These Are Not the Earnings We're Looking For, Part XV

One of our sample of 23 producer firms is Devon Energy who’s stock had a good jump on news of their financial performance, or monstrous deliverability at some Permian wells they drilled. It must have been the wells performance because if we look at the company, which is generally a good company, we see the state of the industry is very desperate. First I want to get to the size of their property, plant and equipment account which sits at $21.3 billion. Their current market cap is $19.7 billion. One of our favorite producers of all is Cenovus which we awarded the most creative accounting award, ever to in 2017. A recent change in CFO’s seems to have them cooling their accounting creativity and adopting some conservative principles. One of them is they’ve increased their depletion in an attempt to begin to bring their property, plant and equipment ($33.25 billion) below their market cap ($12.5 billion.). A variance of $20.75 billion for Cenovus and $1.6 billion for Devon. A recognition of Cenovus’ creativity under the previous CFO and the overall asset bloat in the industry.

We also heard Devon has laid off a number of their staff. A reduction of 10% or 300 individuals. This marks the period between the boom and the ensuing bust at less than 3 months from my point of view. Maybe the next boom will be 4 months! Devon claims they’ll achieve savings of $150 to 200 million as a result of these layoffs. Which doesn’t quite work out in the math department. At 10% that would indicate their overhead is in the region of $2 billion yet G&A for all of 2017 was only $872 million! That means that $1.128 billion must have been capitalized to property, plant and equipment. Which to be honest, at 56% of the total G&A that is at the very low end of the scale in comparison to its peers. If Devon recognized the full $2 billion of G&A on the income statement what would the implications be? First G&A costs would total 38% of their oil and gas revenues. I’ve excluded their purchased product revenues. Their earnings as reported in 2017 of $898 million would have actually been a loss of $230 million. And their annualized cash flow from operations would have been $1.781 billion instead of the $2.909 billion. Just a small difference really, except for when you calculate their industry standard valuation. At six times cash flow their market cap would have been justified at $10.686 billion as opposed to the $17.5 billion. But these are minor differences, aren’t they?

It’s also interesting to note that Devon drained itself of a bit of cash in the first quarter of 2018. Cash was down by $1.214 billion which isn’t a lot in the real scheme of things. Way back in 2016 in order to have some cash, you might recall, Devon issued an additional 27% of their shares for the fire sale price of $1.469 billion. Good thing they did because they would have had to face the music one quarter sooner if they hadn’t. Working capital for a stellar company such as Devon is holding up nicely at $153 million. That too is down $1.323 billion in the past three months. What we can probably suggest here is that there will be more paychecks that might not be able to be cashed in the coming days. I say stellar company because its others who define the outer limit. Suncor have “assets” listed in property, plant and equipment of $76.495 billion and a working capital deficiency of $1.193 billion. They’ve actually nominated their accounting staff for the Nobel Prize in Physics. Their capacity to shuffle bills around at the speed of light is apparently a sight to see!

For Devon to be laying staff off in this the Information age is not that much of an issue. There are hardware and software that can easily replace the people that are being lost and pick up the slack. That would be the thing to do in a crisis such as the oil and gas industry is in. To invest in the capabilities necessary to deal with the future through the implementation of advanced hardware and software. Word is that Devon has decided that in this bust, with the loss of these human resources they will be slashing their hardware and software purchases. Therefore there’s no sense for me to be knocking on their door to see if their interested in the Preliminary Specification. They probably have more wells to drill.

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 profitable 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.

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

What is clearly evident in the oil and gas producers 2018 first quarter reports. Is that Calgary, Dallas, Houston and Oklahoma have no more change between the cushions of any couch’s anywhere. We noted last year that the cash crisis brought on by the withdrawal of investors and bankers funding of the day-to-day needs of the producers. Had led to a determined search for the cash that had fallen between the cushions of the couch as one of the few lucrative sources of cash open to them. And if you were unfortunate to drop a quarter on the ground in one of these cities, your best chance of survival would be to quickly get out of the way of the stampede of producers seeking to picking it up. The demand for cash was epic. What was needed then was oil prices to be within the mid $60 region in order for the producers to be profitable. Now with prices are at $70 the cash crisis that has been epidemic for well over two years has slipped into a deep, dark black hole. Almost every producer in our sample of 23 producers reported significant declines in their cash balances in the past three months, down $6.8 billion, that is if they had a balance to begin with. Declines in their working capital of $4.8 billion to $14.1 billion. With 3% working capital for the $467 billion of property, plant and equipment, something seems disproportionate here. The amount of cash that was used in the first quarter of 2018 is approximately equivalent to the amount of cash that was generated in all of 2016 and all of 2017. It’s almost as though the producers need $130 oil prices in order to survive. Who would have thought?

Profitability was also hit. Not as a result of producers taking our advice and depleting large volumes of their property, plant and equipment. Recognizing the capital costs of past production will have to wait as the depletion that was recorded in the first quarter of 2018 was lower than the first quarter of 2017 @ $14.562 vs. $12.246 billion in 2018. Even at that the first quarter of 2017’s profits were $3.9 billion vs 2018’s $3.6 billion. Moving the number of years that property, plant and equipment will need to be depleted from 8.94 years to 9.58 years. Is it that operations are just consuming the cash and profits? Are overheads that much of an issue in oil and gas? These facts provide me with two distinct understandings. Investors and bankers, who have been on strike for the past couple of years, who now see the further rapid deterioration in producers operations, working capital and cash balances, will not be running to save them on the basis that they’re managed today. They will need to see some change to the future outcomes of the industry before they’ll commit new cash to the oil and gas industry incinerator. The second point is this cash crisis will bring about the end of the “muddle along” strategy and “do nothing” operating procedure. Sitting around doing nothing while the house is on fire is a bad strategy for all concerned. Time to act.

It has always been People, Ideas & Objects contention that the industry has distorted its accounting for the past four decades. Recording the capital costs of a capital intensive business as assets in property, plant and equipment. Then depleting these costs over the life of the reserves that were discovered. Whether those reserves would last 20 years or 100 it didn’t matter. Capital was rarely recognized as a cost in the oil and gas business for these past forty years. The working capital deficiencies of this type of operation would of course be significant. Investors and bankers were expected to provide the lifeline for the producer to a) call themselves successful and b) keep the lights on. What in fact was going on was, and what has deteriorated to a significant level over these past forty years is a dependency on investors unlike anywhere else at anytime. As a result the effect of this mismanagement is that the consumers of energy have effectively been subsidized by the investors supporting the producers capital needs in these past four decades. The consumers have paid the operating costs and a small sample of the capital, the balance of the consumers capital cost subsidy is proudly displayed on the producers balance sheet as property, plant and equipment. And the size of the assets on the balance sheet is what gives the CEO his/her their proof of legitimacy, not evidence of their level of spendthrift.

To express the level that this culture is systemic and chronic within the industry there was an article from WorldOil with the following quote regarding Exxon.

CEO Darren Woods is seeking to rebuild oil and gas reserves in an investment drive targeting $30 billion in annual outlays well into the next decade. Woods’ vision runs counter to what investors are demanding from rivals, which have been restraining spending and returning cash to shareholders in the form of stock buybacks.

Exxon production was down substantially in the first quarter of 2018. Below 4 mmboe / day for the first time since the merger with Mobil. Leading the CEO to continue with Exxon’s high capital expenditure throughput. Which as noted as contrary to the investment communities desire. However, without that investment the reversal of the production profile is current, rapid and unforgiving. What the culture of the industry reflects is that it’s an either or situation. You can either have the appropriate level of capital expenditures and maintain your production profile. Or your production profile will shrink and the investors will be paid what they’re entitled to. If oil and gas was a business then the cash flow that was generated from pricing the product as a result of only producing profitable production, as the Preliminary Specifications decentralized production models, price maker strategy does. This cash flow would fuel growth in capital expenditures, the ability to pay down debt and make the appropriate returns to shareholders all at the same time, all the time. Where every year would be a “good year” in oil and gas and not just the 5 out of the last 32.

Therefore the demand for higher prices to support the costs of these capital programs is necessary. Austerity is not the answer to the issues that the industry is facing. And I don’t believe that this is the demand that is being expressed by the investment community. It is however, the choice of the bureaucrats through their “muddle along” strategy and “do nothing” operating procedure. Generally when you run a business, the business itself generates the funds to provide for the industry needs in the short, mid and long terms. What a concept, eh? And what Exxon’s CEO shows is the continuation of the attitude of having the shareholders subsidize the consumers for their capital costs of a capital intensive industry. Instead of charging the adequate price for their product, the producers would prefer to short sheet the bed for the shareholders and keep spending the money.

And now we’ve come to the third year of a self inflicted cash crisis. What to do? We will not make it out of 2018 without the actions necessary to rectify this situation. Working capital of $14.1 billion divided by the current burn rate of $4.8 billion / quarter gives you 2.94 quarters left. What bureaucrats will do without any working capital will be an interesting development. The easy way for producers to alleviate the pain would be for them to fund the Preliminary Specification. That way the investors and bankers see that there is a plan to deal with the issues and opportunities that are present in the industry, and a means to deal with the future issues and opportunities. Investors and bankers are forward looking people. They like to see what their money can do for them in the long term and with the Preliminary Specification operational in oil and gas, the future would be that of a well run business.

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 profitable 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.

These Are Not the Earnings We're Looking For, Part XIII

This week marks the 27th year that I’ve been working at developing these ERP systems for oil and gas. As far as I’m concerned I can do this forever. What producers should ask themselves is how much longer my productive career will be? Note, I had far more than a decade and a half of work and business experience in oil and gas before I started this. And if People, Ideas & Objects are not around to do this work, what fool would start their probable 30 year trek if what we’ve done here with the Preliminary Specification isn’t good enough. I personally would suggest too, that if this effort is deemed not good enough, that the ability of the industry to use it after I leave the stage is a no brainer. I didn’t do this work to watch someone else build it. Intellectual Property is the basis of this offering, if it’s deemed to be of no value to the industry then it’ll be of no value to the industry, ever. This is not to suggest that because we’ve held on for 27 years that we’re entitled. We’ve solved the current problems in the industry. The disintermediation the industry needs to go through which is being held up by the self serving bureaucrats. Who’ve destroyed the financial, operational and political foundations of the industry. I would also suggest that the big technology providers rolled out of here in the latter part of last century in Oracle’s case, and in 2005 for IBM’s. In both instances the inability for producers to sign on to any software developments was the issue for their exits. After they’ve seen a 27 year effort being refused they can only assume that it’s the same old, same old.

Speaking of self interested bureaucrats, if not for the statutory requirement to issue financial statements and face their shareholders at the annual general meeting once each year. Bureaucrats would live like kings. Reading the financial statements of the producers I have become concerned with what appears to be a trend that is well past the point of getting out of control. Many of the producers are reporting deductions to their revenues for “royalties.” Now everyone knows producers pay royalties in order to earn title to the energy they produce. This would go for Crown or Federal lands, freehold and Gross Overriding Royalties. It is my understanding, and I may need to be educated here, that these royalties are never reported by the producers as they never owned the product. Therefore, and most producers financial statements bear this out, revenues are reported net of any Crown, Federal, freehold or Gross Overriding Royalties. These royalties that are being reported are also in the range of 1 to 2.5 percent, far less than the 20, 25, or even 30% royalty rates assessed by some jurisdictions. Dare I ask is this the new form of bureaucratic compensation? Since the practice seems to be prevalent in Canada, home of the most creative accounting, that would seem to me to be the case.

According to World Oil producers capital structures have become more complex and difficult to deal with. Instead of just the “wildcatter” there are now Hedge Funds and distressed debt owners etc. Making the producers capital structures very difficult to do deals. Also suggesting that assets are not as good as they once were previously believed to be, other than the Permian. Hedge funds are rumoured to be investing heavily in the oil and gas commodities themselves. Oil specifically. Why not, if a producer only mimics the changes in the commodity price, why invest in the stock of the producers? Generating value outside of the rise in commodity prices, such as the Preliminary Specifications value proposition does, is not in the bureaucrats interest. That’s work!

Last year we were promoting that the Best Business Opportunity, Ever was an investment in a newly formed oil and gas company. Our thinking on this has changed in a material way. We can see by way of our estimate that the North American producers have what we believe to be $1.6 trillion in property, plant and equipment on their balance sheets. These “assets” as the bureaucrats would assert, are really the unrecognized capital costs of past production. They also represent the precise accounting of the amount of investment money that has been diverted from the investors to subsidize the consumers of energy. By not recognizing these capital costs of past production the consumers have never paid the full cost of a product that is a result of a capital intensive process. Therefore the need for the investors to earn their investment back in terms of free cash flow can only be achieved by recognizing the $1.6 trillion in property, plant and equipment present on existing producers balance sheets. If these producer firms ceased to operate those capital costs may be irretrievably lost and therefore would not be readily available as further costs in determining the pricing of oil and gas in the Preliminary Specifications decentralized production model’s price maker strategy. And therefore these capital costs would not be able to be retrieved from the consumers justifiably with the “new producers” under the assumption of the Best Business Opportunity, Ever. These “new producers” would appear disproportionately profitable, and the investors would not be able to retrieve their past investments in oil and gas, ever. Therefore the need to deal with the existing producers is a necessity for the investors in order to recover that $1.6 trillion in unrecognized capital costs of past production.

Maybe the investors will continue to treat the oil and gas industry as a sunk cost which was the assumption that underlies the Best Business Opportunity, Ever. The decision is for the investors to make. We are seeing a much higher level of activity in the annual general meetings with a number of the more distressed producers facing stiff opposition to their slate of board members and overall direction. Proxies are always a fun way to watch a boxing match where one fighter is paid to take the fall. Bureaucrats never lose. They control the John Q. Public shares and as a result are able to overwhelm the control block with votes from people who never read the financial statements, or vote. And then the circus roles up the tent for another year. What is needed is more active involvement by the boards of these firms and a firmer handle on the disaster that is the oil and gas industry. I’ve been saying that things are bad in the industry. And that the first quarter of 2018 would be no different. I was wrong. The first quarter is far worse than I believed was possible. Action is required in 2018 by funding the budget for the Preliminary Specification, or the ability to turn this around will be lost.

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 profitable 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.

Our 12th Module, Part V

Implementing blockchain technologies within the Preliminary Specification is mandatory for the oil and gas industry and producers. With the volume of transactions that are managed through People, Ideas & Objects system a means to provide the safety, security and documentary evidence that the blockchain provides is the only reasonable way for the industry to proceed. We are not providing a solution that is available tomorrow but one that will build value for the industry in the mid to long term. Therefore the adoption of Oracles technologies including their Oracle Blockchain Cloud Service (BCS) and Oracle ERP Cloud in combination with People, Ideas & Objects Preliminary Specification, our software development capabilities, our user community driven development and service providers fit well with the needs, opportunities and issues that the industry and producers face today and in this time frame.

Might I be so bold as to suggest. It is clear in evaluating the financial statements of the producers for the 1st quarter of 2018. That the accounting games are still being played and the lack of cash in the industry continues. No cash is being generated from operations. Nothing is being provided from the investment community and no banks are jumping back on the bandwagon. Therefore no one’s buying the industries story. Producers continue to manage as if the status quo is the only operational choice they have. This as far as any objective person can see is a dead end. I would therefore ask, what would happen if the industry proceeded with the developments of the Preliminary Specification by providing the funding for our budget. Would that change the perspective of the investors and bankers that the status quo was being discarded for the mid to long term future? The future that is defined by People, Ideas & Objects Preliminary Specification and therefore prove to the investors and bankers that the industry was a viable choice for their investments once again?

One of the areas that will benefit the most from blockchain technologies is our Material Balance Report. It resolves the processes involved in the measurement and reporting of production of oil and gas on a monthly basis. Capturing the production data in the field through field data capture and automating the subsequent processes all the way to the financial statements. Within this broad definition we have introduced the Material Balance Report as the means in which the producers within a Joint Operating Committee are able to balance the reporting of the various disparate groups that are involved in these processes between field data capture and financial statements. Introducing the ability through the report to material, system and partnership balance the production. The user community through their work will need to determine at what point and where the production volumes within the Joint Operating Committee for a property, plant or gathering system can then be recorded within the blockchain that supports these transactions. Once that production data has been captured, verified and secured then the processes and automation that we note in the Accounting Voucher and Partnership Accounting modules would commence.

Within those modules we address the never ending amendment process that plagues this area of reporting. This is a natural part of the oil and gas business and will continue for some time, I would imagine. What needs to be done in the case of volumetric amendments is that they are written in similar fashion to the blockchain. This somewhat denotes that there is a specific blockchain for the industries production volumes. Which would aid significantly in the global reconciliation processes that are instituted within the Preliminary Specification through the material, system and partnership balance reconciliation process to ensure the integrity of the reporting is either consistent with the facts of the production, or the agreements that governs the Joint Operating Committee. Whichever of those two is in effect. As I noted before it will be the user community that determines the use of the blockchain and whether we are using one or many blockchains within the Preliminary Specification. If there were many one could understand the need for blockchains for volumes, prices, fees and distributions.

The use of Ethereum’s blockchain has the added advantage of implementing smart contracts. Therefore if there was an Ethereum blockchain for processing fees then the smart contracts could be used to process the appropriate fees on the volumes that were processed through those owners assets. On a fully automated basis. This is the concept that the Material Balance Report is designed to capture. Control the production volumes and ensure that the numbers reported, which includes the amendment process, captures the integrity and unimpeachable level of confidence in the volumetric data. Therefore by doing this we are able to automate the remaining processes on an iterative and continuous basis. Providing the ability of the industry to increase the throughput of the industry through enhanced specialization, division of labor and automation. From the Ethereum website

On traditional server architectures, every application has to set up its own servers that run their own code in isolated silos, making sharing of data hard. If a single app is compromised or goes offline, many users and other apps are affected.

On a blockchain, anyone can set up a node that replicates the necessary data for all nodes to reach an agreement and be compensated by users and app developers. This allows user data to remain private and apps to be decentralized like the Internet was supposed to work.

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 profitable 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.

Our 12th Module, Part IV

Oracle’s implementation of blockchain is the general topic of discussion for this post. We are continuing to quote from the Oracle sponsored IDC whitepaper that we introduced yesterday. Within that paper there is a summary that captures Oracle’s product and service offerings, and to some extent their commitment to blockchain.

Oracle Blockchain Cloud Service (BCS) is an enterprise-grade, distributed ledger platform designed to support new DLT applications and extend ERP, supply chain management (SCM), and other enterprise software-as-a-service (SaaS) and on-premise applications by enabling enterprises to conduct business-to-business transactions securely and at scale across a trusted network with tamper-proof digital records (see Figure 2). Oracle SaaS and on-premise application suites are used in many industries as a backbone of the enterprise's information system. Extending these systems with blockchain capabilities through BCS provides significant value to Oracle's customers and can lower many of the risks inherent in adopting new technology.

Oracle was chosen as our technology partner as we believe they have the best technologies in the marketplace. And that is not by a slim margin. Oracle’s Database 18C is in my opinion well beyond what the competition are offering. It would seem to me that IBM, Microsoft and others are unable to keep pace with the developments that Oracle has been making in their database. The same goes for Java. Since their purchase of Sun Microsystems, Java has become ever more popular as the programming language for business. Particularly from a database developer point of view. And no one can stand close to the commitments that Oracle has made in the ERP marketspace. With the purchase of PeopleSoft, Siebel and JD Edwards Oracle spent $18 billion in market acquisitions for these companies. Still not satisfied they undertook a $4 billion, from the ground up, writing of an ERP system based on the Java Programming Language to produce their Fusion Middleware and Fusion Applications. I’m seeing the same level of commitment in their blockchain offering and feel that Oracle will be using their services in this area to further differentiate themselves in the ERP and other market spaces.

Pushing the concept of fair use to its extreme, I now want to quote from the IDC paper extensively. The following are their recommendations on how to proceed with the Oracle blockchain technology within the organizations that are adopting them.

Oracle's Blockchain Offering Provides Several Benefits to Enterprise Customers

▪ Faster transactions with greater resilience: Enterprise customers need distributed ledger platforms that can scale to handle increasingly large volumes of transactions. They also need resilient, highly available, and high-performance platforms to reduce transaction latency and ensure stable and secure connections.

▪Enhanced data privacy: Enterprises are concerned about the privacy and confidentiality of ledgers and limiting access to transaction details, especially in regulated industries. For example, in financial services, keeping the terms and conditions of contract details such as counterparty identities, pricing, and quantity data confidential is always a concern. In healthcare, the privacy of patient health records, patient identification, and health insurance details is paramount. Oracle's cloud services help firms build and maintain secure ledgers and smart contracts with features such as identity management with secure defense, in-depth data-in-transit and data-at-rest encryption, and multiple confidentiality domains within a single blockchain network.

▪ Simplified operations through managed services: Managed services are gaining momentum as enterprises look to get up and running faster with new leaders and new blockchain smart contract projects. Enterprises can launch pilots, run experiments, and work with production- ready ledgers on production-ready Oracle-managed servers, storage, and network infrastructure, leaving backups, upgrades, and other infrastructure management considerations to Oracle software and operations. Oracle's cloud services also support rapid onboarding of new members and governance frameworks that help enterprises maintain control and security of the ledgers.

▪ Integration with Oracle SaaS and on-premise application suites: Oracle provides integration accelerators through the adapters in its Integration Cloud Service and Java Cloud Service for SaaS. These solutions enable enterprise processes in ERP, SCM, and other application suites to rapidly integrate and connect with blockchain transactions and access distributed ledger information. The applications integration toolkits will provide samples, design patterns, and templates for specific business processes.

▪ New business models and revenue streams: BCS provides application development accelerators that help enterprise customers integrate their blockchain transactions and ledger records with new and existing applications. Oracle wrapped blockchain transactions with REST APIs, which can accelerate application development and integration and make transactions accessible both inside and outside the cloud. Oracle Cloud also offers sandbox capabilities that can support corporate IT developers and independent software vendors (ISVs) with application development environments, integrated CI/CD tooling, and prebuilt integration adapters for Oracle and third-party applications. These resources enable firms to quickly build and run experiments and proof of concepts to address specific use cases. These experiments enable enterprises to develop, test, and engage in new business models and revenue streams from deploying DLT and smart contracts. Oracle has also announced integration of blockchain APIs in Oracle NetSuite Suite Cloud Platform and Digital Innovation Platform for Open Banking. This can provide blockchain on-ramps to NetSuite customers and partners and to financial institutions looking to innovate with blockchain and fintech APIs orchestrated by Oracle API management services.

▪ Deployment flexibility and choice: Oracle's Cloud Machine can deliver enterprise-grade PaaS to enterprise customers' datacenters with deployment options behind the firewall. This can enable enterprises to develop cloud-native blockchain applications on-premise with modern platform services. On-premise options are especially important in regulated industries such as healthcare and financial services. The Oracle blockchain solution enables firms to use the private cloud option to retain complete control over their data and applications and fully manage application services behind their firewall, or deploy in the Oracle Public Cloud, or mix and match private and public cloud options in a hybrid deployment. In the future, Oracle plans to allow its BCS-based blockchain networks to accommodate members joining from outside of Oracle Cloud, as long as they are using a compatible version of Hyperledger Fabric, enabling more open network models across the broader Hyperledger community.

We’ll be discussing the Hyperledger community in a future post. We see here what I would call an explosion of the capabilities necessary to integrate the blockchain with in Oracle’s technology. Oracle is providing these services on behalf of their customers, which include People, Ideas & Objects, our user community and service providers. There’s also an offer here that no producer can refuse. Imagine each producer incurring the time and energy to develop these IT capabilities. The value that will do for each of their bottom lines. Or, alternatively, they could use the software development capabilities that People, Ideas & Objects are providing with the Preliminary Specification. Specialization and the division of labor dictate what businesses choose to be involved in the tasks that generate value. And only those tasks that provide us with the most profitable means of operations. Is IT something that each and every producer is able to differentiate themselves on? Is this where the oil and gas producers build their value? With the scope and scale of the Information Technologies available today, the pace of change, and these capabilities providing no competitive advantage other than to function in an advanced economy. Why would each of the producers continue down this road?

With People, Ideas & Objects our budget includes over $100 million in development dollars to the CPA firms to ensure compliance to the regulations are established and maintained in the Preliminary Specification during development. This provides an independent third party review of the activities undertaken during development, and a baseline for each of the accounting firms to commence their oil and gas producers annual audits. These are a check and balance on the software’s developments from a compliance and governance point of view. They are provided to ensure that the software that is developed is consistent with the regulatory and accounting needs of the producers and does not contain any inconsistent anomalies. Blockchain will also provide these assurances to the producers when the technologies are fully integrated as the user community determines. I don’t personally see any alternative providing the oil and gas producer with the most profitable means of oil and gas operations, on an ongoing basis for the next 25 years, in this complex technical environment.

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 profitable 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.

Our 12th Module, Part III

Our next step in defining our 12th module, The Blockchain, is the implementation of the technology by Oracle Corporation. Oracle Fusion Middleware and Applications are the base financial ERP application of the Preliminary Specification. These are now generally called Oracle ERP Cloud. It was soon after the publication of the Preliminary Specification that we amended our budget to move to the cloud for both development and deployment purposes. The ability to build and maintain physical hardware for our needs was a capability that we no longer needed to adopt as a result of Oracle’s cloud offerings. It has been decisions such as these that we have reviewed the entire process of what were doing in oil and gas. The question we are seeking to answer at all times is how can we deliver our product to market at a faster pace than what will be expected. By moving to the cloud we are able to shift the budget dollars from physical hardware to Oracle services and speed up our implementation substantially. Speed being the critical competitive factor in all businesses today. We see the implementation of the blockchain as a critical element in the reduction of the time we need to develop our solution. Although conceptually our offering does not change, the ability to acquire the security and integrity that the blockchain provides will mitigate much of the software development work that needed to be done to build those features ourselves on behalf of the producers and industry. That our technology provider is taking a leadership role in implementing blockchain within their ERP solution is also of great benefit to People, Ideas & Objects, our user community, service providers, producers and industries.

In this the first of two blog posts concerning Oracles involvement with blockchain we have an Oracle sponsored IDC whitepaper. I highly recommend registering for the download and reviewing this document. Oracle is looking to blockchain to differentiate their product in the marketplace and we as well as the producers are the benefactors of that. It is with that in mind that we now shift our attention to our next concern. Now that blockchain resolves much of the security and integrity of the industries transactions, with much work left to be done. Our concern is the Access Control capabilities of the People, Ideas & Objects Preliminary Specification. To suggest that we offer a unique situation would be an understatement here. Having a cloud based, industry wide solution that has the needs of a proprietary access control system such as an ERP demands is to say unique. When we introduce the Joint Operating Committee where multiple producers need access to the same data we have our work cut out for us. Which leaves me with a rather perplexed look on my face when I read the following from this IDC whitepaper.

Our research suggests that most enterprise customers are looking to build permissioned or private ledgers that only allow those with specific permission to access distributed ledgers.

I am unaware if or how the blockchain would provide this capability at this point. However we are not providing a solution that is available today. We are taking today’s Information Technologies and applying them to the business issues and opportunities that exist in oil and gas. Ours is a industry wide software development based on the Oracle ERP Cloud and focused on the needs of our user community. This focus on the user community has been our priority since the publication of the Preliminary Specification and is the only manner in which we will commence software developments. User community based developments are the only quality and usable systems in use today. Therefore with that in context, IDC notes the nature of the blockchain is somewhat in the same state. That adoption of the technology by providers like Oracle are at the very beginning and will be developing over the next few years. Which is consistent with our plans and needs.

Connectivity to existing systems is often a challenge because many blockchain and distributed ledger technology platforms available today are early-generation solutions. For example, capabilities for enterprise plug-and-play with enterprise resource planning (ERP) solutions and integration with enterprise-class system of record (SOR) are not available in most blockchain offerings. Because many solutions are early versions, multiple features that are required for enterprise deployments such as systems availability; business continuity/disaster recovery (BC/DR); and platform security are still under development.

And

The interconnectedness of enterprises with their customers, suppliers, and intermediaries is another challenge faced by business and technology teams looking to develop blockchain solutions. As a result, the distributed nature of blockchain ledgers can make it hard to provide the privacy that some customers and counterparties expect. For example, transaction records contained in buy and sell transactions and details contained in shipping instructions in the supply chain may need to be segregated into different domains to provide privacy and confidentiality. Great care must be taken to provide advanced levels of security to prevent employees or bad actors from committing fraud by posting misleading information or gaining inappropriate access to customer transaction information.

People, Ideas & Objects are a research and software development firm driven by our user communities needs. We are beginning our developments on the basis of the Preliminary Specification. These efforts are a specialization and division of labor that fills the gap between the oil and gas industry and the Information Technology providers. For each producer to have the requisite capabilities to build and deliver software of the Preliminary Specifications scope and scale is untenable based on their budget and limited resources. Aggregating the industries efforts within this new sub-industry, that we are creating between oil & gas and the Information Technology providers, is the only solution to the business and technical difficulties the producers face today. To me, having 150 producers each researching and developing the blockchain technologies and integrations into their ERP systems independently, is ludicrous. As would any aspect of our offering, which does not fall within the producers competitive advantages of its land and asset base, or earth science and engineering capabilities.

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 profitable 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.

Our 12th Module, Part II

We now begin with a description of the blockchain technology and its integration into oil and gas. Within the Preliminary Specification we’ll have many interactions and transactions that currently do not exist in the industry. The volume of transactions that will be processed through our system will be substantially higher than what is currently experienced in the industry. This would be the case with the same producers involved and the same production volumes. When using the Joint Operating Committee as the key organizational construct we are taking the data at its lowest possible value obtainable. Today many ERP systems are capturing aggregated data from spreadsheets. In addition there is an increase in transaction throughput as a result of each participant within the Joint Operating Committee being active in the property as opposed to receiving one set of accounting reports from the operator each month. This volume of increased data and transaction throughput is then extended as a result of the 3,000 administrative and accounting service providers each processing their billings for their services to each of the identifiable Joint Operating Committees. These increase the volume of transactions, and hence the quality of the data, by substantial numbers.

Blockchain is a pure Information Technology solution within the Preliminary Specification. The other eleven modules are designed around the business issues and opportunities that are currently being experienced by the producer firms and industry. Those primarily being the chronic lack of profitability and the cultural capacity to accept they have a problem with profitability. With the business models that are contained within the Preliminary Specification, producers gain our value proposition which is valued in the region of $25.7 to $45.7 trillion over the next 25 years. This differential from the status quo is the Preliminary Specifications decentralized production model’s price maker strategy that enables producers to produce only profitable production. Enabling them to pursue the oil and gas business with the appropriate cash flow to fund their capital expenditures, pay down their bank debts and return capital to their shareholders. Currently producers expect shareholders to fund their capital spending as a subsidy to the energy consumer, leaving them with disgruntled shareholders and high levels of bank debt as a result of the lack of real profitability and cash flow. These business issues are our focus, blockchain is a pure technological application that provides our systems with enhanced security and integrity for the industry and producer. Adding to the dynamic nature of our software development capability, user community and the Oracle Cloud ERP offerings we use as the base of our system.

What is blockchain and how does it work. A good description of the technology of Distributed Ledger Technology (DLT) is as follows. This summary is provided by White Hat Security.

Every time a new transaction is initiated, a block is created with the transactions details and broadcast to all the nodes. Every block carries a timestamp, and a reference to the previous block in the chain, to help establish a sequence of events. Once the authenticity of the transaction is established, that block is linked to the previous block, which is linked to the previous block, creating a chain called blockchain. This chain of blocks is replicated across the entire network, and all cryptographically secured which makes it not only challenging, but almost impossible to hack. I say almost impossible because it would take some significant computational power to even attempt something like that.

In the context of security, both transparency of the system and immutability of the data stored on blockchain comes into play. Immutability in computer science refers to something that cannot be changed. Once data has been written to a blockchain, it becomes virtually immutable. This doesn’t mean that the data cannot be changed – it just means that it would require extreme computational effort and collaboration to change it and then also, it would be very difficult to cloak it.

Finally there is a TED talk from June 2016 with Don Tapscott. In this video he gets into the details a little more than yesterday’s video and calls blockchain an Internet of Value that supplements the current Internet of Information. A good description in my opinion. Which brings up one of the areas of the blockchain and their use as coins or tokens. I’ve mentioned this before and this relates to the centralization of value in the current Internet space. The example I’ve used is of YouTube which was sold to Google for about $4 billion. That transaction is now worth probably in the area of $150 billion for Google’s shareholders, which is a good thing. However, what if the owners of YouTube were able to hang on to their company and realize the value that they generated without having to give away the store. They may have been able to realize that $150 billion themselves. Issuing a coin would have enabled them to enjoy a liquidity at all times during their ownership of YouTube and removed the need to sell the company in the long term. Enabling them to realize the full value of their ideas. What has happened is the larger Information Technology providers have been able to poach the promising ideas and incorporate them within their offerings inside Google, FaceBook, Twitter etc. and leave the owners, although financially satisfied, without their ideas and the work they wanted to do. We may be seeing the downside of this concentration of value with just a handful of companies and the privacy concerns regarding FaceBook.

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 profitable 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.

Our 12th Module, Part I

People, Ideas & Objects Preliminary Specification is almost four and one half years old. During the time that we’ve discussed the specification, the user community and service providers and all the other elements that are needed for the dynamic, innovative, accountable and profitable oil and gas producers. There were no changes to the specification, establishing it as a baseline in which the user community would begin their work. Today we begin the definition of what will be our 12th module of the Preliminary Specification. After researching the topic and grasping an understanding of the Information Technology that underlies the blockchain, today we can begin the integration of that technology into all aspects of the other eleven modules of the Preliminary Specification.

If there was one weakness in the Preliminary Specification it may have been in its ambitiousness. The ability to implement some of the technologies in the manner as described would have been difficult. Areas such as the Material Balance Report where the industry wide reconciliation process is conducted from the field data capture through to the financial statements was going to be difficult. The area of concern was in ensuring the integrity of the data and its reporting when dealing with Joint Operating Committees, amendments and the complexity of the system as described in the Material Balance Reports specification. By adopting blockchain technologies, which I find best described as distributed ledgers, the Preliminary Specification doesn’t seem all that ambitious anymore. What I knew was doable and could be implemented with the technologies that existed in 2013 when the Preliminary Specification was published, are now far easier and in many ways the only way in which the industry should proceed in terms of their ERP systems development.

The best video I found describing what the blockchain provides is from its biggest proponent, Don Tapscott author of the book “Blockchain Revolution.” This video has a number of interesting catch phrases that I think help people understand the technology.

The first quote that I would point out from Mr. Tapscott is “so what that means is the nature of a corporation and the nature of competitiveness is going to change. This is a time of great transformation. First of all, every industry will go through huge convulsions not just financial services. Resources, … Secondly, it means that every business function will change.”

The phrase that I found resonated the most with the Preliminary Specification was at around 3:35 of the video. Mr. Tapscott said “everyone has a “shared network state” where they can “look real time at everything that’s happening.” Once we’ve moved to the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producers. We take on what could be described as “a shared network state” within the industry. The Joint Operating Committees are / could be standalone investments or would be held together as a network of assets within an oil and gas producer as a firm or corporation. Joint Operating Committees are in many ways independent as a result of this “shared network state” and the manner in which they are managed in the Preliminary Specification. The concept of operator is gone and each working interest owner is an active participant at all times.

Recall we are moving the compliance and governance frameworks of the hierarchy to the Joint Operating Committees legal, financial, operational decision making, cultural, communications, innovation and strategic frameworks. Transactions between the owners of the Joint Operating Committee either in terms of the land that they lease, both mineral and surface, the capital assets deployed, the production and sales of commodities, the service industry representatives they engage, the producers earth science and engineering capabilities, our user community and service providers or coin holders will be able to operate within this “shared network state” we understand to be the oil and gas industry and service industry.

The integrity of the transactions that are undertaken in oil and gas are always the subject of heavy documentation and verification. As we move to a software driven world, yes even oil and gas, this integrity, documentation and verification can’t be ignored. With blockchain we are gaining highly secure systems by implementing the blockchain as our 12th module in the Preliminary Specification. Where it will engage with each of the other modules and provide the transaction security that is necessary. There may be one blockchain within the Preliminary Specification or there maybe many. It’s too early to determine the best implementation of the technology at this point. What is known is it will be used in at least 50 different ways that I can think of off the top of my head to provide that integrity and security that is necessary in today’s systems. Anywhere that there are interactions or transactions between producers and Joint Operating Committees there will be the blockchain securing the transaction.

We’ll be discussing the 12th module and some of the technologies around the blockchain in the next few weeks. We will be taking a short break some time after May 9th to review the first quarter’s financial performance of the producers. It’s important to understand the difference at this point between the blockchain as our 12th module of the Preliminary Specification is fundamentally different to our implementation of the blockchain for our Initial Coin Offering. They are for all intents and purposes two mutually exclusive events. One is the technology integration into the Preliminary Specification, the other is the means we are using to raise the financial resources to build the Preliminary Specification. Our coin offering will be based on the rights that are distributed through the coin to its holder that provides them with the exclusive access to the software that will be built from the Preliminary Specification.

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 profitable 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

Financial, Operational, Political, Part IV

Maybe the producers have everything under control. “The large volume of unrecognized capital costs of past production that the industry carries is only an accounting issue for the accountants to worry about. These “assets” do not have any effect on the bank balance at the end of the day. They represent only the money that was spent in the past and that is where they should stay, in the past.” More or less this is the justification for the “muddle along” strategy and “do nothing” procedure. When the producer doubled their reserves and revenues continue to grow “who cares about what happened in the past!” More or less this has been the attitude regarding the business of the oil and gas business. The money being made was in the reserves being discovered and produced. If these reserves are so valuable, why can't they be produced profitably? Profitably based on a reasonable accounting. These reserves have had nothing to do with the accounting from the accountants. What the producers have failed to see is that the money that has been invested in the industry isn’t performing. For all intents and purposes it sits forever as an asset on the balance sheet as property, plant and equipment. To perform the producer needs to take into context what was spent and how that investment has performed under their management. On that basis the performance has been the poorest possible. This new process of evaluation is how oil and gas producers are assessed and bureaucrats are not happy that they now have to account for their past behaviors.

“That people within the industry and the service industry are having difficulty seeing where the value lies in the oil and gas industry. That they don’t want to be part of a thriving, growing operation is not the producers concern.” The industry doesn’t have a problem it's the people who no longer want to work in the industry that do. “The investors and bankers that don’t participate anymore, the service industry reps that can’t fill producers needs, and others that just don’t understand how difficult and hard the oil and gas business is.” Back in the early 1990’s when oil prices were low due to overproduction it was this kind of dialog that was heard throughout the industry. Usually in the annual reports and at the annual general meetings. “Oh whoa is me, another bad year, oh whoa is me.” I think we’ll begin to see this same dialog begin to be pushed across to us from the producers in the first quarter reports and at the annual meetings. I think this year it’s not going to fly, and here’s why.

Many investors are talking. Some are proposing changes to the boards. Producers are resisting and we’ll see who wins the proxy battles. Proxy battles are futile in my opinion. A lot of screaming and yelling and then nothing happens. The chances of instituting any change is very low, no matter how bad things are. And even if things are desperate bureaucrats have their ways of ensuring their franchise is safe. The only way that there’ll be changes from a management point of view is when the bureaucrats know intuitively that the gig is up. That their opportunities are best sought elsewhere in greener pastures in other industries far away. The timing of this jump is critical to the success of their next industries perspective of them. If they wait to long then they begin to look like they may have been responsible for the oil and gas difficulties. Best to leave before the knowledge that bad management was the cause of oil and gas’ downfall and becomes common knowledge across the business community.

When, as we have documented here, the financial difficulties are as bad as they are in oil and gas. The investment and banking communities have hightailed it out many years ago. When the operational difficulties are becoming more of a logistical difficulty and causing the bureaucrats to work evenings and weekends, then you know we’re close to the time for them to bail. The one sure measure of this however is the political. When the politicians believe the lies that the business was represented as by the producers for the past few decades. Then you do not want to be around when the truth begins to be known by those outside of the industry. This could really damage the employment prospects of the bureaucrats in the industry they choose to work for in the future.

When creative destruction hits its peak in oil and gas then that’s the day People, Ideas & Objects, our user community and service providers get the call to put it all back together again. This day has always been a light at the end of the tunnel. For the past number of years my future’s been brighter. Now this light is so bright and so close that I think we could measure it in minutes. There is always the possibility that the producers extend their hold on the situation for another 25 years and keep the show on the road. I just don’t see that, and am certainly not banking on 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 profitable 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.