Our Oil and Gas White Paper, Part XXXVIII

A quick note to say that our white paper "Profitable, North American Energy Independence -- Through the Commercialization of Shale Reserves" will be published on Independence Day. 

The Methods of Oil and Gas Accounting

Overhead

It is important to understand why things are happening as they are. The first issue is overhead. In oil and gas there are various Petroleum Accountants Societies for each region on the continent. They are governed by the Council of Petroleum Accountants Societies or COPAS. Their role is to define the accounting procedure that is adopted by each and every Joint Operating Committees agreement for the property. This has been the case since 1961. Within the accounting procedure the amounts of overhead that can be charged to a Joint Operating Committee are regulated and agreed to by each and every producer that operates on the continent. These overhead allowances capture fees for the overhead that the operator would incur as a result of the increased burden they, as operator, need to have in terms of their accounting and administrative capabilities. Therefore the operator would be generating a “revenue” from its working interest partners for their shares of the overhead fees charged to the Joint Operating Committee. These “revenues,” for lack of a better word, offset the actual overhead that the producer incurs. These amounts of overhead allowances are woefully inadequate to capture the true cost of accounting and administration in oil and gas. They are necessary to avoid the cost that would be incurred if each overhead item had to be costed to each Joint Operating Committee. A task that would be impossible in the manual systems of 1961 and their derivative ERP systems of today. A task that the Preliminary Specifications decentralized production model undertakes with the service providers.

The negligible amount of offset provided by the COPAS overhead allowances to any operator are reflected in the remaining G&A balances of each producer. It is key to remember that the actual overhead items are charged to the various corporate accounts within the system during the year, and at the end of the year a large percentage of their total are capitalized to property, plant and equipment. No one knows for sure what the overhead costs are in oil and gas. I believe the amounts that are capitalized average 85% across the industry. That’s just based on experience, nothing I can point to. The variance reported by producers of their overhead costs range from 1% to over 16% of revenues in the industry. The best estimate of what the actual overhead and accounting costs are is to get pictures of the downtown core of Calgary, Houston, Dallas and Oklahoma City and assume that most of those building and the people in it are involved to some degree.

Due to the fact that overhead at the property level is severely underreported due to the amount of the COPAS overhead allowances. Then we know that the properties will be reporting profitability, if it was able to be determined, that is overstated. In addition corporate profitability is overstated due to the high percentage of overhead that is capitalized to property, plant and equipment to help “build those big, beautiful balance sheets.” The amounts of these overstatements is unknown and unknowable. Please review the section entitled “Service Providers” under “Our Solution” for further information on how People, Ideas & Objects will be recording actual overhead incurred at the Joint Operating Committee.

Performance vs. Needs Work

As a result of this methodology of overhead cost accounting what are property a,b, and c doing in terms of performance? Producers present Statements of Expenditures and Statements of Operations which when combined will tell the reader what the performance of the property is in the current month as long as they calculate a reasonable amount for depletion. As we see with the dynamics of these calculations, just for overhead purposes, the profitability of the property could be overstated by as much as 10 - 15% or more just from the recording of overhead allowances vs. actual overhead. Am I overstating the situation or is it worse? No one knows.

The Preliminary Specification will be recording the actual overhead that is attributable for the accounting and administration of each property to that Joint Operating Committee. This will be done through the service providers as they receive their information from the task and transfer network in the Preliminary Specification. If there is propane production, and propane inventories then all of those service providers associated with the follow on processes of production accounting, revenue and royalty accounting and product allocation down to the point of sale will be invoked and manage the process for that property that month. The cost incurred for that month will be what the service provider has deemed as necessary for the capture of the costs and a share of profit of their organization. This cost may be fractions of one cent for some processes. However the service provider may have millions in revenue from the annual processing of all of the industries data for that process. The costs to the Joint Operating Committee for overhead and accounting as a result of the service provider is going to be as accurate as is possible under any possible scenario considering there may be up to one hundred thousand Joint Operating Committees in some producers.

It will be on this basis, and the other changes that we make through the implementation of the Preliminary Specification that the producer will know with a high level of precision where they're earning their profits and not. Where they can apply their innovation and how to optimize their organizations. This is opposed to today where the bureaucrats assume that overproduction of commodities is irrelevant to the “market rebalancing” of the markets!?

Tangible vs. Intangible

People, Ideas & Objects assert that there is a fundamental error in the manner in which capital assets are recorded from the point of view of tangible vs intangible, and capital vs. operations. Currently everything that is done in the industry goes into the one overall objective of “building the balance sheet” by recording it in property, plant and equipment. With drilling involving high cost rigs, steel pipe and cement, coil tubing and fracing operations we feel a breakdown between property, plant and equipment and intangibles in necessary. This goes for equipping costs as well. Although there are many items with serial numbers, items such as casing bowls, these are not retrievable. The effect of this would be to better clarify the vast majority of the costs of the producer as intangible vs. the tangible nature of property, plant and equipment implies.

Secondly, the clarification between what is rightfully in property, plant and equipment, and intangibles vs. ongoing operations. Drilling new wells and conducting the completion and equipping of those are assets for the purposes of this conversation. However, in the shale era these wells require extensive work to maintain their deliverability. Additional laterals may be drilled, fracing further down the original lateral and reworking the prior fracs are all extensive operations to maintain the deliverability. What are these assets or operations? If we’re only lumping more costs on to the existing reserves, to be depleted over the next 20 years then we’ve completed the deception that is the oil and gas industry. However, I believe that this implies that the initial drilling costs should have been depleted in the initial flush production if we’re just adding the additional costs to the reserves. Alternatively, we can stick to the 30 month program that People, Ideas & Objects suggests in which we deplete the original cost of capital, and handle these incremental workover type costs as operations in the month that their incurred.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Exchange Offering (IEO) that will fund these user defined software developments. It is through the process of issuing our IEO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper Part XXXVII

In terms of the freight that is carried by 147 million barrels of oil equivalent per day. An amount that is opaque to the average energy consumer. Mr. Mills sets out in his paper "The New Energy Economy: An Exercise in Magical Thinking" that the amount that might be saved through a dramatic acceleration in the uptake of Electric Vehicles (EV’s) is quite marginal in terms of the total demand for oil products. I would encourage everyone to read Mr. Mills paper. Where he dispels the belief that batteries will have the capacity to eliminate the volumes of oil and gas production. There are many real constraints to the magical thinking behind battery driven automobiles. Constraints such as the resource inputs into the batteries, and their overall usefulness in comparison to the utility of oil and natural gas.

Such a ban is not easy to imagine. Optimists forecast that the number of EVs in the world will rise from today’s nearly 4 million to 400 million in two decades.67 A world with 400 million EVs by 2040 would decrease global oil demand by barely 6%. This sounds counterintuitive, but the numbers are straightforward. There are about 1 billion automobiles today, and they use about 30% of the world’s oil.68 (Heavy trucks,aviation, petrochemicals, heat, etc. use the rest.) By 2040, there would be an estimated 2 billion cars in the world. Four hundred million EVs would amount to 20% of all the cars on the road—which would thus replace about 6% of petroleum demand.

In a section entitled Moore’s Law Misapplied Mr. Mills documents how society has distorted the belief that solar, wind and battery technologies are about to undertake significant growth in their performance. Where not only are they going to be much more powerful, but much smaller in size. These performance metrics accurately mapping the type of changes we’ve seen from the development of Information Technologies. Another issue that we are beginning to hear more of these days is the volume of solar and wind energy that is being offloaded onto the grid is quite limited. Today many utilities are having to limit the volume of solar and wind energy to ensure that the grid’s power does not fall out of phase. A situation that, if left unattended, would have dire consequences to sensitive electronics.

An ant-size engine—which has been built—produces roughly 100,000 times less power than a Prius. An ant-size solar PV array (also feasible) produces a thousand- fold less energy than an ant’s biological muscles. The energy equivalent of the aviation fuel actually used by an aircraft flying to Asia would take $60 million worth of Tesla-type batteries weighing five times more than that aircraft.73

Finally, when it comes to limits, it is relevant to note that the technologies that unlocked shale oil and gas are still in the early days of engineering development, unlike the older technologies of wind, solar, and batteries. Tenfold gains are still possible in terms of how much energy can be extracted by a rig from shale rock before approaching physics limits.83 That fact helps explain why shale oil and gas have added 2,000% more to U.S. energy production over the past decade than have wind and solar combined.84

Energy Revolutions Are Still Beyond the Horizon

What Mr. Mills has documented throughout his paper is a factual analysis of the alternative energies that are available today, and their probability of success in meeting our demands for tomorrow, and most particularly, as a replacement to oil and gas which is our concern. These facts which are based on the physics of what our lifestyles demand, and what oil and gas currently provide, set the bar very high for their replacement. The capabilities of the carbon based economy are difficult to see due to them being buried in pipelines, processed in static appearing refineries and delivered to their automobile tank and home without any visual representation of how much it is that the consumers are using. This contrasts to the somewhat abundant visual representation of wind farms and solar arrays that are dotted across the continental landscape. Why wouldn’t all those wind and solar power sources eliminate oil and gas? Without the appropriate analysis the media has represented the situation as completely possible and probable and somewhat inevitable. The facts however state otherwise.

The inexorable march of technological progress for things that use energy creates the seductive idea that something radically new is also inevitable in ways to produce energy. But sometimes, the old or established technology is the optimal solution and nearly immune to disruption. We still use stone, bricks, and concrete, all of which date to antiquity. We do so because they're optimal, not “old.” So are the wheel, water pipes, electric wires ... the list is long.

Hydrocarbons are, so far, optimal ways to power most of what society needs and wants. More than a decade ago, Google focused its vaunted engineering talent on a project called “RE<C,” seeking to develop renewable energy cheaper than coal. After the project was canceled in 2014, Google’s lead engineers wrote: “Incremental improvements to existing [energy] technologies aren’t enough; we need some-thing truly disruptive. ... We don’t have the answers.”97Those engineers rediscovered the kinds of physics and scale realities highlighted in this paper.

Hydrocarbons—oil, natural gas, and coal—are the world’s principal energy resource today and will continue to be so in the foreseeable future. Wind turbines, solar arrays, and batteries, meanwhile, constitute a small source of energy, and physics dictates that they will remain so. Meanwhile, there is simply no possibility that the world is undergoing—or can undergo—a near-term transition to a “new energy economy.”

A difficult and sobering conclusion which defies what would be termed common knowledge. Oil and gas producers have to ensure that they continue to provide ample supplies of oil and gas to the marketplace. Deferring to the alternative energy, environmental or leadership coming from the frightened children is unacceptable as reasons why they should somehow cease to provide for the markets demands. Although this is not a risk in any sense today, what follows the loss of the financial, operational and political frameworks of the oil and gas industry is a decline in the capabilities and capacities that were once available. There is no reason for us to go there, and there is no solution to deal with these issues if we find ourselves in that difficulty. Unlike the financial crisis of 2009 there’s no Fed that can flood the market with quantitative easing of oil and gas supply to overcome the shortfall. I don’t believe it's a risk that we need to take, and certainly not one that we need to explore.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Exchange Offering (IEO) that will fund these user defined software developments. It is through the process of issuing our IEO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Canada Day

Third Friday

Our Oil and Gas White Paper, Part XXXVI

Our Initial Coin Offering

Understanding the history of oil and gas producers behavior towards ERP systems providers. With the lack of any viable ERP solutions in today’s market. (If they were viable would the producers performance be as they are?) The overall industry belief is that ERP systems costs interfere with drilling budgets. The producers behaviors displayed towards People, Ideas & Objects since August 2003 when we first introduced the use of the Joint Operating Committee as the key organizational construct of the industry, revealing a substantial threat to the established bureaucracy by way of an effective alternative to manage the oil and gas business, with ERP providers such as IBM and Oracle abandoning the industry decades ago with nothing more than an uncaring shrug from the producers, with oil and gas ERP systems investors now being part of the paleozoic era, People, Ideas & Objects were the last man standing that were providing a solution to the issues created by an uncaring and conflicted producer bureaucracy. Our Preliminary Specification is a solution that provides trillion of dollars in incremental value for the industry over the subsequent 25 year, post implementation period of our product. We now hear producers state they’re losing billions of dollars per year as a result of what these specific issues are bringing to their door today. Issues that have led to catastrophic consequences to their relationships with the investment and banking communities, collapse of the asset sale marketplace with too many producers seeking to sell too many properties and now cash and working capital unable to be enhanced in any material way due to this valueless industries demands for substantial cash, just to operate. The industry and producers have been so utterly destroyed that the consequences are, in People, Ideas & Objects opinion, terminal to the status quo. We therefore believe we stand to experience substantial project risk in approaching the development of the Preliminary Specification if we were to work with the status quo as previously envisioned. And therefore have terminated the opportunity to develop the necessary software and communities on behalf of the status quo producers and industry. We are therefore, in the spirit of creative destruction, commencing the redevelopment of the oil and gas industry as it needs to exist to approach the opportunities and issues that oil and gas must resolve in order for our society to succeed.

Discussion throughout the fourteen years of this blogs history has been hostile towards the producer bureaucrats. Threatening them with effective and efficient, alternative methods of organization gets their back up. Speaking on theirs and our behalf, we have enjoyed one anothers positions and actions against each other over this period of time. Yet even in this time of severe financial distress and material upside from the Preliminary Specification they do not stop their aggressive posture against us. It was last year we were experiencing momentum in our initiative from a number of areas that I would suggest were strong and unexpected. We feel this started the latest bureaucratic campaign in which the industry has moved to stall that momentum by asserting their influence with their pocketbooks. In a somewhat constrained market, fresh cash was a welcome respite to some of those that were interested in what we were doing. We felt this was a consistent and creative action by the producers. We have experienced plenty of fight, vigor, creativity and attitude when it came for them to protect their turf. Which leaves us somewhat perplexed as to where these people go when it comes time to protect their businesses elsewhere. Nonetheless, as a student of business I feel I could learn a thing or two from these people.

If it is reasonable for the bureaucrats to, as I call it, “parse” the revenues that they enjoy to support the defence of their ways and means. Then certainly it would be reasonable for others to parse those revenues to the benefit of the industry on a proactive and constructive basis in order to garner favor and allegiances. So we did. In retrospect we may have been the ones who started this with the movement, or should I state the parsing, of the G&A costs of administration and accounting being reallocated to the service providers. My attitude however is to let the parsing begin!

The Preliminary Specifications decentralized production models price maker strategy is able to raise commodity prices in the North American market to ensure that all production is profitable, always. This does not mean that the entire North American production profile will be producing at any point in time. If commodity prices rise due to increased demand, any production that is shut-in could be returned due to the higher prices. Or alternatively the producers themselves may be able to bring shut-in properties back on the market through their innovativeness. Determinations of profitability will consider all the costs of exploration and production and most particularly a reasonable accounting of the capital costs. One that considers the dynamics of what capital markets are dictating to all industries. We believe that it is therefore necessary to deplete these capital costs, in a capital intensive industry, over a 30 month period in which all of the capital costs are returned to the producer firms for reinvestment. Therefore, the commodity prices necessary to compete in the capital markets, in this the shale era are expected to be, based on our calculations as much as $150 / boe. We see the current approximate $100 differential of what is believed to be necessary in terms of cost vs what existing producers are willing to accept as the extrinsic value of the industry. An amount that is available to the producer firms with just the tiniest bit of effort and a sliver of the cash that has already been lost. Since they’ve displayed to us that they have no interest in these extrinsic revenues we are therefore “parsing” them from the producer firms.

It is critical at this point to assess the industries ability and capabilities to make the changes to earn these differentials themselves. Or, why have they not earned them at this point? They’ve expressed no propensity to do so but why is that? First we would assert our Intellectual Property regarding the use of the Joint Operating Committee and the Preliminary Specification. There were five times in which the bureaucrats attempted to circumvent our copyright. Each attempt closing the door on that opportunity and therefore only making our IP more valuable. Secondly the configuration of the industry and producer firms as specified in the Preliminary Specification is radical surgery that is necessary due to the fact that the industry can’t operate to make its costs variable, based on production, in any other manner that I could see. Who knows what someone else may come up with using another method of organization. The use of the Preliminary Specifications software, user community and service providers are the only manner in which the industry will be provided the opportunity in which to operate for at least the next ten years. As it would take that long, at a minimum, to come up with an alternative idea and research it to the level that it would be viable. Seeing the industries propensity to change in the face of existential threats, what would provide whomever that is with the motivation to undertake that initiative. Therefore, good luck.

Our parsing process continues by identifying the $100 / bbl differential, or extrinsic value. Only the Preliminary Specification and its licensed communities can provide this. Therefore access to these software and services is controlled by the Intellectual Property that is the source of the software. What is particularly grating to the producers is that we continually claim that it is not enough to own the oil and gas asset anymore. It is also necessary to have access to the software that makes the oil and gas asset profitable. Which can only be achieved by way of the Preliminary Specification. As the owner of its Intellectual Property I therefore have the right of access as something that is controllable through People, Ideas & Objects licensing. And as a result I have attached the $100 / bbl extrinsic value to that right of access and am preparing to issue an Initial Coin Offering where the coin holder earns, we recommend one third, of an interest in the identified extrinsic value. We agree that it is a bold assumption of People, Ideas & Objects that producers would turn to the Preliminary Specification should the fee for use be $33 / bbl to the coin holder. We would suggest however that the producer consider the reasons that their investors should be precluded from earning the $67 / bbl in what we call “free money.” Our free money strategy is as a result of the producers not having put any effort or money in the development of the extrinsic value they’ve left to atrophy for these past four decades. The coin holders pay the costs of our development budget in exchange for the rights of access to the People, Ideas & Objects software and user community service providers.

Producer bureaucrats have chosen to fight us throughout our existence. There latest tactic is to buy the allegiances of others with the monies that they earn from oil and gas revenues. Parsing off communities and organizations that have had an interest in the work that is done here at People, Ideas & Objects. We’ve begun doing the same. Our ICO seeks to parse one third of the extrinsic value that we generate, our $25.7 to $45.7 trillion dollar, 25 year value proposition, in exchange for the coin holders funding the development of the Preliminary Specification. In exchange we provide our coin holders with the exclusive right to access the software and services that are developed from the Preliminary Specification. It is in that way the producers, in whatever form they’ll take, will need to arrange with the coin holders to have access to the systems they need to operate their firms, and satisfy their investors. We are also parsing out the accounting and administrative costs budget from the producer firms and diverting these to the service providers as revenues for their operations. Yet I still see much more of the producers revenues left!

Our timelines regarding the issuance of our ICO is approximately three years from today, or July 4, 2022. The publication of this white paper is the beginning of this process. This white paper is an attempt to consolidate the entire position that People, Ideas & Objects, our user community, service providers have at this point in time. Unfortunately, with the length of time we’ve been pursuing the objective of providing the most profitable means of oil and gas operations and the devastation in the oil and gas ERP software market, People, Ideas & Objects are resource constrained. Therefore in the time vs cost approach of raising the budget for our software developments, time is the factor that we do have.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper, Part XXXV

Service Providers 

We’ve discussed in this white paper the critical role our user community and their service provider organizations have in implementing People, Ideas & Objects Preliminary Specifications and most specifically the decentralized production models price maker strategy. They are how we convert all of the producers administrative and accounting costs to a variable, industry based capability, based on production, from the current fixed accounting and administrative costs of the producers. Enabling the flexibility necessary for producers to be profitable everywhere and all the time. The service providers enable a number of other attributes that we’ll be discussing as part of our solution in this section. These include how People, Ideas & Objects, our user community, service providers and coin holders provide the dynamic, innovative, accountable and profitable oil and gas producer with full coverage of all aspects of the knowledge of administration and accounting in our service offering. And the independent nature of this offering.

We learned many things within the Preliminary Specification that are necessary for the dynamic, innovative, accountable and profitable oil and gas producers. Capabilities and capacities in the earth science and engineering disciplines are what the producer should be focused on in order to increase their competitive advantage. Capabilities are as simply defined by Professor Carliss Baldwin as “Knowledge begets capabilities, and capabilities begets action.” Or  Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy” defined the producers role as...

Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. p. 27

Which Professor Langlois later went on to define capabilities as the “knowledge, skills and experience” of the firm. We would add ideas to that list as well. The question that is asked then is what is knowledge? Knowledge consists of two distinct types, explicit and tacit knowledge. Contained within the People, Ideas & Objects software will be the explicit knowledge of how and what an oil and gas producer needs in which to operate profitably. And absolutely none of the tacit knowledge. Tacit knowledge can’t be captured in any form. It is knowledge that is “learned by doing” and defined well in this businessdictionary.com definition.

Unwritten, unspoken, and hidden vast storehouse of knowledge held by practically every normal human being, based on his or her emotions, experiences, insights, intuition, observations and internalized information. Tacit knowledge is integral to the entirety of a person's consciousness, is acquired largely through association with other people, and requires joint or shared activities to be imparted from one to another. Like the submerged part of an iceberg it constitutes the bulk of what one knows, and forms the underlying framework that makes explicit knowledge possible. Concept of tacit knowledge was introduced by the Hungarian philosopher-chemist Michael Polanyi (1891-1976) in his 1966 book 'The Tacit Dimension.' Also called informal knowledge.

In Professor Richard Langlois’ paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.” He defines tacit knowledge as.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

It is one thing to provide the industry with a quality solution from the point of view of explicit knowledge. It’s also easily assumed that industry has already acquired that knowledge to some extent. The need to have the tacit knowledge implemented in conjunction with the systems and procedures that People, Ideas & Objects user community and developers are defining is necessary to ensure a successful implementation. The service providers are People, Ideas & Objects implementation of that tacit knowledge. They will be the ones that are providing People, Ideas & Objects software, their services and process management to the industry. It will be in that way that producers will be able to rely on their industry based, variable, accounting and administrative capabilities to be completed in a timely and accurate manner.

The latest systems buzzword is Microsoft Azure and Artificial Intelligence to resolve the industries issues. We believe these are the incorrect directions for the industry to travel. They are technologies looking for a problem to solve. That is not the case in oil and gas. People, Ideas & Objects are using the business approach to solve the business issues being realized in oil and gas. Using technology to solve the issues we’ve identified is the most effective means in which to resolve them. What we are seeking to do is to establish a strong foundation for the industry in which they can build from. Today, most producers have not organized their data or accounting necessary to provide the profitability of any specific property. Many will argue that point with me. To which I would ask what was the actual overhead that was incurred at any specific property? Not one producer in the industry is aware of what the actual administrative and accounting costs to manage a property are in the industry. Giving people the latest phones, Artificial Intelligence or Cloud Computing is misdirection and a misunderstanding of the issues.

Service providers are independent and are not concerned if its Exxon or a startup that is the owner of the property that they’re billing for their services. Understanding that the service providers will be limited to the data elements that will be necessary for them to manage the process they’re responsible for, it is doubtful they’ll know which client it is they’re charging when they issue their billing to a Joint Operating Committee. Their concern is the efficient and effective management of the process that they’re exclusively responsible for. If a producer does have an issue with their service they’ll know who to contact, the user community member that heads up that service provider. That member of the user community will have the power and the tools necessary to deal with the issues and opportunities that the industry may have as a result of any changes or defects in the software or process the service provider manages. They are the sole point of contact for the industry to discuss the process’ management, and are the only people our software developers listen to. As we’ve always said in today’s current software environment, who do you go to see when your current software solution is not as it should be?

Consolidation within the oil and gas industry is a symptom of creative destruction. Startup oil and gas producers have been extinct for many years now. Another symptom. We see Anadarko throwing in the towel and many of their fellow intermediates believing, hoping, and anticipating, that they may be the next intermediate to be poached. Shell, BP, Exxon and Chevron will survive because that is what they do. That doesn’t make them efficient. If Exxon undertook the development of a system to provide the industry with ERP applications would Shell, BP or Chevron be interested? Of course not. And the same would go for any other producer. It is the independence of this sub-industry that People, Ideas & Objects are creating and their independent approach to the technical aspects of the accounting and administration of oil and gas that makes it useable by each and every producer no matter what their size or configuration. Startups won’t care that Exxon uses it and has, as a result of their production profile, paid the majority of the software development costs through our coin holders levy. They’re only concern will be that everyone pays the same fee for the same service. The independent nature of our “sub-industry” is an attribute that all producers, that is the ones that survive, will appreciate when our coin holders have funded the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper, Part XXXIV

In Mr. Mark Mills paper “The New Energy Economy: An Exercise In Magical Thinking” next section we’ll be discussing the high cost of ensuring energy availability. Within the Preliminary Specification we have determined and implemented through the decentralized production models price maker strategy that the oil and gas commodities are price makers. Not the price takers they’re assumed to be in the industry over the past number of decades. One of the characteristics of a price maker is that there are no substitutes. Which we assert that there is none for oil and gas, and therefore ask. Can you carry nuclear energy in a jerry can, or process chemicals from hydro, lubricate your chassis with solar energy, pave your road with wind energy or power your transpacific shipping fleet with batteries? There is a role for all forms of energy used in today’s energy mix. The limits to solar, wind and battery are real and the myths are based on wishful thinking. It will be a significant and powerful energy source that will be used to substantially reduce our dependence on carbon based energy. Or we’ll need to make some critical decisions on what is more important to us. Life and death decisions. The volume of oil and gas that is consumed today by the global economy is invisible to the consumer. They never see what it is they’re getting or using. The lack of transparency in pipelines, refineries and filling stations makes it look like it could easily be changed by one Tesla charging station. “Then those oil and gas companies will be out of business for good.”

Availability is the single most critical feature of any energy infrastructure, followed by price, followed by the eternal search for decreasing costs without affecting availability.

It costs less than $1 a barrel to store oil or natural gas (in oil-energy equivalent terms) for a couple of months.20 Storing coal is even cheaper. Thus, unsurprisingly, the U.S., on average, has about one to two months’ worth of national demand in storage for each kind of hydrocarbon at any given time. 21

Meanwhile, with batteries, it costs roughly $200 to store the energy equivalent to one barrel of oil. 22 Thus, instead of months, barely two hours of national electricity demand can be stored in the combined total of all the utility-scale batteries on the grid plus all the batteries in the 1 million electric cars that exist today in America. 23

For wind/solar, the features that dominate cost of availability are inverted, compared with hydrocarbons.While solar arrays and wind turbines do wear out and require maintenance as well, the physics and thus additional costs of that wear-and-tear are less challenging than with combustion turbines. But the complex and comparatively unstable electrochemistry of batteries makes for an inherently more expensive and less efficient way to store energy and ensure its availability.

Since hydrocarbons are so easily stored, idle conventional power plants can be dispatched—ramped up and down—to follow cyclical demand for electricity. Wind turbines and solar arrays cannot be dispatched when there’s no wind or sun. As a matter of geophysics, both wind-powered and sunlight-energized machines produce energy, averaged over a year, about 25%–30% of the time, often less.24 Conventional power plants, however, have very high “availability,” in the 80%–95% range, and often higher. 25

A wind/solar grid would need to be sized to meet both peak demand and to have enough extra capacity beyond peak needs in order to produce and store additional electricity when sun and wind are available. This means, on average, that a pure wind/solar system would necessarily have to be about threefold the capacity of a hydrocarbon grid: i.e., one needs to build 3 kW of wind/solar equipment for every 1 kW of combustion equipment eliminated. That directly translates into a threefold cost disadvantage, even if the per-kWH costs were all the same. 26

Facts vs opinions, two sides of the same fence. The Internet has created an environment where opinions are more valuable to their holder than the facts that defy them. We need to overcome this tendency and begin to make rational decisions based on research and facts. Most particularly within the organizations that are providing services that are critical to our economy and our way of life. Producers being driven by the prevailing opinion based on the emotions of optimism and hope have brought us to a situation where the industry is breaking down. This is irresponsible and a capitulation of their duty as producers. Assuming other energy sources will pick up their slack, if necessary, is clearly never going to happen. It’s time to rebuild the industry in the vision of the Preliminary Specification and establish it on the basis of profitability everywhere and always. Then we’ll be able to approach the real possibility of energy independence in North America on a sustainable basis.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Exchange Offering (IEO) that will fund these user defined software developments. It is through the process of issuing our IEO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper, Part XXXIII

We continue our review of Mr. Mark Mills paper "The New Energy Economy: An Exercise In Magical Thinking." Based on factual data, and the application of known physics Mr. Mills basis for making his conclusions that alternative energies are incapable of meeting our demands are as follows.

Scientists have yet to discover, and entrepreneurs have yet to invent anything as remarkable as hydrocarbons in terms of the combination of low-cost, high-energy density, stability, safety, and portability. In practical terms, this means that spending $1 million on utility-scale wind turbines, or solar panels will each, over 30 years of operation, produce about 50 million kilowatt-hours (kWh)—while an equivalent $1 million spent on a shale rig produces enough natural gas over 30 years to generate over 300 million kWh.

Solar technologies have improved greatly and will continue to become cheaper and more efficient. But the era of 10-fold gains is over. The physics boundary for silicon photovoltaic (PV) cells, the Shockley-Queisser Limit, is a maximum conversion of 34% of photons into electrons; the best commercial PV technology today exceeds 26%.

Wind power technology has also improved greatly, but here, too, no 10-fold gains are left. The physics boundary for a wind turbine, the Betz Limit, is a maximum capture of 60% of kinetic energy in moving air; commercial turbines today exceed 40%.

The annual output of Tesla’s Gigafactory, the world’s largest battery factory, could store three minutes’ worth of annual U.S. electricity demand. It would require 1,000 years of production to make enough batteries for two days’ worth of U.S. electricity demand. Meanwhile, 50–100 pounds of materials are mined, moved, and processed for every pound of battery produced.

What we also know is the volume of oil and gas produced totals 147 million boe / day. The mechanical leverage which our society generates from one barrel of oil is the equivalent of 23,200 man hours. Therefore based on the annual production of oil and gas, one man year of labor consisting of 1,952 hours, the total output of oil and gas produces the equivalent to 61 times the 7 billion people on the planet. If we expect that batteries, wind and solar are going to provide a worthwhile replacement to the scope and scale which oil and gas provides then that’s fine. If however, the alternatives are unable to provide a replacement then the need to find some other source of alternative energy to fuel our advanced economies and high standards of living. If we should lose the 61 times 7 billion people which oil and gas is the equivalent of, then we should prepare to live like caveman and fight it out just like we used to. People, Ideas & Objects believes if given these facts the consumer will make the appropriate choice. Potential doom and gloom someday down the road by adopting policies such as the Green New Deal. Or imminent disaster by denying ourselves the way we live today. We believe this is the posture necessary to be taken by the oil and gas producer, what it is they should be stating in order to promote their value to society and their products instead of the unqualified endorsement of “science” that obstructs and confuses their message and their mission. Producers in Canada love to accuse the pipeline companies and the governments of not doing their jobs in securing the pipelines which would ensure their revenue upside was stable. Rereading the sentence once again and the fallacy of the oil and gas CEO comes into clear view. It’s other people’s fault for producers losing out on the upside of their revenues. The only role the producer has in securing any pipelines space is to make the payments to the environmental activists so they have the financial resources to organize, legislate, litigate and protest the pipelines.

Today’s reality: hydrocarbons—oil, natural gas, and coal—supply 84% of global energy, a share that has decreased only modestly from 87% two decades ago (Figure 1). Over those two decades, total world energy use rose by 50%, an amount equal to adding two entire United States’ worth of demand.

The small percentage-point decline in the hydrocarbon share of world energy use required over $2 trillion in cumulative global spending on alternatives over that period. Popular visuals of fields festooned with wind-mills and rooftops laden with solar cells don’t change the fact that these two energy sources today provide less than 2% of the global energy supply and 3% of the U.S. energy supply.

To completely replace hydrocarbons over the next 20 years, global renewable energy production would have to increase by at least 90-fold. For context: it took a half-century for global oil and gas production to expand by 10-fold. It is a fantasy to think, costs aside, that any new form of energy infrastructure could now expand nine times more than that in under half the time.

If the initial goals were more modest—say, to replace hydrocarbons only in the U.S. and only those used in electricity generation—the project would require an industrial effort greater than a World War II–level of mobilization. A transition to 100% non-hydrocarbon electricity by 2050 would require a U.S. grid construction program 14-fold bigger than the grid build-out rate that has taken place over the past half-century. Then, to finish the transformation, this Promethean effort would need to be more than doubled to tackle nonelectric sectors, where 70% of U.S. hydrocarbons are consumed. And all that would affect a mere 16% of world energy use, America’s share.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Exchange Offering (IEO) that will fund these user defined software developments. It is through the process of issuing our IEO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Vacation!

No postings until June 24, 2019

Our Oil and Gas White Paper, Part XXXII

We now begin our review of a paper that has been written by Mark P. Mills, a Senior Fellow at the Manhattan Institute. This paper is entitled “The ‘New Energy Economy:’ An Exercise In Magical Thinking.” This is a remarkable paper that presents the factual basis in which physics will deny the common thinking that there will be a natural transition to clean, alternative energy sources. That these sources of energy would replace the carbon supplies that we rely on today. As a precursor to our review I want to raise a number of points as to why this analysis is critical for the purposes of People, Ideas & Objects Preliminary Specification and the oil and gas industry at large. It is common thinking that “if” the prices of oil and gas commodities breached a certain point, that would initiate the transition to alternatives earlier than would be in the “best interest” of the oil and gas industry. I will be quoting from this paper extensively due to the high quality of the work that has been done, the factual basis that is presented in this document, People, Ideas & Objects are not and have no intentions of ever being in the business of researching within this alternative energy area, and therefore will be invoking the fair use doctrine. Starting with the introduction of the paper Mills states clearly that the alternative energies transition is a myth.

This “new energy economy” rests on the belief—a centerpiece of the Green New Deal and other similar proposals both here and in Europe—that the technologies of wind and solar power and battery storage are undergoing the kind of disruption experienced in computing and communications, dramatically lowering costs and increasing efficiency. But this core analogy glosses over profound differences, grounded in physics, between systems that produce energy and those that produce information.

In the world of people, cars, planes, and factories, increases in consumption, speed, or carrying capacity cause hardware to expand, not shrink. The energy needed to move a ton of people, heat a ton of steel or silicon, or grow a ton of food is determined by properties of nature whose boundaries are set by-laws of gravity, inertia, friction, mass, and thermodynamics—not clever software.

This paper highlights the physics of energy to illustrate why there is no possibility that the world is undergoing— or can undergo—a near-term transition to a “new energy economy.”

Locomotion of humans has historically been through the automobile. Therefore the transition to renewable energy will see battery powered cars continue that trend. This is ludicrous. Battery powered cars is an oxymoronic application of battery power that we’ll look back at, in the very near future, as a distraction. Two ton vehicles being powered by batteries, hurtling down the highway at 60 mph, could only ever make up 5% of the automotive market. That number of batteries would consume the world’s resources of the ingredients that make up any and all batteries. The average speed that a car travels in the intercities of major cities such as New York is 8 mph. Maybe the application of battery powered vehicles is in bicycles, segways and scooters where consumers could use them to travel at up to speeds of 15 mph for those short range 3 - 4 mile trips that they would have otherwise taken the car. This would be a far more logical progression of the technologies and its application. Particularly when the volume of battery power is constrained. The stumbling block to this progression is the outright banning of these battery powered vehicles in many cities around the world.

Nothing is going to eliminate or reduce the consumption of oil, natural gas or coal for the foreseeable future. Current and future use of these forms of energy are not materially changed as a result of the substantial investment that have been made in them, the constraints that are faced, the unbelievable volumes of oil and natural gas that are consumed each day, and the endowment that mother nature has provided in the oil and gas resources that we have built our economy around. Until you can fully visualize the power that is derived from the 147 million barrels of oil equivalent produced each day, you’ll never understand how fruitless it is for the Energizer Bunny to try and compete. The graph that follows is provided by Mark Mills’ paper “The ‘New Energy Economy:’ An Exercise in Magical Thinking.”

What is clear is that after 50 years minimal benefit will have been gained from the development of these alternative energy sources. Although it appears to be solely at the expense of hydrocarbons the sample size would be too small to draw any conclusions. At 2% currently, with wind and solar fields producing energy across the continent it’s reasonable for people to ask, “Is that it?” It will require development of some new type of technology that is unknown today that will drive the carbon economy into instinction. I’m betting on pocket fusion reactors myself. Here we have another graph from Mark Mills’ paper showing what electrical output can be derived from a $1 million investment in shale, wind and solar energy.

In light of these points what is the responsibility of the oil and gas industry? Continued verbal support for a myth and fallacy that inevitably will be seen as untrue? Continue to pay the environmental activists their ransom for being good corporate citizens when the purpose of those organizations is to disrupt the producers and confuse society? Let society casually roll down the wasteful and unproductive environmental focus and alternative energy blind bunny trails, only to be caught out when they see their dependence on oil and gas is far more significant than they could have ever imagined. Are the producers bureaucrats pursuing these alternative narratives so that they look like good corporate citizens at the expense of doing their job of ensuring that adequate energy is profitably and innovatively sourced for the long term? Why haven’t they asserted the industries narrative regarding the value that oil and gas provides society? What has been the purpose for the consumers discount that they’ve obviously provided consumers at the expense of their investors over these past four decades? It’s always best to consider these questions in light of the fact that oil and gas in North America is not a business. A business wouldn't do the things that these producers do and without any leaders, it's difficult for them to assert any leadership.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper, Part XXXI

Our Plan

People, Ideas & Objects plan contrasts with the oil and gas producers plan simply through its existence. The lack of a plan, or to “muddle through” is a feature, not a bug of the North American producer. Active management of the industry at any point, and in any form, is inconsistent with the industries culture developed over the past four decades as a result of the SEC implementing its Full Cost and Ceiling Test regulations for capital assets. These regulations have extinguished the producers initiative to act. If everything that you spend becomes an asset that increases the value of the firm, if everything that you produce is almost pure profit, you are disincentivized to see the situation as anything but wildly successful. “What could be wrong?” Planning, strategy and active management have been ineffective in this environment and as such grew to be unnecessary and therefore not undertaken. How else could you describe the past ten years in the natural gas business in which nothing has been done. If the business should ever have difficulties, as it has always done before, “it will work itself out.” People, Ideas & Objects have been in the oil and gas market promoting elements of the Preliminary Specification since 2005. The full specification since 2013 and nothing was done by the producers other than to abuse us and attempt to circumvent our Intellectual Property on five separate occasions. The threat that we present to the bureaucracy through disintermediation has been the only issue that has been of concern to our very good friends the producer bureaucrats.

What we have now, upon critical review, are obscene financial statements being produced by all of the oil and gas producers. Disproportionately large property, plant and equipment accounts are contrasted by minimal to negative working capital. Shareholders equity that has in many cases retained and current losses rapidly eating away at the money that investors provided to the producers over the course of decades of annual shareholder issuances. Revenues that pale in comparison to the capitalization of the firm, yet produce fantastical profits due to the lack of any substantial recognition of the capital costs of exploration and production in a capital intensive industry. Profitability was not the religion of the industry. Profitability was irrelevant, or we were told the thousands of times when we claimed that we provided oil and gas producers with the most profitable means of oil and gas operations. “Who cares” we were told. Today that profitability is such an issue in oil and gas that the investors and bankers have left as a result of the lack of it, the cash continues to erode from the industry, the service industry and the broader economies are now suffering as a result of a depression era downturn in oil and gas.

Profitability is the purpose behind the Preliminary Specification. Addressing the issue of producing unprofitable production all the time, and everywhere has been resolved by People, Ideas & Objects. Ours is a trillion dollar value proposition. Yet no movement from the producers. If they can’t be motivated by incremental value and real profitability in their organizations, based on their investment in the Preliminary Specification, why would investors and bankers be motivated to return and invest now that they understand the producers culture and history as just described. How is it then that the credibility in oil and gas regarding profitability will come about? The answer is the producers can’t, won’t and will not ever change. The cultural differences are too significant for them to bridge. The damage they’ve incurred to date is also too substantial for them to recover from. Rebuilding in the style of creative destruction will be faster, more effective, more productive and most importantly of all, more profitable. The acquisition of credibility regarding profitability by the existing producers has passed. They could have proceeded with the Preliminary Specification at any point in the past decade. They didn’t, I can’t help them now. They’re too far gone for me or anyone to rehabilitate, if we attempted to implement the Preliminary Specification I think it might end up being, as a result of the damage that has been realized, a failure. And then what?

That therefore is our plan, we are proceeding with our Initial Coin Offering (ICO) described below in order to raise the funds needed for the development of the Preliminary Specification and associated communities and capabilities. We expect that the ICO can be issued in three years time and provide us with the means in which we can move forward in the industry. Review of the “History of ERP Systems and Integration in Oil and Gas” section below will show the reasons that this is the only opportunity open to us. At which point we can then begin the development / integration of the technologies within whatever configuration the industry may be in. Key among these is the price maker strategy to ensure that all production is profitable and the structures that support innovation throughout oil and gas and the associated sub-industries are put into place. Innovation that ensures the consumers are provided with the lowest cost for their energy needs. Profitability has been an issue that we have argued for decades here at People, Ideas & Objects. It is in our DNA, the Preliminary Specification, and makes up our old time religion. As one can also see with the tone of this white paper, the history between us and the producer bureaucrats, the uncompromising manner in our approach, we will not compromise on these fundamental needs of the industry. Those within the oil and gas industry should now be able to look around and see clearly why profitability is so critically necessary, everywhere and always. The damage that I see is comprehensive and the expectation that investors will return to make everything all right again is only evidence that they’ve learned nothing and maybe never will. Expecting that investors will clean up the mess is frightening on two fronts. There isn’t enough investor cash anywhere to even begin solving the industries problems, the consumer is the only source of cash large enough. And when the investors are expected by everyone to make a difference today, you scare the living daylights out of the investors with such over the top, unreasonable requests.

Once we’ve established the capability for all production to be profitable everywhere and always, our plan will begin the process of increasing specialization and expanding the division of labor. This will be necessary in order to achieve a greater throughput from the same resource base. If we are to expand our productive capacity by another 8 million boepd to be truly energy independent, we will need to either expand the resources or figure out a way in which to work more efficiently. We have issues with the supply of earth scientists and engineers, and with the downturn pushing the capabilities of each producer beyond what is sustainable in the long term, this issue needs to be addressed before we can expand our deliverability. Specialization and the division of labor are the toolset in which the industry can achieve these objectives.

Once the profitability and throughput potential are addressed then the industry can set upon the objective of energy independence on the continent. Shale makes this a viable and worthwhile objective, however the manner in which its being done today provides benefit for no one other than the bureaucrats running the producer firms. Energy independence without profitability everywhere and always is unsustainable. With the state of affairs throughout the oil and gas economy we see clearly that today is inadequate for everyone's purposes. In addition to the increased throughput that is required there is a substantial amount of work that is needed on new infrastructure and repairs on existing infrastructure that we’ve relied on for many decades. These costs are not going to be undertaken by investors that are duped by specious accounting. They’ve now learned the lessons that oil and gas accounting is fraudulent and therefore these investments need to be undertaken on a different basis, I nominate the consumer. These costs will have to be borne by the consumer who pays the full cost, capital, operating, overhead and royalty of each boe they consume. That way producers can cycle their capital through their organization on a reasonable 30 month basis which will provide them with the cash necessary to reinvest and achieve the energy independence that is more than possible.

This is our plan, one that we feel deals with the realities of a critical industry that is necessary in ensuring our way of life in our advanced economy. What we do know as a result of the (in)action of the past decade is that the producer bureaucrats aren’t interested. They don’t have a plan and if history teaches us anything, when the situation becomes untenable that’s when management finds greener pastures in other industries. We’re not aware of any of these plans, it's just history tells us of these events that have happened before.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper, Part XXX

A continuation of the section entitled
Overinvestment Leads to Overproduction

The technical economic classifications of price makers and price takers are as follows. From Investopedia.

What Is a Price Maker?

A price maker is an entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker within monopolistic competition produces goods that are differentiated in some way from its competitors' products. The price maker is also a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.

What substitutes are there for oil and natural gas? Can hydro power lubricate your engine? Will nuclear power provide the chemicals that oil and gas can? What size jerry-can can you use to carry electricity from wind or solar? Clearly there are no substitutes to oil and natural gas. And although in the hands of the bureaucrats oil and gas has not been a profit maximizer, that does not mean that it can’t be, or shouldn’t be. The Preliminary Specifications decentralized production models price maker strategy enables producers to produce only profitable production, everywhere and always. Another characteristic of price makers is that small changes in production volumes lead to large changes in price. We’ve seen this with the actions of OPEC+ and the Alberta government’s implementation of mandatory production cuts. If oil and gas aren’t price makers then they would be price takers as the producers assume. So what are the characteristics of a price taker? Again from Investopedia.

What Is a Price-Taker?

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

The example that could be used here is the bottled water market. If you were to compete in that market what price would you set for the bottled water that you produced? Whatever the market provided because the choice between providers is immaterial to the consumer. Therefore cost control becomes the factor where profitability is earned. This may sound like the oil and gas commodities, but is it? It certainly is how the current producers bureaucrats perceive the business to be. The question that needs to be answered therefore is what would happen if the supply of bottled water were halved? I believe the price would remain the same as there would be alternatives such as the tap, juice or soft drinks that provide the consumer with their needs.

Although I’m sure I’ll be provided with continued disagreement from the producers bureaucrats, People, Ideas & Objects believes we’ve proven that oil and natural gas are price makers. Therefore the solution is to solve overproduction in the North American continent from a global, continental and regional point of view. So that producers are able to attain the prices that are necessary to profitably cover the full capital, operating, royalty and overhead costs of oil and gas exploration and production, based on a reasonable accounting. That there is an argument between myself and the industry on essentially this point, since at least 2005, in this 21st century, with the high cost of shale, with shales inherent rapid production decline rates and with the state of collapse that the industry is in. Is truly surreal to me.

What we are therefore discussing is instilling some form of production discipline in all of the producers involved in North American based production. The various forms of production discipline that have been recently implemented are the voluntary production cutbacks in OPEC+, and the mandatory production cuts in Alberta. Neither of these are suitable for the purposes of a long term industry solution. As soon as the mandatory production cuts were implemented, companies such as Canadian Natural, who were strong advocates for, and were one of the producers that requested the government implement the policy. Soon became dissatisfied with the allocation that they had to carry in comparison to other producers. This is the issue with mandatory or voluntary cutbacks. They are effective in the short term however discipline can be short lived when cheating and dissatisfaction with the policy creeps in.

People, Ideas & Objects have chosen profitability as the determinant to allocate production. If a producer can produce the property profitably, assuming a reasonable accounting, then there is no reason they shouldn’t produce. If it is unprofitable then the motivation to shut-in the property is instilled in the producer to maximize their profits. Having properties that are not profitable produce will only dilute their profitable properties and the overall corporate profits will suffer. If the property is unprofitable then the producer has every motivation to evaluate the property to ensure that all of their earth science and engineering capabilities can be applied to it to return it to profitable production as soon as possible. This is the structure, configuration and organizational template that is inherent in the Preliminary Specification for both the dynamic, innovative, accountable and profitable oil and gas producer but also the industry. Producers need to choose what methodology they should implement to solve the overproduction that is in evidence since 1986, wholly attributable to their current business model, and aggravated by shale in today’s environment. We believe that profitability is the only fair and reasonable method for a producer operating in a capitalist society such as North America. And therefore have adopted that for the Preliminary Specification.

There is an implied variance in the methodology of accounting conducted in the industry. Which is true in the current business model. What if the Preliminary Specifications software, in conjunction with the service providers were providing a standardized accounting methodology across the industry? This is what is possible with the implementation of the Preliminary Specification. Each property would be subject to the same accounting treatment by the wholly independent service providers who have the entire industry as their client base. In almost all instances the data and information they’ll be working with will be limited to the process they have under management. These data volumes will be significantly large, yet limited in their number of variables. To know what an individual properties situation is, or to influence the accounting for one individual producer would be difficult for them to undertake. The service providers accounting processing would be standard and as such the results would be the determination of profitability throughout the industry would be a reliable measure of performance that is consistent.

If a producer understands that their property is unprofitable and needs to be shut-in they’ll know they’ve received the same accounting treatment as everyone else in the industry. That the profitabilities determination will be standardized at the property level. There will be many instances where some of the participants in the property remain profitable while others are not. This would be a relatively frequent occurrence that would require that the determination of profitability be assessed at the whole property level. Shutting-in properties is not the detrimental action that the producers bureaucrats believe it is today. This should be seen by the producers as an opportunity to enhance the performance of the property, return it to profitable operations and increase their overall corporate profitability.

We should also note this brings about a new dynamic with respect to the age of the producing properties. If the producer has had the properties in excess of the two and one half years that we recommend that they retire their capital costs. Then those older properties will not have to carry any capital costs and as such these properties will be profitable at all times. This brings about the need for a new capital discipline in terms of new projects for the producers. A discipline that asks if the new wells being drilled will be able to achieve profitable production and therefore produce? Creating a higher threshold, we believe, in order to attain project approval. At the same time the acquisition of properties from other producers will not have the associated reserves times current commodity price valuation that they generally do today. The properties acquisition price will need to be on a present value of the future profitability of the property. Therefore we would see much less of the Occidental acquisition of Anadarko for an enterprise value of $69 billion. Assets that have achieved a total of $695 million in lifetime earnings.

The differences noted here are the evaluation of a property based on its financial performance vs. its evaluation based on the reserve report. Currently the industry uses the reserve report to provide an understanding of the properties performance. These reports are not based on actual accounting of the producers but on field estimates of the costs to conduct an operation today. This is the way in which producers are able to state that their costs have been innovatively reduced from $60 / bbl to $20 / bbl in a capital intensive industry and are therefore continuing to produce profitably in a declining commodity price environment. Alternatively, they may be the financial accounting numbers that have somehow, and in miraculous fashion, disposed of the historical aspect of historical accounting.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Our Oil and Gas White Paper, Part XIX

From the section of our White Paper entitled
Overinvestment Leads to Overproduction

Whether overinvestment occurred in oil and gas is under debate by the producers bureaucrats. Not only do they deny that overinvestment has occurred, they deny that it would impact overproduction. The fact of the matter is they believe they always need more investor money. They would then deny that oil and gas commodities are price makers and therefore if there was any overproduction it would not impact commodity prices. They’ll refuse to be a party to any collusion to rectify the situation as proposed by People, Ideas & Objects in their Preliminary Specifications decentralized production models price maker strategy. What motivates these bureaucrats is quite simple, inaction. There’s is a strategy of “muddling along” and “doing nothing.” Which has provided these bureaucrats with handsome compensation for the past four decades. That only five of the past thirty four years were of any value to anyone other than themselves is immaterial in their minds. They have, and will continue to hold onto, these myths to allow themselves to appreciate the work that they don’t do. As anyone can see none of the points in this paragraph, overinvestment, overproduction, price maker and collusion have any basis in fact whatsoever.

Overproduction happened in material ways in the natural gas marketplace over a decade ago. Shale reserves were being exposed to the marketplace and the decline in natural gas prices was precipitous. Prices were eventually damaged in a comprehensive fashion where natural gas has since traded anywhere between 15 to 1 and 25 to 1 of oil as opposed to its traditional heating value equivalent of 6 to 1. Rereading of the previous paragraph may provide the reader with an understanding of a) how this was allowed to happen, b) what efforts have been taken to rectify the situation, and c) why was nothing done? The answer is, the oil side of the business was healthy enough to carry both sides of the business. Which was true, oil was doing well until December 2014. At which time the shale technologies application to oil fields began the same, dare I say, overproduction on that side of the business. And soon we saw the beginnings of the same shale based phenomenon that was seen earlier in the natural gas side of the business.

The difference between the oil and natural gas markets is that one is global and the other is continental. The collapse of natural gas in North America was almost immediate in retrospect. Natural gas prices in North America were substantially lower than anywhere in the world. Then the LNG boom began to export the overproduction of natural gas globally and eventually global natural gas prices fell to where they’re not significantly different from North American prices. Overproduction in oil has a different history. A global commodity that is exportable without extensive facilities. Overproduction took some time before it began to impact the price. However when it did it affected the global prices of oil the world over. Over the past few years we’ve seen efforts by OPEC+ to allocate production quotas amongst its members and Russia to somewhat successfully rehabilitate the global price of oil. Proving the commodity is a price maker through small changes in production having large impacts on price. This is the global situation in oil today. However, the continued overproduction by the North American oil producers have now created their own “regional” oil markets as I call them. Constrained by pipelines, refineries and other physical infrastructure; regions within North America are creating their own oil prices due to the dramatic overproduction that producer bureaucrats insist doesn’t exist. Production from areas such as the Permian, Canadian heavy oil, and others far exceed the takeaway capacity in the region and as a result producers face steep differentials on the oil prices that they receive. Creating what are global prices outside of North America, and regional prices on the continent.

Similar regional prices are being reflected in natural gas. The Marcellus is chronically overproducing with producers receiving about half of the posted price on the New York Mercantile exchange. In the Permian, which produces associated gas, prices fell to the lowest level in the month of April 2019. Prices of -$5.75 were realized. That is producers paid customers $5.75 to take the gas off of their hands. In addition the Permian and other shale basins are collectively flaring 1.6 bcf / day, the equivalent residential consumption of Texas. The point to remember in this diatribe of mine is, that the producers myths that overproduction doesn’t occur, price takers is the role they occupy and it really is not their fault, they’re profitable! Hence we revisit the previous discussion regarding the policies of how costs are capitalized in oil and gas. Even in the desperate times that we find ourselves today our sample of 23 producers reported profits of $6.13 billion for the first quarter of 2019. Of those producers ten reported losses totalling $1.139 billion. One might assume this was an otherwise healthy industry based on these profits. Which is what the producer bureaucrats would assert.

To be continued Monday.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.