Shutting In Production
The current inactivity in the oil and gas sector reflects deeper, long-standing issues. For decades, producers prioritized cash flow over genuine profitability, a focus that masked the steadily declining performance of their assets. This approach led to a reliance on investors, and when that support predictably dried up, working capital became critical. Officers and directors often point to dividends as the cause of today’s cash shortages, failing to recognize that profitability itself would generate sufficient funds, but also secure the operational independence they had lost through years of questionable financial management and reporting.
A key obstacle to optimizing the industry has been a persistent resistance to shutting in unprofitable production. Arguments typically cite excessive costs or potential reservoir damage, but real-world evidence contradicts this. During the COVID-19 pandemic, approximately 25% of global production was shut-in without widespread reports of subsequent reservoir damage. Furthermore, routine gas plant turnarounds and hurricane-related shutdowns in the Gulf of Mexico (such as those caused by Ida, Laura, Katrina, and Rita, which halted substantial production) clearly demonstrate that temporary cessation of production is both feasible and frequently practiced.
This reluctance to production shut-ins seems symptomatic of a "muddle through" culture within the industry – a tendency to wait for problems to self-correct, often resulting in unnecessary and permanent damage rather than proactive resource management. This passive approach has had staggering financial consequences, contributing to an estimated $4.7 trillion in lost natural gas revenues this century due to overproduction. The industry also largely missed the opportunity to stabilize natural gas prices during the buildout of LNG export facilities, partly due to a failure to grasp fundamental business concepts like "free on board." Today's quiet market activity raises the question: is the industry again missing a chance to improve gas prices by not mastering efficient shut-in and restart processes?
A fundamental problem enabling this situation is the inability to accurately identify unprofitable properties. Current Enterprise Resource Planning (ERP) systems lack the necessary detail, especially regarding overhead and depletion accounting. Without this granularity, producers cannot pinpoint where or address the sources of financial loss, even as the need to rehabilitate oil and natural gas prices grows urgent.
The proposed "Preliminary Specification" offers a solution by establishing detailed, factual financial statements at the Joint Operating Committee level. This approach reorganizes industry administrative and accounting resources to directly allocate overhead costs only to profitable properties, eliminating industry standard overhead allowances. If a property isn't profitable and is shut in, associated work stops, and no overhead is incurred.
Consequently, overhead transforms into a variable cost tied directly to profitable production. By recognizing these actual costs within the cost of production (rather than capitalizing them), the commodity price will reflect the true cost, passed to the consumer upon profitable production. This ensures overhead is either avoided entirely or recovered promptly, creating a self-sustaining cash flow for monthly overhead expenses and ending the constant search for new capital to cover them.
The substantial financial and business advantages of this profitability-focused model, often overlooked by the prevailing "muddle through" mindset, include:
- Maximizing Profitability: Preventing the losses of unprofitable properties from diluting overall earnings.
- Officers and Directors Fiduciary Duty: Ensuring reserves are properly recognized, managed and valued.
- Financial Health: Eliminating the burden of using future revenues to cover past losses.
- Cost Reduction: Shutting in production cuts unnecessary operational and storage costs of unprofitable overproduction.
- Enhanced Reserve Value: Increasing the volume of, and Net Present Value (NPV) of reserves as commodity prices rise.
- Resource Conservation: Saving reserves for the time in which they can be produced profitably.
- Targeted Innovation: Focusing efforts on ”where and how” to make unprofitable properties competitive in the North American capital markets.
- Market Price Discovery: Allowing commodity markets to find their marginal price by removing unprofitable production.
- Reflects the True Cost of Today’s Production: Ensuring commodity prices reflect the actual cost of bringing replacement barrels (such as heavy oil or shale) to market.
- Production Discipline: Profitability is the fairest and most reasonable method of production allocation, aligning actions with financial best interests.
This element of our business model provides a compelling value proposition that we’ve documented to be in the trillions of dollars. Yet the cultural push back has been significant. It's telling that while individuals within the scientific community can be persuaded by the data one-on-one, they often revert to industries' cultural norms once back in their environment, repeating justifications for why production supposedly cannot be shut in.
This resistance likely masks a deeper issue: a fundamental inability within the current system for producers to determine with confidence which properties are profitable and which are not. Even if an unprofitable asset is located, understanding the specific business reasons why it's unprofitable is often impossible with existing tools. Navigating the complexities of Producer / Joint Operating Committee dynamics further complicates decisive action. With effective business tools such as the Preliminary Specification engineers and geologists can more effectively do their work.
People, Ideas & Objects Preliminary Specification resolves the co-location issue of where knowledge and operational authority reside. By delivering the knowledge to the Joint Operating Committee – the entity already empowered with operational control – we eliminate a major source of conflict and inertia. This aligns the Joint Operating Committee's operational framework with the industry's organizational structure, creating a unified approach where shared financial ownership motivates consensus among partners.
Under this model, each Joint Operating Committee receives granular monthly financial statements. Crucially, these reports should not be viewed merely as tools to flag properties after they become unprofitable – that approach reflects the limitations of today's data. Instead, their power lies in proactive management. Producers should use this information to identify properties trending towards unprofitability six months or even a year ahead of time. This foresight allows them to investigate the root causes, collaborate with accounting on business solutions, and potentially avoid the need for a production shut-in altogether.
Without the clarity provided by the Preliminary Specification, the status quo persists: producers cannot reliably gauge a property's profitability or determine what effective interventions are available. Current methods of recognizing depletion misleadingly classifies all production as profitable. Overhead allowances provide no insight into overhead costs, failing to control one of the industry's largest expenses. Furthermore, reported G&A costs appear artificially low (3-5% of revenue) due to heavy capitalization (up to 85%). While the existing system of overhead allowances reflect an industry-wide monthly total of $0.00 in overhead allowances each month.
Conclusion
The oil and gas industry's leadership has demonstrably lost its grip on the sector's financial, operational, and political realities. How North America navigates forward from this point is unclear, especially as revenues continue to be managed by those who seem unable or unwilling to acknowledge this loss of control, creating inherent conflicts.
Trust, faith and goodwill in industry leadership were casualties decades ago. Culturally emphasizing a reliance on dwindling cash flows – mistakenly perceived as the only metric that matters. However, the current level of inactivity reveals that cash flow alone is insufficient to repair the extensive damage caused under this long-standing paradigm.
The critical question remains: what is the path forward? People, Ideas & Objects proposed solutions, designed to address these deep-seated issues, have been met largely with silence from an industry gripped by cultural inertia. There seems to be little belief that meaningful change is achievable. Personnel appear to be simply marking time, anticipating layoffs and severance packages, while leadership in the crucial service sector is showing signs of capitulation.
For thirty-four years, as of May 2025, I have persistently advocated for a different approach. The oil price collapse of 1986 highlighted the issue: strategically shutting in a small fraction of unprofitable production would have stabilized the market and mitigated almost two decades of decline. Yet, my analysis from both accounting and operational auditing perspectives made it clear that the industry's structure, then and now, renders even this seemingly simple action impossible. This realization spurred the development of new organizational models and supporting systems starting in 1991. Decades later, I continue to champion the Preliminary Specifications necessary structural changes, and reflect on not only the desolate nature of industry inactivity, but also the persistence and dedication to “muddle through.”
