It Will Apparently be the Investors Fault

If there is no reasonable and fair method of production allocation in the oil and gas industry. Not only will shale always overwhelm the commodity markets but there is nothing to constrain the producers from continued overproduction. Then through their accounting shenanigans these  producers will always shift the costs of oil and gas exploration and production from the consumers to the investors. The motivation to do so is to report the highest profits and largest balances of property, plant and equipment. This is particularly detrimental in oil and gas when cost escalation as a result of each barrel of oil produced is more challenging and difficult than the prior barrel of oil. Cost escalation is an inherent feature of the industry and these costs end up being covered by the investors. Without the Preliminary Specifications decentralized production models price maker strategy, which allocates production in the most reasonable and fair manner, producers will always regress to discounting the price of their products to the consumer. Until People, Ideas & Objects decentralized production models production allocation method is implemented, which sees all production produced profitably everywhere and always, this regression to the now fully ingrained cultural ways of the industry will always be a risk for the investors in the industry. The following comment was made in World Oil in an article entitled There are fears about an oil spike above $150.

“If oil demand continues to grow to 2030 and beyond, the strategy of returning cash to shareholders and under-investing in reserves will only turn out to sow the seeds of the next super-cycle,” the analysts wrote. “Companies which have barrels in the ground to produce, or the services to extract them, will be the ones to own and those who do not will be left behind.”

The expectation of the investors to subsidize the consumer continues. Note there is not a hint of financial performance or profitability intimated anywhere, only the possibility of “missing out.” Now it also appears that it will be the investors fault for higher commodity prices from potential resource scarcity due to the diversion of producers cash flow from operations to the investors. Shaming investors won’t change their minds and reverse the flow of funds back into the oil and gas producers. What might be considered innovative would be providing investors with a clear accounting based on reasonable and accurate numbers and providing a competitive return in comparison to what other industries are offering their investors. What this quote reflects to me is a continuation of the systemic cultural forces aligned against the investor. “The objective is to drill wells because that’s where the money is.” Except there is no money and the investors are saying that they’re displeased with the financial performance of the industry and will not be participating any further. They want their money back and feel that the story that has been told of high profits and highly valuable companies is not valid. Do the bureaucrats listen to anyone?

Why is new capital required anyway? For the last number of decades many “successful” oil and gas companies have had CEOs that were from the financial community and were there for the ability to raise capital. We certainly don’t see that configuration anymore. Raising the annual capital expenditure budget from the capital markets was an annual ritual that was enjoyed by most oil and gas companies. The business model was “take money from investors, drill wells.” With no other consideration whatsoever. Would there be any need for additional midstream or pipelines? “Not my business.” Would there be a need to cultivate the service industry to better meet the producers needs? “Not my business.” If issues did arise then producers were very capable of all singing from the same hymn sheet. Usually this involved bullying someone into doing something that they’ve chosen not to do for business reasons. A good example of this would be the quote above that is part of a probable new campaign by the producers to have funds released from investors. Let me restate the above for clarity. “The boogeyman of higher prices will come and haunt you if you the investor don’t change your ways.” Such is the business of today’s oil and gas producer.

I admit running the business of oil and gas as a business is highly controversial. I first proposed the decentralized production model and shutting in production to enhance profitability on January 5, 2007 in this blog. It should be clear to the investors at this point that producers believe it’s easier to get the investors back to the table then it is for them to admit they’re running a scam. Discussion of this type is not welcome. Luckily we live in the era of the Internet. The cultural and systemic way in which the industry is operated is ingrained in everyone who occupies space there. What the above quote also shows is that nothing has changed and nothing will change if left to the bureaucrats who are in control today. Rip and Replace is the scenario that we believe is the operational choice for the oil and gas investor. There may as a result be some disruptions in field operations here and there however those can be remedied in the long term. What we know now is that the status quo is never going to achieve profitability. And they certainly will never achieve profitable energy independence in North America.

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.

The Motivation, Energy and Drive?

We are well into the second decade of the shale era in natural gas. Applying multi-lateral fracing of shale formations for oil production didn’t begin until such time as the natural gas prices collapsed. Freeing up the field resources so that they could be applied to the areas where oil was more promising. Nonetheless has anyone made any money yet? After all the screaming and yelling and the production of so many volumes of oil and gas from shale, we are nowhere close to making any money. I think the difficulty is that the producers have no plans to make any money, and the issue of whether they’re making any money or even if they should be is not an issue, concern or discussion point in the industry. Where is the energy that is necessary to turn the industry into a profitable operation, where is the drive to make the changes to do so? I don’t see either, just excuses that enable the bureaucrats to continue to “muddle along” as their strategy and “do nothing” as their operating procedure.

An EIA report has been published that I think shows the source of the overall issue that is prevalent in oil and gas. The issue that we’re talking about here at People, Ideas & Objects and have proposed our solution in the form of the Preliminary Specification. At the bottom of the EIA report it shows “Capital Expenditures for 83 Publicly Traded Exploration and Production Companies” with one of the graphs showing the dollars per barrel of oil equivalent “World Weighted Average.” Note that it is in decline since 2014 and we’ll discuss this below. The point I want to make here is that these are how the industry accounts for their capital costs. Based on the total capital that was incurred to drill, complete and equip the well for production divided by the total proven and probable reserves that were discovered or increased. For engineering and geological purposes these “finding costs” may be appropriate and provide them with valuable information, I am not aware what their specific needs would be. For accounting purposes this allocation to the entire reserves base certainly meets the principle of matching of costs to revenues. However, is this just the application of an inappropriate accounting rule for the purposes of distorting the accounting for other purposes?

The overall purpose for accounting is the measurement of performance. When the costs of the assets will not be recognized for many decades to come, because they’ve adopted this allocation of capital costs to the total reserves base, provides the bureaucrats with a measure of performance that is quite attainable. At approximately $16 / barrel for the cost of capital its easy to show a profit when prices are $74. In fact all of the financial statements reflect the genius levels of profitable capabilities that each of the producers have attained. The point is that producers also spent decades worth of cash in the pursuit of those “assets” and will not recognize those “capital costs” for decades in most cases. This creates the cash shortfall that is epidemic at this point in the industry. So although the producers are reporting healthy profits they demand cash in order to produce. By what measure of performance is that an accurate accounting?

Industries are competing for capital on the basis of the speed in which they are able to turn that capital over. In some industries as quickly as six months. In oil and gas the speed in which capital is turned over is in excess of a decade. Is that competitive? To add insult to injury most of the overhead that is incurred in this industry, which incurs moderate levels of overhead, is capitalized and will therefore be recognizing these costs over the course of the next decade as well. Therefore all the downtown staff, office space, computers, pencils and erasers are capital costs and recognized over the course of a decade. Leaving the producer without the cash that is incurred on these “costs” each and every month of their existence. These costs should be recognized in the period that they’re incurred so that they can be turned back into cash to finance the next month’s overhead costs. This assumes of course that producers were charging their customers enough for the products that they produce. That is not what has happened in oil and gas. Investors have had to fill the void of the cash deficiencies as a result of the chronic and massive spending that producers do with no regard for how they’ll have that money returned. By what measure is this performance? What bureaucrats refuse to do is to charge the appropriate price for their product so that the consumer pays for the actual, appropriate cost of exploration and production in the current period. Instead the bureaucrats were raised with Daddies credit cards that were magically paid each month and that is how the world works.

Dare I ask the question once again. Where is the motivation, the energy and the drive to make these changes through the implementation of the Preliminary Specifications? Here we sit in our 27th year of trying to convince these “business people” of what is necessary. The average cost per barrel noted in the EIA report shows a substantial decline in the capital costs since 2014. From a peak of $32 / boe in 2014 to today’s $16 / boe. Ah the magic of numbers. This miracle is alleged to have occurred as a result of the “innovations” that occurred in the producers. Nothing of the sort has happened, innovations require motivation, energy and drive. These capital cost declines are as a result of the expansion of the number of years in which the capital costs will be depleted. Taking the denominator from 8 years to 16 years has the same effect as halving the costs. Run your own numbers if you don’t believe me. Secondly, if it’s not attributable to the change in the rate of depletion then it represents the level of abuse the bureaucrats have been able to exercise over the service industry in terms of the price they’ll pay for drilling, completion and equipping services. The only innovations coming out of oil and gas producers is how to stack reams of paper higher in an office building.

The cumulative money that has been invested, spent and subsequently lost in oil and gas is tragic. There is no desire to expose this and account for it now. These losses were incurred last year, the year before or last decade. They are sunk costs as far as the bureaucrats are concerned. Not relevant to the decisions of today. The point that I would make is that the scope of the irrelevance of these past losses in the industry has become relevant. Investors left a while ago. As we documented yesterday, producers stocks have essentially recorded a flat performance since November 2016. A time when the performance of the business recorded almost a 100% increase in the oil price, 23% increase in oil volumes and 12% in natural gas volumes reflecting a period in the industry that is doubtful that it could ever have been better. Yet producers have done nothing but lose money while they’ve muddled along! Maybe the past doesn’t need to be accounted for. The way that I see it someone needs to account for it and it's not me. I got kicked out of the industry in 2004 for these ideas. Kicked out I might add because the bureaucrats knew that I was dangerous to their health, well being and most importantly personal cash flow.

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.

Your Ticket to Ride

With oil prices as handsome as they are producers will be rolling in cash and profits in this the second quarter of 2018. Last Friday not only represents the end of the quarter but for all intents and purposes the end of OPEC’s production sharing agreement. They were able to stick to the agreement and achieve compliance rates of up to 250% of the quotas they established. Now with Venezuela in economic meltdown and Iran being subject to renewed sanctions OPEC is being asked to produce at their full production profile. This has been positive for the commodity market as oil prices have been stronger as a result of this news than they were prior to it. Overall OPEC were able to achieve significant price increases during the term of their production sharing agreement. In the beginning oil prices were $38.56 for November 2016. On Friday’s close they were $74.25, a 92% increase. Who says oil and gas are not subject to the principles of price makers.

American producers can also look to the fact that their production volumes during this time have, for lack of a better word, exploded. Moving from approximately 8.6 million barrels per day to what is believed to be 11 million barrels per day. A 28% increase in volumes. Give me any business that has experienced these types of increases in not only price but also volume and I’d be sure to be making money by the barrel. The fact is the oil and gas industry has experienced maybe the best period ever in its history. But this is where the wheels fall off the bus. Natural gas prices over the course of the OPEC production sharing agreement were down almost 4% since November 2016. Production volumes in that side of the business also “exploded” during this period from 87.67 bcf to 98.5 bcf in April 2018, an increase of 12.3%. Oil and gas bureaucrats seem to be maintaining their policy of not resuscitating the natural gas side of the business. Therefore any upside profitability, cash flow, working capital, cash balances and for the oil and gas investor, market capitalization would be mostly attributable to the oil side of the business.

Yet that is not what we’re seeing. Certainly the market capitalization of the producers have had a good quarter. However over the period of time when prices doubled and volumes were up 27% on oil and 12.3% on natural gas the average market capitalization of the sample of 23 producers that we follow was up 6.6%! My only question is why keep the bureaucrats around if they’re that expensive? After a resurgence of almost 100% in the price of oil, a 27% increase in oil production and a 12.3% in natural gas volumes investors get essentially nothing? Over the course of 20 months they are provided with 6.6% which is an annual return of 3.96%. About the same as if they put their money in a savings account. What I guess the investors can be assured of is the future will be filled with this magnitude of volumetric and price increases over the same short periods of time for the rest of time that consumers use oil and gas. The bureaucrats guarantee it.

Is there a problem in oil and gas? The effect of the financial crisis was detrimental to all businesses and the natural gas business does not appear to have recovered at all. Oil prices are up 38% since 2009 so it is arguable if that side of the business has recovered. The cash and working capital situation of the industry and the individual producers are abysmal. In our sample of 23 producers which represent all types of North American producers. Cash balances eroded from $31.6 billion as of October 2016 to $24.7 billion in the first quarter of 2018. Working capital was $20.4 billion as of October 2016 and $14.2 billion in the first quarter of 2018. It's been a decade since the instability brought about by the financial crisis was in full force. Every other industry has recovered and is moving forward with the issues from that era behind them. Therefore I think it is reasonable to state unequivocally that the issue that the oil and gas industry is suffering from are not associated with the financial crisis in any way. There must be something that is causing the difficulties that is unidentified in the producer firms that is endemic, chronic and unresolved.

For discussion of that issue, and most importantly the solution that is recommended by People, Ideas & Objects, our user community and service providers, please review our Preliminary Specification which addresses and resolves the issues and opportunities of the oil and gas industry. Issues that have been prevalent since at least 1986 and who’s origins lay in the accounting changes made by the SEC in the late 1970’s. Simply the accounting for capital permits producers to capitalize everything for decades. Never recognizing the costs in a capital intensive industry creates a number of issues. First it causes the over reporting of assets, profits and cash flow attracting investors to the industry. Then over investment in the industry leads to overproduction that collapses the price of the commodities. Creating a situation where no one is making any real money other than the false profits created as a result of not recognizing any of the capital costs of past production. The cash shortfall from these activities are tremendous and tragic, and have traditionally been backfilled by the annual shareholder fleecing, or as the bureaucrats call it, share issuance. Investors are now wise to this situation and have bowed out and cancelled their involvement in these fleecing’s and dilutions, and expect producers to live off their own cash resources. As we see the industries cash shortfall is critical and represents the fact that the investors had in essence been subsidizing the consumers for their energy consumption by financing a discount in the energy price. Even at $74 oil prices producers are not covering their costs. The second point is that oil and gas commodities are subject to the economic principles of price makers. Where small changes in the production volumes will have large impacts on the prices. This has been confirmed by OPEC’s activities in the marketplace these past few years. The chronic unprofitable overproduction by North American producers will continue until such time as these producers adopt some method of production allocation that is reasonable and fair. The Preliminary Specifications decentralized production model’s price maker strategy implements a production allocation methodology based on profitability at each individual property. If the property is capable of producing a profit based on a reasonable, standardized accounting then it produces. Otherwise it is shut-in where the reserves are saved for a time when they can be produced profitably, where those reserves will not have to carry the cost of successive years of unprofitable production, where unprofitable production will no longer dilute profitable production and the commodity markets will find the marginal costs when the unprofitable production is removed from the market. In other words run the oil and gas industry as a business.

Today is just the current point in the never ending cycle of up and down where the producers ramp up activity that will lead to future declines in commodity prices. Oil prices are “good enough” to not do anything about these issues we’ve been discussing here. Issues which will only lead to difficulties down the road. Over and over again. The shale phenomenon is underestimated in terms of its deliverability in both oil and gas in each and every quarter since its beginning. The unconstrained fashion in which the oil and gas producers approach their production profile will ensure that overproduction will continue until such time as the Preliminary Specification’s production allocation methodology is implemented industry wide. The current culture of the industry is that it will always perceive the future oil and gas prices opportunistically. Hope is the key to the future in the oil and gas industry. This is the circus that is the oil and gas industry. The ride has its ups and downs but the bureaucrats ask, isn’t that why you bought a ticket?

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.

Independence Day

Canada Day

Third Friday

Specialization and the Division of Labor

Throughout the Preliminary Specification we have applied the principles of specialization and the division of labor to the oil and gas producer and industry. These two tools have been the only reason for any economic development over the past 242 years when Adam Smith wrote the Wealth of Nations. Organizations evolve and expand their capabilities through further divisions of their labor and specialization of the work that is undertaken. For the oil and gas industry to increase its production profile, to expand its deliverables efficiently and effectively with the same resource base requires that they develop their organizations through the application of specialization and the division of labor. This is the only manner in which to evolve and expand, there are no other proven methodologies available.

One of the issues that has been noted and documented in the last few decades is from Professors Anthony Giddens and Wanda Orlikowski. Structuration and the model of structuration essentially states that society, technology and organizations move together or a failure will occur. People, Ideas & Objects documented Structuration in our Preliminary Research Report and believe that our friends the bureaucrats fully understood the implications. If Information Technology defines and supports the organization, then IT and more specifically ERP systems should take a heightened role in the organization. Bureaucrats have since invested nothing in ERP systems and limited their exposure to any IT capabilities on a deliberate basis. The reason for this is to ensure that they would be unchallenged in their franchise. If solutions such as the Preliminary Specification were enabled then they would be out of a job and as a result they ensured that no innovations in the organization or technologies have succeeded in the industry for the past number of decades.

For the industry to increase its oil and gas production profile to the level of profitable energy independence requires an investment in the manner that it will approach that goal. We’re not going to get there by simply applying “more.” As I have been critical of the job that has been done, with its focus on drilling wells, I’ve shown that the industry has to expand the types of work that it’s doing in order to be successful. The industry has identified that there are key constraints building in the earth science and engineering disciplines that will need to be addressed if we are to expand our throughput. And lastly the never ending pursuit of oil and gas demands that each and every barrel of oil and gas is more complex and costly to produce than the previous one. The amount of work that is necessary in the future will be substantially greater than what it is today.

These are some of the considerations that have been made in the Preliminary Specification. The solution we have proposed is contrary to the best interests of the bureaucrats in the sense that it ends their job security and / or would require them to do some hard work for once. The reorganization of both the producer firms and the industry are necessary to deal with the issues that are plaguing the producers today. Moving the administrative and accounting resources of the producers to the service providers where they specialize on one process and use the entire industry as their client base. This specialization will enable these service providers to compete based on a variety of new and dynamic competitive advantages. These include their innovations based on their administrative and accounting expertise. Service providers are owned by the user community providers who define and determine what the People, Ideas & Objects software does. Additional competitive advantages of the service providers will include automation of the process that they manage, constantly expanding their specialization and division of labor in order to increase their value proposition to the producer and industry. Dividing the labor between computers and people in a way that the computers will be able to focus on the tasks that are oriented to computing, tasks such as processing and storage and leave the leadership, problem solving, decision making, creativity, collaboration, research, idea generation, design, planning, thinking, negotiating, compromising, innovating and financing to the humans that do it well.

There is also the pooling concept that is introduced in the Preliminary Specification that seeks to deal with a number of issues that producers face today and will face in the near future. Pooling allows greater specialization of the earth science and engineering capabilities of each producer to be undertaken with the understanding that these will be provided to the Joint Operating Committees that they have an interest in, and in combination with the other working interest participants capabilities and specializations. The pooling of these providing the overall scope and scale of the demands that are needed within each of the Joint Operating Committees in the industry.

People, Ideas & Objects are not proposing the Preliminary Specification as a static solution. We are providing the most profitable means of oil and gas operations for the dynamic, innovative, accountable and profitable oil and gas producers. Our user community will be constantly developing new and better ways in which the software will be able to be used within the industry. The user community participant is also the principle in the service provider and will therefore have a first hand look at the issues and opportunities in their area of expertise. Developments and innovations will constantly be made based on their capabilities and will continue to provide incremental value to the producer firms and industry.

When it comes to evaluating the People, Ideas & Objects value proposition it should be considered what the value of these attributes of specialization and the division of labor are. We have been able to calculate what our price maker strategy provides the industry by defining the quantitative value at $25.7 to $45.7 trillion in the next 25 years. The tools of specialization and the division of labor however will be incremental to this value and will be able to enhance the deliverability of the industry with a lower resource base than what is incurred today. A substantial value proposition on its own. Providing opportunities for the industry to pursue profitable energy independence in North America and possibly even more.

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.

"No One Ever Needs Profits"

What we see in this downturn in oil and gas is the societal cost has been nothing short of tragic. People have been displaced throughout the economy as a result of the low oil and gas prices. Small towns that rely on servicing the service industry activity are hurting desperately. The service industry are having difficulties in all aspects of their business and are now expected to extend further credit to the producers in order to work for them. Governments are missing out on their tax revenues from all of these activities. Which may not sound like an issue if you feel they should live within their means. What they’ve proven though is that they never do and the expansion of budget deficits and debt at all levels of government are growing as result of this downturn. The royalty holders are also suffering as a result, they are the rightful owners of the product that the producers pay in order to obtain title to the product. With oil prices in what I would call a barely comfortable position we hear the benefactors of all of this pain and suffering, the energy consumer, unhappy about the subsidy that they’ve been afforded for their consumption of energy these past four decades. The investors and bankers have also suffered and they are the ones who’ve made the most direct contribution to the consumers discounted energy prices. With all this pain and suffering you would think that the consumer would have been grateful! I dare ask our friends on the left in the Democratic party, what’s wrong with a few profits?

Bureaucrats within the producers, firstly have not suffered, but secondly always believed that they needed to stay out of the discussion of energy prices with the public. Hiding under the desk regarding pricing of the commodities to ensure that the costs of the industry are deferred as long as possible. This has been their only response to the alleged pressure they would find if they lifted their heads up and addressed the actual costs of oil and gas exploration and production. These bureaucrats are also the ones who have been absent from the business when it came to anything but drilling wells. Pipelines and the service industry who have constructively approached the industry have been verbally abused and now financially abused through extending accounts payable out to 18 months. At no time did the producers realize the importance of these providers to their business and ignored them and their needs. Now pipeline constraints are everywhere you look and the industry is having difficulty sourcing any kind of field resource, even in the globes most prolific field in the middle of Texas. How could things have become so bad?

My job since 2003 has been, as it has been the role of so many others many times in the service industry before, to suffer and sacrifice to do the right thing for the oil and gas industry. All of this is unnecessary if we would shift to build the Preliminary Specification then these issues would subside. Imagine if we had shifted in a timely manner and were able to avoid all of these societal costs. I guess it is as they say, you can’t get anything done until everything falls apart first. I would think that we are fairly close to that period in time. I don’t see much upside from here and the ability for the industry to last much longer is becoming quite short. We seem to have been able to survive much longer than what most other industries would have been able to survive. The fact that oil and gas is a capital intensive industry provides that prior investments will continue to spin off cash flow that at least keeps the bureaucrats in power. Unfortunately not much of anything else that’s considered positive has or is happening now.

That a deliberate destruction of the industry is being undertaken by a self interested group of people is beyond what I thought was possible. Take a look around and tell me what else is going on. Everyone knows what the problems are and everyone knows, at least those who’ve read the Preliminary Specification, that it’s the solution. Yet nothing happens. It’s not that we’re going to flip a switch and the software rolls out when the decision is made to proceed. We have many years of very hard work ahead of us. The first aspect of that is our budget needs to be raised in full. I’m not going to start this project on a pay-as-you go basis with the short attention spans of these producers. Only to find when we need a cash infusion that oil prices have risen to $80 and bureaucrats decide they don’t need the software. Picking this initiative up a second time after everyone sees the first failure will not happen. Therefore the financial resources have to be in place for this project to start and continue until completed. The most important point of all is the people who are interested in committing to this need to be sure that they can complete their work. They don’t want or need to be cut short half way through and have to do other work and potentially be ostracized by the industry for participating. Follow through is a necessary attribute for the industry to display in order to resolve these issues.

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.

Overhead in a Nutshell

One look at the downtown core of any city in which the oil and gas industry resides and one sees the breadth and depth of the overhead that is incurred. Oil and gas is an industry that incurs a moderate level of overhead due to its complexity. This is not apparent from the financial statements as most of the overhead that is incurred in the industry is capitalized to property, plant and equipment. The shifting of overhead from itemizing it as a cost of oil and gas exploration and production for pricing purposes of the commodities, to property, plant and equipment is part of the desire to subsidize the consumer by deferring as much of the cost of oil and gas exploration and production away from the consumer. The Preliminary Specification sees overhead differently than what is the current practice in the industry. There are several distinct ways in which we deal with these costs to ensure that the commodity is fully costed, these costs are also turned over quickly in working capital from the sale to the consumer and the producer itself is able to limit the amount of overhead that they incur to the absolute minimum.

The first reduction in overhead is of course the reallocation of the administrative and accounting resources to the service providers. Moving the fixed overhead of the producer to become the variable overhead of the industry. Variable on the basis of production at the Joint Operating Committee. If there is production then the overhead will be incurred as a result of the activities necessary to manage that production. These overhead costs are incurred by the Joint Operating Committee with each working interest participant responsible for their share of these costs. Therefore overhead will fall under the classification of operations on the income statement, or possibly it will be segregated on its own line. The point is the use of the service providers will only be incurred on production and be a standard cost across the industry. The standardization comes from the fact that the service provider responsible for lease rental payments, or revenue accounting will be charging the same rate for their services in each jurisdiction. The only overhead that the producer will be incurring on their own account will be associated with the management of that producer which would include the C class executives and senior management.

There is a second source of revenue that is established in the Preliminary Specification for each and every producer in the industry. These revenues will be as a result of the time that will be charged to the Joint Operating Committee in applying the producers earth science and engineering capabilities that make up their unique competitive advantage. These resources will at all times have their time charged through our Work Order system to either a Joint Operating Committee that they are working on, or an overhead account that would be the responsibility of the producer. The costing and billing of the time for these resources would be part of the system and is included in the Preliminary Specification. These revenues are anticipated to be large enough to offset the entirety of the producers overhead costs when we consider the prior elimination of the administrative and accounting resources to the service providers.

An important aspect of this second revenue stream is the concept of pooling that is introduced in the Preliminary Specification. Due to the demands of geology and engineering it is believed that it will be difficult, and not commercially viable for a producer to undertake the full scope of the specialization and division of labor in those professions. Therefore the pooling of capabilities from the working interest participants in the Joint Operating Committee will become a necessity in order to ensure that the full scope of specialization and division of labor is achieved. This pooling will therefore require each producer to have the capabilities to cost and capture their time and effort incurred in each Joint Operating Committee in order to adequately account for their enhanced contribution under the Preliminary Specification environment.

Additional demand for the pooling concept is realized when we see that much of the resource base of the industry will enter retirement in the coming decades. The current downturn has also been detrimental in terms of the volume of new recruits in these two professions that will aggravate this issue further. Lastly the industry is incurring what we believe within the industry to be an unused and unusable surplus capacity of these resources that would be eliminated under the pooling concept. The broad scope of specialization and the division of labor necessary today, and the demands that the producer have the capabilities necessary to approach their properties demands for them as operator see that the capabilities within the producer firm be overbuilt to accommodate the contingencies that they will ultimately face. This creates at any point in time in the industry a surplus capacity of these resources that are unused and unusable. A luxury that I would suggest the industry can no longer afford to incur as a cost and can no longer rely on due to pending resource restrictions.

What these changes will do is divide the overhead that is incurred by the producer and the Joint Operating Committee. In aggregate the overhead in the industry is going to increase substantially as none of it will be capitalized. It is necessary that all of the overhead be incurred in the current period to ensure that the cash that is consumed in these processes is returned to the producer in the current period. The consumer will have to pay for the full cost of the products they consume and that will include the overhead that is incurred in the processes of exploration and production of oil and gas. The practice of deferring these costs to property, plant and equipment for decades is misdirected and needs to stop in the most effective and efficient means. These changes will enhance the producers current financial structure by ensuring their working capital is turned over quickly.

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.

What do Bureuacrats do?

I think the producers need to stand up to the consumers demands for lower energy prices. They always seem to turtle at the slightest criticism and leave the myths and fallacies to linger and manifest themselves into greater difficulties down the road. Instead of attempting to control the “demand level” or the “volume of investment in alternative energy” they need to focus on what their organizations need. Higher energy prices are the only way in which the North American producers are going to be able survive. The news recently had a press scrum of the new Conservative Premier in Ontario, Doug Ford. He was vehemently unhappy with the costs of consumers energy in the province and wanted to know why. He stated that he thought it was as a result of the monopoly in the oil and gas industry of which he was going to sit them down and explain a few things to them. Noting that the price of gas in litres in Ontario would be over $5 per U.S. gallon in the United States and that high of price would never be accepted there. This is where the oil and gas industry needs to aggressively push back. Mr. Ford is new in the job and it was a media scrum of which he’ll begin to get more used to as time passes. The fact is that the high prices for the gasoline in Ontario have far more to do with the Ontario and Canadian governments taxing regimes. Maybe he’ll better understand the situation and since he is the biggest cost associated with the consumers energy, be able to provide a decrease in his consumers energy costs.

The fact of the matter is you can’t buy a half litre of bottled water for the price of a litre of gasoline. Which of these two provide more economic value? If a barrel of oil offsets 5,000 man hours of labor what exists in terms of replacement for this. There is none. Try to lubricate your engine with solar power or use the hydraulic fluid derived from wind energy. Replace the thousands of chemicals that are derived from oil and gas production into the everyday items that we use with hydro or nuclear. There is no replacement for the oil and gas products that are produced. This is a key characteristic of a price maker. Another key characteristic is that small changes in the volumes of supply or demand will have dramatic effects on prices. This has been proven in the oil market over the past two years by OPEC’s production sharing agreement. They have taken a small percentage, probably averaging 2% of all the oil production off of the market during the past two years and as a result the prices have increased in excess of 50%. An attribute that would clearly place oil and gas commodities in the category of price makers.

The continued uncontrolled increases of oil and gas production by producers in North America have displayed two common characteristics in these past four decades. First that none of this production has been truly profitable. This can be stated unequivocally when the assets recorded in property, plant and equipment of the industry are as bloated as they are. These assets represent the unrecognized capital costs of past production, in a capital intensive industry. Secondly the overproduction that has occurred has been as a result of reporting profitability that was not “real” and therefore attracted too much investment leading to the chronic overproduction. This chronic overproduction has been systemic throughout these past four decades and is evident in both oil and gas. For quantitative and qualitative evidence of these facts we need to look only to the natural gas prices that are constrained within the North American region.

People, Ideas & Objects are not proponents of high energy prices. We believe a healthy, profitable industry is critical to the betterment of society. Today’s depressed oil and gas industry provides no one with any value. We owe it to our future to ensure that all oil and gas is produced profitably to ensure that none of this resource is wasted. As we proceed further into the future what we can be assured of is that the oil and gas commodities costs will increase. As the easy oil and gas is produced the more costly, geographically difficult and technically complex our energy supplies will become. Therefore the ability to evaluate the costs of oil and gas and ensure that we are producing only profitable production everywhere and always is a necessity for that healthy and profitable industry that we seek.

This is the message that should be explained to the consumers. That would be considered part of the producers business in my opinion. Running around stating that demand may drop if prices rise or investments in alternative energy will increase are attempts to control the uncontrollable which are not part of the producers business. Profitability needs to be the focus and how to ensure they remain profitable at all times. The industry from a natural gas point of view has been in a desperate situation for over a decade now. The oil side of the business will only continue to perform in the same manner that it has for the past four decades. Without any change, without any discussion from the producers we’re all just sitting here wasting our time. Action is what is needed and I am at a loss to determine what it is that they’re waiting for? Is muddling along so ingrained in the culture that they’re paralyzed to do anything? It’s an inherent part of the Preliminary Specification that the industry must change and that these changes are too dramatic to undertake in the normal course of business. We believe creative destruction will be the mechanism that will bring about the desired changes that are needed in oil and gas. We believe the status quo’s days are numbered.

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.