The Capacity to Spend and Degrade Deliverability

When natural gas prices crossed the $3.60 barrier last month I thought for sure the producers had it within their power to fix this overproduction problem for good.😏 After all it’s been ten years that these prices have been depressed and the natural gas producers could use some luck and finally get a break! Then on January 30 a drop to $3.14 and all the hopes and dreams of so many bureaucrats evaporated. Only to realize a further 7% drop the next day followed by another 5%. With an increase of two natural gas rigs the market felt that maybe that was too much and took it that, once again, the oil and gas spenders were on the march. The capacity to spend money isn’t that highly valued in the business community. Producers should understand that the real value investors are looking for is the capacity to earn profits. Which is light years more difficult to attain than spending money.

Chesapeake laid off 400 people last week. Which means earnings season is upon us with the first of our sample of 23 companies reporting last Friday. The need to appear active by reducing the headcount always looks good just before a bad earnings report. We’ll have our usual summary of the state of affairs in oil and gas when everyone has issued their financial statements. It’s just that it doesn’t seem to matter as much this time. No one seems to be believing what the producers are saying about their business. Commodity prices rise and the producers are out spending as fast as they can once again. We’ve seen this movie several times now and know how it ends. It will be fatal again for all those that depend on a healthy and profitable oil and gas industry. The only people who never seem to be affected by these downturns or general malaise are the bureaucrats and their Ferrari dealers.

Of course what I’ve prescribed in the Preliminary Specification is nothing but painful, hard, difficult work for those involved in the industry. Some might argue that our budget is an impediment to overcome too. I think that our value proposition of $668 billion for 2017 alone, and each of the next 25 years is where the real costs are, in bureaucratic inaction. The bureaucrats may be searching for that 15 minute solution that they believe will resolve their trillion dollar issues. And there is always the possibility that they will find it. I’m not so foolish as to suggest that these issues can be resolved easily or with a fist full of dollars. If this overproduction and oversupply issue is not currently the biggest issue in the history of the oil and gas industry, then I am not aware of what greater peril could be faced by the producers. As a bureaucrat it’s easy, in a capital intensive industry, where your investments are returned to you constantly, to make up the cash flow necessary to keep yourself happy, the lights on and rent paid. There is however so much more that the oil and gas industry has a responsibility to.

We documented the obligations that our $668 billion / year value proposition is responsible for and to whom. The royalty holders, Federal and State income taxes, the service industry representatives who are so critical to the success of the oil and gas industry, and the people who work in oil and gas who are made to suffer unnecessarily under this self interested bureaucratic regime. These stakeholders are all having difficulty financially and otherwise, and unnecessarily so as a result of the inability of the oil and gas producers to act. Producers who spend money as the core of their business strategy have an inward looking perspective where the rest of the industry is of little or no concern. It’s a simple matter of determining what the cash balance is at the beginning of the day and be sure to have that spent by the end of the day. Repeat for each working day. So when the commodity inventories bloat and the prices collapse it’s obvious to everyone that these events have nothing to do with that producer. They are innocent of any involvement or responsibility. When others, such as People, Ideas & Objects makes recommendations such as the Preliminary Specification, it is these internally focused spending machines that work to ensure that no one recognizes that any issue exists and do everything to silence those that upset the status quo.

This situation has been the day to day operation of the oil and gas industry for the past decade. Nothing has been done to resolve any issue whatsoever. Stories and fables have been told as to what the producers were doing to resolve the situation throughout those last ten years. Clearly nothing has been effective. Producers have created the phenomena of “market rebalancing” to reflect the activities they “undertook.” This term reflects their inaction, and desire to let the productive capacity of the industry degrade to the point where it “balances” again. Deliberate destruction. Brilliant! Usually when commodity prices rose during these past ten years my audience on this blog would fade noticeably. Only to return when the commodity prices collapsed again. This time seems to be different in that the commodity prices are up, yet so is my audience. I’ve also noticed in the past that when prices rose the producers stock price rose. And when prices were declining this led to the decline in their stock prices. Now stock prices just go down based on any direction the commodities are moving. It just seems to me that no one is listening to the producers anymore. We’ve seen this movie so many times and there is so much destruction, why are we believing those who choose to do nothing about it?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Third Friday Off

Oh, and Cash Flow Too

We have been focusing on the implications of the capitalization policies of the oil and gas producers. We know that oil and gas producers, by capitalizing as much as they possibly can, overstate their earnings and the size of capital assets on the balance sheet of the enterprise. We also discussed how the overinvestment in the industry is one of the largest costs that an enterprise can incur. And by far the largest cost that any producer or industry can incur is the deployment of that overinvestment, or the over capacity being deployed in continued production. Causing inventories to swell and pricing power to be lost within that industry. These are the lessons that should have been learned by the oil and gas producers in the past ten years since the financial crisis. A time when the shale gas volumes began to erode the natural gas prices. What other distortions and costs are the results of the systemic accounting distortions the producers report. We’ve spoke about cash flow, however that was a while ago. I think it is worthwhile to review that discussion and reiterate what it is that People, Ideas & Objects believe to be a more appropriate capitalization policy for the oil and gas industry. 

It isn’t doing the oil and gas producer or industry anything productive to have their capital assets accumulate and be recognized in the manner that they are today. On the contrary it is beneficial for them to recognize their costs in a more timely manner to ensure that they are deploying their capital more efficiently. Bloating their balance sheets has enabled the overinvestment and overcapacity to build over time. If the producers were recognizing their costs, which today are predominately capital in nature, on a more timely basis they could avoid these distortions and eliminate these hidden costs that are detrimental to the performance and productivity of the industry. They would also return their capital investments to the firm in the form of cash, assuming they sold their products profitably.

If People, Ideas & Objects method of capitalization was implemented the overcapacity and the loss of pricing power, in terms of costs, would disappear and as a result the performance and productivity throughout the industry would increase. Our policies would include a review of the producers capital to determine which expenditures were made for the purpose of maintaining the production profile and which expenditures were made to expand the production profile. Designating those that maintain the production profile as operations irrespective of the type of expenditure, drilling, completion or equipping. We would also review the type of expenditures that were made. The intangibles would be expensed in the current period for all drilling and completion. Only those physical assets with serial numbers and secondary markets would be classified as capital assets. This is a fundamental rethinking of the capitalization of the oil and gas producer. One in which few expenditures ever hit the balance sheet and most costs flow directly to the income statement in the current period. With the price maker strategy an accurate costing of the product is attainable to ensure that the costs of oil and gas exploration and production are accurately passed onto the consumer. And capital is returned to the producer for reuse in the form of cash.

Cash flow under the current bureaucrats methodology is therefore substantially overstated. If everything is capitalized then nothing is deducted in the current period of operations and therefore cash flow is high. The valuation of the oil and gas producer will therefore be high as well as a result of the markets assessing them at approximately six times cash flow. Therefore this change in the capitalization policies would have a detrimental effect to the valuation of the oil and gas producer. That is it would be detrimental if the change in capitalization wasn’t made with the implementation of the price maker strategy at the same time. The price maker strategy would ensure that all production everywhere and always is profitable which would imply that “appropriate” cash flow was maintained.

The point of this exercise is to ensure that the producer is recognizing their costs and passing those to the consumer on a timely basis. This does one thing very clearly. It shifts the burden for these costs from the oil and gas investor to the oil and gas consumer. It will be the consumer that is paying the full cost of the oil and gas they consume. There will be no more subsidy to the consumer as a result of the capital investment made by the investors sitting on the balance sheets of the producers for decades hiding the actual cost of oil and gas from the consumer. Turning over the capital of a producer today is measured in the number of ice ages they’ve passed through. Which is ridiculous. The need to have this capital returned as quickly as possible is a key to the dynamic, innovative, accountable and profitable oil and gas producer. No other industry has their hand out for more capital to be spent every year. Usually there is an IPO and further distributions as a result of some business combination or merger and acquisitions. Carrying and backfilling the producers cash needs each and every year is a fools game that was facilitated by the oil and gas bureaucrats deception. Which they did by issuing specious balance sheets, growing profits and cash flow statements that we can now see in retrospect never existed in reality. Now the only deception is the bureaucrats thinking they can still run the same scam for a few more years before they retire. I could be wrong but I don’t think investors are falling for it.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Another Teachable Moment

One of the most costly aspects of business that an enterprise can incur is the cost of surplus capacity. It is the cost of capital that has been unproductively deployed. The only thing more costly than surplus capacity is if the enterprise continues to employ that surplus capacity and incurs inventory bloat leading to price declines. Luckily we have this problem in oil and gas for the past four decades and therefore this becomes what they call a teachable moment. This assumes that any bureaucrats are reading this blog which is highly improbable. Let's assume for a moment that oil and gas production needs to be scaled back by 15% in order to maintain the prices that are profitable and the market finds its equilibrium at those prices. A 15% reduction in all of the costs of the industry is not going to happen. The capital cost, which is the point regarding surplus capacity, is substantial and was unnecessarily incurred as the market doesn’t exist for that 15% surplus capacity of oil and gas. That shut-in production in terms of its capital cost is the cost that the producers have to carry as a result of overbuilding their capacities. The situation we have today, which in a capital intensive industry is particularly acute.

That we don’t notice this cost is as a result of the fact that the surplus capacity is producing at all times. Leading to the overproduction situation that has slaughtered commodity prices. The cost of this is adequately represented in our value proposition which we calculated at only $668 billion for 2017. If the capital employed by the industry is $1,620 billion then 15% is again only $243 billion. One of the most amazing aspects of these two costs is that these have been pointed out to the bureaucrats consistently, with the appropriate solution on this website, for many years now. Probably better than a decade in fact. Yet nothing has been done about the surplus overproduction, the oversupply or the over capacity. What has been done has been a successive series of attempts to deal with the individual who keeps writing about these issues.

We however should give full credit to the bureaucrats for their ability to snow the media with their claim of being innovative throughout 2017. Claiming that they had reduced their costs of capital by innovating on the method of drilling and completion. This stretch of the imagination has to win the grand prize of them all. There is no doubt that the producers were able to generate concensions from the service providers to have their wells drilled cheaper. However to suggest that this was a reason for the reduction in their overall costs is hideous. A producer may have about 5% of their wells in progress in any one year. The other 95% are completed and the costs for those are historical. You can’t do anything about the historical cost of what you paid for your car, and they can’t do anything about the historical cost they paid for a well two or ten years ago. What they did do in order to make it appear they were “innovative” was reduced the amount of depletion per barrel being recognized in 2017. The only thing that surprises me here is the ability of all the producers to sing from the same hymn sheet! The question is, when all the bureaucrats act in the same manner to deceive their shareholders, is that collusion?

And of course the bureaucrats were busy throughout the year cutting the number of pencils, Post-it-Notes and people they used in their organizations. These were the costs that occupied the little minds of the bureaucrats. Meanwhile they let the two largest costs that an organization can ever face let loose on the industry to reap their destruction. It’s almost like they didn’t understand where their money was going or their costs were! I’m sure they’ll figure it out soon. Acting to change the situation will however never be done as that requires action and that is something that hasn’t been seen in the industry for many decades.

Is it still the myth of “market rebalancing,” a phenomenon known only to oil and gas, and no other business, or economist in the world? Or has the oil price increase been attributable to the volume of oil that the Saudis and OPEC removed from the market with their production sharing agreement. I’m certain the bureaucrats would never accept that Middle East interests would have anything to teach them. It’s much like the Preliminary Specification, logic is difficult for them to comprehend. It's also so much easier to just mouth the words “market rebalancing” then deal with their two largest costs.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Profitable Production is not Collusion

When People, Ideas & Objects introduced the Preliminary Specifications decentralized production models price maker strategy. The oil and gas producers believed we had become the antichrist. Our price maker strategy was the last thing that they would ever consider. I was so surprised at the response that this idea had generated. As a result what we learned from this over the top response was that the price maker strategy was the solution to the issue at hand. If the bureaucrats didn’t believe in managing the supply by only producing profitable production, then they were the cause of the boom and bust cycle in the industry. I have to say that since that time we have come along way from the knee jerk reaction of the bureaucrats. To where the man on the street can see, and has ample evidence that both the commodities of oil and gas are subject to the principles of price makers. That the Saudis and OPEC have taught us a valuable lesson by implementing their production sharing agreement.

We are not implementing any method of collusion between the oil and gas producers to raise prices. We are seeking to find the marginal price by ensuring that all oil and gas production in North America is produced profitably everywhere and always. If it is not profitable then the property will be shut-in until such time as the producer is able to innovate on the costs, the production or reserves and return the property back to profitability and production. While any property is shut-in, as a result of the reorganization of the industry and producer that is undertaken by implementing the Preliminary Specification, it will incur a null operation. No profit, but also no loss. If only producing profitably is collusion then the “market” system is a means in which to collude. A ridiculous assertion and one the bureaucrats should be embarrassed to have considered and still supporting today.

Why don’t the bureaucrats implement the price maker strategy today and forget about the Preliminary Specification? Simply they can’t. They certainly know what the revenue, royalties, operating and capital costs are for each property. The difficulty is that all of the overhead that is incurred by the company is captured in the corporate overhead accounts. These are subsequently cleared by a large percentage, maybe 80% on average, to capital in the property, plant and equipment account. As a result only overhead allowances are charged to the individual properties. These overhead allowances distort the costs of the properties and no one knows the real costs to administer and account for a property. These distortions occur in two primary ways. Operators of properties are incurring all of the overhead on behalf of the non-operators who only pay their share of the allowances. And natural gas may be 5 - 6 times as difficult to administer and account for than oil.

Overhead allowance enable the properties to show a relatively equal amount of overhead being incurred at each property by each producer. The facts however as to how much overhead is incurred at the property are unknown and under the current systems unknowable. These overhead allowances overstate the profitability of the property and do not recognize the actual costs of operations. The actual costs of overhead are capitalized and appear immaterial, however, when determining what produces and what would be shut-in, the fudging of the numbers at this scale is unacceptable. It leads to the situation, somewhat like today, where every producer claims all their properties are profitable all the time. Hence the policies of capitalizing overhead and interest.

People, Ideas & Objects Preliminary Specification corrects these distortions by reallocating the administrative and accounting resources of the producers into service providers headed up by members of our user community. The service provider will focus on one process and have the entire oil and gas industry as their client base. Using specialization and the division of labor, automation, innovation based on administrative and accounting expertise and having the computers work for us as their competitive advantages. Then if the property produces the service providers will receive that data through our task and transfer network. Complete the work that is needed for that property and then generate an invoice for the services that were provided to the individual Joint Operating Committee. If the property doesn’t produce then no data will be sent through the task and transfer network and as a result no work will be conducted by the service providers and no invoices will be generated. Creating the null operation for shut-in properties. It will be in this way too, that the producers will be able to focus on their unique competitive advantages of their land and asset base, and their earth science and engineering capabilities.

By implementing the Preliminary Specifications decentralized production models price maker strategy across the industry. We eliminate the overproduction that is created through the need to ensure that all of the overhead is covered. The Preliminary Specification converts the producers fixed overhead into the industries variable overhead based on production. And by doing so the producers will no longer have their unprofitable properties dilute their profitable properties. Save their reserves for the time when they can be produced profitably and ensure that they do not have to carry the additional costs of successive years losses to be earned in subsequent years. And the commodity markets will find their marginal price when the unprofitable production is removed from the commodity markets. This is how businesses operate. You don’t see GM overproducing continually. When demand is expected to decrease, they scale back production before their inventories bloat. It is constant throughout business and is not collusion. Oil and gas producers have used this lame excuse long enough, it's time to operate the oil and gas industry as a business and not as the bureaucrats piggy bank. OPEC has taught them a lesson about price maker, it's time for the industry to implement it.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

It Has to be the Users

Since the time we published the Preliminary Specification in December 2013. People, Ideas & Objects have focused on the development of our user community. They are our customers as they’re the ones who will be using the software through their service provider organizations. They will be the ones that are defining and developing the solutions that they need to conduct the administrative and accounting functions for the oil and gas industry. Providing them with the most profitable means of oil and gas operations.

The value of the Preliminary Specification is not just the idea of using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable producer. People, Ideas & Objects subsequently completed ten years of research into what the industry and producer would look like if we adopted the Joint Operating Committee. The outcome of that research is codified in the Preliminary Specification. Therefore user community members are not only getting the benefit of the idea of using the Joint Operating Committee but also the research that went into ensuring the idea was functional, fully tested and usable. Building from the foundation of this idea and research will be the work of the user community that I am expecting will begin sometime in 2018.

It is our user community vision that has control over the Intellectual Property and the derivative works that they prepare. At no time will People, Ideas & Objects developers look to, or take direction from anyone other than the user community. They’re our sole provider of understanding and direction with respect to the applications that we build. Producers will engage with the user community in order to have their issues and opportunities dealt with and developed. It is these two critical components that make up our user community vision. The user community controls the Intellectual Property that make up the applications and People, Ideas & Objects will only look to the user community for any developments. It is in this way that the user community has the power and authority to make the changes in the industry that are, and will be necessary.

What we can not have is the situation that the producers have created in the ERP space today. Where most of the time nothing happens in terms of developments of the software applications and the software vendors that do operate are being led by the small change that falls out of pockets of the producers. These software developers have become effectively blind sleeping walking agents of whomever will feed them. Bureaucrats have learned that software seals their fate and therefore any changes to something like the Preliminary Specification would render them redundant. The bureaucrats can no longer determine the method and means in which the software and developments are undertaken in oil and gas. If the Preliminary Specification has the value proposition we’ve discussed here today, what will it be in the future? How will that value proposition be generated and when? It will be the user community that determines where that additional value is available and generate it throughout the industry through changes in the software that they’ll develop. Which is what our user community vision enables, the power, authority and control to do so. Providing the oil and gas producer with the most profitable means of oil and gas operations is not a fixed destination. We will iterate on the software that we produce based on the ideas and thinking that the user community determines is the best direction of the oil and gas industry. This will be the key role of the user community. Continuous value added profitability for the oil and gas industry.

This is where People, Ideas & Objects Revenue Model comes in to play. The coin holders that we’ll be sourcing our budget from to build the Preliminary Specification will be earning their 33% share of the value proposition through their permission rights. These revenues will support the payment of a variety of costs, of which the cost of the software is one. Included in the cost of the software is the user community. People, Ideas & Objects as the licensee of the Intellectual Property will collect these funds and distribute the user communities share.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

2018 Is Our Year

We have now reviewed the situation on the ground in the oil and gas industry. We can expect that nothing will be done about these issues as there is no pain or suffering being realized by the bureaucrats. I think everyone else on the North American continent can see things clearly and are wondering why nothing is being done. For me this time stands in stark contrast to the period when I was proposing we develop systems to address these issues and the oil prices were well over $100 and natural gas was north of $13. That is the time that the producers were laughing heartily at what was then being said. I see it as progress that they’re not laughing anymore. Late last year we moved along from ever expecting any action from the producers and proposed a plan that would see People, Ideas & Objects obtain funding and develop the Preliminary Specification. The full details of our plan, our argument regarding the industry and what we believe to be the best business opportunity are provided at those urls to this blog.

Our plan consists of a prosperous oil and gas industry. One in which we develop and implement the Preliminary Specification which provides the most profitable means of oil and gas operations. One that approaches the next 25 years as the best 25 years of the industry's history. A time where the industry achieves profitability in each one of those years. Funding their own capital expenditures, replaces and refurbishes the infrastructure that we see decaying with greater frequency on the daily news, a future in which the investors and bankers, past and present, are treated with respect and their money treated with the appropriate accountability and not used just to fund the discount to the energy consumer. An energy future where responsible people are making the appropriate decisions at the appropriate times and dealing with the opportunities and issues as they arise. An industry that doesn’t blame the Saudi’s or OPEC, a warm winter or just the way things are on their poor performance and lackadaisical “muddle along” strategy and “do nothing” operating procedure. An industry that has respect for those who have committed their careers to the professions in the industry and expect to have more seniority than what casual labor has in the construction industry. An industry that has respect for the work that is done in the service industry and works hand in hand with those innovative and dynamic people who make the industry operate. And yes will actually pay the people who work in the industry and service industry on a timely basis. A place where it's not an honour and privilege to still have a job but a place where you can make a difference. I expect more from the industry by proposing our plan, and dare to ask, what’s their plan?

2018 stands in stark contrast to our history. People, Ideas & Objects, our user community and service providers have never been in the situation when oil prices have recovered somewhat and people know that the North American producer does not have the situation in hand. During upswings in the commodity prices people have had the tendency to forget about us and assume that things would be returning to normal. There is no normal anymore. All the excuses have been tried and none are being offered today. There are no plans in which to deal with the future of the oil and gas industry outside of People, Ideas & Objects, our user community and service providers Preliminary Specification. After almost a decade of decline in natural gas and enough years in the downturn of the oil business. People are ready for action and ready to commit to what it will take to make the changes spelled out in our plan. 2018 is the year in which we move forward with this software development.

This means the time for action for user community participation begins in 2018. Preparation of your application for submission some time this year would be the ideal timing. It is ideal in terms of the timing for the oil and gas industry. People, Ideas & Objects are user community based software developments. Nothing will be done without our user community in place driving our development. User community software developments are the only way to develop useable, quality software. Development of our user community will be the commencement of our development and anything done in this arena brings us closer to our release date. It is our priority, our focus and the impediment to our delivery. The sooner we are able to organize ourselves the quicker our software will be built. Review of the application process and our user community vision are the two places in which people interested in these developments should start.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Investors Backfilling the Producers Cash Demands?

With the reserves of oil and gas that we discussed in yesterday’s post “The Era of Abundance.” We made it clear that operating a producer based on the short term goal of full production in order to generate as much cash as possible will never be a successful strategy. With the oil and gas reserves that the North American producers have the only rational, successful approach to the industry is to ensure that all of their production is produced profitably everywhere and all the time. Otherwise it will continue to be a spending exercise with no upside for anyone in society other than the handful of bureaucrats at each producer firm. The accounting that generates these false profits must change from what it is today and be determined on a reasonable basis from now on. As we’ve discussed repeatedly here at People, Ideas & Objects the methodologies that are used in the industry of recording capital assets are designed to reflect the value of the firm. This is the not the purpose of accounting, performance should be what the producers accounting is focused on. The dynamic, innovative, accountable and profitable oil and gas producer will seek to reduce their account balances of property, plant and equipment to zero as much as possible.

What has happened that has caused the situation in the market today is that there has been a chronic overinvestment that has led to the overproduction that we’re seeing. By not recognizing the capital costs of past production, producers have inflated their earnings attracting a higher level of interest from investors. The investors had invested their resources in good faith believing that the companies were earning those profits. Meanwhile the producers themselves, due to the fact that they were not recognizing their capital costs in a timely manner, were spending more cash than what they were generating. This cash shortfall was backfilled consistently through the annual shareholder issuance for the subsequent years capital expenditure program. Investors are never happy when they’re consistently diluted by subsequent share offerings. When the firm continues to grow and increase its profits they can handle a little dilution. What they can’t handle is finding out that through bad accounting and mismanagement the financial statements they were provided with in the past, which reflected growth and profitability, have now turned out to be misstatements. Hence we see the investors and bankers strike for the past three years and a chronic cash shortfall in the industry.

Accounting as a department has been effectively dealt with in oil and gas over the past few decades by providing them with the office floor space under the stairs. That way the bills that need to be paid can be shoved in there and they’ll get paid. No one needs to see or hear from them otherwise. On the other hand the accountants have been treated with such disrespect for several generations now that they don’t know any difference. They’re ability to assert themselves no longer exists and they have not filled their critical role in the organization. It is expected of them to pay the bills and ensure that everything that is spent is recorded as a capital asset because that is what the “ceiling test” allows. So they did what they were told instead of asserting a more appropriate performance related, active role in the management of the producer firm.

Bureaucrats caught onto the art of capitalizing costs in the mid 1980’s when the oil price collapsed to $10 and interest rates were high. This art and science began with the capitalization of interest and has only become as creative as those producers who today report 1.3% in annual G&A costs. The point of the exercise is to defer the recognition of any cost against the revenue so that your assets and profits are bigger than your neighbors and never stop growing. Allocating an equal amount of capital cost to each barrel of known reserves has some inherent accounting theory behind it. It however fails the reasonable test when the majority of those reserves will continue to expand over time and never be produced, or recognized, for decades. Meanwhile the production decline curve comes into play so that the need to recognize even less of the capital costs occurs in each successive year. People, Ideas & Objects approach is to recognize as much of these capital costs with the flush production and have all of the capital costs recognized as quickly as possible. That way the investment that was made in the property is recovered and returned in the form of cash to be reinvested again. Today the capital cost of past production, which is also the investors cash, sits for decades as the bureaucrats compare the size of their “well defended” and bloated balance sheets as if they’re something to admire.

Meanwhile, back in New York, the CEO is presenting to investors that for 5% more equity he could increase production by 20% and earnings would double. Who could lose? This “game” has been played since the late 1970’s when the SEC enabled the accounting for capital costs on this inflated asset and profit basis. Has now been figured out by those who have lost the most. The banks and investors. The reserve value of the firm is impressive when you take a TCF of gas times today’s price. The problem is that TCF of gas can’t be produced profitably. It doesn’t even generate as much cash as it consumes. This “game” has depleted the residual value throughout the industry. Nothing is worth anything as it requires capital to produce. It has a management that doesn’t understand this. And this lack of understanding is culturally ingrained across the industry.

I certainly could be wrong about the future intentions of the investors. Maybe they’re banging on the producers door looking to invest right now. Wanting to dilute themselves further and help out with the producers critical cash shortage to make the bureaucrats life that much more comfortable and prosperous. After all, I’ve been told that no one reads or understands financial statements.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The Era of Abundance

As I write this natural gas prices are soaring by almost 10% for the day. No doubt this trajectory will continue indefinitely and as we noted the other day, the bureaucrats have already started the party. Their inaction regarding the decline in the oil and gas business over the past decade must be rewarded financially and handsomely. It’s days like these in which we can all rest assured that the bureaucrats will sleep well tonight. I had a discussion the other day with someone who had immigrated from Ethiopia. When I was growing up Ethiopia was subject to mass starvation which he noted was due to the King hoarding $6 billion and too proud to seek outside help. I mentioned that it sounded like the political mismanagement that Ethiopia was subject too was the same mismanagement that people are experiencing in oil and gas. The important thing is the King and the bureaucrats are doing fine.

One does not have to look very far to find substantial oil and gas reserves these days. Having a TCF of gas or more was the domain of the large integrated producers in the prior era of scarcity. Now it's common to see many TCF and a billion barrels of oil booked by producers that were startups a few decades ago. This is the real value of the producer. Valuing the reserves at the current price is what that producer is worth. Whether they paid this amount or that for the reserves, and if they have that value listed on the balance sheet is totally irrelevant. Accounting has nothing to do with the value of the firm. Accounting has everything to do with the management's performance of the money that the producer received from investors and bankers. Attempting to match the producers accounting to the valuation of the reserves is a foolish game that has presented the oil and gas producer with bloated balance sheets that now reflect they’ve never performed. They have always overstated their assets and overstated their profits by not recognizing the costs of capital in a capital intensive industry. Now they’re living with the consequences of doing this for the past four decades and they’re unable to make the issue disappear overnight. The capital costs of past production have to be accounted for in order to recognize the misstatements that they were profitable operations in the past. That will take a substantial amount of time and reflect that the bureaucrats were not as handsome as they originally appeared. Investors and bankers have caught on to the bureaucrats game and it would be foolish to think that they’ll forget it now.

The second issue producers have to deal with is that every other producer, other than themselves, are racing to put all of their reserves onto the commodity markets today. The chronic overproduction has been on the basis of a profitability that never materialized because it never recognized the capital costs of that production. These two issues create an interesting dilemma. Any attempt to curtail their production to increase the commodity price to the level necessary to earn a profit only allows the producer to lose when the industry has no production discipline. Everyone knows they can increase the price if everyone has production discipline, it's just not going to happen at my firm, the bureaucrat will say. The aggravating factor is the amount of reserves that exist now as a result of the shale boom and other technologies. The oil reserves are noted here.

Another recent development is that the U.S. is now estimated to hold more oil reserves than any other nation. Estimates in 2016 by Rystad Energy indicate the U.S. tops Saudi Arabia and Russia. More than half of U.S. oil is in unconventional shales, which rely on fracking to produce. Although the cost to produce such oil can be higher than conventional wells, when the economics are right it will be tapped. Rystad Energy also estimated that total global recoverable oil reserves were about 2.1 trillion barrels, about 70 times the current production rate and far in excess of cumulative production up to 2015 of 1.3 trillion barrels.

The situation with natural gas reserves is even much more difficult.

The U.S. Energy Information Administration estimates that as of January 1, 2015, there were about 2,355 trillion cubic feet (Tcf) of technically recoverable resources of dry natural gas in the United States. At the rate of U.S. dry natural gas consumption in 2015 of about 27.3 Tcf per year, the United States has enough natural gas to last about 86 years. The actual number of years will depend on the amount of natural gas consumed each year, natural gas imports and exports, and additions to natural gas reserves.

Technically recoverable reserves consist of proved reserves and unproved resources. Proved reserves of crude oil and natural gas are the estimated volumes expected to be produced, with reasonable certainty, under existing economic and operating conditions. Unproved resources of crude oil and natural gas are additional volumes estimated to be technically recoverable without consideration of economics or operating conditions, based on the application of current technology. 

Having production discipline in an era of such abundance requires the current mismanagement to be replaced with the appropriate business model and organization of the producer and industry. We propose the Preliminary Specification which provides for the most profitable means of oil and gas operations. Ensuring that all production produced everywhere in North America is always profitable. However, before that it would be appropriate for the bureaucrats to compensate themselves for the days 10% increase in natural gas prices. Based on these reserves, it may be a long time before they get another chance to compensate themselves for their inaction. They better make their take as good as they can.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

No Action Here!

Word on the street is that the increase in shale oil production that may occur in 2018 is going to be “explosive.” With the deferral of the recognition of the capital costs of these operations we know they’ll all be profitable too. How “explosive” can shale based reservoirs be? One look at the performance of the deliverability of shale based natural gas and we can get a sense of what “explosive” means. In 2016 there was believed to be a downturn beginning in shale gas production. Deliverability declined for whatever reason, but most probably due to the lack of capital in all shale basins. Monthly average dry gas production declined from over 75 bcf / day to a low of a little over 70 bcf / day. During late 2016 and 2017 deliverability “exploded” to about 77 bcf / day with this trajectory continuing for the foreseeable future. It is now very clear to everyone that the bureaucrats have complete control over this resource when the natural gas prices being earned on this production are around $3.20.

We see a very similar trend in oil production with an upward trend starting in late 2011 at 5.8 million barrels per day, continuing that trajectory until June 2015 with 9.6 million barrels per day, then declining to 8.5 million barrels per day in September 2016 and then resuming its prior trajectory to where it stands now at 9.8 million barrels per day. What both of these commodities “explosive” production growth in the 2017 period reflects is that the oil and gas industry is nothing but a spending machine. Without control or consideration of anything other than “more” which is what you’ll find in common with the average junkie. This is the business of the oil and gas business, if you still consider the oil and gas business a business. I haven’t for a while. I recall at the beginning of these uptrends Bloomberg interviewing Mr. Harold Hamm CEO of Continental Resources who said that this time it was going to be different, “we have discipline now.” Does anyone know what these trajectories and the unconstrained production “explosiveness” reflects for the future of the industry?

Speculation is also forming that the increase in North America’s shale oil production will lead to difficulties in OPEC maintaining their production sharing agreement. Nothing will be said by any of its participants regarding the agreement, however it may be found to be too difficult to continue with any extensions of the time beyond 2018. The speculation also suggests that what we may see is a breakdown in the excellent discipline that has been displayed to this point. That cheating on the individual country quotas will begin in a small way and then begin to accelerate. In the face of such continued pressure on the market by new U.S. production, that has no discipline or business attributes, what alternatives are available to the OPEC producers? The only way in which the North American producer can approach the easily attainable goal of energy independence is through the application of sound business practices which involves profitable production everywhere and all the time. What is clear is that we do not have those behaviors in the industry today, nor have we had them for the last four decades. A revision of the behaviours and culture of the industry is necessary. The only way in which that would happen will be by implementing the decentralized production model of the Preliminary Specification. Until then get used to the rhythm.

What North American producers are not talking about today is as telling as their one true and unforgiving behavior. If the value of their stock only increased by 50% in comparison to the percentage increase in the price of oil, what would happen now if there was a decline in the price of oil? What actions are they taking to ensure that the business is sustainable in the long run? What changes are being made to ensure that they become and continue profitable operations everywhere and always? I would think that these topics would be the ones that are the primary concerns of the North American based producers. I see no evidence of that. Nothing has been done to address any of these issues whatsoever. They just need a quick fix of new production and fresh cash. To let the issue of their investors and bankers strike continue for a third year without addressing those needs is particularly disconcerting. What is it that the investors are telling the producers? It’s that they’re not enamoured with the oil and gas business. That they want to see changes before they’ll get involved any further. The are the facts and the common knowledge of the people on the street.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.