We're Going to Need a Bigger Cat
If you Google “pigeons” on this blog you will find the 14 times I’ve mentioned throwing the cat amongst the pigeons. It's as disruptive to the pigeons as one could imagine. Today we’re tossing another cat, however we’re going to need a bigger cat. The following is a follow-on discussion to the request I made to ChatGPT’s DALL:E to prepare the prior blog picture. That picture was a one sentence request such as this request was intended to be. Sometimes AI is all A and I.
Me: Let’s instead throw a mountain lion among the pigeons.
DALL:E That's quite a vivid metaphor! It sounds like you're suggesting introducing a disruptive element into a situation, which could really shake things up. What kind of scenario are you thinking about, or is this just a general observation?
Me: Disintermediation in an industry.
DALL:E Throwing a "mountain lion among the pigeons" by introducing disintermediation in an industry could indeed create significant upheaval. This often involves removing the middlemen or intermediaries in a market, allowing producers and consumers to interact more directly. This can lead to increased efficiency, lower costs, and more responsive services, but it can also disrupt traditional business models and challenge existing players. Which industry are you considering for disintermediation?
Me: Oil & gas
DALL:E Disintermediating the oil and gas industry could have profound implications, as it's an area traditionally dominated by a complex network of intermediaries, including national and multinational corporations, brokers, and various regulatory bodies. Direct interactions between producers and consumers could potentially streamline operations and reduce costs, but it would require significant technological, regulatory, and logistical changes.
For instance, the rise of digital platforms and blockchain technology could make it feasible for transactions to be more transparent and direct, reducing the need for some traditional intermediaries. This could also help in managing the distribution of oil and gas more efficiently and possibly even opening the market to smaller producers or alternative energy sources more effectively.
Such a shift would likely face considerable resistance from established players who benefit from the current system. Moreover, regulatory frameworks would need to evolve to address these new business models and to ensure safety, environmental protection, and fair practices.
What specific aspects of disintermediation are you most interested in exploring within this industry?
Me: I came here for the picture.
DALL:E Certainly! Could you describe the specific image you'd like me to create for you related to the oil and gas industry, or any other theme you have in mind?
Me: Tossing a mountain lion among the pigeons.
Former Pioneer CEO Scott Sheffield has been excluded from participation on ExxonMobil’s Board of Directors as part of a Consent Order to approve Pioneers acquisition by Exxon. The Federal Trade Commission (FTC) Consent Order was commented on by Exxon in the Wall Street Journal.
The FTC’s proposed consent order, in addition to barring Sheffield from the board, requires that for a period of five years, Exxon won’t add any Pioneer employee or director to its board, other than certain named individuals.
The FTC didn’t accuse Exxon of wrongdoing.
“We learned about these allegations from the Federal Trade Commission,” an Exxon spokeswoman said. “They are entirely inconsistent with how we do business.”
Pioneer's response to the allegations.
The allegation is that Pioneer’s CEO Scott Sheffield, from the WSJ.
Federal regulators said Sheffield had exchanged hundreds of messages with OPEC representatives and officials discussing crude-market dynamics, pricing and output. They said that through “public statements, text messages, in-person meetings, WhatsApp conversations and other communications while at Pioneer, Sheffield sought to align oil production across the Permian Basin in West Texas and New Mexico with OPEC+.” OPEC+ is the wider group of oil producers that includes OPEC and several others led by Russia.
These are some of the facts of the case and what is not mentioned is the actions of the FTC may have been triggered by a lawsuit.
The lawsuit itself.
Additional Facts
The arguments put forward as to the reason why People, Ideas & Objects Preliminary Specification could not be accepted by producers was:
- It was collusion.
- Shutting in production would damage the oil & gas formation.
Collusion
In retrospect we may be able to place the understanding of collusion by producers in the same category of how “free on board,” “putting cash in the ground” or “building balance sheets.” They understand business at such a basic level as to allow $4.1 trillion to slip out the back door while they are “muddling through” is fairly clear in terms of its actions, if you see it you'll generally know it’s collusion. What Schefield did was collusion in my opinion.
Contrast that to what People, Ideas & Objects Preliminary Specifications decentralized production models price maker strategy does. And to allege its collusion places the allegation in the category of those that know nothing about business. What our ERP system does is provide an actual, factual, detailed, standardized and objective accounting of each property's financial performance. Which can not be performed today! Therefore if the property is capable of being produced profitably it produces, otherwise its shut-in. Allowing the producer to earn the highest level of corporate profits when losses on properties no longer dilute profitable properties. Reserves are saved for a period when they can be produced profitably and will not have to earn the incremental earnings to make up for the prior losses. When reserves are used as storage it cuts the producer's cost of production and storage. Removing the marginal production from the market allows the marginal price to be discovered.
Why would a producer continue operations in unprofitable conditions? The recent Pioneer press release exemplifies a sense of entitlement, with claims that paint OPEC as the culprit of overproduction, driving down prices. However, it’s crucial to recognize that the dynamics of oil production are not solely influenced by OPEC, particularly when it is understood their production costs are as low as $3 / barrel.
- I was unaware that OPEC participated in natural gas which contrary to Pioneers claims, are the lowest prices in decades. Exclusively in North America!
- It was the collective participation of the shale producers, however not Pioneer specifically, to run as quickly as possible to the new frontier of clean energy. Declaring “shale would never be commercially viable.” I don’t believe OPEC participated in the farce.
- I forget, what’s the amount of production that’s been curtailed by OPEC for the last number of years. Is it as high as 4 million barrels of oil / day?
It is these inconsistencies that are ripe throughout the Pioneer press release. It is disgusting and below the stature of a self proclaimed leader of an industry. Particularly one who is alleged to have conducted themselves in such a manner. Who have accused People, Ideas & Objects of proposing a solution that is collusive. And fundamentally destroyed oil & gas in North America.
Shutting in Production
In my coverage over the last 19 years on this blog, I have often critiqued what I perceive as evasive maneuvers in the oil and gas industry—labeling many explanations as mere excuses, blaming or scapegoating. The recent Pioneer press release is a classic example, replete with blame-shifting that does little to address the core issues at hand. It's surprising to see an industry player actually take decisive action, as proactive measures are seldom seen in an industry culture typically characterized by a "muddle through" approach. Why does that action have to be collusion?
Let's consider the implications of operational decisions in scenarios of risk and maintenance. For instance, when a hurricane approaches the Gulf of Mexico, it is standard procedure to evacuate staff from production platforms, halting production for safety. Similarly, major production cuts, like Saudi Arabia's shutdown of 2 million barrels of oil equivalent per day, are strategic and without consequence to the reservoirs. Routine maintenance such as workovers also necessitate that production be temporarily halted.
Conclusion on Collusion: A Reflection on Pioneer’s Response
Over the past twelve years, People, Ideas & Objects has proposed the Preliminary Specification as a solution addressing various challenges within the oil and gas industry. This proposal is aimed at maximizing profitability by sharing overhead costs, similar to cloud computing models, and making such costs variable based on profitable production. Our model has demonstrated a potential to generate trillions of dollars in value over the next 25 years, ensuring the industry's profitability, energy independence, and longevity for future generations. Despite the merits, my advocacy has met with significant resistance.
Since the release of our Preliminary Research Report in August 2003, I have faced substantial professional and personal backlash. The industry's leadership, often more concerned with personal gains than collective advancement, has been dismissive of our ideas. This experience underscores a broader reluctance within the industry to adopt innovative frameworks that challenge the status quo.
But there’s more, that they would accuse me of proposing a solution that colludes, when it quite obviously asks the reasonable question of why would you produce at a loss for decades at a time? Can’t be answered even today.
Moreover, accusations of collusion have been directed at our proposal, which fundamentally seeks to question and rectify the rationale behind sustained unprofitable production. Recent developments, such as Pioneer's engagement with major investors in 2019, highlight a reactive rather than proactive approach to the industry. Who claim now they were colluding because their investors demanded it of them as stated in Pioneers press release!
Further, in 2019, Mr. Sheffield and other senior Pioneer leaders visited with Pioneer’s major investors, including the largest pension fund managers in the U.S., and listened to their comments about the need for better capital discipline, which would allow Pioneer to generate competitive returns and free cash flow that could be used to improve liquidity and return cash back to shareholders via share buybacks and dividends, similar to other S&P 500 companies. Based on this investor feedback, Pioneer began discussing and initiating planned capital reinvestment and return of capital changes at investor conferences and on its earnings calls. These actions were solely motivated by Pioneer’s desire to meet investor expectations that the Company offer a competitive total return framework compared to other industries.
Or in other words “It’s not my fault, we only colluded because the investors were pressuring us.” The industry's reluctance to embrace responsible management and acknowledge external input is disheartening. Our proposal offers a path forward, yet it has been met with resistance and scapegoating. The ongoing challenges within the industry only reinforce the need for a paradigm shift towards more accountable and innovative management practices.
As the industry faces scrutiny and labels of malpractice, I remain committed to advocating for a solution that prioritizes innovation, dynamism, accountability and profitability. Our approach stands as a constructive alternative in a landscape often dominated by short-sighted and self-serving decisions.