A Perception of Financial Status, Part III

Part III of People, Ideas & Objects paper "Consider This... A Perception of Financial Status: Why Oil & Gas Producers are not Profitable"

Overhead

The commercial purpose of recognizing overhead is to ensure that production earns the cash necessary to pay for it. Every month, producers incur accounting, administrative, technical support and other organizational costs that must be funded. When those costs are omitted or understated in the breakeven calculation, production may appear “profitable” from their point of view while failing to generate sufficient cash to sustain the organization supporting it. The resulting deficiency consumes working capital or requires funding to be sourced from elsewhere.

Synallagi is designed to incorporate the full cost of that support into the commercial evaluation of each Joint Operating Committee. Costs attributable to a particular well or property are charged by our user communities service providers directly. Shared costs are allocated through transparent, consistently applied methods that account for the resources each activity consumes. An overhead allowance is insufficient where it does not represent the actual cost incurred. Each cost must enter the calculation once, with its source and allocation available for examination.

These amounts become part of the monthly breakeven calculation and therefore the price required to produce profitably. Synallagi price maker strategy uses that calculation to determine whether the market price supports production. The revenue required from consumers must cover the complete cost of providing the commodity, including the organization necessary to administer and support its production.

The objective is to establish a recurring monthly cash provision adequate to meet the producer’s overhead obligations. As production revenue is collected, the overhead component replenishes the cash used to pay those costs. The calculation must account for the timing difference between paying expenses and collecting revenue in order that adequate working capital is maintained. 

This gives producers a practical basis for managing overhead and its recovery. They can determine what it costs to support each Joint Operating Committee, whether production is earning that amount, and whether collections are replenishing the cash required for the next month. Overhead becomes an explicit commercial requirement, with responsibility for both its cost and its funding.

As actual overhead costs are attributed to each Joint Operating Committee and allocated to the participating producers, Synallagi preserves the detail needed for both commercial evaluation and financial reporting. Producers using the SEC’s Full Cost methodology can then apply the appropriate capitalization and expense treatment to those costs, while retaining their full visibility in the breakeven calculations used for production decisions

Synallagi Methodology Towards Overhead

Oil & gas is moving into a new environment where ERP and business systems demands of the organization are far greater than at any time before. The interactions between trading partners and members of the Joint Operating Committee begin to become an issue if they’re unable to maintain the pace of today’s market speed and velocity. A producer may have spent the appropriate resources on ERP systems yet they’re forever constrained by the producers in their Joint Operating Committees and suppliers in the service industry. How does this paradox get resolved? 

Synallagi changes the cost dynamics of overhead of the oil & gas industry. Our user community and their service provider organizations are a reallocation of the administrative and accounting resources of today’s producers. Configured to hyper specialize on one process on behalf of the industry. Therefore processing the information for just that producer, Joint Operating Committee and well. Creating the data granularity necessary to infer information through appropriately configured databases and the foundation of automation and autonomous operations. Internet of Things is one of those technologies which are of value to the producers that are configured to deal with that data in that form. The value in IoT is in the receipt of the information. Then automation of the production, revenue and royalty accounting processes can be automated extensively through appropriate built systems by our user community and supported by their service provider organizations. Hyper specialization and the division of labor in both the work of the people in the industry and in the computers will expand the amount of work conducted from the same resource base.  

Sharing of this infrastructure on a global North American industry wide basis takes the costs of these developments and allocates them to each producer in the industry. Instead of each producer attempting to build their own systems to some specification that may or may not be able to work with that company's choice of systems. By sharing in the cost of these developments producers can avoid these issues and reduce their costs of development and long term support. 

The third aspect of how Synallagi assists the oil & gas producer is through the configuration of our user community and their service provider organizations. As discussed the charges for processing of their work is to the Joint Operating Committees. Therefore if a well, a property or a Joint Operating Committee is reporting unprofitable operations. Producers can shut-in that operation and gain the advantages we’ve listed here. What Synallagi has done therefore is turn all of the producers' costs variable based on profitable production. If production is shut-in it therefore generates a null operation, no loss and no profit. 

The other aspect of this method is that all of the overhead costs are being charged to the Joint Operating Committee in the current period. Therefore they’re being priced in the commodity price that’s passed to the consumer. The cash incurred to pay for the overhead is therefore returned in the subsequent month to be used again and again. 

Synallagi treatment of overhead is designed to deal with these overhead issues identified within the oil & gas industry. Turning them variable, reducing them by sharing the infrastructure costs and specializing the accounting and administration will be sizable. However, only if the members of a Joint Operating Committee participate and are involved in Synallagi.

Investors and Bankers

Accounting, investing and many other elements of business are based on trust. If the industry is reporting earnings on the basis of GAAP then technically it implies the same trust extended to oil & gas as to any other industry. If it is found that representations of what was profitable is questionable that trust is violated and investors then act accordingly. 

In oil & gas investors suspended their participation in any further stock offerings. What producers found was the doors were closed to them. They would need to find another way to raise their capital. Banks allowed producers to use the unused portions of their credit lines until such time as the banks had caught on to what the investors had learned. The investors in 2015 and the banks in 2018. 

What we will find in this Consider This… document is evidence of an erosion of competitiveness since 1986 that began culturally and to a large part had been unknown and not understood. One that drove a wedge between the operational “wing” of the company and the financial “wing.” Where neither could understand one another and no one could appreciate the points being made. This division operates as two independent silos and operations makes decisions based on corporate financial reports confirmation of earnings without the understanding of the financial issues subtly manifesting themselves on the horizon. But yes producers continued to report profitable operations and they were as specious as they were at any time before. Endorsing their “spending is profitable” understanding that supported an ever depreciating competitiveness. 

Therefore we continued with status quo operations of drilling and completions on the expectation of their investors “imminent” return. These capital expenditures were next financed by asset sales and then by not paying the service industry for drilling and completion operations for up to 18 months. The service industry is a different issue for producers and maybe their most difficult to resolve. Consolidation has been undertaken, yet the natural gas price revenue losses in the eight months of 2026 have totaled what was lost in revenues for 2025. 

Breakeven

Where’s the Beef?

Much of our discussion of Synallagi concerns performance: what an operation costs, what it earns, how quickly it recovers its investment and how its results can be improved. Financial Accounting provides the financial statements through which a producer reports its position and results. Management Accounting supplies the detailed information needed to direct the business. Synallagi places substantial emphasis on Management Accounting because commercial decisions require information at the level where expenditures are incurred, production occurs and responsibility can be exercised.

My criticism is that the industry’s accounting systems, procedures and resources have failed to provide that information with the completeness, timeliness and authority it requires. Accountants have been expected to satisfy reporting obligations without being given sufficient means to establish whether individual wells, properties and Joint Operating Committee interests are performing commercially. Producing the accounts and equipping people to manage the business are different responsibilities. Both must be fulfilled.

I suspect many of my competitors, and many people working in producer accounting departments, would recognize this criticism immediately. In my assessment, the past forty to fifty years have subjected accounting and systems budgets to persistent downward pressure while regulatory and reporting obligations have expanded. The people responsible for the information have been asked to carry more responsibility with fewer resources. Management Accounting becomes work for which there is neither sufficient time nor an adequate system.

The question extends across the industry: what enduring financial strength has been built from the trillions of dollars invested and the enormous volumes of oil and natural gas produced? Officers’ and directors’ compensation cannot serve as the measure of success. The accounting must extend to investor returns, lenders’ exposure, careers, service-company viability and the industry’s capacity to renew itself. The demands for profitability and accountability that followed the 2015 downturn cannot be answered merely by pointing to another production record.

Society has an interest in the answer. Oil & gas support transportation, food production, industry and the infrastructure of daily life. An industry entrusted with supplying those resources must maintain the financial and organizational capacity to do so. Consuming the resource while weakening that capacity transfers the consequences beyond the producer’s shareholders.

I place responsibility for the producer’s response with its officers and directors. Their desire to blame the government does not discharge that responsibility. Leadership cannot claim credit for successful development while assigning responsibility for commercial failure elsewhere. Officers and directors must generate the resources and possess the authority to approve expenditures, select systems, establish priorities and require accountability. They must ensure that the business can determine its costs, evaluate profitability and act on what the information reveals.

When engineers must turn to independent reserves reports for the cost information needed to manage current operations, Management Accounting has failed to serve them. Those reports have their own purpose. Engineers and geologists however need Synallagi detailed, current financial information that connects their decisions and innovations to the performance achieved.

Consider the traditional reporting supplied to members of a Joint Operating Committee: Statements of Expenditures for capital activity and Statements of Operations for operating activity. These summarize the operator’s charges and each participant’s share, showing current-period and accumulated expenditures. They perform an essential billing and accountability function. By themselves, however, they do not establish the complete profitability of each participant’s interest.

Overhead exposes one of the gaps. Where an overhead allowance is charged, the statement identifies an amount recoverable under the agreement. It does not necessarily identify the actual administrative and accounting resources consumed by that property. The allowances remain insufficient to answer the management question: what did administering this well actually cost? Industry accounting procedures distinguish directly charged costs from indirect costs recovered through overhead provisions. COPAS: Overhead Principles.

Across a combined view of participating producers within a Joint Operating Committee, corresponding overhead allowance charges and recoveries cancel as transfers between them. The underlying costs do not disappear. Salaries, systems, offices and administrative services have still been paid for. Allowances amounting to a net transfer of zero establishes neither zero overhead cost nor an accurate attribution of that cost to the production that must recover it.

That is the information Synallagi is intended to provide. Actual overhead must enter the commercial evaluation alongside operating costs, capital recovery and the required return. Management Accounting must make those requirements visible to the people making decisions—and give the resulting financial information authority over what happens next.

A breakeven calculation is only as complete as the costs and recovery obligations it recognizes. If those requirements are missing, the apparent margin provides an incomplete account of the business.

Break Even 101

Breakeven defines the price required to recover the costs assigned to a specified operation over a specified period. Its usefulness depends on the completeness of those costs and the consistency of the production assumptions. Covering immediate operating expenditure establishes an operating cash threshold or contribution margin; it does not establish recovery of the investment. Synallagi commercial evaluation incorporates actual operating costs, actual overhead and capital recovery, with the required investment return establishing the profitability threshold against which production is assessed.

The calculation must connect expenditures to the production expected to recover it. Dividing capital by total remaining reserves can obscure the timing of recovery, particularly where substantial volumes will not be produced for many years or even decades. Engineers must therefore bring production forecasts, decline curves, intervention requirements and expected recoverable volumes into an explicit recovery period. Workovers and additional development require both their expenditure and their incremental reserves and production to be recognized. The resulting evaluation must distinguish each well’s economics while accounting consistently for shared facilities and each producer’s Joint Operating Committee interest.

Breakeven changes as operations proceed. Production that covers operating costs but recovers insufficient capital leaves an outstanding obligation against fewer remaining volumes. Production below operating cost adds a cash deficit to that obligation. The recovery balance must therefore reflect opening unrecovered expenditure, additional expenditure and the contribution actually received from production, without counting any deficiency twice. High initial production followed by steep decline makes early under-recovery particularly consequential: the resource is consumed while the subsequent capacity to generate recovery receipts diminishes.

For engineers, this information provides a financial measure of technical performance. A proposed intervention can be evaluated by its effect on costs, production, recovery timing and profitability. An operating anomaly may become visible through its financial consequences before its physical cause is understood. Under Synallagi price maker strategy, market price and these detailed local economics govern the production decision. Profitable production proceeds; production that fails the commercial standard prompts corrective action, preservation or suspension. The objective is to give engineering decisions a comprehensive financial basis and make their contribution to the business measurable.

People, Ideas & Objects defines overproduction in commercial terms: production sold below the full breakeven required to recover operating costs, actual overhead and capital within a competitive period. Under this definition, excessive production begins when the volume marketed fails that commercial test. Our analysis takes July 1986 as the starting point for examining how unrecovered capital from past production can accumulate when those deficiencies remain unaddressed.

Continuing to overproduce has consequences beyond the individual producer. Additional supply can depress the price received on a much larger volume already being marketed. Other producers then face reduced margins and greater capital-recovery deficiencies. When they continue producing below their respective breakeven levels, the process reinforces itself. Reserves are consumed, capital remains unrecovered, and subsequent production carries an increasing recovery burden. Deferring the recognition of capital costs in financial statements does not resolve that commercial deficiency.

The question is whether the industry’s organization allows market prices to impose meaningful commercial discipline. A price signal cannot protect capital or preserve reserves when producers repeatedly proceed without recovering their full costs. Sustained over decades, this behaviour can erode the financial capacity required to maintain the industry, support its service industry and replace declining production.

Our natural gas analysis measures revenue deterioration against a stated heating-value benchmark. The corresponding erosion of oil revenue requires its own explicit benchmark before it can be quantified. The commercial obligation is nevertheless the same for both commodities. Synallagi breakeven calculations establish what must be recovered, and its price maker strategy requires each producer to act on that information. Production must earn the resources necessary to sustain and renew the industry.

A Perception of Financial Status, Part II

 Overhead Cost Reductions

Synallagi requires a reconfiguration of the industry’s accounting and administrative resources to deliver the financial detail necessary for commercial decisions. Capturing production data through the Internet of Things is the beginning. Overhead allowances must give way to the actual costs incurred in administering each property and well. What does it cost to perform production, revenue and royalty accounting for a particular well? How do those costs differ between oil and natural gas operations? Synallagi is designed to make these differences visible alongside operating costs and capital-recovery requirements. Standardized, consistently prepared, performance related accounting information would allow users to compare individual wells or aggregate their performance.

We see the potential for overhead costs under Synallagi to fall to a single-digit percentage of current expenditure. That potential rests on several methods designed to reinforce one another. Shared Cloud Computing infrastructure and specialized accounting and administrative services reduce the duplication involved when each producer builds and maintains these capabilities independently. Common infrastructure is developed once for shared use, with its development costs distributed proportionately across participating production on a BOE-per-day basis. Ongoing computing, software and service provider costs remain identifiable within the actual costs of delivering those services.

This structure expands hyper specialization and the division of labor beyond the boundaries of a single producer. A specialist’s work can serve properties across the industry, supporting a depth of expertise and volume of activity that an individual organization may be unable to sustain. Common processes provide a foundation for Artificial Intelligence to assist with repetitive work, identify exceptions and extend the capabilities of those specialists.

Adam Smith’s pin-making example illustrates the scale of improvement that reorganizing work can achieve. He described ten workers collectively producing approximately 48,000 pins per day—4,800 per worker—compared with fewer than twenty each if working independently without the relevant training. The comparison implies at least a 240-fold productivity difference. Smith connected this achievement to the division of labor, developed skills and machinery. What further possibilities emerge when specialization operates across an industry and is supported by Artificial Intelligence? Adam Smith, The Wealth of Nations, Book I, Chapter I. 

Recognition of markets, the Joint Operating Committee, innovation and Intellectual Property as Organizational Constructs provides further means of organizing work and extending improvements across participating producers. Together, these arrangements are intended to reduce overhead while increasing the precision and usefulness of the accounting. The commercial benefit is lower actual costs per BOE, a clearer profitability calculation and greater financial resources available for productive information, analysis, decision making and investment.

Comparing Our User Community to Today’s Overhead Structure

People, Ideas & Objects has raised the industry’s overhead problem many times. We have documented it extensively. At one stage, we identified capitalized interest and other costs receiving similar treatment. Notably, interest and certain related costs were later removed from this reporting method under discussion and, soon afterward, from broader industry practice. We first noted this development on our blog on November 10, 2008.

What remains materially unchanged in 2026 is the capitalization of overhead. Why has gross overhead continued to be reported in the same manner? The discussion that follows suggests this is one of the principal mechanisms through which cash continues to bleed from the industry and their accountability reporting distortions continue to persist.

The relevant question is why capitalized overhead has not been corrected. Is there a specific intent behind the desire of officers and directors to continue reporting overhead in this manner? If so, what is that intent? Why has it persisted? And why were some related costs remedied while overhead remains untreated eighteen years later?

People, Ideas & Objects maintains that, under Synallagi, our user community and their service provider organizations would operate at single-digit percentages of today’s fixed gross overhead. If there is a chronic and systemic source of overproduction in oil & gas, it lies in the fixed gross overhead carried by producers. That is where the problem begins to reveal itself. Capitalization is the mechanism that makes the issue less visible. It creates a distinct cash flow problem while distorting reported financial performance.

The argument begins with two observations.

• First, overhead costs at any point in time amounts to roughly 10 to 20 percent of revenue.
• Second, at any point in time, approximately 85 percent of gross actual overhead is capitalized.

A related issue concerns overhead charged to Joint Operating Committees. Those charges are based on estimates agreed through the Council of Petroleum Accountants Societies. In the broader industry picture, those overhead allowances are effectively zero. Any amounts charged are earned by the operator. Any net recovery merely reduces post-capitalization overhead costs. Under Synallagi those overhead allowances are replaced by the actual, factual overhead costs.

The core issue is straightforward. When overhead is capitalized, those costs are recovered over the life of the reserves. Producers allocate capital costs across all proven reserve volumes reported by their independent reservoir engineers. The cash spent on overhead in a given month is therefore returned in small increments each month over the life of the property.

That creates a structural cash problem. Each month, each producer must find new cash to fund the next month’s overhead. No cash float is created because overhead is not priced into the commodity, is not passed through to the consumer, and is therefore not returned to the producer in the current month to fund the next month’s overhead.

The materiality of overhead in oil & gas therefore creates a persistent drain on cash. This was masked when investors were subsidizing the majority of producer capital expenditures, which included capitalized overhead. Once that support disappeared, producers turned after 2015 to every available source of capital to sustain operations and overhead.

Leadership, behind the eight ball.

Today, with working capital diminished and in many cases negative, producers are financially and operationally impaired. They are barely able to fund the capital spending required to sustain production. Each year becomes more difficult as their competitive position depreciates further. Their prior conduct toward the service industry has compounded the damage, leaving trust, motivation, capacity, and capability far below what the service industry now requires.

People, Ideas & Objects therefore asks why a policy that has been in place for decades, and that is demonstrably destructive to producer cash requirements, has remained unchanged after more than a decade of industry discussion. What is it about capitalized overhead that makes it this persistent?

For all practical purposes, capitalized overhead has been a root cause of the loss of support for producer capital structures. That loss of support began in 2015, when investors withdrew because of poor performance and a fundamental lack of accountability. Nothing meaningful has been done to address either issue. How, then, does this critical cash problem remain in place in 2026?

There must be some continuing intent, motivation, or institutional desire to preserve the practice despite the absence of liquidity, the loss of support of their capital structures, and the existence of alternatives such as Synallagi.

Leadership has taken shale, one of Mother Nature's greatest endowments of wealth, delivered it to the greatest economy known to man, and for the sake of whatever remains concealed in overhead accounts, destroyed its present value.

Allocation of Capital Costs to Production

Recognition and retirement of capital costs in a timely, competitive period is one method of measuring the reality of the reported earnings. One person put it this way in terms of investing. It’s not the purchase of a stock on the basis of its price earnings ratio that’s the appropriate evaluation. Or how it performed against analysts expectations. It’s how those earnings were determined, are they “real?” Has the company put its competitiveness and performance as the priority in what is reported. Or is it just fudging the numbers? Moving capital assets to the income statement in a competitive manner is how the quality of a firm’s shareholders are determined. The quality of shareholders will subsequently dictate its market capitalization. Thinking on the basis of investing in these criteria will reveal the perception that People, Ideas & Objects sees oil & gas today. 

For decades, producers have celebrated “building balance sheets” and “putting cash in the ground.” The language treats expenditure and asset accumulation as achievements in themselves. Yet capital committed to a property remains an investment to be recovered. A larger balance sheet establishes neither the quality of that investment nor the period within which shareholders will receive a return.

Allocating capital costs across substantial reserve volumes can produce a modest depletion expense per BOE and easily support reported earnings. The commercial question remains: how much of that investment is being recovered from current production, and how long will recovery take? Where much of the production lies decades ahead, a palatable accounting charge can coexist with an uncompetitive recovery period.

Shale makes this distinction particularly consequential. Heavy initial expenditure can be spread across a large estimate of proven recoverable volumes, reducing the apparent capital cost assigned to each BOE. But high initial production, steep decline and subsequent intervention costs determine when—and whether—the investment can actually be recovered. A low allocated cost per BOE cannot, by itself, demonstrate competitive financial performance.

Synallagi therefore establishes a commercial capital-recovery discipline against which production and investment decisions can be evaluated. The recovery period, expected production, additional expenditure and required return must be explicit. Financial statements must remain connected to that commercial reality through a clear account of what has been spent, what has been recovered and what remains outstanding. Taking account of North American capital markets expectations of competitive performance.

Officers and directors are responsible for making that relationship visible. Their integrity is demonstrated by the completeness of the information they provide and the decisions they make when performance falls short. Shareholders should not have to discover, years later, that reported profitability concealed a persistent failure to recover their investment.

Full Cost Accounting

The SEC formalized its Full Cost Accounting rules in the late 1970s. Under this method, qualifying acquisition, exploration and development expenditures—including unsuccessful exploration costs—are accumulated in broad cost centres, generally on a country basis. Capitalized costs are subsequently allocated to production through depletion. The accounting therefore evaluates a broader investment program rather than treating each unsuccessful exploration expenditure as an immediate loss. SEC Full Cost rulemaking, 1978.

The depletion calculation uses proved reserves, with the amortization base incorporating applicable estimated future development and abandonment expenditures. It does not permit costs to be spread indiscriminately across every resource thought to exist in a formation. Nevertheless, the resulting expense per BOE can distribute recognition of the investment across production extending well into the future. That allocation does not establish whether the investment is being recovered within a commercially competitive period. SEC: Oil and Gas Producing Activities.

Our argument concerns the financial culture that developed around this distinction following the 1986 oil-price collapse and became more consequential as shale expanded. Expenditure, reserve additions and production growth increasingly served as evidence of achievement. Where production failed to generate sufficient cash to replenish the investment, additional investor capital could sustain the next expenditure cycle. Existing shareholders supplied more money or accepted dilution, while the underlying recovery deficiency remained.

This is the culture we describe as “spending is profitable.” An expanding asset base could support the appearance of progress while the business remained dependent on investors to supply cash that profitable production was expected to generate. The commercial question became obscured: had the previous investment actually been recovered, and had it earned a competitive return?

Shale intensified that question through five interacting characteristics.

    1. Substantial drilling and completion expenditure.

Long horizontal laterals and extensive completion programs can require substantial capital before production begins. The comparison with conventional development varies by reservoir, well design and location, but the obligation is consistent: the investment must be recovered from production within a period that justifies committing it. A technically successful well has not completed that commercial task merely by commencing production.

    2. Access to extensive hydrocarbon resources.

Shale development opened large resource opportunities and, in established areas, reduced some of the uncertainty associated with finding hydrocarbons. Commercial uncertainty remained. Where qualifying proved reserves increase relative to the associated amortization base, the allocated capital cost per BOE can decline. That result must be evaluated alongside the expenditure still required to develop those reserves and the time needed to produce them. A large reserve denominator does not itself establish timely investment recovery.

    3. High initial production volumes.

Strong early production creates an opportunity to recover capital quickly when the realized margin is adequate. The same production profile accelerates any under-recovery when the realized margin is not. A substantial portion of the well’s recoverable volume can be sold before its proceeds have discharged the corresponding investment obligation. Production records and cash receipts may look impressive while the remaining resource carries an increasing recovery burden.  

    4. Steep production decline.

Horizontal wells commonly combine high initial output with steep subsequent decline. As production falls, the volume available in each subsequent period to generate recovery receipts diminishes. Maintaining overall production can require further drilling while earlier investments remain unrecovered. Decline therefore makes the timing of profitability particularly important. It reflects reservoir and completion behaviour; it is not simply a consequence of having produced a large initial volume. EIA: Horizontal-well production and decline.

    5. Further expenditure to sustain or improve production.

Workovers, recompletions, refracturing and additional development may require substantial expenditure. Each intervention must be evaluated against the production and financial contribution it is expected to deliver. It cannot be assumed to restore the original production rate or reproduce the original decline profile. Nor is every intervention automatically capitalized: routine operating work and qualifying development expenditure have different accounting treatments. Whatever its classification, the expenditure must enter the commercial evaluation. Example of Full Cost accounting policies.

These characteristics reinforce one another when production proceeds without adequate capital recovery. Heavy expenditure establishes the obligation. Strong initial output can consume the best recovery opportunity at inadequate margins. Decline reduces subsequent cash generation, and further expenditure adds another obligation to the balance already outstanding.

The issue extends beyond producers using Full Cost Accounting. Changing the financial-reporting method does not, by itself, establish that development expenditure has been recovered competitively. The distinction between reported earnings and demonstrated commercial performance remains.

Synallagi Method

Synallagi addresses that distinction directly. The objective is to recover invested capital within a competitive period defined by North American capital markets. Recognize its cost appropriately against production and earn a sustainable profit. The profitable operation discussed in this paper, capital committed to long-term producing assets is progressively realized through sales as receivables and ultimately cash.

The strongest outcome is a property that continues producing an enhanced profitability after its original investment has been fully recovered. The producer has replenished its financial resources and retains the opportunity to earn high profits from the remaining production. That is the performance sought by a culture of reserves preservation, performance and profitability. The proceeds from oil & gas receipts will always be required to fund the current replacement cost of that boe produced. 

The cost must be recognized in determining earnings. Inadequate recognition can leave too much expenditure on the balance sheet and present an incomplete account of profitability. Integrity requires officers and directors to make the relationship between expenditure, cost recognition and cash recovery understandable. Shareholders must be able to determine whether the business is generating the resources needed for renewal or repeatedly asking them to replace what operations failed to recover.

Synallagi capital allocation operates at the product-pricing and Management Accounting level. It determines the recovery requirement per BOE, using outstanding capital, expected production within the selected recovery period, additional expenditure and the required return. Actual operating costs and actual overhead complete the commercial evaluation. The resulting information supports decisions at the well, property and individual producer’s Joint Operating Committee interest.

This commercial standard operates alongside the applicable financial-reporting requirements. Its purpose is to establish whether production meets the financial obligations of the business when the decision to produce is made.

Under Synallagi price maker strategy, profitable production proceeds. Production that fails the commercial standard is shut-in or suspended while corrective action and preservation alternatives are evaluated. Where the deficiency is confined to one well, the response can be directed to that well while profitable production elsewhere continues. The proposed benefits of this discipline are discussed here.

Objectivity is equally necessary inside the producer. If the financial evaluation indicates that a well should be shut in, the people responsible must understand the costs, production assumptions and recovery requirements behind that conclusion. They must be able to trace the result to its source and establish that the same methods have been applied consistently across relevant wells, properties and Joint Operating Committee interests. That consistency must extend across the industry through standardized methods applied to each producer’s actual circumstances. A producer can then make its own shut-in decision with confidence that its evaluation reflects a common commercial standard and that differences in reported profitability arise from underlying performance rather than inconsistent accounting methods.

“Muddle Through” leaves each new production and investment cycle to carry unresolved deficiencies from the past. Synallagi makes those deficiencies visible and gives commercial evaluation authority over the next decision. Officers and directors remain responsible for acting on the information. Continued expenditure is an investment decision whose success must be demonstrated through recovery, profitability and the financial capacity it leaves behind.

Perception of Financial Status, Part I

 North America must confront a fundamental change in how oil & gas is produced—and the consequences of failing to organize the industry accordingly. Shale transformed the pursuit of scarce discoveries into the commercial challenge of managing abundant resources. Yet producers attempted to accommodate that abundance within a business model built around scarcity. Our argument is that the resulting emphasis on production, without sufficient discipline over profitability and capital recovery, has created financial weaknesses that compound with every subsequent investment.

We need leadership prepared to rebuild the industry around shale’s characteristics and society’s requirements. The objective must be to sustain profitable North American energy independence while providing the energy foundation for the next quarter century of economic development. Abundance is an extraordinary advantage, provided the industry can produce it profitably and finance its continued availability.

Oil & gas is a basic necessity of modern society. An industrial transformation driven by Information Technology and Artificial Intelligence makes the obligation to provide affordable, abundant and reliable energy more consequential. Meeting that obligation requires producers capable of recovering their investments, maintaining their operations and financing the technical capabilities and service industry on which future production depends. Allowing those capabilities to deteriorate while celebrating production records would constitute a profound failure of responsibility.

Europe’s experience with dependence on Russian energy demonstrates the economic and political exposure that can accompany reliance on foreign supplies. Russia’s use of energy as an instrument of political pressure helped precipitate the European energy crisis of 2022, with severe consequences for households and businesses. North America should recognize the strategic value of its own resource base and the importance of maintaining the commercial capacity to develop it. Council of the European Union

People, Ideas & Objects has pursued a vision consistent with these obligations. Synallagi business models, architecture and design address how producers, Joint Operating Committees, our user community and service provider organizations can organize around reserves preservation, performance and profitability. Its purpose is to connect technical decisions to their financial consequences and give commercial accountability the authority necessary to influence those decisions.

Our price maker strategy establishes the commercial discipline: each producer evaluates the market price against the actual costs and required capital recovery of its interests in each property and well. Profitable production proceeds. Unprofitable production is withheld or suspended while the conditions necessary for profitability are addressed. Engineers and geologists gain the financial information needed to demonstrate the value of their work and direct their capabilities toward improving performance.

There is substantial work ahead to build, test and implement Synallagi. There is substantial value in the work already undertaken to develop a coherent organizational response. We believe this foundation can spare the industry years if not a full decade of repeating that effort. Industry support has yet to materialize at the level required to proceed. Continued delay postpones both implementation and the much larger rebuilding process that the system is intended to support.

The two EIA graphs below illustrate the physical scale of that challenge.

Between December 2023 and December 2024, crude oil production from existing Lower 48 wells fell from 11.0 million to 6.7 million barrels per day. New wells had to replace 4.3 million barrels per day, approximately 39% of the starting production rate. New production largely replenished the decline before contributing to growth. EIA: production declines from existing wells

The natural gas comparison is equally consequential. Over the same period, production from existing Lower 48 wells declined by 27 Bcf per day. That exceeds Canada’s entire average natural gas production of approximately 19 Bcf per day in 2025. The scale of the replacement requirement should dispel any impression that the gas decline presents a modest challenge. EIA: existing-well declines; Canada Energy Regulator: Canadian gas production

The financial question follows directly: does the production being sold generate the resources necessary to sustain this replacement effort? Repeatedly committing capital without recovering it competitively weakens the capacity to undertake the next round of investment. The technical achievement of maintaining production cannot answer that commercial question. What will society face when it does?

For more than three years, I’ve argued with industry over the revenue consequences of chronic overproduction. Our calculation measures North American natural gas revenues against a 6:1 heating-value-equivalent benchmark with oil. On that basis, the cumulative revenue shortfall this century has reached approximately $5.4 trillion. This measures the difference from the benchmark; it exposes the scale of the commercial question that this paper asks producers to confront.

The divergence has been substantial. In March 2024, WTI averaged $81.28 per barrel while Henry Hub natural gas averaged $1.49 per million Btu—a quoted-price ratio exceeding 54:1. EIA: WTI prices; EIA: Henry Hub prices

Critics question the relevance of heating-value equivalence. Consider this: the United States produced an average of 118.5 Bcf per day of marketed natural gas in 2025. Using our approximate conversion of six thousand cubic feet per barrel of oil equivalent, that represents 19.75 million barrels per day of oil-equivalent energy. Replacing that energy contribution on a heating-value basis would require almost 20 million barrels of oil every day. EIA: U.S. marketed natural gas production

That is the magnitude of the resource whose commercial stewardship is at issue. North America needs an industry organized to preserve its reserves, earn competitive profits and finance its own renewal. Leadership must accept responsibility for establishing those conditions. The first step is to organize the industry where profitability governs production and generates the internal resources needed to rebuild.

To continue without addressing the issues identified in this paper would compound the failures that brought us here. I believe the consequences would extend far beyond producers and their shareholders, placing North America’s energy security, economic strength and quality of life at increasing risk.

Energy Independence Requires Financial Strength

North America has the resources, talent and capacity to pursue another period of extraordinary economic development. Artificial Intelligence may expand what its people and businesses can accomplish, creating opportunities whose scale we are only beginning to envision, understand or appreciate. People, Ideas & Objects, our user community and their service provider organizations are optimistic about that future. Realizing it will require dependable energy and an industry financially capable of providing it. Energy independence, and the freedom of action it supports, must be sustained through continuing investment and renewal.

Can oil & gas producers meet that challenge? Shale has demonstrated remarkable production potential. The question is whether producers, their wider industrial structure possess the financial strength, capacity and confidence to develop it sustainably. Increased demand would test the commercial foundations supporting the entire productive system. North America cannot assume those foundations are sound merely because production continues.

The industry’s technical achievements deserve recognition. Visit a major processing facility or examine the engineering behind a modern well and the complexity becomes tangible. Chemical processes, subsurface knowledge, equipment and skilled people have been brought together to accomplish extraordinary things. People, Ideas & Objects has consistently recognized that achievement. Our critique concerns whether the commercial arrangements governing it recover the investment, reward the participants and preserve the capacity to continue.

We argue that a culture developed in the decades following the 1986 oil-price collapse in which spending, production growth and operating cash flow became accepted evidence of business success. Capital could be described as money “putting cash in the ground,” and an expanding asset base as a balance sheet being “built.” Yet neither description demonstrates that the investment will return a competitive profit within a period sufficient enough to justify having made it.

When we discuss shutting in any unprofitable oil & gas production. In a North American market where prices have been stabilized by appropriate production management. It would be anticipated that no more than 2 - 5% of unprofitable production may need to be shut-in. What is shut-in may also be a single well with an unprofitable anomaly in a 50 well unit that for some reason doesn’t perform. We are not involved in the operational concerns of the drilling and completion decisions. We are not involved in any of the operations of engineering and geological involvement. We are providing a resource in the form of actual, granular level, factual, standard and objective accounting information for them. A tool that they’ve been without for too long and one that can support their dynamic performance related decision making.  Accounting has a role in business and yes, we are asserting that role, however that is not something that is a threat or concern to how engineers and geologists conduct their work. 

In a North American market where producers consistently apply commercial discipline to their production decisions, we anticipate that the numbers of wells required to be shut-in could be relatively small. Our working assumption is approximately 2–5% of total production, with the actual amount determined by the economics of individual wells and properties. A shut-in decision might concern a single well with an unresolved cost or production anomaly within an otherwise profitable fifty-well unit.

Synallagi provides the financial information needed to identify and investigate those exceptions. Decisions concerning drilling, completion, reservoir management and field operations remain with the engineers, geologists and other professionals responsible for that work. They gain an additional resource: actual, detailed, traceable accounting information prepared through standardized, objective methods. This allows them to connect technical decisions to financial outcomes, identify opportunities for improvement and determine whether remedial work can and does restore profitability.

Accounting has an essential role in business, and Synallagi gives that role practical effect. Its contribution strengthens professional judgment by making the commercial consequences of operational decisions visible. Engineers and geologists can then demonstrate the financial value of their innovations, preserve reserves where production is uneconomic, and help generate the resources needed to finance further improvements.

Scientific Changes

Synallagi changes that relationship by bringing engineers, geologists and accounting into a shared culture of reserves preservation, performance and profitability. Using the Joint Operating Committee as an Organizational Construct places the producer’s competitive advantages in engineering and geology directly within the organization responsible for the property. This builds on familiar industry relationships while introducing two important opportunities for engineers and geologists personally.

The first is a broader range of employment opportunities. A geologist’s specialized knowledge may serve several Joint Operating Committees developing properties within the same geologic zone. A gas pipeline corrosion engineer may contribute expertise across multiple Joint Operating Committees and midstream operations. Their hyper specialized skills can reach the organizations that need them, expanding the opportunities available to each professional beyond a single producer.

The second is the opportunity to compete through the financial value their expertise creates. Synallagi and its service provider organizations offer new perspectives through which engineers and geologists can investigate opportunities, evaluate alternatives and determine the financial contribution of their innovations. Their curiosity and pursuit of technical improvement gain a commercial dimension: they can demonstrate how their work improves profitability, preserves reserves and strengthens the economics of the property. (Please see the benefits listed in the Crypto and Stablecoins section of this paper.)

Stronger financial performance can, in turn, provide the resources for further investigation, development and innovation. Engineers and geologists benefit from both wider opportunities to apply their expertise and a clearer means of demonstrating its value. Their contribution helps finance the next generation of opportunities for them to pursue. Oil & gas is a commercial endeavor. 

A faster drilling rig, a new pipeline or an additional gas plant can create substantial value. Management must establish what commercial outcome each investment delivers. Resolving a physical constraint can enable more production while leaving inadequate returns unresolved. We call that continuing accommodation of deficient economics “Muddle Through.” It substitutes another operational intervention for an examination of the assumptions governing the business.

Commodity Prices

In “Consider This… Markets as an Organizational Construct,” and its podcast, People, Ideas & Objects examined Friedrich Hayek’s 1945 paper “The Use of Knowledge in Society” and the role of market prices in communicating dispersed knowledge. “Producers need not reconstruct every variable influencing the market before making a commercial decision. They need the market price and a detailed understanding of their own production economics.”

Synallagi price maker strategy applies this principle at each well, property and producer’s interest in a Joint Operating Committee. Profitability governs the production decision: profitable production proceeds; unprofitable production is shut-in. Synallagi is designed to provide the detailed accounting necessary to make that determination through monthly financial statements incorporating actual costs, actual overhead and depletion determined under a competitive North American capital-recovery standard. This connects the commodity market’s price signal with the producer’s specific commercial circumstances and places profitability at the centre of the decision to produce. That discipline is fundamental to Synallagi purpose and the tangible portion of its value proposition.

Shutting in production does not necessarily require shutting in the entire property governed by a Joint Operating Committee. On a ten-well property, unforeseen circumstances may render one well unprofitable while the other nine remain profitable. Shutting in production from the affected well can improve the property’s financial performance, preserve its remaining reserves, and retain financial resources for engineers and geologists to investigate the problem and determine what is required to restore profitable production.

Detailed financial analysis may reveal an operating anomaly that would otherwise go unnoticed. A correction in the field could reduce costs and restore profitability without interrupting production. Adding financial analysis to the engineers’ and geologists’ toolbox provides another means of identifying problems, evaluating remedies and demonstrating the value of their innovations. Their technical expertise gains a measurable financial dimension, strengthening their ability to generate the resources needed to finance further projects.

The illustration developed above makes the consequence of not deploying Synallagi price maker strategy visible. Second quarter reported values. It is reported 29 Bcf/day of Permian gas sold for negative $2.15/Mcf, with this paper's example of their assumed costs ($2.15 * 0.90) of $1.935/Mcf. Individual volume losses total -$4.085 per Mcf.

Below we assume the remaining 92.3 Bcf/day of U.S. gas sells for positive $2.15/Mcf at a 10% margin. The national scale reference is EIA’s first-half 2026 marketed production average of 121.3 Bcf/day. Applying those volumes and assumed economics over 91 days produces approximately $10.78 billion in second quarter Permian gas losses against $1.81 billion in profits from the remaining production. EIA production reference.

Under these assumptions, the Permian 2026 second quarter consumes the equivalent of approximately eighteen months of the remaining U.S. gas production profits. This is a gas-only illustration, excluding hedge settlements and associated oil and liquids revenues, rather than a measurement of national industry losses. It demonstrates how a loss-making segment can overwhelm the earnings of a much larger profitable segment. Production volume alone conceals that relationship.

These assumptions are highly favorable compared with today’s actual economics. Using the 1985 average natural gas price of $2.51 as the base, the inflation-adjusted equivalent today would be $7.82. On a heating-value-equivalent basis, natural gas would command $16.98. Today’s prices in the Netherlands and Tokyo for LNG imports are $27.82 and $27.23; deducting approximately $8.00 for shipping and refrigeration leaves $19.82. All prices are in U.S. dollars.

Producers’ shale production has effectively destroyed North America’s natural gas market pricing. Before shale, natural gas prices maintained a reasonably consistent relationship with oil prices based on their respective 6:1 heating values. That relationship deteriorated when shale production began, leaving an oil-to-natural-gas price ratio of 33.0 today and reaching a peak of 52.54 in March 2024.

Consider This… Who Will Pay for North America’s Energy?

 North America possesses an extraordinary oil & gas resource endowment. The larger question raised in our new paper, Consider This… A Perception of Financial Status, is who will pay to develop and sustain it.

Will investors and bankers be expected to replace capital that production has failed to recover? Or will the revenues earned from consumers cover the full cost of providing the energy on which their prosperity depends?

Energy prices matter to households and businesses. So does the financial capacity to maintain reliable supplies. An economy cannot preserve affordable energy indefinitely by consuming the capital, equipment, skills and organizational capabilities needed to produce it. Shortages, greater dependence on foreign supplies and constraints on the potential of Artificial Intelligence and an Information Technology industrial revolution would carry their own substantial costs.

This paper asks whether oil & gas has allowed its remarkable technical accomplishments to obscure its commercial responsibilities.

Engineers and geologists have transformed the resource base available to North America. Their achievements deserve recognition. The business surrounding those achievements must also recover its investment, earn competitive profits and finance the next generation of production. An industry capable of producing record volumes still has to demonstrate that it can pay for their replacement.

The “leaky bucket” analogy illustrates the challenge.

Between December 2023 and December 2024, crude oil production from existing Lower 48 wells declined from 11.0 million to 6.7 million barrels per day. New wells therefore had to replace 4.3 million barrels per day—approximately 39% of the starting production rate—before contributing to growth. This was the decline from the existing wells, not a 39% fall in total production. EIA: production declines from existing wells.

Keeping the bucket full requires continuing investment. The commercial question is whether the contents being sold generate enough money to pay for that effort.

The Permian demonstrates how consequential this question has become. In 2025, the region supplied approximately 48% of U.S. crude oil production, averaging 6.6 million barrels per day. Its production increased by 280,000 barrels per day, accounting for most of the country’s annual growth. That increase was achieved after replacing the region’s declining production. The net addition alone does not reveal the scale or cost of the replacement work beneath it. EIA: U.S. oil production in 2025

Natural gas presents an equally substantial replacement requirement. Existing Lower 48 wells lost 27 Bcf per day of production between December 2023 and December 2024. For perspective, Canada’s entire natural gas production averaged approximately 18.3 Bcf per day in 2024. The decline being replaced in the Lower 48 exceeded the output of Canada’s whole gas industry. EIA: existing-well declines; Canada Energy Regulator

By December 2024, total Lower 48 gas production reached 116.5 Bcf per day. Using our approximate conversion of six thousand cubic feet per barrel of oil equivalent, that represents roughly 19.4 million barrels per day of oil-equivalent energy. Its importance to the economy deserves to be matched by commercial discipline over its production.

Our concern is that the financial bucket leaks as well. When production does not recover its full commercial costs, reserves are consumed while capital remains outstanding. Subsequent production must carry that unrecovered burden alongside the cost of further investment. Reported earnings do not, by themselves, establish that the money has been recovered within a competitive period.

I have been discussing this problem since the 1990s. Too often, the response still amounts to the same sequence of expectations: investors invest, producers spend, production increases, and the industry waits for better prices. Rinse, repeat. “We’re just waiting for the investors to return.”

The paper challenges that sequence and presents Synallagi as an organizational response. Its breakeven calculations identify the actual operating costs, overhead and competitive capital recovery required by each well, property and Joint Operating Committee interest. Its price maker strategy uses that information alongside the market price to support each producer’s independent decision about whether production is profitable.

Accounting supplies engineers and geologists with another essential tool: a clear account of the financial consequences of their decisions. That information can help them identify anomalies, improve performance, preserve reserves and demonstrate the commercial value of their innovations.

North America’s energy independence must include the ability to finance its continued production. That requires profitable operations, a capable service industry and the repeated recovery and reinvestment of capital. Waiting for a more favourable price cannot substitute for establishing those conditions.

I have written A Perception of Financial Status to make the problem explicit and present a proposed way forward. The objective is an industry capable of earning the resources needed to sustain its technical achievements and meet society’s requirements. The responsibility to begin that work rests with the leadership making today’s decisions.

A Day Off!

The numbers are getting a little slim, so I’m learning to cherish these birthdays. I’m taking my 68th off.

Back in May 1991, at 32, I never imagined I’d still be doing this at 68, or that the work would mean decades of living in such poverty. Yet here I am, and I'm more than willing to accept that I am wrong but I just can't reconcile that with the fact their investors have been similarly ignored for eleven years. 

So yes, take the chance if you see an opportunity to bring value to oil and gas. Producers record stands and I hope the officers and directors are appropriately shamed.

The Digital Revolution Will Not Wait for Oil & Gas

 Officers and directors of North American producer firms may soon find the pressure to act becoming impossible to ignore. For years, I have argued that the industry’s financial performance has been inadequate. Now a larger question is emerging: can the industry finance and deliver the energy the continent will need?

The expectations are growing. So is the distance between those expectations and an industry culture that remains committed to muddling through.

Some of the most candid criticism is coming from Canada, where distance to market, transportation costs and heavy-oil quality differentials can compound producers’ financial challenges. These circumstances demand a stronger commercial response. Instead, the familiar explanation persists: government prevents the industry from accomplishing what it otherwise would.

The government has plenty to answer for. So do officers and directors.

“We’re Not Running Fast Enough”

In a recent interview, Enbridge CEO Greg Ebel warned that Canada must move faster to compete for investment. His assessment was blunt: “we better run faster, and we’re not running fast enough.” He pointed to the relative attractiveness of American investment opportunities and the need for Canadian policies that support development. Enbridge interview.

His criticism is directed principally at the government. I hear a message for producers as well.

The United States has its own regulatory conflicts, infrastructure constraints and political obstacles. Those difficulties have hardly disappeared. Yet Ebel’s comparison exposes the commercial question Canada keeps avoiding: what must change here to make investment worthwhile?

People, Ideas & Objects has consistently argued that North American oil & gas needs to establish profitability throughout its production profile. The capacity to produce another barrel or another unit of natural gas tells us very little about whether producing it creates value, recovers the capital consumed and finances the industry’s future.

That distinction becomes decisive when the discussion turns to the Digital Revolution.

Governments, utilities and think tanks are beginning to describe the energy system they believe the future requires. Producers should be leading the commercial response. Too often, they appear to be waiting for someone else to remove every obstacle before they reconsider how their own businesses operate.

Enbridge has the scale and geographic reach to pursue opportunities elsewhere. Canadian producers should consider what happens when the capital and infrastructure they need follow those opportunities.

If the message still fails to register, no one should be surprised. At times, the Canadian industry appears almost comatose.

Before Declaring a Market Failure

The argument has become more pointed in Alberta, where a leaked cabinet report reportedly described TC Energy’s plans for its NOVA Gas Transmission Ltd. system as “misaligned” with anticipated demand. It also alleged a “market failure” that left important growth regions unable to access natural gas. The concerns included potential demand from AI data centres, oil sands projects and other industrial development. CBC report

I find the assignment of responsibility incomplete.

A regulated pipeline business needs a commercial foundation for expansion. Producers and customers must translate their expectations into credible requirements and commitments. The pipeline operator must develop projects, secure approvals and arrange financing. Someone ultimately has to support the cost of the capacity being requested.

A government forecast of future demand does not, by itself, accomplish any of that.

Nor would it be accurate to suggest the NGTL system has stood still. TC Energy reports approximately $15 billion of investment in the system over the past decade and continues to advance expansion projects. The dispute concerns whether the location, timing and scale of planned capacity will meet emerging needs. TC Energy’s NGTL system overview

That is a more useful starting point. Which projects need service? When do they need it? What commitments have been offered? Where does the process break down, and who is responsible for resolving it?

Those questions place producers, industrial customers, pipeline operators and governments within the same commercial discussion. Simply identifying the pipeline company as the failure risks allowing everyone else to escape scrutiny.

If Alberta expects an extraordinary expansion of energy demand, it needs an equally serious account of how that demand becomes financeable infrastructure and profitable production.

Who Is Paying?

On September 2, I responded on X to the Fraser Institute’s Strategies to Secure Canadian Energy Sovereignty. The paper advocates export diversification, additional infrastructure and changes to the policies affecting energy investment. Its authors emphasize creating conditions that attract capital. The authors’ summary

My frustration concerns the industry’s habit of treating another government strategy as the answer to its own commercial failures.

Are we back to five-year economic plans? The Soviet echoes become difficult to ignore whenever executives spend decades explaining why the government prevents them from acting, then expect the government to organize their future.

Investors’ demands for profitability and accountability should never have been difficult to understand. In my view, their retreat beginning in 2015 delivered a verdict that the industry has still failed to absorb.

Losing investor confidence is like having your engine seize on the way to your vacation. You can keep gripping the steering wheel, but you are going nowhere. Eleven years later, too many officers and directors still appear to be sitting behind that wheel, pretending to hurtle down the highway.

Now the government is supposed to draw up a strategy and make everything happen?

With whose capital? Whose resources? Supported by what underlying profitability?

Private capital can finance substantial development when investors can see credible returns. That is precisely why the industry’s ability to earn those returns matters. If producers cannot explain how their ambitions will generate value, transferring the discussion to Ottawa does nothing to resolve the underlying failure.

Call this self-serving gibberish if you like. Before celebrating another strategy, answer the question industry and government keep stepping around:

Who is paying for all this, and what profitable activity will sustain the investment?

That was the substance of my September 2 post. The question remains.

Energy and the Digital Revolution

Two developments offer a more constructive view of what could come next.

The first is Professor Philip Zelikow’s Hoover Institution presentation, American Energy: The Key to Success in the Digital Revolution. In less than six minutes, he connects the foundations of American industrial success with the requirements of the emerging digital economy. Watch the presentation

His historical argument brings together resource abundance, engineering talent, workforce education and an enabling political environment. Those capabilities allowed the United States to turn its natural endowment into industrial strength.

He then identifies three essential dimensions of the Digital Revolution: hardware, software and energy.

That third dimension should command the attention of everyone in oil & gas. Chips and software require a physical system capable of supplying the energy that makes them useful. Resource abundance creates an opportunity to build that system. Realizing the opportunity requires investment, infrastructure, technical capability and execution.

I recommend watching the presentation and following the Hoover Institution’s George P. Shultz Energy Policy Working Group.

My conclusion is straightforward. Energy will help determine which economies can realize the benefits of the Digital Revolution. Oil & gas producers have an opportunity to make a substantial contribution. They also have an obligation to demonstrate that they can sustain it commercially.

When governments and think tanks are articulating the opportunity, while governments and pipeline companies argue over the capacity to serve it, producer leadership should be unmistakable.

Where is it?

Brick by Brick and Stick by Stick

Consider Alberta and California as two different expressions of economic opportunity. Alberta possesses an extraordinary energy resource base. California has built a concentration of information technology businesses and expertise closely associated with the development of Artificial Intelligence.

Both illustrate the importance of turning resources, knowledge and investment into productive activity.

For Alberta, the relevant question is how effectively its resource wealth becomes enduring economic value. Calling energy an economic engine is easy. Keeping that engine productive, profitable and capable of financing its next stage of development requires considerably more.

I have argued for rebuilding this industry “brick by brick and stick by stick.” The emerging demands make that proposition increasingly difficult to dismiss.

The “muddle through” culture consumes attention, capital and time merely maintaining itself. Attempting to build the capabilities required for the Digital Revolution within that culture could absorb the very resources needed to move forward.

People, Ideas & Objects Synallagi, our user community and their service providers offer the basis for a different approach: reserves preservation, performance and profitability.

That means developing the information and operating capabilities through which producers can understand the economics of their properties, recover their capital and make independent decisions about when production creates value. It means treating profitability as the commercial foundation of reliable supply.

An industry expected to support a major expansion of economic activity must be capable of financing its own continuing contribution.

The Value Still in the Ground

The second constructive development concerns investment.

On April 7, 2025, I published Oil & Gas Arbitrage: The Market Finds a Way. The argument examined the opportunity to acquire oil & gas assets during periods of weak commodity prices and preserve exposure to their longer-term value. Read the paper

There are two related sources of potential gain.

First, higher realized prices can increase the expected future net cash flows from an existing reserve base. Because costs do not necessarily rise in proportion to revenue, the effect on value can be substantial. Its magnitude depends on the asset’s costs, production profile, development requirements, fiscal terms and the duration of the price improvement. The upside can be substantial: under the right cost and valuation assumptions, even a 10% increase in commodity prices could double an investment’s value.

Second, a stronger price outlook can make additional volumes economic to recover. Under the applicable technical and commercial criteria, that can support an increase in estimated reserves.

The geology has not changed. The economic boundary of what can be developed has.

Natural gas that cannot justify development at one price may become commercially attractive at a substantially higher price. The investor can therefore benefit from both improved economics on existing reserves and the potential development of additional resources.

Those additional volumes still require capital and execution. Their value depends on the producer’s ability to develop and operate them profitably. Reserves estimates, economic valuations and the accounting carrying value of an asset are also distinct measures.

This is why preserving the resource and improving the business that manages it belong in the same investment argument.

On September 14, Carlyle-backed Avenrock Energy announced an agreement to acquire Parallax Energy, establishing a new Western Canadian light-oil platform focused on Alberta’s East Shale Duvernay. The transaction remains subject to customary closing conditions and regulatory approvals. Carlyle’s announcement identifies long-duration resources and improving market access among the region’s attractions. Carlyle announcement

I see that investment as consistent with the broader opportunity described in my paper. Carlyle’s own rationale stands on its announcement.

Acquiring the assets establishes the opportunity. Operating them profitably determines how much of that opportunity becomes lasting value.

The Digital Revolution is raising the stakes. The resource exists. Capital is making choices. Officers and directors need to decide whether they will continue defending the culture that brought us here or begin building the capabilities the future requires.

Now is the time to start the development of Synallagi.

Consider This... AI is the Killer App of IP

A technical glitch (user based) left this in Monday's spot for publication, as draft. It is the last post of this series and is not out of sequence by publishing it today.

 Artificial Intelligence: Intellectual Property as the Killer App

George Sivulka, CEO of Hebbia, made an important distinction in this presentation:

• Individual Artificial Intelligence breeds chaos.
• Institutional Artificial Intelligence fosters coordination.

Isolated AI produces answers or actions, while institutional AI produces governed orchestration. Consider the number of AI Agents that may soon be operating within a producer firm. What types of Agents will they be? Who will authorize them? What information will they be permitted to access? What will they be expected to produce, and who will be accountable for the consequences?

AI Agents deployed independently throughout an organization represent the individual Artificial Intelligence Sivulka described. Each Agent may appear useful in isolation, yet collectively they can circumvent established processes, duplicate existing capabilities, produce conflicting information, and introduce considerably more risk than value.

The resulting questions are not theoretical.

• Was an AI Agent granted the database access it required, or was its usefulness limited by incomplete access? Did it obtain information beyond what was authorized? Is its output accurate, complete, and relevant? Can the result be recreated consistently? Is there an authoritative source against which it can be validated?
• What happens when an existing system presents more comprehensive and trustworthy information? Which result is correct? Which is reliable? If the two presentations are inconsistent, can either one be trusted?
• That is not coordination. It is managed chaos—assuming it is managed at all.

From Individual AI to Institutional AI

Institutional Artificial Intelligence does not mean merely providing every employee with access to the same AI platform. It means placing Artificial Intelligence within a defined operating environment governed by established authority, business processes, information structures, security, accountability, and Intellectual Property.

Before an AI Agent is permitted to act, the institution must be able to answer:

Who authorized the Agent?

What business purpose is it authorized to serve?

Which information may it access?

What transactions or processes may it initiate?

Which decisions may it support, recommend, or make?

How will its actions and sources be recorded?

Can its output be reproduced and independently verified?

Who reviews exceptions, errors, conflicts, and unintended consequences?

Who remains accountable for the result?

Without these answers, an AI Agent is not an institutional capability. It is an individual experiment operating inside a commercial organization.

That distinction becomes particularly important when Artificial Intelligence is introduced into accounting, administration, operations, and Joint Operating Committee activities. Will an AI Agent’s output be accepted for regulatory purposes? Will other members of the Joint Operating Committee rely upon it? Can its calculations be proven? If proving the result requires someone to reconstruct the entire analysis manually, what efficiency has the Agent actually created?

If the output is not sufficiently reliable for regulatory, contractual, accounting, or operational purposes, is it limited to supporting decisions? If so, what kinds of decisions? Surely consequential strategic or operational decisions cannot be based upon information whose authority, completeness, and reproducibility remain uncertain.

Artificial Intelligence is too valuable to be deployed without these determinations.

Artificial Intelligence Is Not a Substitute for Information Architecture

AI Agents, Palantir, Databricks, and similar technologies are increasingly treated as essential items that corporations must be able to mention to investors. Technology history contains no shortage of products and movements adopted as evidence that an organization was operating at the frontier—only to be replaced or forgotten shortly afterward.

Artificial Intelligence should not become another corporate fashion.

Its greatest value is not in gathering poorly organized data from incompatible systems and presenting management with a collection of possible answers. Search engines have been locating, aggregating, and organizing vast quantities of information for decades. Artificial Intelligence can do considerably more, but only when the underlying information and business architecture permit it.

The more important question is why existing oil & gas systems cannot prepare the required financial and operational information today.

Has the data been captured in its primary form? Is it properly normalized and organized within an appropriate database? Has the industry become dependent upon aggregated information because the original operational detail was never retained? Have management and operational accounting fallen behind financial reporting because the systems lack the information necessary to support them?

There is no technical reason for this condition to continue.

Field data capture, Internet of Things devices, automated processes, and transaction-level information can provide more complete, accurate, and timely financial and operational data. Artificial Intelligence can then operate upon that foundation. It should not be expected to compensate for the absence of one.

AI applied to poorly structured information may produce an answer faster. It does not necessarily produce the correct answer.

Artificial Intelligence Within a Transaction-Focused ERP

Synallagi (The Greek word for Transaction.) is a transaction-focused Enterprise Resource Planning system. Artificial Intelligence introduced into this environment can provide substantial benefits, including improved analysis, automation, exception management, planning, coordination, and Autonomous Asynchronous Transaction Orchestration.

It also creates consequential risks.

A producer’s responsibility does not disappear merely because an Artificial Intelligence system initiated a transaction, issued a request, prepared a purchase order, generated a Work Order, or performed another automated or autonomous action. The organization must continue to govern the authority, purpose, limits, and consequences of every action undertaken through its systems.

This creates a distinct challenge for future Enterprise Resource Planning systems. Artificial Intelligence must be capable of operating with greater autonomy while remaining subject to defined commercial authority, business rules, security, verification, and accountability.

If Synallagi appears complex, it is because these complexities already exist within the oil & gas business. Synallagi addresses them directly through software and through the specialized service provider organizations established by our user community. That software and those services are People, Ideas & Objects’ response to the operational difficulty of the industry and the technological capabilities society now demands.

Ignoring these risks would be foolish. Preventing Artificial Intelligence from creating value because the risks were never addressed would be equally so.

Intellectual Property as the Institutional Framework

Artificial Intelligence requires more than data and computing capacity. It requires defined knowledge, authority, processes, relationships, limitations, and expected outcomes.

That is the role of Intellectual Property.

Intellectual Property provides the guidelines, guardrails, frameworks, security, and operating definitions governing who may do what, where, when, why, and how. It establishes what an AI-enabled process is intended to accomplish, what it is prohibited from doing, and the conditions under which its output may be accepted.

Licensing our user community and their service provider organizations ensures that the Artificial Intelligence they deploy through Synallagi performs the functionality expected and authorized within their licensed areas. The applicable Intellectual Property defines the process management embedded in the software and the authority under which that process operates.

There is no more and no less.

Within Synallagi, Intellectual Property and Artificial Intelligence have a bidirectional operational relationship:

Intellectual Property provides the business models, process definitions, knowledge, authority, and constraints upon which Artificial Intelligence operates.

Artificial Intelligence applies, extends, and operationalizes that Intellectual Property through analysis, automation, coordination, and autonomous activity.

Intellectual Property is therefore both the fuel and the guardrails for Artificial Intelligence.

This is how individual Artificial Intelligence becomes institutional Artificial Intelligence.

Artificial Intelligence combined with Intellectual Property makes Orchestration both possible and operational.

Intellectual Property Organizes People

Intellectual Property is not merely a technology asset. It is a means of organizing people around defined knowledge, rights, responsibilities, and commercial purposes.

Copyright protection reflects a principle embedded in the United States Constitution: progress is encouraged when people have recognized rights in the works and ideas they create. Those rights allow knowledge to be developed, protected, licensed, commercialized, and distributed through durable organizational structures.

Intellectual Property will retain its value for as long as people continue to have bad ideas, good ideas, ridiculous ideas, brilliant ideas, and ideas whose value becomes apparent only after years of work.

Artificial Intelligence does not diminish the importance of those ideas. It increases the speed and scale at which they can be tested, refined, implemented, and distributed.

Much of the increase in the Western world’s standard of living can be attributed to specialization and the division of labor described by Adam Smith. Successive generations have found better ways to provide products and services faster, at higher quality, and at lower cost. Steam engines, internal-combustion engines, moving assembly lines, automation, software, and now Artificial Intelligence have extended that process.

The enduring source of progress, however, is not the tool alone. It is the organization of people and knowledge around productive purposes.

One of corporate America’s less-discussed weaknesses is its tendency to accumulate knowledge within organizational silos until that knowledge becomes inaccessible, commercially unusable, or obsolete. Artificial Intelligence, software, and new organizational models make those silos increasingly vulnerable.

Engineers and geologists no longer require the institutional scale of established producers to develop sophisticated operating capabilities. New producers can be formed around specialized knowledge, clearly defined Intellectual Property, software, Artificial Intelligence, and algorithms. With the appropriate commercial and organizational structure, these scientists can outperform larger competitors burdened by outdated ideas, systems and methods.

The reset is already underway—from organizations that hoard knowledge to individuals and communities capable of converting knowledge into operating capability.

Synallagi as an Institutional Environment

People, Ideas & Objects established Intellectual Property as one of Synallagi three principal competitive advantages. Our user community and our research are the other two.

Over the past several decades, Intellectual Property has enabled us to establish a distinct position within the Enterprise Resource Planning industry. It provides North American oil & gas with a structure, business model, plan, vision, method of addressing its persistent difficulties, and competitive framework of enduring value.

The details of what works and what does not will be determined by our user community during development. The broader institutional environment, however, is already defined through Synallagi’s nine Organizational Constructs, the seven frameworks of the Joint Operating Committee, its eleven modules, Oracle Cloud ERP, and the body of Intellectual Property governing their relationships.

Together, these components establish a shared direction.

When someone within the oil & gas industry asks how a particular activity should be undertaken, that person should be able to understand intuitively where the work belongs, which authority governs it, what information it requires, and how the need should be communicated to others operating within the same environment.

That common understanding is institutional coordination.

The Killer App

In the early 1980s, people purchased personal computers without knowing what practical purpose they would serve. Asked what they intended to do with them, many offered the same answer: store recipes.

Businesses were equally uncertain. A departmental personal computer might be shared among ten people and then carefully dusted each evening while providing little material value.

Lotus 1-2-3 changed that. The spreadsheet gave the personal computer an immediate, compelling commercial purpose. Word processing followed, and the expensive electronic recipe holder became an indispensable business tool. The term “killer app” came to describe the application that made the underlying technology essential.

Artificial Intelligence is now searching for its killer app.

Within Synallagi, that killer app is Intellectual Property licensing to our user community and their service provider organizations.

Our Intellectual Property licensing architecture gives Artificial Intelligence a defined commercial purpose. It determines what knowledge may be used, which processes may be performed, who may authorize them, what limitations apply, how responsibility is allocated, and where the resulting value belongs.

These mechanisms constrain risky or unbounded behaviour while enabling the desired degree of analysis, controlled automation, and Autonomous Asynchronous Transaction Orchestration.

Artificial Intelligence is a powerful new animal with multiple personalities. It can produce extraordinary value when applied appropriately and for authorized purposes. It can enter areas of consequential impact without sufficient forethought. It can also be used in ways that are plainly inappropriate.

Society has never before placed tools this powerful, affordable, and broadly available into the hands of so many people.

The difference between chaos and coordination will not be Artificial Intelligence itself. It will be the Intellectual Property, authority, architecture, and institutional discipline within which Artificial Intelligence is permitted to operate.

Artificial Intelligence + Intellectual Property, Makes Orchestration Possible and Operational. 

1. Constraining Abilities and Behaviors

Intellectual Property considerations impose hard and soft limits:

Access controls, segregation of duties, and sensitivity tiers: Synallagi permission models treat valuable IP as protected assets. AI inherits the same constraints as our user community and service providers; AI cannot elevate privileges or combine roles in ways that would violate IP-protection or embedded compliance policies dictate.

These constraints keep AI from becoming an unbounded actor operating in unknown and unconstrained ways within producers, Joint Operating Committees or other organizations Synallagi may be operational.

2. Harnessing Behaviors Through Intellectual Property-Grounded Guidance

Orchestration aligned to IP domains: Synallagi operates within scoped knowledge and tool access that mirrors the IP and Joint Operating Committees are organized. Orchestration enforces high-level business intent while remaining inside their IP-defined boundaries.

3. Enabling Controlled Automation and Desired Asynchronous Autonomy

The same Intellectual Property-centric controls that constrain the system also create safe operating envelopes for autonomy:

Risk-tiered human-in-the-loop: Routine, low-risk tasks can run fully autonomously. High-stakes actions involving large commitments, decisions, allocations or data sharing will trigger configurable thresholds that route to human approval or dual-control. Any proposed write or external action is checked against IP-protection policies, monetary limits, categorical rules, and anomaly detectors before execution.

Auditability and reversibility: Full logging of AI decisions, data accessed, and actions taken supports both operational control and later IP enforcement (e.g., proving independent development or detecting leakage).

Intellectual Property supplies both the distinctive knowledge that makes the AI valuable inside Synallagi and the legal and technical boundaries that keep it focused and accountable. The result is automation and autonomous behavior that is powerful enough to deliver the “killer-app” productivity gains while remaining inside the enterprise’s desired control surface. Without these IP-defined definitions and constraints, Artificial Intelligence becomes less useful and unacceptably risky.

Intellectual Property gives Artificial Intelligence something authoritative to know. Artificial Intelligence gives Intellectual Property the capacity to reason. Orchestration gives both the ability to act.

Conclusion

The next generation of Enterprise Resource Planning systems is being built today. North American oil & gas will participate in this environment in one form or another. The question is whether the people who will develop, operate, and depend upon these systems will build what they need for themselves—or accept whatever the status quo chooses to provide.

The choice is between an institutional system such as Synallagi and an alternative best compared to the Department of Motor Vehicles: centralized, procedural, slow to change, and more committed to preserving its processes than improving the results of those required to use them.

Persistence may be the one attribute current producers have working in their favour. They will continue to “muddle through.” How they will do so is increasingly difficult to understand. The commercial world has changed direction, while the industry’s unresolved problems become more restrictive, expensive, and crippling each day. As producer risks increase, the responsibilities, rewards, and opportunities available to individuals diminish, while the explanations offered by officers and directors become more elaborate.

Persistence is not a strategy.

If a 1920s vision of organizational efficiency is considered adequate for the 2020s and beyond, then “muddle through” remains the appropriate choice. Synallagi offers a different vision: markets and producers organized through the Joint Operating Committee, supported by our user community, specialized service provider organizations and an Enterprise Resource Planning architecture capable of adapting continuously to changing commercial conditions.

For individuals deciding where to invest their careers, knowledge, and future, the contrast could not be more stark.

Artificial Intelligence will intensify that choice. It is a remarkable technology whose eventual consequences may exceed anything we presently anticipate. Will it produce changes comparable to another Industrial Revolution? Almost certainly.

Its low cost, accessibility, and ease of use will place extraordinary capabilities in the hands of individuals and institutions alike. That prospect conflicts directly with organizations satisfied with a century-old operating model. Those organizations nevertheless retain one considerable advantage: they control most of the industry’s institutional and financial resources today.

They have also observed what happened to industries that were disintermediated, reorganized, or as we describe them, “refactored their organizational charts” before them. They have learned how to defend their authority and preserve their position. We should expect them to use the resources they control to do so.

The means through which individuals maintain their independence—from both DMV-style institutions and Artificial Intelligence controlled by others—is Intellectual Property. More precisely, it is enforceable access to Intellectual Property, clearly defined licensed authority, and the ability to convert knowledge into operating software and commercial capability.

Our user community can define what it knows to be accurate, embody that knowledge in Synallagi, and apply the resulting capabilities throughout the industry. Its members can then combine Synallagi’s explicit knowledge with the tacit knowledge accumulated within their service provider organizations, benefiting both producers and themselves.

That is the Synallagi vision: unified Intellectual Property ownership supporting distributed authority, innovation, specialization, and commercial independence.

It is a compelling alternative to the DMV model. It is also a choice each individual must make. For my part, I am grateful that I made that decision long ago.

This installment of the Consider This… series of papers has described Artificial Intelligence as the killer application of Intellectual Property. Possessing Intellectual Property has always been valuable, but the practical question remained: what are you going to do with it?

For years, Synallagi was stored in a database originally used for recipes. The Intellectual Property existed, but its ability to act remained limited. Artificial Intelligence changes that. It can interpret, apply, extend, and operationalize Intellectual Property at a speed and scale that were previously impossible.

The relationship is reciprocal. Artificial Intelligence makes Intellectual Property dynamic; Intellectual Property gives Artificial Intelligence its form, structure, purpose, authority, and limitations.

Without that structure, organizations may attempt to manage their risk by restricting the number of AI Agents they deploy and containing the fallout when those Agents produce conflicting information or exceed their authority. That is not an institutional solution. It is merely limiting the amount of chaos.

Within an oil & gas Enterprise Resource Planning environment, Artificial Intelligence must operate through defined business processes, authorized information access, verifiable results, accountable transactions, and enforceable Guardrails. Intellectual Property provides those conditions. It turns Artificial Intelligence from a powerful but unbounded tool into a reliable institutional capability suitable for financial, administrative, and operational use.

People, Ideas & Objects’ Synallagi—together with Autonomous Asynchronous Transaction Orchestration, our user community, and their service provider organizations—provides that institutional solution for North American oil & gas producers.

Synallagi is wrapped within an Intellectual Property framework that enables producers to meet emerging challenges, realize new opportunities, and eliminate persistent, systemic, and financially damaging problems. It aligns technology, knowledge, authority, motivation, and accountability within a coherent commercial architecture.

The result is what we describe as "A New Discipline" for oil & gas.

It is founded upon a revised culture of reserves preservation, performance, and profitability. It enables producers to increase their speed, capabilities, capacity, success, and achievements as the marketplace changes. Most importantly, it reduces Organizational Latency—the time between recognizing an opportunity, determining what must be done, developing the required capability, and achieving a successful result—to a fraction of what it is today.

The future is being built now. The only remaining question is who will build it—and for whose benefit. People, Ideas & Objects, our user community and their service provider organizations have the Intellectual Property in the form of Synallagi with Autonomous Asynchronous Transaction Orchestration. Intellectual Property gives Artificial Intelligence something authoritative to know. Artificial Intelligence gives Intellectual Property the capacity to reason. Orchestration gives both the ability to act. 

Artificial Intelligence Is the “Killer App” of Intellectual Property—Making Orchestration Both Possible and Operational.