Let's Revisit "Recycle Costs"

Competition is healthy. Everyone strives to do better every day and that is how we progress to earn the standard of living that we have come to enjoy. I suggested yesterday that current producers are claiming that they can produce at $48, whereas People, Ideas & Objects Preliminary Specification could only achieve the $100 estimate that I calculated. I’m not offering a very competitive alternative, no wonder the bureaucrats don’t appreciate me. I seem to be traveling backwards when I should be moving forwards. How can this disparity occur? Lets for the purposes of selling my point of view revisit what “recycle costs” are.

I have yet to see a CFO of a producer quote these numbers that you hear producers are able to achieve in terms of their costs and profitability. They know precisely the layout of the local prison cells and the number of inmates per cell. I’ve never heard or seen a CFO quote those numbers, and with those prison floor plans I am certain we will never see or hear them state these absurdities. When I do here or see one of them you’ll be sure to hear it here first. The people that are pushing those numbers out are unaccountable useful idiots that the producer might set out on the street. Or, as in most cases, the press is only parroting what these people have told them. No one in the industry believes these numbers. They are fudge.

How is it that an industry that receives over $100 per barrel and is barely profitable suddenly reduce their costs below $50. It’s a miracle! I’ve heard that it’s due to the innovations that have been instituted by the producers since the decline in oil and gas prices. Since the western world uses historical accounting how do you innovate the costs of a well that was barely profitable at $100 down to profitability at $50. I worked in oil and gas accounting from 1977 to 1985. I worked in oil and gas auditing from 1986 to 1994 and I have seven accounting courses, but I don’t know how to do that. And I’ve never been in prison either.

So the question comes down to what are “recycle costs” the industry term for what it currently costs to produce. Simply it is the cost of production that would be necessary to produce a profit at an oil price of x. If x = $50 the cost of production must be below $50 so the recycle cost would need to be $48. Done, how else could you justify full production that eliminates your entire capital base? After they get these numbers out on the street the investments will flow back into the firms on that false belief. The bankers love it that you’ll be profitable down the road as well. When the time comes to answer the bankers and investors questions it will be “oh, this operation did this, and that operation did that, missing our targets, but our costs next quarter will be $44.”

If you haven’t caught on yet, I’m accusing the industry of wholesale fraud. But remember you never heard an officer of anyone of those companies ever state what the oil or gas price they are profitable at. It’s all heresay, the press believes it, the investors believe it and the toilet stuffed with cash flushes again.

It goes back to the desire to never account for the “sunk costs” in the industry. Why when you can continually get away with fraud. This has gone for so long it’s the culture of the industry. People are taught and trained to do this. If you don’t play along you’ll be ousted like that blogger at People, Ideas & Objects. Persona non grata, but I’ve never felt I had anything to lose except my integrity. Yesterday I calculated the costs and committments that the current producers incur to produce is at $200 and they say they can produce a profit at $48, someone is selling an agenda.

An industry that has had their capital base wiped out is not normal, but highly abnormal. That states unequivocally that they never made any money during the entire life of the organization. They’ve destroyed any money they were given. That includes the time when prices were over $100. I would suggest that there is something seriously wrong in that industry. In the case regarding the oil and gas industry it is run by a group of self interested bureaucrats who have a good thing going for themselves and could care less about anything else. When an industry has proven that it’s incapable of ever making any money it’s time to start sweeping out the old. It is corrupt, not functioning and unable to be rehabilitated. Or maybe they did get their costs down to $48, their debts paid and returned the money back to all their shareholders. And this was just a dream, and J.R. didn’t get shot.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

The Transition Begins

The oil and gas investor is faced with a choice. And by investor I mean those that participate in building producer firms, not those that trade shares on a market. They can invest in the existing producers and continue on with the status quo operations. Or begin fresh and new with an industry remake based on the People, Ideas & Objects Preliminary Specification. Today we will analyze these two alternatives to determine which choice is in the best interests of the investor, and quite frankly everyone. At the same time we will see what position the bankers will take with respect to any changes that the investors make.

We know that the bureaucrats can’t, won’t and will not ever change. This was best displayed in their narrative last week regarding Opec’s meeting being a failure. The narrative was that Opec had lost credibility, or relevance due to their inability to agree on a production ceiling. I think 30 million barrels a day is still relevant. A production ceiling was discussed briefly but was never really on the agenda, it was on the North American producers wish list. Opec producers are making money. They said they see the “market rebalancing” and therefore did not see the need for action. Throwing the “market rebalancing” narrative of the North American producers back at them. The issue in oil and gas lies with the North American producers financial situation.

Lets look at that situation from People, Ideas & Objects point of view. I have stated that these are the times where producers actions will be looked upon as critical to their future. What are they doing in these next six months. That will determine what their future will look like. If it’s more of the same, then they will prove that they are incapable of understanding the issues they are faced with. If they are able to make some decisions that address the issues and opportunities in the industry then they may find that the investor class will have a different attitude towards them in the coming months. What we might learn today is that it doesn’t matter what a producer does, they’re stuck. And it appears that I have been wrong about the point regarding their actions in the next six months.

It has been the past culture of the bureaucrats not to concern themselves with “sunk costs” in accounting for their performance, or calculating the margin on a barrel of oil. And there has never been any accountability by the producers on this point. Investors have accepted the claims of the bureaucrats, that they were profitable. This alleged profitability lead to overinvestment which subsequently lead to overproduction creating systemic, catastrophic losses across the industry. The question today is, will they now include the costs of those losses that have been incurred in the past two years in oil, and the costs of the losses in natural gas over the past six years? Or are these just the past “sunk costs” once again and they don’t need to discuss or consider them. Or, should these costs be included in what is required to produce profitably in the future? For lack of a better word let's call these losses legacy costs.

The history of the oil and gas industry is that most of the producers have not made any money during their entire existence. That is a fair statement when your retained earnings are extinguished and your capital structure is exhausted by losses. Which is the current status of a number of producers including senior intermediates. Maybe I’m not up to date on investors behavior, and am unaware that they don’t read financial statements anymore and only listen to the narrative that is pushed out by bureaucrats. Or maybe the investors do look at the financial statements and wonder how it is the producer will produce oil and gas in the future with these legacy costs constraining their every move?

Therefore let's look at the various scenarios that an investor has to contemplate. Company A has been in business for 10 years, has a production profile of 100,000 boe / day and is losing money. They have lost all of the money that they may have reported as profits during those 10 years and a good portion of the money that was invested in them. They are heavily indebted to the banks who are expressing patience at the moment. You're being asked to invest an amount at very favourable terms in comparison to their valuation of a few years ago. The money will be used to pay down debt and maintain the production profile for the next two years. Management state they can produce at $48 / bbl.

Or, the investor can take the same capital and set up their own new producer firm that will compete in the new oil and gas industry. Use the People, Ideas & Objects Preliminary Specification and the industry configuration that is provided. Which imputes from day one they do not have to develop any administrative or accounting capabilities. Only access what they need from the service providers that provide the administrative and accounting capabilities on an industry wide basis. Purchase production on very favourable terms as the current producers are desperate for cash to give to their banks, and build a new dynamic, innovative, accountable and profitable producer. In this scenario there are no legacy costs. The investor's own 100% of the firm and there is no debt encumbering any of the assets.

The issue comes down to these legacy costs. The current producers would like the world to continue to ignore them as they feel they are irrelevant. However, in reality they are an albatross that each of the existing producers carry around their necks and will need to be addressed before they can approach the capital markets or suggest that they are profitable. These legacy costs exist in the form of the handsome levels of debt that the firm carries. And the legacy costs exist in the large number of shares outstanding. Providing a new investor little in terms of a percentage of the highly constrained operation. Their entire existence as a producer organization has been a failure, which most certainly will terminate once they get the investors money. The fact of the matter is the bank has encumbered all of the assets, or will soon, and will not allow the management to do as it pleases. Why would an investor volunteer their resources to these producers further destruction. They are guaranteed to lose! The industry as it stands today can never compete again with these legacy costs on the balance sheet. You can argue that the bank can’t take all of the producers over, which from where I sit is a very sound strategy. Because after all it was only about getting the bureaucrats paid.

So this is my advice for the oil and gas investor. When a producer says they can produce for $48 / barrel. Add $100 for legacy costs. That way you’ll have a better understanding of the kind of prices you’ll need to earn a profit from that producer and ever hope to see a return. It also helps to clear away a lot of the bureaucratic bullshit. And makes that other scenario, starting over with People, Ideas & Objects, a lot more interesting.

At some point the management will learn that the superhuman effort to turn the organization around is not that much fun. Any promises regarding your investment will just walk out the door. The point of this post is that you can ignore your fixed assets and overhead costs in the determination of your performance for apparently four decades or more. But one day, you will have to account for them. In summary, when we include the cost of capital and overhead I would estimate that it costs approximately $100 to produce a barrel of oil. That would be the cost of production for the producer under the People, Ideas & Objects scenario. One that is focused on providing the producer with the most profitable means of oil and gas operations with the strategy and capabilities to achieve that. The cost to produce from the existing producer would therefore be $200 when we include the legacy costs that they have conveniently ignored during the good times. I don’t know, I’m kind of on the fence in terms of my decision. How about you?

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

We're All Virtual Now

I find it fascinating watching people who work in the physical world. How things don’t turn out as they’re expected, causing something to be reworked, delaying scheduling and turning the budget into a wishlist. As time and money expand with the level of sophistication of the project, the contingencies for real life problems come into play. Living in the physical world kind of makes me chuckle. Some might accuse of me of being delusional or dreaming, I do have my detractors. However, in terms of the People, Ideas & Objects user community the Preliminary Specification and its derivative works exist in the minds of the people who are user community members. When established, the user community will be thinking virtually about their portion of the oil and gas industry. How it operates today and how to make it more efficient and effective for tomorrow. Living a virtual world where the physical constraints that limit most people no longer exist and no longer matter.

As we have stated many times, mostly in our budget, the user community will consist of approximately 3,000 individuals. Who provide their understanding of the industry to our software developers to ensure that the People, Ideas & Objects applications they develop are correct and what they need. It is anticipated that there will be 600 user community members in front of our developers at any time during the development of the Preliminary Specification, and in these next 25 years as a minimum. The user community member is a part time position. It is not their day job and in many cases will not be where they spend their day.

Most of their day will be spent operating the service provider that they’ll own and establish to manage the industries process they’ve specialized in. It is in this area that they’ve provided the know how to the People, Ideas & Objects software developers, developed the software application that they use in the service provider, and will have a continued relationship with the iterative software developments of this process for the next quarter century. Managing the service provider that they own will be their primary source of income and focus. It will be their hands-on understanding of the industries issues regarding that specific process. Determining what is needed to enhance the quality and speed of their offering to their oil and gas producer clients. As the principle in the service provider, our user community member will be able to have constant access to the People, Ideas & Objects software developers to make any changes to the software that they use. It will be their domain, their world that is in many ways a virtual representation of the possibilities and difficulties they face in the industry.

We therefore need to get the Preliminary Specification in the heads of the user community. And that is what we have been doing for the past two and a half years since we published the Preliminary Specification. Developing the user community. It's one thing to state that you are user community based software developments and it's another thing to do it. Many people have been involved in ERP integrations where the user was going to be front and centre to the implementation. Promised that you would get the systems that you want. And then when the project team is selected, the project manager looks at the timeline and budget and the first thing that has to go is the user community involvement. That’s not the case here. One look at our budget and the fact that we will not start developments until the full user community is established should assure you of that. Our user community vision should also go along way to providing you, as a potential user community member, with the seriousness that I take user community based software developments. Everything else is a waste of time and money. Or have we learned that 1,000 times already.

A user community of this size has not been assembled in oil and gas before. And it will not be an easy undertaking. It will however be a permanent undertaking for at least the next 25 years with defined revenue streams for those that do join. You will collectively be taking command and control of the administration and accounting of the oil and gas industry. You will be taking over the work that the bureaucracy does today. Rendering them unemployed. It is important work that’ll exists in a virtual world, unconstrained by the physical. Providing the oil and gas producers with the most profitable means of oil and gas operations. And there is more. You’ve all heard me state that the Joint Operating Committee is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the industry. That by moving the compliance and governance framework of the hierarchy into alignment with the seven frameworks of the Joint Operating Committee. We achieve a speed, innovativeness, accountability and profitability in our producer firms. This speed is attained through this organization of the user community and service providers. They are the dynamic and capable elements of the industry infrastructure, the means in which to accommodate and initiate change as they see the need in their day-to-day interactions with producers and our software developers.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

A Career's Worth of Work

We have clearly identified that the existing producer firms are inadequate to meet the needs of the future energy consumers demands. These hollowed out carcasses that call themselves producers can’t, won’t and will not ever make the changes necessary to deal with their issues. When it comes to addressing the point about the accounting for capital and overhead you know you read it here first, and have only ever read it here. There is no desire to deal with any of the problems facing these producers. Sticking their heads in the sand and hoping that the issues will all go away on their own isn’t going to work. Or “market rebalancing” which we know is the willful destruction of the industry. In addition to of all this destruction we have a difficult job to do in order to meet the demands of the future energy consumers. Freezing in the dark is the extreme of this thinking. However, it is important to remember that the U.S. is the most advanced economy in the world and the largest consumer of oil and gas. Which country will be the first to volunteer to hold their economy back to ration the energy that we do have?

If a group of like minded people were to gather to approach a period of time in an industry with such difficulties. The first thing they would want to do would be to organize themselves to approach this new environment. Make sure everyone was in the right place and all pulling in the same direction. It would seem to me, in this day and age, that might be a good job for software to define and support that organization. That is the job of our user community here at People, Ideas & Objects. To reorganize the industry based on the Information Technologies that identify and support our modern organizations.

We’ve talked about leadership in the past week and the role that it plays in this initiative. I particularly want to point out that we are user community based software developments. We are establishing our user community now and will not commence development of any software until such time as our users are in place. They are the critical element of our softwares quality and ensuring that we’re building the appropriate systems for the oil and gas producers and service providers, and their futures. The Preliminary Specification provides the foundation of our user communities work. It is a vision of how our systems are different. How the producers, industry and service providers will be structured and operated when we use the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer.

The leadership from our user community during the initial developments of the Preliminary Specification will be key in providing our software quality and the foundation of the industry Very important work that will be a necessity for these next 25 years. But there is much more. Our user community is not a one off and done scenario that the industry can then continue on without. What will be critical for the industry in these next 25 years will be the user communities capability to adapt to any situation that it finds itself in. That it deals with the issues and opportunities that are discovered. Without our user community as a defined oil and gas industry capability then all we are doing is sealing the industry under the constraints of the Preliminary Specification for the next 25 years. Certainly a better situation than today, however with the user community continuing their work throughout the remainder of the industries existence then the industry can make the changes that it needs when it needs them.

This is how I see things continuing from here. A future in which the industry becomes adaptive and reactive. Exploiting its opportunities as they appear. Where the needs of the industry are anticipated by our user community, instilled in the software of the producers, service providers and industry. And the industry is changed with little deliberate thought by the producers to make the change. Dynamic is what I would call the characteristic that I would want the industry to become. What are the bureaucrats offering?

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Leadership's Goals and Objectives

Our last number of posts have discussed leadership in the oil and gas industry. Leadership which will be needed to guide it through the difficulties that it’s in. We see in the current administration no initiative to address the problems that are systemic and critical to the survival of the industry. Continuing on as we are is not an option when we consider the next 25 years and the demands that will be placed on us by energy consumers. It will be a progressively more difficult era than at any time in the history of the industry. That is a given. We’ll need to focus on North America as the exclusive region of our concern. We’ll have to turn the industry over to the basis of profitable operations in terms of all of its production. And we may have to consider the objective of energy self sufficiency as an overall goal. This latter goal only attainable once we have all of North American production being produced profitably. Now we begin to see the breadth and depth of leadership that is needed to make the oil and gas industry fulfill its promise.

We certainly won’t be meeting these goals and objectives on the basis of the producer organizations that exist today. We are far short of meeting North America’s demand for oil. All of oil and gas production in North America is unprofitable. The producers themselves have destroyed the faith the investors and bankers have in the industry. It will be those investors and bankers that will be needed to make the investments to achieve these goals. And it is these producers who are in such dire financial condition as to need at least a decade in rehabilitation before they can approach the dynamic, innovative, accountable and profitable demands of these goals and objectives. Are we suggesting that we will approach this industry's future, with these organizations, when we discuss our capital needs with future investors? Or should we get our act together by implementing the Preliminary Specification first?

When we extend these current difficulties over the next 25 years and compare that to what we are able to provide in the Preliminary Specification. We are assessing our value proposition. It has been our critique of the industry that the costs of capital and overhead are almost never considered in the accounting by the producers. We would change that basis of accounting and begin to calculate the costs of production that include all of the costs that are incurred. Capital, operating, royalties and overhead. As a result, the producer would need to be generating much higher revenues to cover the cost of capital from the prices that are realized when they sell their production. Under the Preliminary Specifications decentralized production model we use the price maker strategy for all the producers. Only profitable production that considers all of these costs will be produced. The remainder will be shut-in until the prices rise or innovations are found to produce the property profitably.

As a result of this price maker strategy the future oil and gas investor will be able to safely invest in oil and gas with an understanding that the producer will only be producing profitable production. However, also understanding that those producers that don’t know what they are doing may still be reporting losses as a result of unsuccessful drilling and completion operations. That they however, will not be destroying the commodity markets with overproduction which is the propensity of them to do for the past number of decades under the current bureaucracy. In addition, since the cost of capital is considered in the calculation of profitability their capital will be returned to the investors through profitable operations. Unlike today where producers have had their hand out at least annually for additional capital. Diluting previous investors interests as bureaucrats spend themselves blindly into overproduction.

Therefore there are two basic elements of our value proposition. One is our price maker strategy that provides producers with the most profitable means of oil and gas operations. Lifting the price of the commodities in the marketplace to the marginal cost. This will move the prices of oil and gas to substantially higher values than what have been realized over the past two years in oil, and past six years in natural gas. The second element is that return of capital in the form of dividends that will be possible when the producers recognize the cost of capital by passing them through to the income statement in order to recapture that invested capital. It is these two elements that have put our value proposition in the range of $25.7 to $45.7 trillion over these next 25 years. $5.7 trillion is attributable to the increase in the commodity prices as a result of our price maker strategy. This portion of our value proposition is significantly below what a calculation would generate based on today’s prices. The second element is based on the estimate of what is necessary in terms of capital investment in the industry over the next 25 years. Which includes the return of the capital that is sitting on the bloated balance sheets of the producers today, which the bureaucrats have never thought of ever returning.

Leadership from stem to stern, everywhere and within everyone will be necessary. One of the things that People, Ideas & Objects is doing is making a change in the work that people in the industry will be doing. We will be leaving the work that computers do to the computers. And that includes the processing and storage of information. Too much time and effort of good people are spent in these mindless tasks today. And we will instead spend our time on the things that people are good at. The leadership, unstructured problem solving, decisions, creativity, collaboration, research, ideas, design, planning, thinking, negotiating, compromising and innovating. What exactly are the bureaucrats offering over these next 25 years.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Season's End

Bill Gross the bond king intimated that there is always someone with a sandwich board predicting armageddon. Well if the shoe fits, I’ll certainly wear it. But that’s not the case here at People, Ideas & Objects. There is a deep, fundamentally broken oil and gas industry in North America. A once in a millennium fire in Canada will be resolved in the short term. This fundamentally broken industry has manifest its issues since the late 1970’s and will not be resolved until action to implement the Preliminary Specification is taken. If you believe that I am predicting demise on the basis of some apocalyptic theory then that’s fine, you can stop reading. If you believe that I am trying to solve an issue then we can continue.

If you believe that the commodity markets have rebalanced and the bureaucrats have fixed the problem, then there is nothing here for you either. To me these commodity markets appear to be capitulating. Going through the process of having major participants leave the industry as there is nothing for them. Abundant losses, no discussion about the issues and no thought that there is a problem and certainly no action to resolve the problem. These have a negative impact on people’s confidence. So yes I’m in no way optimistic about where the price of oil and gas will be heading. Gas storage will be filled this summer leading to another major step downward in pricing. Oil has Iran and Saudi Arabia competing for new customers and new demand from current customers to the tune of 4 million barrels per day. Bureaucrats, I think, have been effective in running up oil and gas prices in the short term to provide a narrative that offsets the losses they’ve incurred. Losses that in many cases wipe out the entire capital base of the producer. If that doesn’t scream at you, nothing will. Now that the agm season is over, we’ll see if the commodity prices normalize.

It is these low commodity prices that people believe is the issue. I would suggest that it’s a symptom of the larger issue addressed by the Preliminary Specification. That being, the accounting in oil and gas makes it appear to be a profitable industry because none of the actual costs are being recognized. This keeps an unprofitable and unviable industry continuing on the basis of the chronic and continual investment of capital from investors and banks. The comprehensive and continued support of producers capital programs, when continued, make the industry appear a viable going concern. Take away the investment dollars and you have a cash starved beast that can’t maintain its asset base, which is marketed as an advantage under the narrative of “market rebalancing.”

What is particularly disappointing to me is that this has gone on for so long it’s the culture of the industry. The entire industry has been raised, educated and trained on this basis and never questioned if it was a valid, functioning business model. When the producers continue to report that they’re profitable. Despite what may or may not have occurred within the producer firm. It attracts more investment. And in the case of oil and gas, more investment than the industry can handle which has lead to overproduction in the commodities. We saw this phenomenon play itself out for almost two decades in the 1980’s and 1990’s when oil prices were too low. Nothing was done, no one questioned the actions of the producers, it was just “oh woah is me,” another bad year has passed. And muddling through continued. That’s not how you operate a business and in 1991 I set out to do something about it and today that something is the Preliminary Specification.

The other day I unilaterally declared that I had the credibility going forward to fix the issues in the marketplace. This caused some laughter and commentary from my friends the bureaucrats who feel buoyant now that oil prices have recovered to as much $50! I would warn the bureaucrats not to declare anything too prematurely. The credibility that I claimed was with the investors who have not necessarily been inspired by their management. If all you’re providing them is a mirror image of the commodities activities, both up and down. Followed by a wholesale destruction of the firm in the long run. Then I would be more concerned about your credibility in that sense, rather than your momentary ability to predict an upswing in a commodities price. These problems are not solved. They aren’t accepted as being a problem and the industry has rejected the thinking contained within the Preliminary Specification by not yet adopting it. This is due to the self serving reasons that the Preliminary Specification disintermediates the bureaucrats. We are the Uber, and they are the taxi commissions. And therefore, maybe I too have misdiagnosed what really ails the oil and gas industry.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

This is All About Leadership

We are at an inflection point in the oil and gas industry. If you believe that “market rebalancing” will have a remarkable effect on commodity prices, and the good times are just around the corner then there’s nothing here for you at People, Ideas & Objects. This is the point in time when those that will be leading the industry in its next iteration stand up and say that “this” is no longer good enough. It comes down to the point of what do you believe. Are we in a minor disruption that will clear itself, or is this a wholesale upheaval of the industry. One that requires action by many people to clear out the stale and non-functioning elements of the industry. Creative destruction at its finest hour.

If you’ve been reading this blog for a while you know I appreciate the work of the oil and gas bureaucrats. I won’t go into their many deficiencies but will point you to this blog's long history on the topic. I’ll assume instead that you are that leader who is tired of the status quo, who is concerned about the state of the industry and the lack of action by the bureaucrats. If you are, this is the place you want to be. We have 5,000 man years of work ahead of us in developing the Preliminary Specification and moving the industry onto a commercial footing. And that is just the software development portion of the task that we are undertaking. Leadership everywhere and at all levels of the industry is going to be demanded to fix “this.”

The other day we talked about the Leadership teams within People, Ideas & Objects and our user community. These are the leadership positions that are necessary for just the software development, and only those that can be clearly identified at this time. There will be many more as we proceed. Those members of the user community, the 3,000 people we’re looking to provide our software developers with the precise details of how it is the oil and gas industry operates. These are leadership positions as well. The user community member will have to know what it is that is necessary to make the Material Balance Report everything that it could possibly be. For example. And have the resources within the industry to verify that information. Our user community is the critical element of our softwares ultimate quality. Their leadership will be something that we will be looking for them to provide.

The secondary role the user community member fills is that of the principle in the organization that will be developed to provide the People, Ideas & Objects software and that organization's services to the producers. Our “service providers” will be established by the user community members who will own and operate them. They will be the ones that lead these organizations and develop the service based organizations that the producers will need in the new industry configuration that is required to provide our price maker strategy. Recall the service providers will be providing the entire oil and gas industry, as their client base, the process management of one individual process. This may seem like an onerous data driven task that would be monotonous and boring to undertake. I disagree, this will be a dynamic and exhilarating place to work. The competitive advantages of the service providers are their automation, specialization and division of labor. With the access that the service providers principle, the user community member, has to People, Ideas & Objects software development capabilities. The service providers will be able to iterate and constantly improve the software they use, and their service offering to the producers, both in terms of their speed and quality. Service providers will undertake all of the industries administrative and accounting capabilities. There is movement away from each producer developing their own similar, redundant administrative and accounting capabilities that are not shareable or usable outside the producer firm. It is this overhead that is also inhibiting profitability in the industry.

Again we have only touched on the leadership that will be necessary in the software and services areas as a result of the changes that will be instituted by the Preliminary Specification. The producers themselves will be going through a process of rapid change as well. Leadership will be needed to see them through the changes that will be made through this software and service development process. A leadership team to match the activities occurring in the People, Ideas and Objects software development, our user community and service providers. Investors and bankers will be taking a different attitude towards investing in oil and gas. It will be a while before they come back. That is, they will not be back until we can prove that the industry is consistently profitable based on a detailed, actual accounting. An accounting that looks at the performance of the management, not an accounting that tries to emulate the valuation of the company. Only then will they return. Therefore additional leadership needs will have to be met within the producer firms with an understanding that the old guard will be gone and the new ways will have to have new corporate leadership.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Memorial Day Holiday

No Posting Today

Third Friday Off

Leadership Roles

In addition to the CFO position that we need to fill, People, Ideas & Objects is developing the following Leadership Teams. These teams will be permanent full and part time members of People, Ideas & Objects and the user community, a separate entity. Ownership of the user community is held by People, Ideas & Objects but will have its own Leadership Team. This is to accommodate the unique characteristics of the user community and ensure that the focus remains on providing the producer with the most profitable means of oil and gas operations. Members of these Leadership Teams will be those that can make a difference in the industry, who see this as an opportunity to make the changes that are necessary to reset the industry on an appropriate commercial footing. People who are interested in a challenge and are not afraid to jump in.

In terms of the needs for People, Ideas & Objects we are looking for two people. The CFO which we mentioned the other day. And the President & COO. These two positions are based in Houston and report to me. The President & COO will be wholly responsible for the software developments. If either of these positions interest you please contact me here. These are the key elements of the Leadership Team of People, Ideas & Objects. There will be more positions open as the funds begin to flow. Be sure to keep up to date here.

The user community has been our priority for the past number of years. Our biggest impediment to the development of the Preliminary Specification is getting the ideas contained within the specification into the heads of the approximately 3,000 members of the user community. We have been pushing the Preliminary Specification out to the industry at large for the past two and half years since its publication. And we are generally unaware of where we are exactly in terms of achieving that number. It is important to note that we will not start developing software until the user community in its full form is in place. User community based software developments are the key to quality and that is the only basis that we are approaching the development of the Preliminary Specification. I can assure you that many people are reading the Preliminary Specification each and every day. It's important to get these ideas in the heads of the user community so that they can think on this new basis and ensure that they implement their piece of the system based on this new, fundamentally different understanding of using the Joint Operating Committee.

The Leadership Team of the user community consists of a large team of people who will be involved. I will be sitting as the Chairman of the organization, and there will be a board of four other directors. In addition there will be a CEO, CFO, and COO. These are the standard fare positions that will undertake their standard roles within this organization. Please note they are separate from the software development team. They are exclusively concerned with the process and functionality of the applications of People, Ideas & Objects. Please read the user community vision if you haven’t. To understand how this user community organization is uniquely structured within the oil and gas industry. A structure that ensures it has the power and control over the Intellectual Property that makes up the applications they are responsible for.

The last set of members in the user community Leadership Team are the Product Owners. In an agile development team a product owner is part of the software development team. They are responsible for the product and will be required to prioritize the software teams developments. Funnelling the user communities contributions into a coherent and usable application will be part of their responsibilities. We are making these Product Owners key parts of the user community Leadership Team. We have allocated a section in our budget for these individuals with healthy compensation, administrative support and a discretionary budget. We are looking for a total of 25 product owners to join our team. One for each module of the Preliminary Specification. The remainder are allocated to specific areas such as the user interface, mobile, data model, etc. As with all of the members of the Leadership Team, their background will be in oil and gas with a strong aptitude towards technology, augmented with some post secondary education in Information Technology.

#!/bin/sh is the starter's pistol for everyone to begin the competition. The industry needs these positions filled and people to start working and organizing the solution for the industry. I am working on the money and you’ll have to take it on faith that the producers will act. What choice do they have? Bankruptcy. Therefore it’s up to us. This will be a difficult task and there is no certainty of success. We will not fail because we can not fail. The industry would be out of options if we did fail.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

More Bureaucratic Abuse

Producers actions in these next few months will be the critical difference to their success or failure as an organization. Sitting around praying for “market rebalancing” will be the most effective way to achieve their demise. Pretending that they’re a viable going concern and continuing to fleece their banker and investors for more capital isn’t going to work anymore. At the same time bureaucrats will have to find that cash from somewhere. As the banks put the brakes on realizing the proceeds of any material transaction, their only source of cash is production. Which of course is the only source of cash anywhere in the industry. Which of course leads to further declines in the prices of the commodities due to further overproduction. We’ve seen this play out a few times now. What is it that bureaucrats think will change this time? They need to act now. People will be looking back to this time to see what they’ve been doing to solve these issues. If they find the producer has been hunkering down waiting for the “market to rebalance” that producers bureaucrats might find the office taking on a streetscape like appearance.

What producers need to do instead is subscribe to the development of the Preliminary Specification. They’ll need some money to do this so they’ll have to find some to make the necessary commitment. To determine their share they’ll need to calculate our budget times the amount of their deliverability, in relation to the total deliverability of oil and gas for North America. That share of our costs will be their upfront commitment to this development. No one said this was going to be easy. The scope and scale of this problem demands that a solution be provided. The upside is that they might be able to fend off any attempts to run them out of the business by the bankers and investors. Showing them that they have a plan as to how to deal with the situation might make the investors and bankers feel more comfortable than they do now. Secondly, the upside of doing this, that is our value proposition is in the range of $25.7 to $45.7 trillion over the next 25 years. This as a result of our price maker strategy and the ability of the industry to begin to return the capital that’s invested in it. Establishing the industry on the basis of the most profitable means of oil and gas operations. Making it a commercial enterprise not this daycare inspired activity exercise.

I’ll bet that stung a bit. Take a critical look at the industry today. The present value of the North American industry is worthless. Nothing of value is being generated by it as a commercial business. Its activity for the sake of activity. Doing rather thinking. Is this the best that the industry can do? Can we take what we have today and rise to the challenge of meeting the needs of our investors and consumers over the next 25 years? Not on the basis of this lot. And not on the basis of kneeling down and praying for the “market to rebalance.” It’s time to shape up and start doing the job that has been entrusted to the industry. Take a position; lead, follow or get the hell out of the way.

Why did we have to take it to this level of destruction? That is the question that I guess we’ll never know. It seems human nature to want to keep trying the old ways until it's obvious they no longer work. The point is that we can start to focus on the solution now and begin to make the changes that are going to turn the oil and gas industry into the dynamic, innovative, accountable and profitable oil and gas industry that it needs to be in the long run.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Wanted, Our CFO

In anticipation that we are about to begin the process of building the Preliminary Specification. I am announcing today that we are seeking our first employee. Our CFO. We are looking for a world class CFO that can fill the position that is needed within our organization and will provide for the needs of the oil and gas producers, our user community and the service providers. As a startup there will be much to do for this individual. That pretty much defines the position, we need everything and have nothing. Those that are interested should email me here.

In follow up to our Friday post in which we discussed the demise of the credibility of the oil and gas producers. How it has been spent with the investment community as a result of the bureaucrats self-serving ways and running the industry into the ground. I want to announce as well that the line forms to the right. That is to say, as I noted in last Friday’s post, that to reestablish yourself as a profitable oil and gas producer is the credibility that needs to be earned. Therefore for oil and gas producers to earn that credibility and to prove that they are focused on profits, will be achieved by subscribing to the software development of the Preliminary Specification.

Continuation of the status quo is always an option. However, just as with ideas, choices have consequences. Going it alone will possibly enable the bureaucrats to make it through without the support of the banking and investment community. That's a tough road to hoe. The easy route would be to pay the subscription for our budget and, here’s the other requirement, actively participate in the developments. The broad scope of industry understanding needs to be captured in the software that we are developing. That is not going to happen without the user community being in the leadership role in terms of how these applications function. The user community will need the producers participation for a variety of reasons to ensure a quality of the final product and to ensure that it meets the producers end use needs. There is no solution that is going to meet your needs without your blood, sweat and tears on the floor. Paying the bill for our budget is the first step and should be representative of the understanding of the significant commitment that you as a producer are undertaking to ensure that your needs are effectively communicated and captured in the software. If this initiative fails don’t look to me or the user community, failure will be 100% attributable to poor producer participation and producers do not have the option of failure.

If you're still sceptical that I can raise your sinking boat out of the water. Talk to your bankers and talk to your investors. They have some skin in the game. They have no interest in your organization failing. If you told them that you had an initiative that you were participating in that would return your firm to profitability, has a price maker strategy, and that you needed their support to turn your producer firm around. The skies might turn and a little less black and bit more blue. What do you have to gain.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Victoria Day in Canada

No posting today.

Credibility

In the last two days I have detailed the reasons that the oil and gas industry is in the state of decline that it’s in. That accounting and economic misinterpretations have negatively influenced the culture of the industry. And the primary reason for this decline is inaction by the bureaucrats whose motivation is inconsistent with the needs of the industry, the investors, the people who work in the industry and the service industry. Bureaucrats are, as I have stated, only lining their pockets at the expense of others. They have a healthy operation that has served them well for the past several decades. Their motivation is to hold still to keep the status quo filling their pockets.

And let me be candid for a moment. It could be stated that Bernie Madoff didn’t fully comprehend the accounting principles in which he was reporting to his investors. And it also could be stated, in Mr. Madoff’s defence, that he misinterpreted some of the fundamental economic principles of the work that he was doing. Others, and there are many, think he’s a crook. Madoff went about misrepresenting the value of the assets that he held and reflecting higher profits than what the fund was earning. His operation was stopped when the FBI no longer accepted the story that was being told in his statements. Otherwise Mr. Madoff would have continued with his operation to this day. So when oil and gas bureaucrats talk about rebalancing the market, which is also known as deliberate destruction, what are we really talking about? Are they just trying to keep the operation going for a while longer? Or are they trying to get to the core of these issues and resolve them?

At what point does an industry move from being given the benefit of the doubt to being questioned as to its motivations? We have had a difficult past decade since 2008. The financial crisis. Natural gas prices collapsed and continue to slowly erode. The natural gas overproduction was then matched by the overproduction in oil to cause both sides of the business to be in difficulty. A situation that hasn’t happened before. Is this environment the one we should learn to accept as the norm with the lethal combination of shale and bureaucrats? The decline in the business has created the narrative of “market rebalancing” that took us through 2015’s earning season and annual general meetings, only to lead to no action, no plan and no discussion of the issues. Only destruction. It's at this time that the bureaucrats can start the party for the next eight months? No need to account to anyone.

How much of your money are you willing to invest in Bernie Madoff. And the related question, how much are you willing to invest in oil and gas. I wouldn’t touch either with a ten foot pole. Both have serious credibility issues that are unresolved in the marketplace, in my opinion. I think until those issues are resolved the credibility to raise any money will be in jeopardy for any serious producer seeking any serious money. And maybe I’m late to the game here. Or maybe I’m the one that’s keeping score. The amount of junk bonds issued by the producers had been significant in the last two years. Maybe the investors had these credibility questions well before this point in time leaving only the junk bond market as a source for funding. What I might be doing here is noting the point in time where the industry rope is going to suddenly become taunt. The rope being the proverbial rope that the investors were willing to give to the bureaucrats to give them the benefit of the doubt. Now with the Annual General Meetings out of the way with no action, no plan and no ideas. That’s it.

I have been barking about these points on this blog since 2005. I published related documents on this topic as early as August 2003. People are tired of me barking about this. I’m tired of barking. What has barking at the moon accomplished? Credibility that I understand what the issues are. I set out to solve this problem well before it was even seen as a problem. I also set out to develop the solution. The foundation of the Preliminary Specification is the use of the Joint Operating Committee which is what I published in August 2003. I’m either barking mad or I’m just really lucky. Either way I now have the credibility to reestablish the industry on the foundation of a commercial enterprise. The bureaucrats don’t, can’t, won’t and will not ever make the necessary changes. That may be a bit of a stretch for some people to accept. Maybe they’ll find a way to solve this in the future.

Our claim is that we provide oil and gas producers with the most profitable means of oil and gas operations. Something that should interest any company or person looking to enhance their performance. That the business model of the Preliminary Specification addresses specifically the issue in the marketplace today and is a workable solution doesn’t gain any traction with the bureaucrats. That I have difficulty selling profitability to these people should be of grave concern to the oil and gas investor. The bureaucrats are more interested in their personal franchise than they are in the business. They have taken the business to the level that it is today. Where it is now the biggest crisis since the financial crisis. And all they can do is suggest we’ll muddle along and do nothing. That this is somehow acceptable to them after filing quarterly and annual reports that show the level of devastation has been nuclear within their organizations?

Our value proposition falls within the range of $25.7 to $45.7 trillion over the next 25 years. It should be clear to everyone how that money would be earned through our price maker strategy. And all I hear from the bureaucrats is the pounding of baseball bats against my backside. It will be interesting to see where the credibility is given in the industry in these next six months. I have bored my audience to tears trying to convince others to institute these changes. And bureaucrats have done nothing but burn the place down. Who’s going to have the credibility to approach what has to be the new oil and gas industry. The one that we build from these ashes. It’s going to be an interesting few months.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Economics 101

In addition to the accounting issue we discussed yesterday. Oil and gas bureaucrats have misinterpreted an important element of their commodities economic behavior. They have assumed that the oil and gas commodities are subject to the principles of “price taker” when in fact they exhibit the classic behavior of “price makers.” Once again, the culture of the industry has developed over the years based on this misinterpretation and created the situation that we have today. That being of systemic destruction of the industry.

The culture is to produce. Investors are rewarded with higher stock prices based on higher deliverability. Production profile increases are rewarded with handsome, leveraged, increases in the stock price of the firm. Bureaucrats have caught on to this and have based their compensation on the performance of the stock of the producer. The more lucrative action in terms of stock price increases comes from projected production profile increases. As long as the firm can meet its targets, either through acquisition or drilling, the stock price will increase ever higher. The derivative of this thinking is that the commodities are scarce and there will always be a market for the products. That it’s beyond the producer's control to affect prices in any manner. Which is the case for most producers other than the majors.

In the past decades the investors saw that this was being achieved and reported in a profitable manner by the bureaucrats. Therefore they continued to encourage their bureaucrats to seek higher production profiles to gain more value in the stock. The investors were asked for the investment necessary to achieve these gains and the game went on and on. No one has stopped to ask why it is that every oil and gas company needs to issue stock or access their line of credit each year. This is not common in most industries, why is it the case in oil and gas? Certainly it’s a capital intensive industry but the amount raised each year only grows. Where does all this money go? Does the business ever generate its own capital? And do the investors see any of this money in terms of a quarterly or annual dividend? Or is this just “a build the company and exit” strategy? And not really the oil and gas business. Or, is it something else? We’ll discuss this “something else” tomorrow.

People, Ideas & Objects Preliminary Specification changes the economic basis in which the oil and gas commodities are produced. We provide the oil and gas producer with the most profitable means of oil and gas operations. And we do that by instituting production discipline across the industry by ensuring that every producer adheres to the principle that only profitable properties are produced. Which within our system is in their best interests to do so. And as we’ve noted, the Preliminary Specification uses the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. It is in this way the producer will know that all of their reserves will be produced profitably. That none of the oil and gas reserves will have any financial losses added on top of the capital costs that have been incurred on that property. And that their profitable operations will no longer be diluted by any of their other unprofitable properties. And the commodity markets will find the marginal cost as only profitable production is being produced by the industry. It is People, Ideas & Objects price maker strategy that enables these benefits to occur based on the producers independent decisions, based on a factual accounting, as to whether or not a Joint Operating Committee is profitable.

We do this bit of magic by changing the structure of the industry and of the producer itself. The producer is stripped down to the C class executives, earth science and engineering resources, landmen, legal and some support staff. The remaining administrative and accounting resources are reallocated to service providers which are discussed below. The producer is then able to focus exclusively on their earth science and engineering capabilities, and their land and asset base as their key competitive advantages.

The industry is restructured by taking the administrative and accounting resources from the producers and reallocating them to the service providers based on specific individual processes and sub-processes. Each service provider will specialize on that process that they have exclusive rights to within the North American oil and gas industry. Some consideration for some processes are necessary, such as production accounting related processes. When a property incurs an activity (production), that will be communicated to the service providers through our task and transfer network which will trigger their work on that property for that process. The service provider will then complete that process and bill that Joint Operating Committee for that service for that month.

The price maker capability comes into play when the property is determined, based on an actual detailed accounting, not to have produced a profit and as a result is shut-in. And as a result of being shut-in, none of the service providers will be reported any activity in our task and transfer network for that Joint Operating Committee. And subsequently no processes will be incurred and no billings will be sent for any of the administrative or accounting service providers to that property. The property ends up recording a null operation, no profit but also no loss. Enabling the producer to achieve the most profitable means of oil and gas operations.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Accounting 101

I’m not satisfied that I’ve communicated the scope and scale of the problem that the oil and gas industry faces. It's difficult to express the impact these accounting policies have had on the culture of the industry over the past four decades. These issues will not go away by themselves either. Market rebalancing will never provide for the return of a profitable industry. An industry that operates on the basis that all of its costs are capitalized will always appear to be profitable. That is the bureaucrats motivation. Any revenue you do generate will be offset by little to none of the costs that are left and a small allocation of the capital costs based on the production realized over the total reserves. A fool would be profitable in oil and gas. Based on the financial statements of a producer, you don't know if the producer is run by fools or geniuses. It’s becoming well known in the industry that the North American oil and gas industry is not a viable industry today. It’s also becoming known that it may not have been viable at any time in these past few decades. My narrative is resonating.

In addition to recording profitable operations, capitalizing everything under the sun creates balance sheets that are bloated with those assets. The sad thing is these are considered healthy in the oil and gas industry. These are only testaments to the spending festival that has taken place within the organization. A healthy balance sheet will be composed of predominately liquid assets that have the capacity to be deployed. Sitting with big balances of capital assets have only allowed the annual funding of additional capital from investors and bankers to appear that the producer is reasonably capitalized between debt and equity. The fact of the matter is those capital assets are limited by SEC regulations to be below the total of the reserves as determined by the independent engineers times the market prices for the commodities. Or, the total gross revenues of the firm in its remaining lifetime. A ridiculous and unreasonable method of valuation. And remember it's these assets that are being written down in the impairment charges by the auditors.

What would you do if you were approached by a businessman who wanted you to invest in his real estate business. And when you looked at the balance sheet saw that it was a significantly sized operation and very profitable, only to find out later he recorded the asset based on the 100 year life of the building times the monthly rental they received. You’d run! That’s what I would do. What’s happened in the last four decades is a stampede of investors trying to catch the profits and gains that were being reported in the oil and gas industry. And in some cases many people made money. It’s important however to segregate trading gains on a stock market and what‘s happening in these organizations. The organizations were all overspending their investors money and generating overproduction that lead to lower commodity prices. This is what happened in the late 1980’s and 1990’s and the producers were incapable of doing anything about it. They just muddled along waiting for the market to rebalance. Which did happen after a few decades.

Market rebalancing will not function at any point in time with shale based reserves being part of the makeup of the industry. Production discipline has to be implemented through the decentralized production model of the Preliminary Specification. I undertook to solve this industry issue before the shale reservoirs were discovered as it was evident to me well before then. Now it should be clear to everyone that the business model is incapable of providing any value. When I look at an oil and gas producer I generally wipe out the property plant and equipment off of the balance sheet to determine how they will be configured to approach this new shale based environment. Move those capital costs to the income statement where they belong and see how the producer survives. Not many producers can stand to have this treatment done and reflect a viable going concern. Only the majors are really able to see their way through to a new future in the industry. The rest of the producers generally have negative working capital and are heavily indebted. Some may think this is an unreasonable approach. I think it's highly appropriate. If you look at the assets of the producers today, are they generating any value, or pulling the producer under? What would the present value of these losses generate in terms of an investment's market value. That, I think is how the industry has to be perceived in order to reconcile the difficulties that it’s in and to put itself back in the position of being considered a viable going concern.

Accounting is about performance. Measuring it and making it comparable between organizations and other industries. Investors have believed that oil and gas was like other industries and were being accounted for correctly. They were accounting for it correctly under the guidelines, just the SEC has this manner that they allow for oil and gas and disallow for every other industry. If an organization tried to do this type of accounting in any other industry the SEC would shut them down within a minute. The inconsistency and conflicting principles here need to be reviewed and revised. Investors have to be told the correct story and the producers need to understand their performance based on a reasonable basis. The fantasy accounting that has gone on in oil and gas for these past four decades has become culturally ingrained and is destructive to the core. It must stop.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

A 1950's Wildcatter's Vision

Natural gas was selling for $0.55 in Canada last week. Storage there is at 91% and the demand from the heavy oil plants declined due to the fires. If anyone thought that producers couldn’t earn a profit at $0.55, we all know now they were wrong. Bureaucrats can’t, won’t and will not ever change. They just don’t care. We need to make the change for them by implementing the Preliminary Specification despite them. It is the only way we are going to save this industry from this madness.

Last week on Bloomberg T. Boone Pickens was interviewed in Las Vegas. He made a couple of points that I found to be noteworthy. The first was that he felt that the Saudi’s were probably unable to increase production from their current levels. Recall the Saudi’s have stated they will increase their deliverability by two million barrels per day to match Iran’s increases. I guess Mr. Pickens has some insight that the Saudi’s aren’t aware of. The point I would make is this is just a case of he said, he said. And what Mr. Pickens wants us to do is to wait it out the few years to determine who’s right. It will be during those years that we’ll see continued destruction of the North American industry as a result of $0.55 gas. Think of all of the time, money and energy that will have been wasted picking sides in who might be telling us the truth.

The second thing that Mr. Pickens stated was that he had drilled a well last year that reached payout in nine months. That he was not going to drill an adjacent well there until the price of oil reaches $60.00. This is so typical of an oil man, it sounds just as they did in the 1950’s. Payout is the term used for the time in which the capital costs of the wells drilling, completion, and equipping costs have been recaptured from net revenues. A period of time that is a very high cost operation that lasts as little as 10 days. We should also include in that calculation the costs of the organization that exists to administer and account for that well. Which was purposely built at significant cost, and was paid for during the entire nine months, and is still incurring costs day after day. We should note too that not all wells are as successful and there are other capital costs involved in gathering, processing and marketing of oil and gas. And we should also include all of the engineering and geological costs that went into the development of the drilling of that location. These costs didn’t seem to resonate with him that they needed to be paid as well. And if this well had these costs allocated to it I doubt it would have reached payout in a three to four year time frame.

It's time to stop thinking of this business from the 1950’s version of a wildcatter’s eye. Unless Boone Pickens is willing to go on Bloomberg with the classic 1950’s tin hard hat and be smeared with mud and oil. That image, and that way of managing the industry has died. The fact that the industry hasn’t realized that and is still slow walking itself into oblivion is the issue that we see today. There are more costs involved in this business than what are being reported by these producers. These costs are all capitalized on the balance sheets, including capital, interest and overhead, and left to balloon to unreasonable size and never, ever hit the income statement. The costs go in, but never come out and are never talked about. If the SEC didn’t state that this was the prescribed method you would need much bigger prisons.

The Preliminary Specifications decentralized production model corrects this behaviour by considering all of the producers costs at each and every Joint Operating Committee. We use the Joint Operating Committee as it is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the industry. By moving the compliance and governance framework from the hierarchy into alignment with the seven frameworks of the Joint Operating Committee we achieve a speed, innovativeness, accountability and profitability in our oil and gas producers. We also say so long to the bureaucrats.

When we use the service providers for the administrative and accounting capabilities of the industry. Those service providers charge for their services directly to the Joint Operating Committee. Giving an accurate accounting of the costs of the operation of that Joint Operating Committee. And if the property is shut-in for the month, then the service providers will receive no information from our task and transfer network that will trigger any of their work, and hence no billings for any administration or accounting services will be sent to that Joint Operating Committee that month. A property that is shut-in is effectively a null operation, no profit but also no loss. Enabling the price maker strategy of our decentralized production model to take effect based on the individual decisions of the producers at each and every Joint Operating Committee.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Did You Hear the Story About...

What should be clear to everyone is that the bureaucrats are fine with the situation as it stands today in oil and gas. Biding their time only becomes a challenge when they have to face the shareholders in the Annual General Meeting. They’ve published their first quarter reports. Most of the Annuals for 2015 and the meetings themselves have been put away, only the majors and a few independents are left, and then they’ll all be home free. Such are the stresses and strains on the bureaucracy in oil and gas. It’s summer, and other than that blogger, who cares about the business. It's time to relax and enjoy ourselves. That’ll be the operating strategy for the next eight months for our good friends the bureaucrats. The logistics of managing the cash balances will be left to those that are still grateful they have a job.

I have to say that I was disappointed in the quality of the accounting for the first quarter of 2016. To me it reflected two distinct trends. 1) By publishing the accounting information only created problems for the bureaucrats. 2) Therefore there was a narrative that was otherwise not told. What I saw that led me to these conclusions were the volumes of MD&A that were provided. And to contrast that, the brevity of the actual financial statements. In one case I was unable to secure the Statement of Changes in Financial Position for a senior Intermediate. MD&A are not standardized reporting that are subject to audit. They are a story that management are attempting to tell the investors. In times such as these there are stories that can be told. Much time and effort was spent in preparing the MD&A and shrinking the financial statements to irrelevance. What we need are the full financial statements that qualified investors can compare and contrast between producers and between other industries. That is the purpose behind standardized accounting that is audited or will be audited. Not to tell a story but to make the information comparable.

The interesting news that will be out today is PennWest’s first quarter 2016 earnings. If you want to know what is going to happen to the industry in six months, just watch PennWest. They have been trading around a $1 for the better part of a year. When a producer runs out of cash. When the have no capacity in their working capital. When they have no investors buying the story, when the banks say so long. Your stock drops to around 5 - 10% of what it was. Expect to see this happen to many of the producers more often in the next year. The issue with PennWest is they have $88 million in debt payments to be made in May 2016. No money and no capacity to pay. They are trying to sell their crown jewels in terms of properties. However, I would bet that as soon as that money hits the bank account, the bank itself will seize those funds. Leaving PennWest with less revenue from those properties to live off of next month and defaulting on those May debt payments. Trouble with a capital T.

But then “market rebalancing” could turn the industry around and I might be wrong about the level of destruction that has occurred in the industry. Maybe the investors will realize the bureaucrats are such great guys and give them the money they need to weather this storm. I’ve been wrong before. The fact of the matter is that this will not end. Whether we continue down this road at the speed that we have been these past six months. Which has been pretty fast. Or we take a longer road to armageddon, armageddon is where we are headed with these bureaucrats.

In retrospect it's been a great time to be an oil and gas investor. Companies such as Chesapeake are up over 400% this year. Which is symptomatic of the entire industry. Some may herald this as a sign that things are improving, which would be understandable. I see this as the ultimate opportunity for anyone still around to get out. There is nothing here for anyone but the bureaucrats. This is a classic dead cat bounce and I can’t see anything that has changed in the marketplace. No one is discussing the fact that natural gas storage is going to breach the storage facilities in July or August. Which is bearish on the prices in the short and long term. And no one is discussing the new Saudi strategy that matches Iran’s increase in deliverability in their head to head battle over new customers. “Market rebalancing” will need to continue, therefore, until the North American producers lose another 4 million barrels of deliverability before it works. It’s good to be a bureaucrat, clearly the issues are too big to deal with, best to just sit back and enjoy the summer.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

A Producers Plan of Action

The oil and gas industry needs to redeem itself in the eyes of those that have lost faith in it. Not an easy thing to do, and not an easy thing to do when we consider the current situation. We will need to trash the strategy that is in play, commonly known as “market rebalancing” as it is an irresponsible and foolhardy strategy to be pursuing. Destroying capabilities until the productive capacity of the industry matches demand will be a never ending pursuit with Iran and Saudi Arabia both increasing their capacities by 2 million barrels per day. It's not only the lost productivity that’s at issue, there are the investors losing their investments in all of the oil and gas assets as nothing else is profitable in the industry. The banks are never going to loan money to oil and gas producers again. And people will be seeking employment in other industries that have more security than a fly by night operation.

You do reap what you sow and now is the time to start thinking about the long term and how the industry will meet the consumers needs for energy. You’ll need to win back all of these people, the investors, bankers, service industry and employees. And they’ll need solid proof that you’ve found that old time religion. Profits, because an industry can’t live off of cash flow as a measure of its health. It needs profits. And we’re talking about the real, bankable profits that I’ve never seen earned in the industry in these past few decades. You’ll need, therefore, to base your accounting on something that is more reasonable than what has been done in the past. For as much criticism and blame that I have laid at the feet of the SEC for this current situation, they define the outer limit of what a producer can record as their asset balances. That doesn’t mean that each and every producer hits that limit each and every year.

Beg, borrow or steal the budget needed for the Preliminary Specification. The only way that production discipline is going to be implemented across the industry is through the decentralized production model of the Preliminary Specification. This will also institute the new accounting basis that enables the price maker strategy to be the foundation of each and every producer. It will be in that way a producer can temporarily shut-in any unprofitable production, save the reserves for a time when they can be produced profitably, cease to dilute their profitable properties by producing unprofitable properties, reduce the costs that the remaining reserves have to recover and allow the commodity markets to find the marginal cost. This will be the strategy of the industry as opposed to today’s destruction of the asset and ruining themselves financially in the process of “market rebalancing.”

Participate in the user community. People, Ideas & Objects Preliminary Specification is user based software developments. Active involvement will ensure that the unique needs of your assets are captured in the software and your company will be able to function with the software when it’s built. Bureaucrats have become adept at finding scapegoats to blame for their current demise. Blaming me for not building the software you need is not going to be my fault. It’ll be yours. And to the larger issue, the industry as a whole needs to start taking responsibility for the things that it does do. Those big boy pants are still hanging in the closet.

This situation will be many years of hard work in order to turn around the industry. Don’t expect any help from the investors or bankers that you may have had a relationship with in the past. They have memories. You’ll need to earn their trust back before they start answering the phone again. That’ll be by establishing a record of operating a profitable industry. The amount of damage that has been caused is so significant you can only begin to imagine. You will be alone in this and will need to suffer and sacrifice in order to rebuild this industry. But you know what they say, the struggle is the prize.

I’m sure people don’t like me talking to the bureaucrats like I do. What respect have they earned? Most of them will be leaving in the next year anyway, seeking newer pastures. This plan of action will be implemented by the new oil and gas leadership. One that is going to rise out of the ashes of what is left of the mess that exists today. We have a job to do, let's get it done.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.