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

 Composition of Our Value Proposition

Tangible & Quantifiable Attributes

Profits

People, Ideas & Objects presents a solid value proposition, estimated to be between $25.7 trillion and $45.7 trillion over the next 25 years. This has been validated through the work we did in late 2023 to detail the revenue losses on natural gas incurred this century. The validation of this proposition comes from the deterioration of natural gas pricing structures over the years, which shifted from a heating value equivalent of 6:1 to as low as 50:1 by early 2024. These revenue losses, amounting to $4.1 trillion for the period from 2000 to 2023, have been portrayed by officers and directors as opportunity costs—a perspective we disagree with. The decline in natural gas prices stems from chronic and systemic overproduction. The Preliminary Specification we provide offers an ERP solution tailored for oil & gas producers to rehabilitate oil & natural gas markets. It’s clear that “muddling through” while oil & gas prices have deteriorated by over 800% in just two decades is simply unacceptable.

Our value proposition enhances overall oil & natural gas profitability through the implementation of the Preliminary Specification’s decentralized production model, projected to yield an additional $5.7 trillion over the next 25 years. The documented losses in natural gas reinforce the accuracy of our estimates concerning the impact of chronic overproduction. While we have quantified these natural gas losses based on observable price declines, objectively quantifying the revenue losses in oil has proven more challenging. Nevertheless, we believe our estimates are consistent with the historical trends observed over the past 23 years.

Our argument that oil & gas represent a primary industry seems to be overlooked by many officers and directors. However, we assert that much of the lost value also represents critical financial resources for the broader oil & gas economy. These losses affect not only producer profitability but also the essential resources needed by the service industry, including capital and operations for drilling and fracing fleets, and compensation to royalty holders for product title acquisition. The overall liquidity, functionality, prosperity, and profitability of the industry are at stake.

The responsibility to ensure the service industry remains vibrant and capable lies as much with producer officers and directors as it does with their own firms. The service industry is an extension of their firms, structured through markets to address the diversity of geographical regions and geological concerns. Without the market-driven solutions provided by the service industry, producer field costs would be exponentially higher, and the capacities and capabilities of the entire industry would face severe constraints. Rendering it far less productive.

Capital

The remaining $20 to $40 trillion of the quantifiable portion of our value proposition is derived from the innovative methods that People, Ideas & Objects employ to account for capital. These capital costs are essential for producers to build and sustain the oil & gas infrastructure and production across North America over the next 25 years. Our estimates are grounded in independently discussed capital expenditure projections within the market. Our value proposition hinges on the difference between the accounting method we advocate in the Preliminary Specification and the traditional practices that have dominated the industry for decades.

Currently, officers and directors operate under the belief that their role is to "build balance sheets" and "put cash in the ground." This approach involves capitalizing the majority of the producer's costs and depleting these over the life of the reserves, resulting in balance sheets that are excessively inflated and always inflating. When capital assets are overreported, it leads to the equal and inverse overreporting of profitability, which in turn attracts excessive investor interest for investment in the industry. This influx of investment contributes to further overproduction in oil & gas, leading to significant and ongoing price discounts, and occasionally, drastic price collapses—hallmarks of a market governed by the principles of price makers.

Their method is based on the flawed assumption that investors will cover capital costs, while consumers will bear operating expenses. However, since 2015, the withdrawal of investor capital has highlighted the industry's unsustainable reliance on external funding, revealing that genuine profitability is lacking. Despite our discussion and the evident issues, no significant changes have been made by officers and directors since 2015, leaving the industry in a state of peril.

In contrast, People, Ideas & Objects advocate for recognizing all capital within the first 30 months of a property's development—a method particularly relevant in the shale era, characterized by high costs, steep decline curves, and significant capital costs of rework. By recognizing capital costs over a shorter period, producers can pass these capital costs on to consumers, which is a reasonable expectation for a capital-intensive industry. Our value proposition aims to ensure that prior capital investments are returned to producers in the form of cash, enabling them to reinvest in further capital expenditures, pay dividends, and service debt. This approach eliminates the need for stock issuance or bank loans, except for substantial transactions. The continuous and iterative return of capital would provide producers with the financial resources needed to manage their operations effectively.

These attributes are the hallmark of a profitable firm. If producers seek more capital, they have the ability to generate it themselves by achieving genuine profitability. Despite my ongoing efforts over the years, producers have consistently refused to acknowledge that accounting plays a critical role in their performance. They often rely on the belief that only geologists or engineers can determine the profitability of a basin, as evidenced by statements like "shale will never be commercial" in 2021. This narrow perspective overlooks the complexities of business operations, focusing solely on the technical aspects while undervaluing the broader influence of accounting and business, which are often relegated to the simple task of paying the bills in producer firms.

Working Capital

When producers capitalize the majority of their costs, they include substantial portions of their overhead as capital. This practice results in the cash used for these monthly overhead expenses to not be replenished within the current period. Instead, the invested cash remains on the balance sheet for decades in some cases, forcing producers to seek new sources of cash each month to cover their recurring overheads. Essentially, producers fail to maintain what is commonly referred to in business as a "cash float." Over the course of a year, working capital is drained through capital expenditures and associated overhead costs. Since 2015, when investors ceased providing further capital support, the working capital within the industry has reached critically low levels. In response, officers and directors have resorted to extreme measures to sustain their capital expenditures, including delaying payments to the service industry for 18 months or more. This approach severely undermined the financial stability of the service industry, leading to a significant downturn, exacerbated by the subsequent COVID-19 lockdowns and then reduced activity levels among producers.

Producers must recognize that they operate within a primary industry, and their working capital should be viewed as a reflection of the financial health of the broader oil & gas economy. When producers mismanage their cash flow, they not only worsen economic downturns but also find themselves ill-prepared to take advantage of upturns or maximize opportunities. This situation arises because no one in the industry has sufficient cash to conduct the necessary level of business. The reliance on investors to meet the industry's cash needs is a phenomenon that can be attributed to oil & gas officers and directors who lack a fundamental understanding of business. The working capital of producers should be regarded as akin to the Federal Reserve’s role in keeping the industry operational—similar to the importance of maintaining the right amount of oil in an engine’s crankcase. The balance between too much or too little working capital is crucial.

Producers serve as the Federal Reserve for the oil & gas economy. The correlation between the decline in active rigs, as shown by IEA data, and the exit of capital demonstrates that a healthy industry requires a greater volume of working capital within producer firms, which in turn supports the broader oil & gas economy.

Producers are currently unable to recover the majority of their costs in this capital-intensive primary industry. I have been discussing this issue for over a decade, yet nothing has been done to change the methods that exacerbate the problem. The lack of necessary cash within the system causes unnecessary stress throughout the broader oil & gas economy. Some argue that we should return to the gold standard to stabilize the value of the dollar, which is an impossibility. The dollar serves as a medium of exchange, not a store of value. Limiting the amount of money in the system constrains the volume of transactions that can occur. When cash is scarce, its value increases due to excess demand, but the economy suffers because fewer transactions can be undertaken. This scenario is akin to a vehicle with no fuel in the tank or oil in the crankcase, rendering it inoperable despite being mechanically sound.

By recognizing capital costs on an accelerated basis through the Preliminary Specification, producers and the industry as a whole can rehabilitate their working capital and cash flow issues. Officers and directors often believe that SEC requirements for full-cost accounting compel them to report the largest possible balance sheet, using the ceiling test as a target rather than the outer limit it is intended to be. In contrast, People, Ideas & Objects advocate that the most profitable producers would aim to reduce their property, plant, and equipment account balances to zero, reflecting that they have been profitable enough to retire all their incurred capital investments. Profitability, not cash flow, is the appropriate measure. 

Cost Control

Controlling costs is a crucial endeavor for any organization, and it should be a top priority, especially since low-cost organizations tend to be more resilient. But what are the highest costs that oil & gas producers have been grappling with for decades? One of the most significant issues is the impact of unprofitable properties, which dilute the earnings of profitable ones. Producing reserves at a loss, particularly when prices are low or even negative, can be devastating to the prospects of financial recovery. For instance, if the cost of producing gas is $9 but it sells for only $3, the resulting $6 loss would require six profitable volumes sold at $10 just to break even. Such losses are highly destructive to earnings and diminish the reserve value of the producer—yet this reality seems to be beyond the comprehension of many current officers and directors.

Focusing on profitability is what truly generates value. When unprofitable production is shut in, it’s removed from the market, which increases overall revenues. By eliminating the dilution of profits from losing properties, the firm can report its highest possible profitability, no matter what its production profile may be. Unprofitable properties should be moved to the firm's inventory of innovation, where they can be returned to profitable production as soon as possible. This can be achieved through cost reduction, increasing reserves, boosting production throughput, or applying other innovative strategies. The goal is to use the firm's earth science and engineering capabilities to generate incremental profitability in the most innovative ways possible, finding the marginal price when only profitable production is maintained.

What many producer officers and directors fail to grasp is that these actions build incremental value. It’s true that no additional petroleum reserves may have been discovered or developed, but they’ve proven that reserves are essentially worthless if they can’t be produced profitably. This has been the case for decades, as the industry continues to consume cash in the process of production.

Alternatively, what would the present value of profitable shale reserves be? It’s here that we can find the limit of producers' business thinking. They believe that “building balance sheets” to a size that replicates the value of the reserves is the objective, for some reason. We discussed property, plant and equipment and the most profitable producers would have the lowest values recorded in that account. However, the reserves present value would soar based on the marginal price being realized and assessed against far greater volumes of the reassessed commercial reserves volume. Having “real” profitable operations however are not to be accepted. Recall the mid 1980s natural gas prices adjusted for inflation would today be about $10.00, not $2.14. Recall too that the mid 1980s was a time of 100% conventional production. 

Alternatively, consider the present value of real or genuine profitable shale reserves. This is where the limitations of producers' business thinking become apparent. Many believe that the objective is to "build balance sheets" that mirror the value of the reserves, but this approach is misguided. We’ve already discussed that the most profitable producers would have the lowest values recorded in their property, plant, and equipment accounts. However, if they focus on achieving a marginal price that maximizes profitability, the present value of their reserves would soar, driven by far higher prices and greater volumes of commercial reserves. Returning the investors focus back on to reserves valuations. Yet, the concept of maintaining "real" profitable operations is rejected. 

To put this into perspective, natural gas prices in the mid-1980s, when adjusted for inflation, would be around $10 today—compared to the current market price of $2.14. Shale has introduced new cost structures in the oil & gas industry; it has brought in initial or flush production volumes that have overwhelmed the natural gas price structure, driving it down from its heating value equivalent of 6:1 to as low as 50:1. This shift has had a devastating impact on the entire oil & gas economy. Devastating every source of value in every corner of the greater oil & gas economy. 

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

 Introduction and Objective

Today, we are examining the oil & gas industry through an economic lens, considering the future opportunities and challenges we touched upon in our recent discussion of the broader economy. This analysis is crucial as it highlights the industry's current mindset and the potential pathways forward.

The Economic Landscape of Oil & Gas

Oil & gas producers often find themselves blamed for inflation, a perception fueled by government narratives that point to rising energy prices as the culprit. However, as Milton Friedman aptly put it, "inflation is everywhere and always a monetary phenomenon." The reality is that government spending is the primary driver of the current inflationary environment, not oil & gas price increases. Unfortunately, this misconception persists unchallenged because producers have largely remained silent, failing to defend their industry against such accusations. This lack of advocacy extends beyond inflation; it encompasses environmental and regulatory issues where producers have opted for a strategy of silence rather than engagement.

Consumers benefit immensely from oil & gas, which offers one of the greatest value propositions in any market. A single barrel of oil equivalent provides between 10,000 to 25,000 man-hours of mechanical energy at a cost of just $0.003 to $0.0075 per man-hour. The efficiency and value derived from this energy source are unparalleled, yet the industry has failed to communicate this effectively to the public. Even if oil & gas prices were to double, it is unlikely that this would trigger inflation or a recession. On the contrary, ceasing the use of fossil fuels would severely cripple economic output, as energy is the backbone of our civilization.

Market Based Solutions

It is astonishing that oil & gas producers continue to see themselves as price takers, adhering to outdated notions that ignore the reality of market dynamics. In truth, they are price makers, and the industry should be governed by market signals that determine the profitability of production. If a product is not profitable to produce, it should not be produced. This simple principle, followed by most other industries, has been largely ignored in oil & gas, leading to chronic overproduction and the resultant price collapses.

Producers have instead relied on complex and often absurd methods to predict future prices. Using technologies like Artificial Intelligence to analyze floating oil tank roofs from satellite images to determine global oil inventories. These efforts are misguided, focusing on predicting market behavior rather than responding to actual market signals. This approach has led to disastrous outcomes, such as the negative $37 oil prices witnessed in April 2020. Despite these failures, the industry has not learned its lesson, continuing to operate in ways that defy basic economic logic.

The industry's reluctance to embrace market-based solutions has had severe consequences. The April 2020 incident, where oil prices plunged to negative $37, was not an isolated event but a symptom of a broader issue—chronic overproduction driven by unprofitable production practices. This approach is unsustainable and has caused significant damage to the industry and its stakeholders.

The solution lies in leveraging the power of the Internet and modern software to create a more efficient, decentralized operational environment. The hierarchical structures that once defined corporate organizations are no longer necessary. Instead, software can facilitate more dynamic, market-driven operations that respond to real-time data and market conditions.

The Future of Oil & Gas

The future of the oil & gas industry, like that of the broader economy, will be shaped by those who can innovate, lead, and generate profits. The current leadership has demonstrated a profound inability to adapt to changing market conditions, clinging to outdated practices and failing to address the fundamental issues facing the industry. The result has been a series of failures, most notably in the development of shale, which should have been a transformative success but instead has been a financial disaster.

The path forward for the industry must be guided by profitability and innovation. The era of relying on investor capital to sustain operations is over. Instead, the industry must focus on generating real, sustainable profits that can fuel growth and pay dividends to investors. This will require a complete overhaul of current practices and the adoption of new technologies and methodologies that prioritize efficiency and profitability.

Conclusion

The recent comments from Shell’s CEO, Wael Sawan, underscore the failure of the current leadership in the oil & gas industry. Sawan’s acknowledgment that liquefied natural gas (LNG) is "the only credible solution that gives you both energy security and decarbonizes the energy system" highlights the shortsightedness of previous decisions to pivot away from shale towards clean energy. This shift was driven not by market realities but by a failure to understand and capitalize on the true value of shale.

Sawan plans to grow Shell’s LNG volumes by up to 30% this decade, either through acquisitions such as the recent purchase of Pavilion Energy, or getting its hands on third-party volumes. The company recently invested in ADNOC’s Ruwais LNG project in Abu Dhabi. 

Now, the industry is scrambling to invest in LNG facilities, a strategy that continues the pattern of overbuilding and misallocation of resources. This approach is emblematic of a leadership that has consistently failed to grasp the fundamentals of the oil & gas business, focusing on building balance sheets rather than creating value.

The cycle of failure in the oil & gas industry is clear, and it is driven by a culture that has persisted for decades. The only way to break this cycle is through a fundamental change in leadership and strategy. New leaders must emerge who understand the importance of profitability, innovation, and market-based solutions. People, Ideas & Objects Preliminary Specification offers a roadmap for this transformation, providing the tools and frameworks needed to build a dynamic, innovative, accountable and profitable industry.

The choice before us is stark: continue down the path of failure with the current leadership or embrace the opportunity to build a new, more prosperous future for the oil & gas industry. The time for change is now, and the direction we choose will determine the industry's fate for decades to come.

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

 Introduction and Objective

With the release of the second quarter financial statements from producers, we will delve into a three-part analysis. Today’s post will provide an overview of the broader economy and its potential future influence. The second post will focus on the oil & gas industry, examining the economic conditions that may shape its trajectory. Finally, our last post will evaluate the financial statements of the producers, assessing their readiness to navigate an uncertain and potentially exciting future.

The Overall Economy

There’s no doubt we’re facing challenging economic times. North America has been treading water, with the economy on some form of life support since September 2001. This century's mortgage interest rates have declined from a high of 8.05% in 2000 to as low as 2.96% in 2021. These rates reflect the broader trend in corporate and consumer markets during that period. While these rates may seem low compared to the 18.4% seen in October 1981, the current inflation feels more rampant, despite what official figures may suggest.

Nonetheless, once President Reagan had instituted supply side economics. The subsequent relief realized by lower interest rates, far more competitive firms arose to lead the economic prosperity for the remainder of the 20th century. What is the probability we’ll see that style of economic prosperity if inflation declines and possible interest rate relief? Markets are beginning to show distress and the decline in interest rates has begun in some areas such as Canada. While others such as Japan have increased their rates. Interrupting the carry trade which had fueled United States stock and bond purchases. 

Given the current levels of debt in North America, which ballooned due to prolonged low-interest rates, will businesses remain competitive with rates at 5% or higher? Governments and businesses alike have used the relief from low rates not to reduce debt but to expand spending, often through rounds of massive bailouts. The critical question remains: Can firms be competitive in an environment where interest rates are higher, and economic stress is evident?

A Brief History in Time

The first major call for the investment community to lower its expectations came after the terrorist attacks on 9/11. The need to finance wars over the following decade was met with the investment community acceptance of lower returns, as reflected in the lower Fed rates. The second was during the financial crisis when systemic risks nearly collapsed the economy. The government intervened, and again, the investment community accepted lower returns for the greater good. The third major call came during the COVID-19 pandemic, where the investment community again stepped up, trusting that the government would act with integrity, as it had in the past.

However, in recent years, the actions of the current administration have eroded that trust. Treasury Secretary Janet Yellen’s approach to government borrowing, which many view as inflationary, has broken the implied agreement that the government would maintain fiscal responsibility. This betrayal has raised concerns globally and set a dangerous precedent.

The excessive debt burden carried by governments, businesses, and consumers now limits any potential bailouts. The issue isn’t just high-interest rates; it’s the sheer volume of debt. As the market forces the Fed to reduce its balance sheet, the government faces a critical choice: restore credibility or continue reckless spending. The market may soon dictate these decisions, with significant implications for the economy.

Is There a Solution?

Absolutely. The cycle of bailouts and artificially extending economic life hasn’t fostered genuine prosperity. Instead, a reduction in the standard of living seems inevitable for many, especially in countries like Canada, where the currency’s value has plummeted, and housing prices have skyrocketed.

Yet, we stand at a unique point in history. Information technology is fully mature, and innovation is happening at a breakneck pace. Even tech giants like Facebook are struggling to stay relevant. The rapid evolution of technology is creating new opportunities, and those who can seize them will thrive.

In contrast, the oil & gas industry, much like other sectors of the economy, has been held back by outdated practices. Keeping unproductive companies alive, akin to zombies, is no longer viable. The time has come to move forward and embrace the opportunities that innovation presents.

The one quote that resonates with me is that of Cathy Woods from ARK Investments. Suggesting that innovation was responsible for “$19 trillion of equity market cap” today. Which would grow to $220 trillion by 2030. Whether that is available or not, the undeniable point is that innovation in tomorrow's market will be more dominant and valuable than at any other time. Participation is available for those that can see the opportunities. It’s that simple. 

Conclusion

The crossroads we find ourselves at today offers a choice that is as stark as it is consequential. On one hand, there is the opportunity to engage in a new, innovative, and value-driven economy—one that is brimming with potential but also fraught with inherent risks and challenges. This path is not for the faint of heart; it introduces a degree of chaos and uncertainty that demands a higher level of commitment, ingenuity, and resilience from all who choose to walk it. The rewards, however, could be unparalleled, offering satisfaction and the potential for unprecedented growth and prosperity. It is a deliberate choice.

On the other hand, there is the option to continue with the status quo—a path marked by minimal risk, but also one devoid of true satisfaction or substantial reward. This path represents a safe, predictable existence where the primary goal is survival rather than thriving. It’s a path that offers comfort in its familiarity but little else. The status quo may provide a sense of security, but it also comes with the cost of stagnation and missed opportunities.

Yet, this choice comes with immense responsibility. To opt for innovation and disruption means accepting the possibility of failure, navigating through periods of uncertainty, and enduring the pressures that come with pioneering new paths. It requires a mindset that is not just focused on short-term gains but on long-term value creation—a mindset that values adaptability, continuous learning, and the courage to challenge the status quo.

Control of the Process of Production

 One of the significant differences between the Preliminary Specification and current industry practices lies in how control over the production process is maintained. A striking example of this difference is the LNG issue that People, Ideas & Objects discovered last year. Producers were selling their natural gas at Henry Hub prices to unknown buyers who then refrigerated and shipped the gas to the global market, capturing the majority of the available profit. How did this happen? Is this a common occurrence, and are there other instances where value is leaking out of the industry?

Over the past decades, producers have been obsessively focused on cutting costs. While cost control is crucial, especially during tough times, this myopic focus has had counterproductive consequences. The oil & gas industry is capital-intensive, with the majority of costs falling within that category. Consequently, the service industry, which plays a crucial role in extending producers' capacities and capabilities, has borne the brunt of these cost-cutting measures. This has led to diminished and rapidly declining capacities and capabilities within the industry, and the attitude seems to be one of indifference.

As a primary industry, oil & gas producers have the luxury of controlling the production process. Traditionally, the engineering discipline has dominated the industry, with a natural focus on achieving objectives in the most cost-efficient way. Control over the production process would logically be a part of this thinking. However, producers' thinking often extends only to the physical control of production. If involved in exporting LNG, they assume they must build and operate the facility, a task outside their capital budgets and competitive advantage. Consequently, they pass the title of the product at the inlet to the LNG facility.

Typically, Petroleum and Natural Gas Leases transfer the title of produced products once royalties are paid. Producers should adopt the attitude and responsibility of ensuring that their title is passed to the customer at the point of sale to the end user, not any time before. In the Internet era, this does not require producers to have the necessary infrastructure for these operations. Their core business is exploration and production, and it will always be. However, contractually maintaining control of the title until it is sold to the end user ensures that all the product's value is realized. Intermediaries can handle the product on the producer's behalf, either "free on board" with "net back pricing" based on the cost of moving the product to the customer.

This difference is monumental. It distinguishes developed nations from undeveloped ones. The current approach by producer officers and directors has relegated the North American oil & gas industry to the role of "hewers of wood and drawers of water," effectively turning it into a third-world, valueless, and incapable industry. This is metaphorically and literally the quality of the current leadership. Evidence of this is provided in the $4.1 trillion revenue loss due to the differential between traditional natural gas prices and what producers received. All the while, they have ground the service industry down to the point of no return, expecting them to be available when needed later.

Investors had enough of this in 2015 and suspended the annual allowances granted to these spendthrift, out of control organizations. Meanwhile, those offering solutions to these issues were deemed "persona non grata" and ostracized. Perhaps discussing business from the perspective of a developed nation was too much for the officers and directors to comprehend. On second thought, the scale of damage is so significant that they should have realized it on their own. Nudging from investors and People, Ideas & Objects should have at least provoked some thinking, however I can assure you that it didn’t.

Creative Destruction

Over the past twenty years, People, Ideas & Objects have demonstrated that the economic principles of creative destruction, spontaneous order, and serendipity have become less effective in the 21st century. The mechanisms that once drove economic renewal in North America are now hindered by the development and sophistication of software, particularly ERP software. Once implemented, organizations face significant challenges in making changes without first addressing software issues. They must define their needs, develop the required software, and deploy it to achieve any desired changes or improvements.

What seems like a simple process of change management becomes complicated due to two main issues: the lack of a software development capability to implement changes and the resistance from organizations due to the potential for disintermediation resulting from these changes.

To modify software, several questions arise: Who has the authority to make these changes? Who will execute the changes? And most importantly, who will bear the costs? If changes are to be made in-house, they might proceed if the right people are available and authority is granted. However, if the software is from a vendor, the process becomes more complex. The vendor may resist changes unless they benefit the entire user base, and questions about cost allocation and contract terms arise.

In the “muddle through” environment prevalent in the oil & gas industry, administrative processes often incur high costs with little value, making change difficult to justify. As a result, the business suffers. In the case of oil & gas, these issues have led to global challenges that now require an industry-wide rebuild. A reorganization based on the vision of the Preliminary Specification offers a proven value proposition worth trillions of dollars over the next 25 years. This model emphasizes our user community-driven and change-oriented software development approach.

Serendipity and Spontaneous Order

Globalization has pushed specialization and the division of labor to unprecedented levels, enabling seamless collaboration between firms located thousands of miles apart. However, this has also reduced the chance for serendipitous discoveries that can drive business growth and foster competition. The emergence of alternative solutions to meet new market demands is hindered by the complexity of regulations, financing, and the necessary capacities and capabilities. The status quo has never been more rigidly defined than it is today.

Adam Smith “Man of Systems”

At the same time when firms are faced with an inability to move forward and change with markets. We need to understand the difficulties caused by those who believe in the “man of system” concept. The “man of system” is a concept introduced by Adam Smith in “The Theory of Moral Sentiments.” It refers to someone who is overly confident in their ability to design and control social systems according to their own ideals, often ignoring the complexities and unpredictabilities of human behavior. Such a person tries to impose their plan without considering how individuals might react or how their actions might disrupt existing social arrangements. Smith warned that this approach is often misguided and can lead to negative consequences. From the "The Theory of Moral Sentiments."

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. Some general, and even systematical, idea of the perfection of policy and law, may no doubt be necessary for directing the views of the statesman. 

But to insist upon establishing, and upon establishing all at once, and in spite of all opposition, every thing which that idea may seem to require, must often be the highest degree of arrogance. It is to erect his own judgment into the supreme standard of right and wrong. It is to fancy himself the only wise and worthy man in the commonwealth, and that his fellow-citizens should accommodate themselves to him and not he to them. It is upon this account, that of all political speculators, sovereign princes are by far the most dangerous. 

This arrogance is perfectly familiar to them. They entertain no doubt of the immense superiority of their own judgment. When such imperial and royal reformers, therefore, condescend to contemplate the constitution of the country which is committed to their government, they seldom see anything so wrong in it as the obstructions which it may sometimes oppose to the execution of their own will. They hold in contempt the divine maxim of Plato, and consider the state as made for themselves, not themselves for the state. The great object of their reformation, therefore, is to remove those obstructions—to reduce the authority of the nobility—to take away the privileges of cities and provinces, and to render both the greatest individuals and the greatest orders of the state, as incapable of opposing their commands, as the weakest and most insignificant.

I may therefore be guilty as charged. However, oil & gas needs to deal with the glaring conflict and contradiction of the status quo failure to proceed forward productively and profitably in the past decades. Which of these now ancient concepts should we adhere to? Creative destruction has not occurred as bankruptcy, government bailouts and “muddle through” maintain the living dead for decades while their replacements never get a chance. Spontaneous order and serendipity may be somewhat enabled through the Internet however it is the Internet that has enabled globalization to be realized to such an extent. The forces of comparative advantage will continue to expand on trade and globalization. How will today’s organizations deal with unknown and unseen competitors appearing overnight on the horizon.

Is People, Ideas & Objects Preliminary Specification an arrogant proposal as Adam Smith’s “man of systems” suggests or a solution to a new problem we’re faced with? What we’ve called a modern day software bug. A rational solution that proposes an overall vision of how, what and why the industry and producer firms would operate in a dynamic, innovative, accountable and profitable manner? One where our empowered user community has the authority and capabilities to define and support the industry and producer with its needs and objectives on an iterative basis? One driven by “real” profitability for all concerned?

Or are we now to remain in the position that we are with the software definitions that have brought the industry to its knees. Due to believing that those who have a vision of what is necessary are misguided, dangerous and arrogant? I think we have the answer in the continuing deterioration of oil & gas over the past two decades and more. The extinguishing of any value from shale and future prospects due to the elimination of trust, faith and goodwill of all those that had built the industry before. Adam Smith warned the “man of system” would enable designs of government or those in authority who would design systems that support their authority. It is for that reason I can boldly state that it is not I who is arrogant or am the one who should be accused of being a “man of system.” It is the producer officers and directors themselves who are guilty. 

Why Are These People Here?

 Our previous post clearly illustrated how officers and directors have painted themselves into a corner. They now face a situation with no resources, support, or goodwill available to them. They must find a way to address their organization's declining productivity, lack of capital, eroded goodwill, and most critically, the capabilities needed to navigate the difficulties they have created. In early 2024, People, Ideas & Objects quantified the material nature of their natural gas revenue losses this century. By comparing the pricing structure of natural gas at a heating value equivalent of 6 to 1 of the price of oil vs. what was realized, which was as high as 50 to 1 in early 2024, we found that producers had lost $4.1 trillion U.S. in cumulative revenues.

Last year, we offered officers and directors a chance to address these issues. “Our response to an RFP” was one of the many offers we made, attempting to provide a solution. As with all our other offers, it was vehemently declined. Seeking an alternative, we formulated our new approach with the Profitable Production Rights and Flexible Profitable Production Rights. These involve selling access rights to process a producer's production through our Cloud Administration & Accounting for Oil & Gas software and service facility. This provides Profitable Production Rights holders with the opportunity to participate in a hybrid oil & gas and technology solution derived from the Preliminary Specifications Intellectual Property. Profitable Production Rights owners can then license their exclusive access rights to producers, generating a royalty stream for processing their production.

The extent of the damage caused to the industry has been significantly increased due to the “muddle through” culture of officers and directors, the opaque nature of their specious financial accounting, and the substantial cash flow generated in oil & gas, which has been just enough to sustain minimal operations. This has enabled producers to continue far longer than most industries would in similar circumstances. The length of time that People, Ideas & Objects has been involved in bringing this solution to the market has been excessive, and the damage and destruction the industry faces are absolute. This is why a rebuild from the ground up is necessary.

People, Ideas & Objects Revenues

We are confident that the significant damages experienced by the North American oil & gas industry will persist and remain as substantial as we have consistently reported. Consequently, we are moving forward to generate a revenue stream derived from the sale of Profitable Production Rights. These funds will be used to build the proposed Cloud Administration & Accounting for Oil & Gas facility, including the software development of the Preliminary Specification and our user community.

As issues within the industry become more apparent and are met with the typical non-response, people will begin to see the urgent need for a solution. This growing awareness will drive interest and participation in the Profitable Production Rights, fueling the completion of the People, Ideas & Objects Preliminary Specifications.

We believe oil & gas producers have one viable alternative to fund their future: generating the “real” profitability enabled by the Preliminary Specification. Producer officers and directors seem to believe that investors will eventually return to recapitalize the industry. However, investors, who still hold residual share interests in these producers, have expressed their disinterest in further investment since 2015. This stance will not change until there is a demonstrable improvement in producer performance, as they are also not interested in any further dilution.

Achieving the level of performance demanded by investors necessitates rebuilding based on the Preliminary Specification. We believe that successful ERP software solutions should focus on user community developments and be funded from oil & gas revenues. Our Profitable Production Rights are licensed rights purchased to process one barrel of oil equivalent per day through the Cloud Administration & Accounting for Oil & Gas software and service facility. No oil & gas production will be processed through this facility without securing a Profitable Production Right.

Access rights are managed through the smart contract of the blockchain technology on which the Profitable Production Right is built. These rights are granted for the life of the facility, are assignable and transferable to any North American production. Their value derives from their access licenses, which the rights owners will license to producers for processing their production. Rights holders can negotiate contracts with property producers and use the smart contract of the blockchain to manage access and collect net revenues.

First Years Budget

Recently, I proposed raising our first year's budget through the sale of Profitable Production Rights at 10% of their purchase price. Initially, I set a deadline for this, which was more aligned with project-based thinking rather than that of a going concern. These are our revenues and should be viewed as a future income stream, something that should not have a deadline. As we move forward with commercializing People, Ideas & Objects, we should expect a few bumps along the way.

The purpose of offering a heavy discount of 90% on the Profitable Production Rights is to address the immediate funding needs for our first year. One of the initial deliverables will be the establishment of the blockchain and associated systems to enable the trading of these rights. However, these systems will not be available until we achieve the necessary level of revenue to proceed as a going concern.

Profitable Production Rights Opportunity

In discussing the Profitable Production Rights, we have identified several key markets for individuals and organizations interested in purchasing our product. These include:

• Investors: 
• Engagement Strategy: Highlight the disillusionment investors have with past industry practices. Our strategy aims to re-engage them by offering a license in a dynamic, innovative, accountable, and profitable oil & gas producer.
• Value Proposition: Provide a direct, persistent royalty share in oil & gas production, showcasing a shift towards transparency and profitability.
• Oil & Gas Employees: 
• Risk Mitigation: Acknowledge the risks faced by individuals supporting industry transformation.
• Future Promise: Emphasize confidentiality and the potential for a safer, more rewarding future in a transformed industry.
• Service Industry Representatives: 
• Stability Advocacy: Address the boom/bust cycle and advocate for a more stable and trustworthy relationship between producers and the service industry.
• Trust Rebuilding: Focus on rebuilding trust and ensuring mutual profitability, emphasizing long-term partnerships.
• Producers (North American and Worldwide): 
• Direct Purchase Incentive: Encourage direct purchase of North American Profitable Production Rights Licenses.
• Cultural Shift: Promote a culture of preservation, performance, and profitability across the industry through our approach.
• Our user community and their service provider organizations:
• Participation and Motivation: Reflect their motivation for profitability everywhere and always by participating in these software developments.
• Incremental Value-Add: Offer a Profitable Production Rights License that provides incremental value-add, enhancing their role in the industry.
• Direct Participation: Highlight the attractiveness of direct participation in the production process as an incremental form of value for those within the oil & gas community.

By targeting these markets, People, Ideas & Objects aim to secure a broad base of support for the Profitable Production Rights, ensuring a more dynamic, innovative, accountable and profitable future for the oil & gas industry.

Shale

Shale formations, with their vast potential, represent one of the greatest endowments of value bestowed upon mankind. The development of methods to access these formations, particularly in North America's dynamic and entrepreneurial economy, is largely thanks to the service industry. These formations have been known since the first U.S. Geological Survey in the late 1800s. With ample shale resources available for the remainder of this century, extracting this resource will certainly be among the most expensive endeavors in oil & gas. Therefore, escalating costs must be accounted for appropriately to ensure the industry's profitability.

The value proposition of oil & gas for consumers is immense, equating to 10,000 to 25,000 man-hours per barrel of oil equivalent. However, wasting these resources by producing them unprofitably is unacceptable. Unprofitable production equates to overproduction, causing commodity prices to collapse. We owe it to future generations to manage the resource properly, ensuring that all production is profitable and that a prosperous and healthy industry is handed over to them.

Never before in the history of mankind has something of such value and significance been so fundamentally destroyed. Based on the first two decades of performance, shale has proven useless in the hands of the current generation of officers and directors. They have failed to make any money, a fact they admitted only three years ago. They have hollowed out producer firms of all value, leaving reserves that, if unprofitable, are worth nothing and merely consume cash to produce. Disappointed investors have been ignored for a decade, leading to the shutdown of university programs dedicated to oil & gas engineering and geology. The devastation in the service industry is profound, and the lack of trust, faith, goodwill, and belief in any positive change while the current officers and directors are involved is a significant issue.

The industry must undergo a comprehensive rebuild to address its many difficulties. People, Ideas & Objects' Preliminary Specification addresses the ERP software needs, but there are countless other challenges that must be tackled simultaneously. The business model used during the era of scarcity fails in the era of shale abundance.

Producers believe they have transitioned to a new environment with fresh opportunities ahead. This optimism overlooks their inability to solve fundamental issues or address investor concerns, reflecting poorly on their understanding of the current situation. The past twenty years of shale’s dominance have been nothing short of a financial catastrophe. To believe that everyone is ready to move forward is misguided. By the end of 2023, 764 TCF of natural gas had been produced from shale, with gas prices ranging between 35 and 50 to 1 of oil in 2024— a tragic outcome that can not be repeated. An outcome that we are destined to repeat with today’s leadership.

Conclusion

Officers and directors have consistently made excuses, blamed others, and created scapegoats for their failures. They control the primary industry revenues, which are the only remaining source of value to address the issues within the greater oil & gas economy. The rest is devastation and destruction, with no one willing to contribute more after losing nearly everything. So, blame away!

On the other hand, we have a leadership in the producers' officers and directors that lacks even a basic understanding of business. Since the 1986 oil price crash, they have defaulted to a "muddle through" culture, the only approach they know. This mentality of doing nothing, saying nothing, surviving, and cashing the check has permeated generations in the industry.

Consider the nonsensical statements made by officers and directors over the past decades: “Waiting for a cold winter,” “Building balance sheets,” “Putting cash in the ground,” “Shale will never be commercial,” “Clean energy is our frontier.” The LNG fiasco of last year saw “others” taking hundreds of billions, and probably trillions of future dollars from producers due to a lack of understanding of “free on board” or “net back pricing.” Remember the absurd claims of continued profitability as oil prices declined from $80 to $30? How did this miracle of historical accounting happen? It didn’t, the mythical “recycle costs" drawn from what beaten-down service industry prices were in the current market, was applied to producers' entire well inventory.

I’m only highlighting the most ridiculous and devastating examples. The worst may be the natural gas price destruction itself. Who would allow their product pricing structure to erode from 6 to 1 down to 50 to 1 over 17 years? With fully disenchanted investors and a solution to these exact issues available since August 2012, one must ask:

“Why are these people still in charge?”

The Consequence of Being a Primary Industry

 The Greater Oil & Gas Economy

In discussing the North American oil and gas marketplace, including producers, the service industry, and other suppliers, I often refer to the oil and gas industry as a primary industry. While I don't always use the term in its purest sense, I do so to highlight the issues and opportunities within this greater economy. Today, I want to expand on why classifying oil and gas producers as a primary industry impacts other areas of the economy and what needs to be done.

Primary, Secondary, and Tertiary Industries

People, Ideas & Objects' classification of primary, secondary, and tertiary industries aligns closely with textbook definitions. Primary industries, as I see it, include oil and gas producers who receive revenues from oil and gas production. These revenues stem from capital, field service capabilities, engineering, and geological science. Oil and gas producers must recognize their business as a primary industry, bearing the responsibility to ensure the health and prosperity of all participants in the greater oil and gas economy, from investors to grocers supplying field services. The only income source for these participants is access to the primary industry's revenues, making it crucial for producers to manage the industry effectively and efficiently—an obligation they have abdicated.

The difference in our classification of secondary industries lies in the exclusive nature of the service industry's work for oil and gas producers. Field service providers have done their jobs impeccably for decades. The foremost reason is the geographical regions in which a producer may have interests can be varied and broad. If producers maintained their own field capacities and capabilities, their productivity would significantly decrease. Specialization and division of labor in geographical regions allow the service industry to thrive based on market demand from producers. This method has expanded our standard of living and prosperity for nearly 250 years. Indirectly building and maintaining these resources is a key obligation of a primary industry. No other industry needs drilling and fracing services.

The Abusive Cycle

I have chronicled the abuse suffered by the service industry over the decades. During boom times, producers express frustration over the inability to complete as much work as desired. During busts, they mitigate fallout by cutting activity levels, demanding deep discounts, delaying payments, and turning a blind eye to the destruction of the service industry's capacities and capabilities. The service industry is now operating at 30% capacity, rapidly depleting due to wear and tear and fleet cannibalization. Baker Hughes' recent announcement to shift focus off the continent is a testament to this decline.

Any attempt now to deal with oil & gas producers, the service industry will demand radical operations be undertaken within their organization. Paying high prices for the highly skilled labor that knows they’ll be laid off at some point. Worked for excessive hours for months on end in remote areas when the “good times” do arrive. Keeping an eye on the critical nature of the task at hand and the need to have the client satisfied with commercial production. While at the same time attempting to operate a profitable operation themselves. Only to find the next bust is staring them in the face, their prices and activity levels are each halved unilaterally by producers. Facing 25% of the revenues they had just the prior quarter, they’re exhausted and frustrated, only to reorganize and repackage themselves “one more time.” This cycle exhausts and frustrates them, leading to repeated reorganizations. The focus of the service industry must be profitability above all else to ensure long-term value and guarantee quality and safety.

Except this time is different isn’t it. The discipline, work ethic and reliability doesn’t seem to be evident in the youngest generation. They’re not motivated by the same challenges we were. Where we wanted to solve problems and get things done. They want to find places where they can use their phones. So if there’s no one manning the grocer at 11:00 PM to buy the food for the rig, then they’ll have to close the store until 7:00 in the morning. The fact your rig costs hundreds of thousands of dollars per day is unknown and irrelevant to them.

Those who found purpose in running rigs and making things happen have started families and bought houses. During the last prolonged layoff, which began when investors withdrew support in 2015, they moved to other industries that appreciated their skills and offered steady work. They’re not coming back. The loss of physical equipment is compounded by the loss of the skilled workforce needed to operate it. From the EIA.

They started working in other industries that appreciate their skills and offered steady work for decades. They’re not coming back. Of course the ability, the understanding and way in which a ten kilometer lateral well can be drilled and fraced successfully is easily achieved by any highschool dropout. The rig operator turns to their investors who built the equipment that was cut up and sold for scrap during covid to survive. And can see their best choice for survival is to just buy them a drink. It's therefore not just a physical loss of capacities and capabilities in terms of the equipment. It’s a loss of the resources necessary to make the equipment operate. The owner / operator of the drilling rig looks at this situation and thinks he can put it all together for another six month boom cycle, and then thinks about retirement instead. Such are the consequences of operating a primary industry where all the money belongs exclusively to the oil & gas producers. 

Moving Forward

We recently discussed the declining natural gas volumes in shale. Stopping this decline requires 200% of the effort it took to grow productive deliverability. Moving from 30% to 200% capacity will be a significant challenge for producers.

The service industry, however, remains unconcerned. This blog has long argued that losing investor support in 2015 would lead to diminished capacities and capabilities and declining production deliverability. In a shale-based world, with high capital costs and technical difficulties, the management by officers and directors has been akin to skydiving without a parachute. The investors' ultimate message of dissatisfaction in 2015 was ignored, which should have focused the officers' and directors' minds exclusively on remediation.

Everyone who has dealt with oil and gas producers and experienced their "it's mine, it's all mine" attitude towards cash has a front-row seat to this unfolding disaster. Accusations, blaming, and scapegoating have run their course. The officers and directors themselves will be seen as the impediments to progress. Politicians will be the first to raise concerns about declining natural gas deliverability, and when consumers understand the failure orchestrated by these leaders, the full extent of the catastrophe will be revealed.

Their signatures are all over this fiasco. Running and hiding is impossible; even Elon Musk hasn't colonized Mars for them to escape to. The lawyers and courts will likely pursue them for damages, slowly selling their assets to cover the costs.

Who’ll Step Up?

Candidly, I doubt anyone will step up. Some jobs are too difficult and the results too tenuous to be worth the effort. We should start over and rebuild the industry from scratch, based on the vision of the Preliminary Specification. Reorganize through new partnerships and acquisitions of prior producers' properties, focusing on profitability first and foremost. We've seen the consequences of ignoring profitability.

We know the transition won't be smooth. The continent will lose some productive capabilities, partly due to actions by new producers. Unlike previous officers and directors, we don't need to offer excuses or scapegoats. The old producers will be the ones under scrutiny, not us. For us, it’s all about seizing the opportunity.

But It’s Just Not That Bad!

If you can’t see the issues, enjoy the show and wait. This will not end well for the current officers and directors. The opportunities are now. Understand the impact of the Preliminary Specification in the rebuilt oil and gas industry. Get organized and move on with the attractive opportunities you see. Don’t worry about the current leadership; worry about the clock ticking and opportunities being taken by others.

"That Jarring Gong," Part XVI

 The Urgent Need for Change

People, Ideas & Objects have reflected on what we believe to be a crisis in the boardrooms of oil and gas producers. There is no longer the support or goodwill necessary for the officers and directors to continue as viable going concerns. Bold assertions, but we’ll make our point clear. Despite having stretched the period for decisive action well beyond normal expectations, the inaction of these leaders is best represented by the investors' suspension of capital support in 2015. For nearly a decade, producers have engaged in desperate and foolish activities, attempting to prove they didn’t need their investors' money. Believing investors would eventually return when they recognize the brilliance of their plans.

These actions avoided seizing available opportunities and employed failed strategies and tactics, many of which were at least unethical and probably illegal. This has created devastation in every corner of the greater oil and gas economy. The only beneficiaries over the past decades have been the officers and directors themselves. Every other group, including career professionals, service industry businesses, investors, and bankers, has been played for fools by these leaders.

What remains of the producer organizations is not worth keeping. No one trusts or has any faith in the current cohort of officers and directors. The value developed in the industry before the 1980s has been eroded, and the value granted by the investment community has been squandered. The industry is now worthless for several reasons:

• Unprofitable Reserves: The oil and gas reserves cannot be produced profitably.
• Inability to Manage: Producers cannot determine how, where, when, or what is necessary to produce oil and gas profitably.
• Lack of Business Understanding: The industry holds a rudimentary understanding of business principles, unable to determine the appropriate direction.
• Herd Mentality: The collective will of the crowd, akin to the Keystone Cops or buffalo herds running off a cliff, prevails.
• Shale Abandonment: Producers divested shale, admitting they couldn't make money, then took oil and gas revenues to invest in clean energy, only to return to shale and claim consolidation as the answer. What will be next?
• Missed Opportunities: Producers lost out on hundreds of billions of dollars in LNG exports to unknown operators due to their lack of business understanding and incompetence.
• Deceptive Accounting: Producers cannot identify why a property is losing or making money due to massive overcapitalization and deceptive corporate accounting.
• Overcapitalization: Balance sheets primarily consist of property, plant, and equipment (PP&E), with working capital at 2.08% to 3.32% of PP&E over the past 12 months. Overcapitalization creates overstated profitability.

All these points are known and understood. Officers and directors have acted on nothing, and nothing has changed since 2015 or even earlier. They are waiting for a time when former investors realize the brilliance of their unpublished plans. 

Today, they are isolated and responsible for the industry’s performance and current status. They had the resources and responsibility to address opportunities and issues but have destroyed the entire North American oil and gas economy. A fundamental rebuild is necessary to commence functioning again. Officers and directors have proven they can't, won't, and will not change, rendering any expectations of improvement foolhardy.

The current state of affairs has probable and almost certain shale decline curves affecting the natural gas deliverable volume in the United States, reflecting the destruction authored by officers and directors. The infrastructure of capacities and capabilities needed for a turnaround is no longer available and needs rebuilding. The resources to do so are no longer accessible to the current officers and directors, and there is no goodwill left in these producers. The only viable path forward is through profitability in a primary industry, a task at which the current officers and directors have proven woefully, if not purposely, incompetent.

Officers and Directors Issues at Hand

The political situation created by the myths propagated by producers will soon be exposed if these natural gas decline curves come to light. Public expectations are that this issue should be resolved without negative consequences to the economy or political stability. Given the claims of record profitability and cash reserves, the public will not understand why the problem was not addressed. Tolerance for high prices or shortages will be zero, and the public will not accept any excuses, blaming, or scapegoats. The era of “muddle through” will finally meet its end.

The critical question remains: who will the officers and directors turn to for solutions? They have had the authority and responsibility, yet they’ve dodged accountability and misused industry resources. They have stayed well past their prime, chosen to underperform, and displayed no leadership. Oil and gas is a primary industry, so leadership accountability is essential. However, the industry has become an ossified bureaucracy, unwilling to act outside the status quo and clinging to a “muddle through” mentality. This inability to take risks has led to comprehensive and complete failure, delivered as a feature by its leadership.

Given the chance to resolve the issue themselves, officers and directors did nothing. Investors provided clear evidence of necessary actions in 2015, yet the leadership ignored it. The Preliminary Specification, designed specifically to address these issues, was published in August 2012, but no action was taken. Instead, they left the industry, declaring shale’s performance non-commercial, and sought unrelated ventures with no competitive advantage. They indirectly communicated to their staff and the service industry that they were no longer part of the leadership's direction, taking oil and gas revenues to invest in clean energy without proper authority—essentially committing fraud by diverting investor funds.

Officers and directors have no vision for the future. They argue that the Preliminary Specification is too big to be viable, but its size reflects the scope of the problem. The accounting and administrative system needed to organize the producer and industry for profitability may represent only 5% of the global issue they now face. In reality, they need to start from a position far worse than from scratch—perhaps negative 90%. The reasons for this are:

• Lack of Trust and Goodwill: No one trusts or has faith in the current leadership.
• Perpetual “Muddle Through” Mentality: This has been the modus operandi for decades.
• Operational Ignorance: The industry is unaware of how and where to earn profits, maintaining an uncommercial level of competitiveness due to an accounting method that equates spending with profitability.
• Arrogant Culture: A belief that their business sophistication precludes external advice.
• Risk Aversion: A culture that avoids rocking the boat and taking risks, assuming profits will make up for any downturns.
• Complete Failure: The industry is unprofitable, unprepared, unaware, uncaring, unaccountable, and irresponsible in its actions.

Consequences and Implications

Officers and directors have consistently followed one another off the cliff, like buffalo, never choosing to lead since the 1970s. Their reaction to the collapse of commodity prices, often caused by their own confusion, has been to retreat rather than to lead. Now, they must get out of the way. Nothing will change while these untrustworthy leaders continue to drive producer organizations into the ground. If there is any hope for the future, it lies with new leadership that understands the issues and opportunities, has a track record of performance, and possesses unimpeachable integrity.

Before they step aside, they must initiate the rebuilding process. This includes funding the Preliminary Specification to halt the waste of time and resources. While some may accuse me of opportunistic self-promotion, I have spent many decades dedicated to solving this exact problem, without deviation since August 2003.

Actions will speak louder than words. We've heard enough from the producers over the past decades to know their promises were insincere and misguided. Future leadership will be judged on their performance, not on press releases or their dedication to DEI or climate initiatives. A recent article in the Wall Street Journal highlights the political difficulty producers have created for themselves. All the expected political maneuvering must be handled by oil and gas leadership. As a primary industry, oil and gas will have to fund the follow-on industries to build out capacities and capabilities.

Conclusion

Producer officers and directors have sold a bill of goods they cannot deliver. Over the past two decades, the facade of profitability has unraveled with their investors. This is an issue they still do not acknowledge and perhaps do not understand. The service industry met every demand placed upon them, even exceeding expectations. The innovation and development of shale is solely credited to the service industry. Producer officers and directors, who claimed to be the innovators, were merely the benefactors, sharing the benefits only among themselves. They produced misleading financial statements to mask the destruction of what should have been the greatest wealth generation the industry had ever known. Now, two decades into the shale “revolution,” the results are catastrophic.

But this is not just a matter of opinion. The public and politicians have yet to see the purported wonders brought about by the producers' so-called innovativeness, management, and wealth generation. The challenge now is for officers and directors to deliver on these promises. And do so alone, constrained by their “muddle through” culture, without the ability to innovate, the inability to profit and no financial resources or support of their capital structures. We all have front-row seats and look forward to seeing if these heroes escape again in their unfolding drama.

"That Jarring Gong," Part XV

 A Reasonable Hypothesis

One of People, Ideas & Objects’ basic hypotheses is that the oil and gas industry has not built value since the late 1970s. Instead, it has been incinerating capital on an unimaginable scale. Without annual share issuances through the ongoing support of the investment community, the capital built in the industry prior to the 1980s was exhausted. This forced producers to source fresh capital to maintain their organizations as going concerns. Our hypothesis is derived from the 1986 oil price crash, which made the situation more difficult and seemed to culturally separate commodity pricing from decision-making. Capital was sourced and spent on whatever was the most attractive catchphrase to Wall Street at the time. Our hypothesis was confirmed through repeated oil and gas commodity price collapses that were highly destructive and largely ignored by the current crop of producer officers and directors. Even without the repeated price collapses due to chronic overproduction, or unprofitable production as we describe it, overproduction continues to erode oil and gas prices. Officers and directors fundamentally believe they are price takers, where commercial operations are obtained by making it up on volume.

We argue that the industry has become a spending machine, learning through specious accounting methods that spending money is profitable. Performance, therefore, is measured by the capacity and capability to spend money, as all money spent is considered profitable according to audited financial statements. Capitalizing almost every cost incurred by the producer creates overcapitalization, which is only equaled by the volume of overreported profitability. Despite what the results or performance of the property may be. This circular relationship is designed to, as officers and directors claim, “build balance sheets” and “put cash in the ground.”

Our hypothesis also suggested that once the accounting magic was discovered for what it was, investors would become wise to the producers’ eventual fate. Producers would and have become hollowed out, poorly performing, and capital dependent. Today, producer firms are leaderless and lost. They lack a basic understanding of business and are unable to function as businesses. Declaring shale uncommercial, they exited the industry, taking oil and gas revenues to fund clean energy investments with them. Meanwhile, they allowed others to maximize profits by developing the significant global LNG marketplace, leaving the domestic market to producers.

Locked out of the global LNG market, producers are now relegated to domestic prices subject to frequent price collapses. They failed to realize they couldn't take oil and gas revenues with them to fund clean energy investments, proving their lack of commitment to oil and gas. Abandoning shale as uncommercial shows they admit failure, and lack the understanding necessary to implement the appropriate remedial efforts. Their complacency allows significant oil & gas business opportunities to be easily missed in a preoccupation with unrelated clean energy technologies and unrelated industries of which they hold no competitive advantage.

Producer financial statements’ reliability and the officers and directors’ business capabilities became issues for investors in 2015, leading to their suspension of further support for producers' capital structures. This situation should have concentrated producers' efforts on remediating investor concerns. A decade later, nothing has been done, leading to chronic cash and working capital shortfalls, an embarrassment to all of them. Media and politicians claim producers are earning record profits and hoarding cash, yet critical analysis shows minimal working capital is unable to support a capital-intensive industry. Producers' capital expenditures budgets are only considered funded by including 100% of their lines of credit. 

After decades of believing that spending was profitable, there was no performance or competitive criteria to eliminate weak players. The homogenization of producers’ performance has dropped to about 25% of what commercial enterprises need to attain.

When working capital is an issue in a primary industry whose commodities are price makers, a phenomenon unique to the business world. The damage caused to the trust, faith, and goodwill by the oil and gas producers towards the service industry is significant. Producers conducted operations with accounts payable being paid in 18 months, slashed activity levels, and demanded huge discounts, cutting service industry revenues by 75%. COVID-19 exacerbated these difficulties, forcing the service industry to cut up equipment for scrap and sell horsepower to other industries. Now operating at 30% of prior capacity, the service industry is declining rapidly due to equipment retirements and fleet cannibalization. Producers will need to rebuild capacities and capabilities on a direct, philanthropic basis to regain the service industry's trust and respect.

Winston Churchill

When the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have effected a cure. There is nothing new in the story. It is as old as the sibylline books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong—these are the features which constitute the endless repetition of history." (Martin  Gilbert, Winston S. : The Prophet of Truth, 1922-1939 (Volume V) (Winston S. Churchill))

The last point of our hypothesis aligns perfectly with Churchill's sentiment and is the "Jarring Gong" everyone must wake up to. This is evident in the EIA’s "Monthly U.S. Dry Shale Natural Gas Production by Formation" graph. Notice anything significant?

For the past year, I have speculated about the turning of the natural gas basins, and there is now undeniable evidence that they have indeed turned. How will this be remedied? Clean energy, consolidation, or perhaps a board meeting? Let's not confuse ourselves with the obvious facts that support this.

• Shale is the greatest endowment of riches known to man. We are fortunate to have them and therefore secure, reliable, profitable and affordable energy for all of North America is attainable, at a minimum, for at least the remainder of this century. Of which we’ll need. 
• The level of incompetence required to destroy an industry while producing these resources is staggering. Officers and directors are 100% responsible, should have been accountable, and had the resources to address the issues and opportunities they face. However, they did nothing but “muddle through.”
• A solution in the form of the People, Ideas & Objects Preliminary Specification has been available since August 2012 to tackle these specific issues.
• Chronic and systemic overproduction of natural gas continues and will continue.
• Natural gas prices are producing unprofitable production, therefore it is overproduction. 
• Shutting in of any natural gas production announced by producers in March 2024 was effective however temporary. Prices have resumed their declines.
• Of the 12 shale basins, 6 have turned.
• Marcellus on 12/2021, Down 5.7% as of 5/2024
• Utica on 12/2019, Down 53% as of 5/2024
• Barnett on 11/2011, Down 66% as of 5/2024
• Fayetteville 11/2012, Down 84% as of 5/2024
• Mississippi 10/2022, Down 16% as of 5/2024
• Rest of U.S. 10/2012, Down 57% as of 5/2024
• Reversing this trend to previous growth levels will not be achieved by merely returning to 100% field-level capacities and capabilities. It may require over 200% of the prior capacity to grow production deliverability and overcome these basin's decline.
• Where will these resources be sourced for these capacities?
• Who will be motivated to sacrifice their capital in the manner expected by current officers and directors past actions. 
• How will those field hands who’ve now moved on to other careers in other industries be motivated to return. It may require more than one big paycheck. 

The Producers Logistics

I estimate it takes a minimum of seven years to transform a concept to a producing oil and gas property. Investopedia quotes a study indicating that the period from discovery to production is 5.5 years, which aligns closely with my estimate. Since investors stopped supporting producers in 2015, capital, working capital, and cash have significantly diminished. Alternative sources were found to meet their needs, but these have now dwindled. Despite my attempts to convince producers that the Preliminary Specification would generate substantial profits and provide all the cash they need, they resist due to concerns about their personal career security. Nonetheless, in times like these, focusing on internal cost-cutting is the obvious strategy.

The oil and gas industry, being capital-intensive and reliant on external capital for all its costs, has been performing at just 25% of a commercial operation threshold. Having lost investor support they’ve now exhausted their seven years of work in progress, producers now lack the field capacities and capabilities to drill more than 30% of prior growth levels. It's as if old Mother Hubbard went to the cupboard to feed her children and found that the kitchen had been taken in last night's tornado.

Given the seven-year timeline for this process and their limited understanding of business, cutting costs in the initial stages would be prudent. Starting in the first year of difficulties, it would be most effective to cut costs incurred in the first year, hoping to reclaim resources once business returns to normal. If this proves insufficient, cut costs in the second year, and so on. This approach allows the process to continue for another seven years from the onset of difficulties, with the expectation that normal business operations will eventually resume, preventing permanent loss.

Prior growth level capabilities may be woefully inadequate. The shale characteristic of steep decline curves becomes critical when a basin cannot maintain the necessary level of activity to sustain and grow deliverability. Shale offers immense wealth, but with conditions, and the steep decline curve has always been known. Officers and directors may not have understood the business principles behind managing a diminishing resource. If they did, they would not have ignored their investors' concerns for nearly a decade. It's as they say, math is hard. During this period, officers and directors were proudly parading their "biggest, most beautiful, and well-built balance sheets" down main street.

Conclusion

The actions and behaviors of the past few decades suggest that officers and directors will only make a sustained effort to turn the industry around once they fully understand the consequences of their actions. While some may cynically believe their commitment would last mere days, I would wager it might extend to a few weeks. Their best opportunities will lie in finding new sources of cash from areas unfamiliar with their past antics. The media and governments, which the latter have significant financial resources, could be prime targets.

Producers have signaled to their investors that profits are not a priority. Their inaction implies a lack of concern for both the oil and gas business and investor interests. Allowing the industry to be destroyed to prove their point. This attitude suggests that they are uninterested in the future, which holds unlimited potential for everyone except the officers and directors. Their lack of motivation I would suggest is due to the fact they control the oil and gas revenues. It will become increasingly difficult for them to explain to their investors why this limitless future is of no interest to them.

Blaming the declining productivity issue on the government might be a strategic move, especially with the media support producers currently enjoy. However, this strategy could backfire if the truth about these outcomes from producers' past actions becomes public knowledge. A more hostile environment could emerge if it is revealed that producers have been misleading the American people. I would not want to be around when the public turns against these officers and directors.

What we’ve heard before is a long litany of excuses, blaming, and viable scapegoats as to why producers could not do this or that. Most of these excuses did not pass for basic common sense, such as “waiting for a cold winter,” or were outright mistruths, like “shutting in production will damage the formation.” The creativity in generating these excuses has been impressive, and there seems to be no diminished capacity in this regard. The expectation might now be to "drill baby drill," which contradicts the arguments that have stymied them in the past. Who will they blame then? The service industry, investors, or anyone else they desperately need to depend upon?

As a former auditor, I have a propensity to want to kick dead horses to see if they are, in fact, dead. Therefore, let’s review: Producer officers and directors will need to undertake a significant effort with no capital or support, no ability to earn money and no money on hand, no internal capabilities to conduct operations, and a reputation in the recruiting industry where no one is generally interested in them when exciting opportunities abound elsewhere. They lack field-level capabilities to conduct any operations from operators that would trust, believe, have faith, or goodwill even if the check was certified. Lastly, they have no organizational capability to do things in a way that doesn’t just cause more damage and destruction. Yea, this horse is dead.

"That Jarring Gong," Part XIV

 Compliance

During our time off, the United States Supreme Court ruled that the Chevron doctrine is no longer law. This is welcome news for those who believe the administrative state had become unconstrained in creating and applying administrative law, seemingly for its own benefit. A review of any producer's quarterly and annual reports reveals the extent to which corporate America is burdened by compliance with regulations that offer little tangible benefit. Although Sarbanes-Oxley weathered the financial crisis due to its legislative support, many climate and diversity, equity, and inclusion (DEI) initiatives seem driven more by controlling narratives rather than practical outcomes. 

In my opinion, if climate change becomes a trillion-dollar issue, dynamic and innovative solutions will emerge. Until then, it's just more unaccountable taxes claimed to resolve the issue, yet perpetually demanding higher taxes as the job is never done. DEI initiatives have constrained organizations in unimaginable ways and opened them to criticism for noncompliance. More time, energy, and money are spent here than on profitability, which doesn't even make the top ten priorities.

The future of these regulatory burdens will hinge on the outcome of the U.S. election. One side may eliminate them, while the other may support them by passing enabling legislation. The reality is that producers have not focused on profitability for many years, lacking the time and money to do so. The compliance and governance burdens have fostered a "compliance first" culture that understandably seeks to avoid noncompliance pitfalls. If many of these regulations lack a legal basis, an alternative might be to ignore their requirements and let the courts determine their validity. The chosen route will soon be evident, but North American business is too regulated and not dynamic enough to meet future demands.

In our view at People, Ideas & Objects, the consumption of time, energy, and money on compliance is unacceptable. We believe compliance and governance should be the natural consequence of the actions taken by the producer firm. Within the Preliminary Specifications Compliance & Governance module, we align these "corporate" frameworks with the Joint Operating Committees' legal, financial, operational, cultural, communication, innovation, and strategic frameworks. This alignment brings increased speed, accountability, and profitability to the Joint Operating Committees. 

Whatever the future holds for compliance requirements, the Preliminary Specification offers producers an opportunity to have our user community prepare for their Compliance & Governance needs. This approach identifies specific compliance and governance costs at the property level and ensures those costs are covered by its performance.

A Bridge Too Far?

The question we need to answer is: how do you build a bridge? How do you create anything of material value and substance that doesn’t generate revenue until it’s completed? This is the issue we face with the Preliminary Specification. The scope and scale of the issues in the oil and gas industry are so vast that tinkering at the edges with one or two producers will only be wasteful. Approaching the existing culture with a wholesale change will not succeed unless we can summarily ignore that culture and commence a comprehensive restructuring based on a new vision. We believe we’re at that point, as the industry has been ground down to a valueless non-entity. If we don’t rebuild it with the vision of the Preliminary Specification, then which vision would you prefer?

This debate doesn't address whether we're crossing the Atlantic or Pacific Ocean with our bridge. Given where we are today and where we need to be to address the next 25 years, the distance is as vast as the Pacific Ocean. I cannot convince the industry leadership that they have a problem and that a reorganization is necessary. To solve any problem, the first step is to organize yourself to approach its resolution. People, Ideas & Objects have a clear vision of what the industry needs to do and how to organize it. However, the industry’s leadership clearly doesn’t want to fulfill their role in what needs to be done. They believe that absolving themselves of the compliance risk from their new regulatory masters supersedes all other aspects of leadership. This mindset reveals their redundancy and underscores the urgent need to resolve this leadership vacuum.

Culture is Direction

What we’ve learned over these number of decades is that as much as producers claim to be responding to their environment and instituting changes. Actual change is quickly overruled by their culture. Today we see the industry is regressing back into its cultural influences. Companies such as Ovintiv are now focusing on the balance sheet once again. EQT were highlighting the performance of their hedges. Although it would have appeared that overproduction of natural gas was understood and actions were being taken by a number of producers to deal with the excess production in March of 2024. Being rewarded with a doubling of natural gas prices as a result. Those days have now passed and the lessons learned appear to be forgotten. Natural gas prices have fallen 35% since June 10, 2024. 

The persistent cultural influence of “muddle through” is accepted as fact, with nothing being done about it. The responsibility, authority, and resources to address the issue are often avoided to save resources for another day.

I often find myself impressed with the technologies claimed to be used in oil and gas and their applications. Whenever the question arises whether producers are doing enough to implement advanced technologies, we are bombarded with buzzwords like Artificial Intelligence, Machine Learning, Internet of Things, and more. These technologies are always touted as “promising” and “game-changing” when applied to oil and gas, leading one to believe that what is represented as a factual case study is more of a vendor's technological dream.

These claims contrast sharply with the legacy difficulties that People, Ideas & Objects face in getting the Preliminary Specification accepted. Organizing data and optimizing the organization for performance and profit seem to hold no interest. It's not just us that are concerned about the economic viability of the industry; shareholders have been withholding their support for almost a decade and are now capitulating due to producers' inability to act or perform. On one hand, there are issues that manifest into existential threats and business solutions that are ignored, alongside shareholders' concerns and an industry taken to the brink of having no value. All this while supposedly using the most advanced Information Technologies available? The contradictions are too glaring. These fairy tales belong on the heap of other mistruths that have been spoken. Perhaps in the second quarter 2024 reports, producers' officers and directors will adopt a policy that honesty is the best policy. See, even People, Ideas & Objects can float such fairy tales.

Conclusion

Although the leadership of oil and gas may be tinkering with Artificial Intelligence, Machine Learning, and the Internet of Things, these technologies will likely only serve to enhance their resumes for future career moves. They are chasing after new, shiny objects, knowing full well that their failure is inevitable. The industry is on a trajectory with the momentum of a 30” log rolling down a hill, unstoppable and destructive. The opportunity to intervene and change course was long ago, and they did nothing. Now, there’s nothing anyone can do to stop it, and it will annihilate everything in its path.

Reinstating their vision through consolidation is not the solution it may have seemed in the 1950s. This outdated strategy is causing more people to realize its negative consequences. Besides, consolidation is nearing the end of its 18-month cycle in terms of the industry's attention span. Soon, they might shift focus to offshore drilling or another distraction, attempting to dupe everyone once again.

Reflecting on their performance over the past few years reveals a series of missteps and failures. They abandoned shale, declaring it uncommercial, and diverted oil and gas revenues into clean energy. Realizing their mistake, they returned to shale, only to find the industry in shambles. The damage done to the service industry by these officers and directors is particularly severe. Faced with the uncommercial nature of shale once again, they decided consolidation was the solution.

The legacy of failure these officers and directors have left behind is damning. They have consistently shifted from one area to another, much like the buffalo did in the 1800s, moving from SAGD, heavy oil, natural gas storage facilities, offshore drilling, unconventional natural gas, and unconventional oil, to clean energy, then back out of clean energy, and now to consolidation. One wonders if they are finally discovering the cliff that the buffalo always seemed to gravitate towards.

Capital destruction through facility overbuilding has been their modus operandi, executed with expert skill and a complete abandonment of rational thought. Their only strategy is to run with the herd, overbuild, realize the damage, then move on to the next big thing without ever considering using the market to guide their capital investments. They have never considered remediating poorly performing assets into profitable operations. Instead, they perpetuate propaganda about the next big thing and how they’ll succeed if given a few more billion dollars.

This leadership has repeatedly proven its incompetence, leaving a legacy of broad consequences that will be felt across North America. Their propaganda has convinced politicians that they can do anything. But the truth is different. Officers and directors should prepare for accountability being demanded from another group. Will the politicians stand behind the investors, bankers, service industry participants, and others who’ve been harmed by these leaders? Or will they jump the queue and demand answers immediately?