more effort and ingenuity with each incremental barrel. In a rapidly increasing cost environment, wouldn't it be prudent to have good control and understanding of how and where real profitability is earned? The innovation and drive leaving the service industry is, therefore, a tragedy of unique proportions. But I repeat myself. 

The production and reserves are prolific, but the decline in deliverability is quick and unforgiving in shale, measured in months, not decades. Measured on a logarithmic scale, they point straight down when they turn. It's not an overall reserves issue of concern; there are ample petroleum reserves remaining to be sourced. However, it demands the same volume of capital that was used to complete the first wells. Whether you extend and frac the lateral, drill and frac a new one, or simply re-frac the old lateral at different positions, each of these operations costs millions of dollars and will expose as much production as the initial drilling did, for the same period of time. The issue is that the service industry and the necessary capital are not as they were. With capacity at 30%, any guess is probably appropriate regarding the quality of their capabilities.

If, as claimed by OPEC and proven in last year's calculations by People, Ideas & Objects, there were $4.1 trillion in natural gas revenue losses, oil production may face additional short-term overproduction of both commodities throughout 2025. Prices may be severely affected on the downside, further eroding the service industry due to lost time and declining revenues of producers from both volume and price declines. Stating this shows it's a fundamental principle in business that a firm would do what is necessary not to experience price and production volume decline concurrently. At the hands of producer officers and directors, this 2025 prediction seems accurate and therefore futile.

What the service industry realized in the immediate post-COVID period, when producers were not paying their bills, was not only the cutting up of equipment or selling of horsepower but also the loss of labor needed to drill a lateral for a shale well. These workers left to find steady employment in other industries, where they are probably now firmly entrenched. How they come back to an industry with less equipment, investors burnt by producers, and the capitulation of the brain trust and entrepreneurial drive remains uncertain. Excuses, blaming, and the creative generation of scapegoats by officers and directors should be seen as cause and effect.

If you read the Preliminary Specification completed in August 2012, it details my concerns for the industry if chronic oil and gas overproduction continued. The discussion centered around the fact that these commodities are price makers, not price takers, as officers and directors assumed. It clearly indicated that overproduction was causing prices to fall below the marginal price. If producer officers and directors had been open to criticism and had not ostracized me from the industry, this could have been effectively avoided. In retrospect, it's obvious that these are general business principles beyond their comprehension.

The Post-it note, pen, telephone, receptionist's time, and receptions square footage are all capital items found in property, plant, and equipment in every oil and gas producer. My offer still stands: if any producer wants to refute my claims, I’ll conduct an audit of their overhead costs to determine the truth, and I'll do the audit for free. Hardly anything is capital in oil and gas. PennWest is no longer a firm because when the SEC investigated, they found it was capitalizing operating costs. Such is the passion for avoiding any cost ever hitting the income statement.

Overstated assets generate equal amounts of overstated profitability. Overstated profitability draws in overinvestment from investors looking to capture those profits, leading to overbuilding the productive capacity of the industry which results in overproduction, which is fatal to pricing in a price-maker product. These arguments precipitated my drive to begin this journey back in 1991. Sparked by a Calgary Herald newspaper article that I can't reproduce due to copyright. On page 33 of the July 26, 1986 issue, there are two related articles: "OPEC Minister Can See Economic Destruction" and "Return to Glory Days Unlikely." These articles responded to the initial overproduction-induced oil price collapse from $30 to $10. The issue was known and understood globally at that time. The consequences were well-documented, and the long-term economic destruction was predicted. It’s 2024, and after a valiant effort by investors to defy gravity and keep the industry afloat, what has been made of North American oil & gas.

Conclusion

2025 may be the year when officers and directors begin to realize the damage they've done. They'll need to formulate new viable scapegoats for themselves and find a way to cover their exit out the back. This has gone on too long and the damage will soon take on a permanence that will roll over our economic and political performance. It was unnecessary and will be unnecessary tomorrow.

"That Jarring Gong," Part VII

 Profitable Production Rights Framework

“Frameworks” in People, Ideas & Objects context, represent software applications that enable developers to access advanced capabilities through various methods. These frameworks are offered as a service, allowing developers to inherit the capabilities, capacities, and reputation of the framework provider for a fee. While "framework" may not be the perfect term, we use it in the Preliminary Specification to describe our approach, including Oracle Cloud ERP.

Since 2020, a new framework has been under development, now generally available, that focuses on blockchain technology. People, Ideas & Objects intend to use this framework, called “Onyx”, developed and operated by J.P. Morgan Chase, to manage our Profitable Production Rights blockchain.

Please watch this video overview of Onyx. At 7:10 Keerthi Moudgal states the pertinent point of how blockchain, J.P. Morgan Onyx and People, Ideas & Objects will be able to operate. It’s not a means to raise capital. It's a facility in which investors will be able to use to trade and transact.

Tokenization of Real Assets: Insights from JP Morgan's Onyx Digital Assets | Business of Blockchain

Attributes of Onyx by J.P. Morgan for Profitable Production Rights Holders

• Enhanced Liquidity: Provides a trading platform for both Flexible and Profitable Production Rights.
• Independent Technology: An independent third-party blockchain technology and platform developed and managed by the largest bank in the world. [Learn more](https://www.investopedia.com/articles/investing/122315/worlds-top-10-banks-jpm-wfc.asp).
• Smart Contracts: Utilizes smart contract-based blockchain technology to manage the Profitable Production Right licenses on behalf of the holders. [More on smart contracts](https://www.ibm.com/topics/smart-contracts).
• License Revenue Management: Captures license revenue and pays the costs to process Cloud Administration & Accounting for Oil & Gas software once operational.
• Leverages Intangible Value: Enhances the value proposition from the Preliminary Specifications' decentralized production model. Profitable Production Rights licenses are assessed as a percentage of oil & gas revenue.
• Intrinsic Value of IT: Realizes the intrinsic value of Information Technology when applied to disintermediate an industry's business model.
• Transferable Licenses: Licenses are transferable to any North American oil & gas production and remain valid as long as the Cloud Administration & Accounting for Oil & Gas facility operates.
• SEC Compliance: Will comply with SEC Form D. 

These highlights outline our first-year budget to establish this framework as an operational capability. Once operational, People, Ideas & Objects will load the Profitable Production Rights licenses onto the Onyx framework. The first year's budget of $10 million U.S. aims to make these rights fully operational, serving as our funding source for subsequent development costs of the Preliminary Specification. As development progresses, we will sell the necessary rights at the trading value of the product to realize the required proceeds.

Producers Competitive Structure

People, Ideas & Objects Preliminary Specification offers a compelling value proposition that is based on a number of methods in which to provide for the most profitable means of oil & gas operations, everywhere and always. The highlights include.

• Commodity Pricing Structure: Implements a pricing model that ensures timely and accurate recovery of all exploration and production costs, passing these costs to consumers.
• Hyperspecialization and the division of labor: to enhance the industry throughput and performance from the same resource base.
• Shared Accounting and Administrative Infrastructure: Cloud Administration & Accounting for Oil & Gas shares these functions across the industry, eliminating redundant costs associated with individual producers building and maintaining their own capabilities.
• Joint Operating Committee Costs: Ensures that Joint Operating Committee costs, including overhead are variable, based on profitable production. If production is shut-in, all costs are variable, thus no profit but also no loss.
• Cash Management: Returns cash incurred in overhead to the producer/Joint Operating Committee to cover the subsequent month’s overhead costs. Currently, overhead is capitalized to property, plant, and equipment and depleted over decades, necessitating new sources of fresh capital be sourced each month.
• Capital Cost Recognition: Aligns the recognition of capital costs with capital market expectations, avoiding outdated practices like “putting cash in the ground” and “building balance sheets,” which reflect poor business understanding. Instead, the return of capital is used to fuel capital expenditures, preparing the industry for its most complex and challenging future.

Key benefits and outcomes include disintermediation through Information Technology: Leveraging IT to streamline operations, reduce inefficiencies, and create a more direct connection between production and profit.

People, Ideas & Objects propose a reimagined industry structure emphasizing dynamic, innovative, accountable, and profitable producers. Advocates for a comprehensive cultural change within the industry to embrace new operational models that prioritize profitability. Recognizes the need for a comprehensive industry effort to overcome the challenges and risks associated with transitioning to these new models.

Our strategy is ambitious and seeks to address the challenges facing the oil & gas industry by fundamentally rethinking how it operates. By engaging a broad spectrum of stakeholders through the Profitable Production Rights License, our approach aims to transform the industry into a more profitable and innovative sector. A transformation that is not only necessary for the industry's survival but also for its ability to compete and thrive in a global market that increasingly values these attributes.  

Implementation Summary

People, Ideas & Objects include a blockchain module as one of the 14 modules in the Preliminary Specification. This module is designed specifically for the producers and will not be associated with the operation of Profitable Production Rights. However, Profitable Production Rights, operated on J.P. Morgan’s Onyx, will be the essential gateway producers need to secure each barrel of oil equivalent per day they produce. This access will be crucial for utilizing the Cloud Administration & Accounting for Oil & Gas software and services provided.

The proceeds from the sale of Profitable Production Rights will be used to build the Cloud Administration & Accounting for Oil & Gas facility. The development costs of the Preliminary Specification include expenses for developers and our user community, who contribute to the project and earn specific rights through their involvement. These include a license to establish independent service provider organizations for conducting service, support, implementation, accounting, and administration on behalf of producer firms. Access to these service provider organizations will only be available through the Profitable Production Rights gateway access to Onyx.

Service providers, being independent, will bill producers directly for their service fees and are responsible for their own costs. Reorganizing, building, and maintaining the industry's accounting and administration would be unreasonable for anything other than the market to manage, making this structure the preferred and chosen method. 

The fees generated by Profitable Production Rights will not include any inherent direct value from the service providers; they will cover only the Cloud Administration & Accounting for Oil & Gas. Negotiations for the Profitable Production Rights licenses will be determined by their rights holders.

As the cryptocurrency and digital asset spaces evolve, barriers to entry and scale are gradually falling away, says Massey. The global economy is moving closer to widespread adoption of these new ways of doing business. When cryptocurrency and digital assets become easier to access and transact than fiat currencies and traditional processes allow, organizations may witness a groundswell of adoption that transforms the way value is exchanged.

 —by Tammy Whitehouse, senior writer, Executive Perspectives in The Wall Street Journal, Deloitte Services LP. 

Strategy for Industry Transformation

A core component of our strategy is to incentivize stakeholders of the oil and gas industry to adopt new practices that ensure profitability and sustainability. This involves transitioning from traditional methods to more innovative and accountable approaches, facilitated by the Profitable Production Rights License. This license not only generates revenue for People, Ideas & Objects but also acts as a catalyst for industry-wide change.

Target Audiences:

• Oil & Gas Investors: Our strategy aims to re-engage investors who have been disillusioned by past producer practices. By offering them a stake in a transformed, dynamic, innovative, accountable, and profitable industry, we seek to renew their interest and confidence.
• Oil & Gas Employees: Direct participation in the production process is attractive and promises a safer, more rewarding future during this transition. Focusing their interest on profitability, everywhere and always.
• Service Industry Representatives: Addressing the oil & gas boom/bust cycle, our strategy advocates for a more stable and trustworthy relationship between producers and the service industry. This approach aims to rebuild trust and ensure mutual profitability.
• Producers (North American and Worldwide): By encouraging the direct purchase of Profitable Production Rights Licenses, our strategy seeks to secure production rights and promote a performance-based culture across the industry.
• Our User Community and Their Service Provider Organizations: Their participation in software development demonstrates their commitment to profitability. Our user community and service provider organizations come from the broader oil and gas community, and their direct financial participation in the production process is highly complimentary.

Our target audience for Profitable Production Rights licenses provides these holders with incremental value, securing license revenues directly from the production of profitable oil and gas. Producers pay the Profitable Production Rights license holders a percentage of revenue as the fee to access Cloud Administration & Accounting for Oil & Gas.

Our Response: To a Request for Proposal (RFP)

In 2021, in anticipation of receiving Requests for Proposals (RFP’s) we wrote a response and published it to our wiki to provide an understanding of the benefits of the Preliminary Specification. It details the seven Organizational Constructs we’ve defined within the 14 modules of our software to create a new culture in the industry. Explaining the choices we made in terms of the areas we felt we could be best employed in the industry to build the most value. 

Our competitive advantages are unique and highly relevant to the current state of the oil and gas industry. People, Ideas & Objects is structured to ensure the delivery of high-quality ERP systems to North American oil and gas producers, enhancing their operational efficiency and profitability.

Conclusion

The Profitable Production Rights strategy is ambitious, aiming to address the multifaceted challenges in the oil and gas industry by fundamentally rethinking its operations. By focusing on innovation, accountability, and profitability, and engaging a broad spectrum of stakeholders through the Profitable Production Rights License, this approach seeks to transform the industry into a more profitable, sustainable, and innovative sector. This transformation is crucial not only for the industry's survival but also for its ability to compete and thrive in a global market that increasingly values these attributes.

The oil and gas sector generates 10 to 25 thousand man-hours of mechanical labor per barrel of oil equivalent, translating to 23 to 59 times the number of man-days produced by the world's entire population. North America, particularly sensitive to political and economic disruptions in fuel supply, has seen its oil and gas producers squander the substantial endowment of shale, earning nothing but destruction from it. This mismanagement may be leading to an accelerated decline in production deliverability that may be irreversible, potentially jeopardizing our way of life. Despite this, the producers remain unaffected and complacent, they will “muddle through.”