Exploding Myths, Part VI

In Part V of our Exploding Myths series we documented the changes that we believe producers will be faced with in the near future. Those challenges include the current lack of investor and banker support, but also a systemic service industry demand for cash upfront for them to conduct any operations. Rendering producers financial capabilities a number of decades behind other industries, making their capacity to provide adequate, competitive returns in the capital markets that much more difficult to achieve. You do reap what you sow however, and the abuse that has been handed out by the producer bureaucrats to the service industry these past few decades has been epic in its disrespect, rudeness and the financial or business risk being placed on those outside of the producer firm. Let us count the ways in which this has occurred.

First it’s important to recognize that oil and gas exploration and production is a primary industry. The revenues that are generated are those derived from the sale of oil and natural gas. Custody of the oil and gas is taken by the producers once the royalties have been paid to earn title of the commodity. Then, and here is the important point, it’s all the producers. At no point does the consideration that the service industry was the critical resource the producer used to obtain those revenues. The service industry representatives are considered to be leeches on the good fortune of the producer. This is the effect that occurs when the revenues that are realized are not recognized for who and what was done to earn them. Therefore the relationship with the service industry can and is in conflict by the bureaucrats hanging on to their cash and the service industry begging to be ordained for a slice of the pie. It is this conflicted relationship with the producers that keeps the service industry from realizing their full potential. If recognized as the dynamic, innovative and productive extension of the producer themselves the relationship would be collaborative and respectful. Instead any new field based developments must be fully described and displayed to the producer before it will be accepted by industry. Essentially expecting the provider to show the producer their Intellectual Property so the producer can understand, but also pass it around to other friendlier service industry representatives. Ones in which the bureaucrat may have an undisclosed personal interest in. China has nothing on the shenanigans of oil and gas bureaucrats. I call this the wash cycle that is systemic throughout the industry. This also allows the producers to claim that they are the ones who are the drivers of innovation. Whereas in reality they’re hesitant to try any new technology for decades, such as coiled tubing and the well known difficulties that Packers Plus enjoyed. Yet bureaucrats are the ones out selling themselves as the innovative ones! Even last year they stated the upside in their profitability from Artificial Intelligence was dramatic! Sure. 

When times are good as they were earlier in this century the chronic boom / bust cycle has caused the service industry to be tepid in their response to the boom’s. This has had an effect on their pricing for high cost items like drilling rigs and the like. When capacities are reached and exceeded as they always are in the boom times it becomes a matter of allocating their few resources on the basis of price, after all they’re running businesses. Therefore exploration and production costs of the producers go up. And this precipitates the producers to open the flood gates in terms of the derogatory terms of what they’ll call their service industry partners, or is that the working class. Greedy, lazy are a few of the Canadian producers favorite. I say “let them eat cake!” has a higher level of empathy than bureaucrats.

Companies such as Chesapeake who commented in their third quarter report that they may not be a going concern, who Moody’s have downgraded their bonds to include a Probability of Default rating will now find that the simple things that took a second or two to complete before may now take a number of hours to complete. I refer to this activity as the herding of cats. When, after several hours of work is done, you turn around and half the cats you thought you had lined up somehow wandered off. Undeterred you begin the process once again.

Yet all of this would be so simple to solve. People, Ideas & Objects have been promoting our solution since 2013 with key components of it as far back as 2007. Well before the issue of overproduction and oversupply became as problematic as it has today. World Oil is now stating that...

On that basis the route to salvation for this very important fuel increasingly has to come from companies cutting production, either voluntary or involuntary.

When they say this it almost sounds like common sense! Yet natural gas has been depressed for ten years, oil for 5. Investors left almost 4 years ago. The net result of this deterioration in the producers business, is nothing. A shrug and an “oh well, we’ll muddle through like we always do.” The extent of this crisis is past anything that can be considered acceptable. Serious degradation in the financial capabilities and now in the capacities and capabilities in the operating theater are collapsing. Humpty Dumpty style. And the only thing we’ll hear as a result of the World Oil suggestion of shutting in production is “Shut-in production? Not me, we’re profitable!”

Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.

Milton Friedman

The now common claim that capitalism is waning and a broader perspective is needed is unnecessary. Capitalism is in fine shape and all that is required in oil and gas is that they practice it. The difficulties in the service industries and general economy are directly relatable to the inability of the bureaucracy in the producer firms to give a damn about their profitability. Once producers are profitable from a real perspective, not these specious accounting profits of the past four decades, then the prosperity will “trickle down” to everyone who is associated with them. As a primary industry they are the ones that receive the revenues from the oil and gas sales. These sales make the economies operate when they are distributed in a manner that is consistent with the needs of the markets. Having a handful of bureaucrats divvy up the proceeds by putting four in their pockets for every one that anyone else receives would most certainly generate a consensus in the marketplace today. I’m not saying the producers don’t have the right to the revenues as the producers in a primary industry. What I am saying is that with every right comes along the associated responsibilities. These responsibilities have been ignored as a convenience to those who don’t give a damn about the damage they’ve caused and are causing in this industry. I’m sure I could generate a consensus on this point as well.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part V

The myth producers continue to push that all is well is certainly counter to the arguments put forward by People, Ideas & Objects. Our White Paper “Profitable, North American Energy Independence - Through the Commercialization of Shale” identifies the following scenario if producers do not change their ways. Noting on page 12 that “the state of industry affairs on an objective basis is terminal.” First by pointing out that none of the value that was built in prior generations, and all of the investors resources over the past number of decades doesn’t mount to a hill of beans. The industry retains no value and demands cash in order to operate which it has done for many decades. The difference today is that investors and bankers are wise to the bureaucrats wanton destruction of value. Secondly our White paper noted that cash was to become hyper critical in the fourth quarter of 2019. I then stated as the third issue “as night follows day the financial destruction within the oil and gas producers will lead to diminished operational capacities and capabilities.” On Friday January 17, 2020 an article was published in the Wall Street Journal entitled “Schlumberger Plans U.S. Pullback as Shale Oil Drillers Struggle.” Producers should realize the implications of what is being stated in this article. It documents the changes being undertaken by Schlumberger in the North American market. Schlumberger being the largest oil field services company, these changes have implications that are far reaching and will take decades to mitigate the damage to producers future capacities and capabilities. These are the Schlumberger changes.

• Reducing their headcount by 1,400 people.
• Drawing down their North American operational shale capacity by 50%.
• Reallocating this North American spending to global initiatives.
• Recognized a $12 billion writedown in the fourth quarter, mostly attributable to North American operations. Unknown what the amount of the total of this asset write down was in terms of accounts receivable. 

The CEO Mr. Olivier Le Peuch then stated the following.

As the year progresses, the effect of slowing North America production growth is likely to cause tightness in the market and further stimulate international operators to step up their investments in the second half of the year and beyond,” Mr. Le Peuch said.

I read this as goodbye for good. Any downside in North America productive capacity will be Schlumberger's gain in the international markets. I also see this as part of an overall movement from denial to anger which is the second of five levels of grief. With the destruction of cash which has been a feature, not a bug, of the current downturn. Producer management of their field services has been abysmal. Systemic default of “unsecured creditors” is all the rage in oil and gas. I suspect that this was one of the motivating factors in Schlumberger $10 billion fourth quarter loss and their exiting the continent. We have noted elsewhere that these defaults will precipitate the need for producers to pay cash up front in the future. No matter who they are. Making what we are experiencing now a much longer and more protracted decline. If producers have to generate the necessary capital in advance, with no assistance from investors or bankers, it will be a few additional years before they generate the necessary funds and be able to pay in advance. Service industry participants will ask for cash up front and producers will say “they can pay in 30 days.” At which point the service industry will say “see you in 30 days.” When you have fundamentally betrayed the people that depend upon you, you’ve changed the rules of engagement. I guess the producer could threaten to take their business to Schlumberger instead, at which point the service industry will say, “see you in 30 days, if you have that cash.” The Preliminary Specifications decentralized production models price maker strategy takes the cash that producers have buried in the ground and spit polished on their well built balance sheets in property, plant and equipment. And begins to pass those costs on to the consumer of the oil and gas commodities. Oil and gas is a capital intensive industry indicating that the majority of the cost of the commodity will be capital. In today’s competitive capital markets no industry can compete by storing cash in the ground for decades. Only People, Ideas & Objects Preliminary Specification enables the return of the invested cash in a timely fashion (30 months) to begin rebuilding the oil and gas producers. We’ve been discussing this major difference of our system for over a decade now, and you would think that if the producers were able to make the necessary changes to achieve this on their own, they would have done so. But they can’t do it, won’t do it and will obviously never try. Bureaucrats are terribly conflicted as the Preliminary Specification disintermediates them from the industry.

I see strong parallels in what is happening today with the market that I compete in, that being oil and gas ERP software. There was a dynamic, interested investor marketplace for systems in the early 1990’s. The ability to raise capital was relatively easy. But producers believed that ERP systems stole from their drilling budget and worked to ensure they paid nothing for the ERP product and only its service contract. As a result, today it is all but impossible to raise capital for oil and gas ERP systems, as it has been since late 1996. I don’t say this from any experience. I say it from the point of view that I would not take anyone’s capital as I would have no ability or capacity in which to accurately predict if I could ever return a single dime to any one of those investors. This is not just the ERP providers. The same shenanigans have been conducted by these producers on all of their suppliers. They don’t recognize other people’s Intellectual Property, they won’t work with anyone unless they are of a size and pedigree, an example of two ways producers dictate terms. The point that I’m making is the oil and gas industry will have to conduct itself with much less sophisticated financial capabilities, that being cash. Having abused their absolute power in these markets over the past number of decades will demand a different basis of dealing in the future. Which will include a lack of investors when the cash is sitting in the ground, and a lack of willing investors stepping into the oil and gas service industry.

As our White Paper noted, the method of dealing with overproduction by the producers was to muddle through and do nothing. As evidenced by the past ten years of inaction its clear to see they’re fully committed to this strategy. Although I do not believe that we will see a decline in oil and gas deliverability in North America. We have a new risk that is inherent in the shale era. The rapid decline rates of shale is something that we’ve never experienced before. Will it now get ahead of the producers ability to continually increase their production? Will the loss of the capacities and capabilities we’re experiencing in the service industry today be too much for producers to stop the erosion of their productive capacity?

You do reap what you sow. The only systems development or plan being offered to solve the industry issues is the Preliminary Specification. And we are of the opinion the damage that has been experienced by the industry by its bureaucracy is in excess of what anyone can fix. We are therefore pursuing creative destruction and our Initial Coin Offering. Nonetheless no one would offer anything without payment upfront before any development work would be done. Payment in full I would add. I see this same treatment being applied to the oil and gas industry by all of its suppliers. And it will be applied consistently to each and every producer, no one will be immune. The only business risk that will be entertained by anyone providing any service to the oil and gas industry has now fully shifted to the oil and gas producers themselves.

In related news Cenovus has announced that they’ll be carbon neutral in a few decades. Such leadership! It’s clear these producers are unable to focus on their business agenda or prioritize. And that is the myth we explode today, that all is not well. Cenovus announcements are not expressions of naivety, they are distractions and cover stories for the avoidance of any responsibility. It’s not that they feel any guilt about the state of affairs, it's that they want to appear oblivious. We’ve heard nothing but sunshine and rainbows from these producers, no action and their time has run out.

We’ll break now to continue this discussion again tomorrow in Part VI.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part IV

The question needs to be asked, how does North America become a higher performing economy with a highly defined and evolving specialization and division of labor, integrating all of the new technologies on a spontaneous basis? We address and resolve these issues in the Preliminary Specification and noted that the current installed technologies have locked organizations in an unchanging steady state. Where the capabilities and capacities to make the necessary changes are unknown and unaware of the need for change. Organizations throughout North America are encased in proverbial cement as a result of the Information Technologies they employ. Making any changes to the organization must be executed first in the software to ensure that the organization does not regress back to its prior state. Software defines and supports, but also constrains organizations in the status quo. We believe our good friends the bureaucrats have taken this knowledge and used it to their benefit. If they never changed their software, they would never be challenged in the manner in which they operate. We can see throughout this oil and gas crisis that no discussion of organizational change is ever initiated. What we do know, since March 9, 1776 from Adam Smith's The Wealth of Nations, is that all economic progress has been the result of specialization and the division of labor.

The myth that we hear in the market today is that planning is ineffective. There are a myriad oil and gas pilot software development projects being funded by handfuls of oil and gas producers and this is not inconsistent with their history. These pilots are either forgotten about, or proven to be ineffective. Occasionally one might succeed with its sliver of scope and scale to be deployed at those sponsoring producers. There they’ll work together with the thousands of other applications that have been developed over the past number of decades to make what these unique oil and gas producers need to function. And this is where much of the administrative and accounting costs are replicated within each oil and gas producer. Each producer undertaking the same tasks as all the others in their own unique way. Unable to share these unshareable capabilities that drain the industry of any hope of profitability. The same applies to most of the budget for the IT department which is spent on maintaining its empire with little if anything conceived to make effective business change. Planning in this environment is clearly redundant.

The mantra of muddling through and doing nothing as they key strategy and operating procedure of the oil and gas producers becomes clearer as to its purpose and function. To propose anything would be ludicrous and too costly. And that is where we are in terms of the producer demand for the Preliminary Specification. “It’s too comprehensive and won’t work.” “The treatment appears to be toxic to the patient.” Yet they seek to provide the same scope and scale within their own organization on a budget that pales in comparison to our proposed budget. We expect under their current organizational structure, none of these producers will be able to survive, even for the short term. Chronic difficulties with cash and profitability will continue and become more acute as each quarter passes. The only way in which to make the industry and producer based changes in the Preliminary Specification is through creative destruction. We’ll be creative while the producers destroy themselves.

And that is the situation we face today. We don’t believe this industry can prepare itself for a challenging future such as what the oil and gas industry faces. With piecemeal applications and little to no change management capabilities built into any of their software, its development and those that are responsible for implementing and operating it. People, Ideas & Objects seek to build a dynamic, innovative, accountable and profitable industry capable of meeting the needs of the industry as it changes and evolves, with the technologies as they are developed. This will not be done on a muddle through strategy. This will not be done without planning. And our plan is designed to continue to support the industry throughout its challenging and difficult period to 2045.

What I am suggesting here is that the economic concept of spontaneous order is dead. How in this highly structured Information Technology environment that we operate in, and will be even further constrained and defined by in our future, are we just going to break out on an industry-wide basis and pursue new business models and opportunities? Maybe creative destruction will have to become a quarterly event! When “things” could be defined and controlled within the producer firm itself, reorganizations were productive and applying specialization and the division of labor could be conducted on a clear basis. Now with supply chains being developed across continents how will they be efficiently defined and developed? This is how the bureaucrats propose the oil and gas industry continue to proceed on a go forward basis. Cashless, investor and bankerless, organizations conceived and operated in the third industrial revolution, and capital expenditures to refurbish, repair, rebuild the aging infrastructure, unable to maintain profitable energy independence or even generate the financial resources necessary to deal with these demanding capital expenditures.

I can understand and appreciate the bureaucrats belief in muddling along. Planning over the past four decades hasn’t been conducted and they’ve survived and personally prospered to this point. Maybe bureaucratic survival isn’t adequate anymore and the needs of others should be considered. Profitability affects more than just investors. It reflects a healthy industry that is able to function and prosper in society for all concerned. Something the bureaucrats have chosen not to care about.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part III

Since the 2009 financial crisis the market rebalancing of natural gas has been one of the consistent claims of the producers. The same has been the case for oil since 2014. What we see in 2020 is neither market has been “rebalanced.” Why is that? How does one go about rebalancing a market? Have these steps been taken by North American producers? Or are the Russians manipulating these commodity markets between Presidential elections?

The fact of the matter, as we’ve described in the Preliminary Specification and our White Paper, is that “market rebalancing” is one of the key myths that producers bureaucrats continue to push so that they can continue to sit on their hands. There is no such concept outside of oil and gas known as “market rebalancing” that goes on. As we’ve pointed out markets do one, and only one thing, which is to provide information in the form of a market price. If the price is adequate to make a profit then a reasonable, rational person would produce. If the market is not providing an adequate price then that same individual would choose not to produce. Market rebalancing is the myth that keeps on giving the producer bureaucrats cover for their “muddle along” and “do nothing” ways. Don’t believe me, go back and check the dates when prices collapsed in these commodity markets. Why would any rational, reasonable person continue for a decade without any response to the destruction being caused by producing at low prices? The answer is at one time they had willing investors duped by specious financial statements.

Natural gas prices are the worst they’ve been for this time of year since 2016. Which doesn’t say very much and isn’t news. Oil prices in 2019 were substantially lower than in 2018. Projections for earnings in the fourth quarter are expected to be a surprise to the downside. The IEA believes that 2020 will see oil supply exceed demand by 1 million barrels per day. Anyone want to guess what natural gas markets will be like? The thing to remember is these bureaucrats when caught in the camera’s lights can say with all confidence that they have this. Just ignore the look of horror on their face.

Maybe producers should look at the bigger picture of what their investors want. Sure free cash flow is the word of the day. And oil and gas bureaucrats have always been able to pick out the one business criteria to make their claims of what they’ll do within a specific year. What they need to learn is that business is about building value year after year, and what I mean by that is not destroying value, which requires real profitability which would generate real free cash flow. Using the cash that is generated in the business to fund all of the necessary capital expenditures, pay dividends and pay down debt. All three, each and every year. Not claiming one of these business metrics they’ll magically perform in the current year, only to come up short again. Investors don’t want to run the business, that’s the producers job. To make them money, that’s what businesses do.

Last year it was share buybacks that were all the rage. Until it was pointed out to them that buying shares on the market, then running those shares through the shredder and burning them was not building any value. Producers purchased their shares on a wholesale basis by diverting their cash that should have been used to pay their suppliers in the field. Members of what we all used to call the “service industry.” The service industry was useful during the initial phase of the investor strike to finance much of the capital expenditures of the producers by having them extend to producers 90, 180 and 270 days to pay. What these producer bureaucrats have deemed here in 2020 is that the service industry is an old and nondescript sort of name. They’ve come up with a better name that suits the producers needs on a go forward basis, one that much better describes their view of the service industry. What they’re now calling them is “unsecured creditors.” Pengrowth in a plan of arrangement, or heck in any arrangement these people really don’t have to be paid! “Unsecured creditors” kind of has a nice ring to it, doesn't it?

Encana was buying $1.6 billion of their shares, then shredding them when they could have easily drawn down their accounts payable. It was the industry trend and the cool thing to do. If they were interested in building value, reducing the liabilities of a business would have made a substantial increase to their investors, instead producers must meet the narrative, there’ll be no deviations. Stock buybacks were the narrative at the beginning of 2019, free cash flow is today’s and later this year it will be defaulting on their “unsecured creditors.” Just as all of the pain that is being experienced by everyone in the general economy that is affected by oil and gas. The producer bureaucrats are the gang that could shoot straight right into their boots. The steep downward trajectory throughout the general economy in oil and gas is a result of the self-interested, conflicted and lazy bureaucrats. But this mistake of not paying those that are rightly owed, if I could call it a mistake, will come back quickly to cause serious issues to the bureaucrats. Producers will now have to get their cash out. Oil and gas will now be an all cash business. Want something done. Get some cash to pay the whole freight up front. And don’t be surprised when the “unsecured creditor” says he thought the producer was paying down their 270 day outstanding balance of accounts payable instead.

The term unsecured may begin to take on a much larger than life image in 2020 than the producer bureaucrats may have wanted. The other area where unsecured seems to be applied this year is in the employees of the producers. As in unsecured employees are on the street. Occidental is the first that I’m aware of out of the gate this year. Sort of like the first new years baby. Think of these layoffs as a post acquisition / Christmas gift. Occidental had been offering a voluntary retirement program since the acquisition of Anadarko however this is an increased cut in the unsecured employees. No numbers were announced. Apache chimed in the next day to make sure they were being seen as prudent with the hacking of 500 people and an announcement of the closure of their San Antonio office. This closing will bring on another 270 unsecureds when it occurs. Discussing the larger cuts being made in the general economy as a result of the irresponsibility of these producers would be redundant and melt down the Internet. The question that I guess I have is who gives a damn about what the price of oil or gas is in 2020?

One thing we can be assured of is the safety and security of the bureaucrats. Their ability to deliver on free cash flow is unknown and unknowable. It was the Saudi’s fault or the winter wasn’t cold enough as their reason for non-performance. None of this has been their fault in anyway, they’re innocent. With the designated unsecured classification being established, diverting that cash to source the funding of the bureaucrats personal empires in 2020 is secure. They always seem to have the winning hand, not caring has its benefits. It certainly is dark and gloomy outside in oil and gas. This is as I have been saying for many years and offered the Preliminary Specification as the means to mitigate these damages. There is no need to sugar coat any of this now, it’s only going to become much worse.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part II

One of the myths that we’re hearing being chanted is that free cash flow is now the focus of the producer bureaucrats. Feeling the pressure from disgruntled shareholders, bureaucrats are lining up saying that free cash flow is what they’re all about. For the record free cash flow is the remaining amount of operational cash flow after the deduction of capital expenditures. In oil and gas this number has generally been negative for many decades. It’s difficult for me to discern whether there is more authenticity in this claim than the litany of other excuses they’ve used. Excuses like waiting for a cold winter, capital discipline, yada yada yada. We’ve always stated that the methodology of accounting in oil and gas is that balance sheets and income statements are overstated due to the policies used to capitalize costs to property, plant and equipment, these past four decades. Capital costs are seemingly never recognized in the price of the commodity to the consumer. These costs, in a capital intensive industry, are stored for generations on the producers balance sheet. We have argued that cash flow is therefore overstated when the capitalization of every possible cost is undertaken, those costs then being allocated to each and every molecule of oil and gas reserves, and only the current productions portion of those capital costs are recognized as depletion. The nuance of overstated cash flow is not one that is easy to understand. Changing the amount of depletion from one number, by increasing the recognition of capital costs in an accelerated manner, does nothing to the amount of operational cash flow recognized in an accounting period.

You do however have an overstatement of operational cash flow due to the overhead costs being recorded at 2 - 4% instead of the probable real incurred costs of 20% of revenues. The difference here being the overhead that is capitalized. Have a producer prove me wrong if you don’t believe my percentage of overhead in the industry, or read Exploding Myth, Part I. This point alone seriously overstates the amount of cash flow generated by the producer and industry overall. When producers are evaluated at six times cash flow, would it not be prudent to boost cash flow? The fact is that in the Preliminary Specification producers will begin recognizing the cash that is being burned in the form of overhead in the organization each and every month. Our method of recognizing and costing the actual overhead as part of the price of the commodity instead of storing these overhead costs on the balance sheet for decades. Why would we do this in the Preliminary Specification? To ensure that these substantial overhead costs were immediately passed on to the consumer in the form of higher commodity prices and therefore the cash incurred on those overhead items are returned to the producer through the establishment of a 60 day float in order to have the money to pay the overhead costs in the subsequent month. This currently doesn’t exist in oil and gas. These overhead costs would also materially affect the balance sheet as we’ll be recording none of the overhead as capital from the point of when the Preliminary Specification becomes operational. This method will materially affect the earnings of the producer by increasing the costs that are recognized in any period. These costs of the operation will be substantial, overhead being upwards of 20% of revenues, which would offset the minor costs of recognizing the amount of overhead that is being depleted from property, plant and equipment. Therefore operational cash flow would be substantially reduced in comparison to today's method, as would free cash flow. It would however leave the same choice that producers face today in determining if they should pay dividends and never having cash again.

Capitalizing operating costs is an effective tool to overstate balance sheets, income statements and cash flow. In Canada producers became very effective at this method when they also include royalties in the calculation of what would be capitalized. I have little evidence of this activity other than the SEC prosecution of executives of Obsidian’s former persona of PennWest. We haven’t seen any of this activity in the industry since the SEC launched their litigation. Todd Takeyasu was the CFO that the SEC is most enthused about in their litigation. I can understand why. I knew Todd when we conducted audits together in the late 1980’s and early 1990’s. I can assure you Todd will have the nicest audit file put together in terms of the discussions and documentation regarding the capitalization of operations, overhead and royalties. Who authorized it and what was said. What he doesn’t seem to understand is it’s the CFO’s role to stop such nonsense from happening.

The Preliminary Specification also looks at the capitalization of assets from a different perspective in terms of what is or should be a capital asset in property, plant and equipment. Throwing everything that is spent into property, plant and equipment is only an effective business model when there are investors who can be deceived by these actions. A more nuanced accounting will now be necessary and that is what we’re bringing with the Preliminary Specification. Most of the work done at the well site is intangible in nature. Yet intangibles are not treated any differently than tangibles on the financial statements. We think they should be and as a result subject to a much more rapid method of depletion or depreciation. Again what producers will find here in this accounting change is hoards of cash when using the Preliminary Specifications decentralized production models price maker strategy. Which ensures only profitable production is produced everywhere and always. In addition we believe only the initial drilling and completion should be capitalized, particularly when dealing with shale wells. The majority of the capital costs incurred to drill and complete those wells should have been retired by the time the wells have had to be heavily reworked with additional laterals drilled and multiple completions on these new laterals. Shale has a rapid decline rate that demands significant rework where new capital needs to be employed to maintain deliverability. What is the effective accounting policy for such a property? The other characteristic of shale is that the proven reserves that are exposed are orders of magnitude higher than what oil and gas has ever been familiar with. Is allocating all of the capital costs equally across the entire proven reserve base, which will be produced over the next century, with each of the subsequent reworks costs added to those original costs the most effective business model? Or is this just the best way to bank cash in the ground?

If the producers continue with their myth that they’re providing free cash flow then they’ll have to provide an understanding where it is exactly that all of their cash is going. What should be obvious to most people in the industry is that cash only goes in and never comes out. This fact is being realized now that the investors and bankers are protesting. The myriad excuses and myths that have been peddled by these producers are more to deceive one another now. They’re the only ones that still believe in what they’re doing is right, or is it that they have to keep their story straight?

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Exploding Myths, Part I

We return to 2020 with an interesting point of view being reflected by our good friends the bureaucrats of the oil and gas producers. The two things that I noticed the most were the continuation of the exits, the most prominent of which being Mr. Harold Hamm giving up the CEO post at Continental Energy. The second point seems to be a desperate attempt to seize the narrative. As a result I’ll be running this “Exploding Myth” series countering the arguments in the producers narrative. First up at bat is Chevron’s write down of $10 to $11 billion in the fourth quarter of 2019 for their natural gas properties. Chevron had $169 billion in property, plant and equipment as of 12/31/2018, a 7% write down doesn’t seem material enough to me when natural gas prices are down 26% since that time. Granted Chevron’s property, plant and equipment includes oil, downstream and international assets, it just isn’t a prosperous time in oil and gas. My argument has always been that the majority of these “assets” are better described as the unrecognized capital costs of past production.

One of the differences between the Preliminary Specification and the manner in which the industry is operated today is the management of property, plant and equipment. We believe as a capital intensive industry oil and gas should reflect a large portion of capital as part of the cost of the commodities price in providing the product to the consumer. Current producers believe capital assets are to be used to bloat the balance sheets in order for the CEO to strut about town with the biggest balance sheet. We believe the Preliminary Specifications timely recognition of capital costs in the commodity price would provide producers with the return of the previously invested cash resources necessary to fund future capital expenditures, dividends and pay down debt. Current producers seem to think that investors enjoy the brilliance of the deployment of their cash in the development of state of the art engineering experiments. We believe oil and gas has not been profitable for four decades as a result of these policy differences, which has created a management culture that is systemic, unchangeable and terminal for the status quo. A culture that knows no difference and is unwilling to accept responsibility. We also believe that the value that oil and gas provides the consumer, the 23,200 man hours of labor per barrel, is significant and ask: why would we ever sell any oil and gas that is unprofitable? How would we justify such actions to future generations? At least if it was profitable then we would know it was not used inappropriately or wasted. Asking if renewable energy, a substantial energy user during its development, had to pay the real cost of oil and gas producers exploration and production would they ever become economic?

The Wall Street Journal wrote about the Chevron write down, Chevron’s CEO Michael Wirth comments.

Chevron Corp. is writing down the value of its assets by more than $10 billion, a concession that in an age of abundant oil and gas some of its holdings won’t be profitable anytime soon.

The com­pany is also un­der­tak­ing a re­struc­tur­ing, go­ing from four global pro­duc­tion units to three. “Com­pa­nies that wait un­til change is forced upon them fail,” Mr. Wirth said in a video sent to em­ploy­ees last week. “We’re not go­ing to let that hap­pen at Chevron.”

We have to make the tough choices to high-grade our portfolio and invest in the highest-return projects in the world we see ahead of us, and that’s a different world than the one that lies behind us.”

This sounds to me to be a capitulation of any responsibility for the past development of sub-grade assets, and the desire to do anything about them! People, Ideas & Objects have argued that our business model provides oil and gas producers with the most profitable means of oil and gas operations. Is this the response to our business model? It also appears to me that Chevron’s CEO is unwilling to take his own advice to make the necessary changes before changes are forced upon Chevron.

I mentioned in our White Paper the analogy that I draw to the bureaucrats in the oil and gas producers. These bureaucrats as Keystone Cops are always running around to the next best thing in oil and gas. Heavy oil, SAGD, unconventional gas, shale… Once everyone jumps on board and the “new” thing is determined to be uneconomic, they all run to the next great thing. “High grading” Chevron’s portfolio is them running down the back alley to the next great thing. The Preliminary Specification looks at the producers portfolio of properties and evaluates them on the basis of a standardized accounting that determines the properties profitability based on all of their actual costs. Revenue, royalty, capital, operations and actual overhead. Then if the property is profitable it will continue to produce, otherwise it will be shut-in where it will incur no profit but also no loss. Enabling the producers to focus on their shut-in properties and innovatively bring them back onto production. While these properties are shut-in they will be leaving their reserves in place for a time in which they can be produced profitably, not adding the incremental losses to the cost of the reserves to be captured in the future, ensuring the producer reaches their highest profitability when only profitable properties are produced and allowing the commodity markets to find their marginal cost. Instead the narrative to refute our logic is that we’ll ignore the assets that aren’t as pristine from an engineering “high-grade” point of view, as they aren’t as entertaining to us? Maybe Chevron’s write down should include those assets they are no longer interested in.

In our White Paper we documented how producers alleged the business model in our Preliminary Specification is collusion. We argued these past years that it’s not, and anyone making independent business decisions to shut-in production based on actual, factual accounting data to determine profitability was not collusion, otherwise we are the new Soviet Union. It’s actually good business and what most industries do that don’t have investors lined up around the block. Those were the good ol days weren’t they? Our argument seems to have permeated the craniums of the bureaucrats and they’ve now come up with the “high grade” reasoning to refute our claim of providing the most profitable means of oil and gas operations.

It’s our argument about their storage of cash in the ground that the producer bureaucrats refuse to listen to. By capitalizing everything for decades they’ve locked the investors cash into the ground until such time as they recognize it as depletion. However, this game has gone on for four decades now and the revenues being generated by these assets are so pale in comparison to what they should be, they’re not generating adequate cash due to the heavily discounted commodity prices producers created for themselves and have been selling their products for. Storing these capital assets on the balance sheet also reflects the amount of the capital subsidy consumers have enjoyed which the producers investors have unwillingly provided. If oil and gas was a business they would begin to treat all properties somewhat the same. If they’re profitable then they’ll produce but oil and gas hasn’t been a business for many decades. It’s been an exercise in destruction, whose purpose is almost complete and will not be resolved constructively or judiciously.

The other aspect of the cash deficiencies these producers are unwilling to accept or listen to is the fact that most of their costs are capitalized. We point out this has become so extreme that the receptionists time, telephone service and Post-it-Notes are all capitalized and left as property, plant and equipment for decades too. This therefore has turned the producers into chronic spending machines wholly dependent on continuous outside funding, until these past few years that is. Their oil and gas revenues have become poor in comparison to what they should be. And whatever is earned is inadequate to cover all of the current costs of the producers as they continue to sink every dollar they find in the ground each month. When you had willing investors lined up down the block and breaking down the door this was not an issue. Now however, the cash drainage each month is epic. Money goes in, and never comes out. Then the search for next months cash begins, and so on. Hence we have the producers stuck in a never ending cash drain of their own making, refusing to admit they have an issue and only refuting the claims that we’ve made in our Preliminary Specification and White Paper. This cash issue will be the terminal factor that they’ve refused to address over the past five years of diminished investor interest. Now with severely deficient working capital, time has become their biggest enemy. Time remaining in which they can keep the doors open.

We recently learned that Houston’s office vacancy rate has hit 26% which represents 60 million vacant square feet. Calgary has over 30% vacancy rate with 15 million vacant square feet. Meaning Houston has more vacant square footage than Calgary has square footage. Nonetheless I’m always called to prove my claim that overhead is in the range of 20% of revenues. No one knows what the overhead is in oil and gas. The question I have, if the producers claimed costs of overhead at 2 to 4%, why would they shut down so much of their head offices? The best they could be saving here is 0.6% to 1.2%. Seems to me to be too much grief and pain being realized for a 1% cost reduction? Maybe bureaucrats find layoffs to be the best part of their job!

This working capital issue is more than just what the operational producers will concern themselves with. During bankruptcy a “client” will always command respect from the justice and the administrators when they have strong cash flow. Oil and gas is a cash flow industry. Until it is realized that the cash flow that is produced is incapable of providing the day-to-day operations of the producer. The administrator will assess these firms on the basis of their cash generating capabilities. Which we have seen in the past 5 years and even in the past 10 years since natural gas collapsed, doesn’t exist. I would argue that the accounting has been suspect since the late 1970’s but then I’m alone with only the facts on that. I leave you with one question: how does an industry, a primary industry at that, become worthless?

Here’s a clue as to where all the value went. This graph from the WSJ’s Lev Borodovsky was included in the White Paper. It accurately captures the attitude in oil and gas. It states when a producer would shut-in a property and it’s breakeven point for a variety of shale properties. (Note, never have I seen a property shut-in for its lack of economic performance. Ever.) Assuming if we could that the shut-in price in this chart is the variable operating costs of the property that were not capitalized. The well breakeven price is a fundamental misunderstanding of what breakeven means. Nonetheless, we’ll take their numbers and assume the amount is the capital and operating costs of the property. Essentially the graph proves that the producers will always produce as long as they were covering off the variable operating costs. Now this is what I said in the White paper that captures the fallacy in this thinking.

What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graphs numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.

We have also argued the allocation of capital costs to each and every barrel of oil in reserves is inconsistent with the capital investment market. Whether the barrel is produced today, this decade or even this century, we believe this SEC allowed outer limit of what is allowed is unacceptable for each producer to reach each year. Therefore the actual cost of these shale production volumes capital costs would be substantially higher if allocated in a manner consistent with a market economy.

As we look toward the next 25 years in this industry we know we can’t get through this period with the producers that we have today. The legacy of their bloated balance sheets will haunt them from this point forward. Their capital structures are permanently destroyed through decades of not recognizing adequate costs of capital in the products they sold. Now they’ll be forced to compensate for that with revenues and cash flows that are wholly inadequate due to their destruction of commodity prices. They’re incapable of surviving today’s business environment, how bad will it be in just three years? The only way to approach this next phase of oil and gas is through a redefined industry and producer structure. One based on succeeding always and everywhere, where producers are dynamic, innovative, accountable and profitable. Where everyone can depend on the primary industry that oil and gas is to fuel the careers, prosperity and quality of lives that have not been provided in the past 29 out of 34 years. At least I think we’ve had 5 good years. Where the next 25 years capital expenditures demand the $20 to $40 trillion necessary for the next phase of North America’s development, will be sourced from the commodities sales themselves. Investors are saying it won’t be them. This is beginning to almost sound like a plan! And what is the industry’s plan? Much like Chevron’s, ignore the majority of their non-performing properties, they cover the overhead, and look for gleaming, state of the art, engineering projects. After all it’s what they do.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Updated User Community Vision...

And we’re back, 2020 has a nice ring to it and I look forward to what should be the most interesting year we’ve had so far in the history of our project. To all those that have read People, Ideas & Objects user community vision, you have my apologies. I’ve now rewritten the document to be more readable, if you made sense of it before there will be no need for you to reread it. There are no content changes as the vision stands as it was when I first published the document. I originally completed the writing of the user community vision in early 2014, soon after writing the Preliminary Specification. I had not read it since, I reread it over the holidays and I found it to be of poor quality and needing to be heavily edited, which has now been done. The three key points that provide the user community with the power necessary to ensure that producers and industry are provided with the most profitable means of oil and gas operations are;

• People, Ideas & Objects developers only look to the user community for their input. We are deaf, dumb and blind to all others. 
• Only user community members are licensed to make changes to the underlying Intellectual Property of the Preliminary Specification and its derivative works. 
• The user community have their own budget. “They are not blind sleepwalking agents of whomever will feed them.” Habermas

It is these three attributes that provide the power to the user community to affect the changes that are necessary in the oil and gas industry. This is not the typical user community that has been established to make it appear like an ERP system has adopted some buy-in from its users. This is an effective user community that will form the basis of how the industry will operate when the Preliminary Specification is implemented and for the next several decades as it is expected that the developments of the systems and business models necessary to ensure that the oil and gas industry remains dynamic, innovative, accountable and profitable will fall permanently within the user communities domain. User community members are provided with their part-time revenues from People, Ideas & Objects and will generate most of their value through their service provider operations which they will earn through our initial software development. Ensuring that not only is the software but also the services are provided to the industry.

It was during my review that I also undertook to rewrite parts of the following pages.

• Service Providers
• How to Join
• Budget

Once again nothing needed to be changed from a content point of view. Only readability was addressed.

To say that I’m looking forward to 2020 would be an understatement. The issues we identified many decades ago have manifest themselves into an industry that is worthless. The demand for cash to support this long term destruction of the industry continues and fewer sources of financial support are being realized each passing day. The time when serious action will be required is upon the producer firms. People, Ideas & Objects expect that these bureaucrats will do what their history has shown them to be quite competent at. Leaving, of which we began to see the initial exits of some key figures in the fourth quarter of 2019.

A cashless and valueless industry does not need to have its leadership walk out on it. But that is what we’ll be faced with as the solution to the problem is beyond the scope of what the current bureaucrats can accomplish. The situation is untenable for them and therefore they’re only holding on for what additional compensation they can personally prosper from. I would suggest one of the dynamic changes as a result of the shale era will be that the leadership of the industry will not be sourced from the engineering and earth science disciplines. But form in the hands of those leaders that can make the industry profitable. The future oil and gas industry's leadership will therefore be regenerated and exercised through this user community. This will be the means in which the industry regenerates itself, profitably, not as an out of control spending machine. If this appeals to you then you should act, as actions based on individuals working in collaborative fashion, driven by an overall vision such as the Preliminary Specification is how we’ll solve this.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

The Preliminary Specification Part CCCXIX(a) (PA Part XL)

I am pleased to announce a revision to the Preliminary Specification. It involves the Partnership Accounting and Accounting Voucher Modules and more specifically our implementation of our Material Balance Report. One of the features of the Partnership Accounting module in combination with our Accounting Voucher is that we have undertaken the objective of automating the production process from field data capture to the financial statements. We were limited in how we were going to achieve this lofty objective outside of detailing the Material Balance Report in our two modules. Our user community will show the way. Today we have a development in this area that I think will provide our user community with the means to implement an effective and innovative solution for producers and industry for the 21st century. It will involve the real time capture and use of the field data, in the many forms that it can take. What we are noting here is defining more of the physical infrastructure and overall vision of how we resolve this difficult area of the industry. And make it a contributing factor to how a producer achieves their most profitable means of oil and gas operations, everywhere and always.

This has now become an area where People, Ideas & Objects overall vision will be able to achieve the significant innovations we’ve set out for ourselves and our user community. The ability to approach this area has been beyond the scope and scale of individual producers IT capability and budget. It will continue to be well beyond the resources of any individual producer. However, our approach of engineering this solution on behalf of the entire industry, to develop, implement and manage, by way of our user community and their associated service provider organizations, makes the possibility not only real, but a definitive task that we must complete successfully. Significant value can be generated in this area of the industry by eliminating highly redundant and excessive costs associated with what are current borderline manual systems in place today.

So what’s changing in the Material Balance Report, the Partnership Accounting and Accounting Voucher Modules and the Preliminary Specification that makes the opportunity all the more real. One word, Starlink. Starlink is in essence Elon Musk’s plan to make all his SpaceX dreams come true. It will be the source of the funds he needs to make reusable rockets, voyages to Mars and so many other ideas of his commercially viable. So what does this have to do with oil and gas? Starlink is a network of 30,000 satellites, almost 500 have already been deployed, that provide an always on and available anywhere Internet service. Situated in low orbit across the globe they will provide Internet availability almost everywhere. The limit is the southern and northern pole regions which cannot be well serviced. The service area extends to the top of the Canadian provinces such as Alberta. Therefore anything that is situated anywhere in Alberta, or the lower 49 states will be able to be serviced by Starlinks satellite Internet service.

General availability of the Internet everywhere and always will be a substantial increase in the viability of the commercial Internet of Things (IoT). Monitoring and controlling the industry's facilities will be enabled in a matter that is far more integrated and comprehensive than what is available today. All oil and gas facilities will be able to be connected, except for those in the Arctic, Northern Territories and Alaska. The physical requirement will be a “pizza box” sized receiver that will communicate with the satellites. What will the role of SCADA in the future of the Internet of Things be? Our user community will be provided with a blank slate in which the vision of these two modules will guide them as to what they are to achieve. The possibility is significant and could resolve many of the issues that are inherent in these processes. Working these out and engineering a solution for the 21st century is the opportunity here and we should look at this in that manner.

People, Ideas & Objects and our user communities solution will need to be engineered from the ground up. I mean that from both perspectives. Sticking with what drives the industry today is inadequate when the costs of the system as conceived here in the Preliminary Specification will reduce much of the producers and industries high monthly incurred costs. Our user community will be able to undertake the design of the systems, develop the software based on the needs of the industry and producers, integrate and implement them with their service provider organizations and support them throughout the various product life cycles involved in the overall solution. This is the future and where the industry needs to go. The current producers are stuck in their self inflicted financial destruction and therefore the need to rebuild the industry is upon us. Our user community will lead us through this difficult time and task. If as a potential user community member you’re interested in this specific area, or in other areas of the Preliminary Specification, and you’re not working on your application to the community, I think the state of the industry should inform your sense of urgency.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

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

The volume of bureaucrats that are leaving the industry has begun and we’re definitely seeing both the quality and quantity of exits that show this will be the future. They include,

Imperial oil CEO Rich Kruger, September 17, 2019

Marathon CEO being pushed out by Elliott Management, September 27, 2019

BP CEO Bob Dudley, October 4, 2019

Obsidian CFO David Hendry October 21, 2019

Apache SVP Worldwide Exploration Steven Keenan October 23, 2019

Pengrowth Energy bailing out through company sale for 5.4% of their 52 week high, and 0.192% of their all time high. November 1, 2019

Chesapeake providing the cover story that they’re not a going concern. Enabling the exits of their bureaucrats. November 5, 2019

You have to consider the sacrifice that these bureaucrats are making. Giving up on the gravy train that has kept them well compensated for the past number of decades at the expense of pretty much everyone else in society. That, and we should not concern ourselves with what it is they’ve been doing, they’ve done nothing constructive for the past few decades. As for the service industry, after financing the producers field activity for the past 18 months, at fire sale prices which cannibalized their fleet and now with little hope of collecting their accounts receivable. It’s not that they knew they were financing the producers activity, it’s just that they thought they were dealing with reputable firms who would pay their bills. They of course will be fine, they have a lot of equipment that can be cut up for scrap metal and sold. When you consider the financial damage everywhere, the disastrous situation in the field with diminishing capabilities and equipment, the nonchalant attitude of the producers parroting that this is how the business is. You have to wonder how the expectation that investors will just return and make everyone whole again is based on any foundation of reality. Investors look to the future, to industries that provide plans and opportunities that intrigue and excite them. Industries that will provide profits and cash with as minimal risk as possible. All you have in oil and gas is guaranteed high risk and never any return.

If we think back to the 2008 / 2009 financial crisis. And I would recommend that everyone watch the movie “The Big Short” for a refresher on the history of that period. What are the parallels to the oil and gas industry today? I see many. Mostly the denial that is rampant throughout oil and gas, assuming that things will turn around, as it has done many times before. We are far beyond just a financial crisis. We have been losing money and destroying value in oil and gas since the late 1970’s. The inherent residual value that exists in the industry is inadequate to support itself financially. The situation has carried on to the point where the capabilities of the producers has diminished. This is represented best in Calgary by having greater than ⅓ of all office space empty. The service industry has been for all intents and purposes destroyed and will require a dedicated effort by the producers to rehabilitate it. A rehabilitation based on the understanding that the service industry exists for no other purpose than to provide capacities and capabilities to the oil and gas producers. Universities in the faculties of engineering and geology have been cleared out of any interested students. People in general don’t like working in remote dirty areas that are far from their families. People are now working in other industries that provide them with adequate compensation and a lifestyle that makes them never want to return to the “big money” days of oil, of which they have nothing left of anyway. How is this pain going to be solved and where are the financial resources coming from to make the industry whole again? Where is the plan?

As during the financial crisis no one would stand up and say there was a problem until it was obvious. Only a handful of people were seeing the situation correctly and hence were benefiting from their foresight. Yet those individuals were run into the ground by those insiders who refused to listen and change their ways in the face of such obvious issues. We see this same situation in oil and gas today and just as these crisis don’t start at the drop of a dime, they take decades of dumb regulations to manifest themselves. Just as Lehman Brothers, Bear Stearns, Country Wide and AIG’s collapse eventually brought the house down around everyone. I think we are eerily close to a similar triggering point today. What is it that we’re waiting for, is there any clearer sign that our trajectory is downward, steep and unrecoverable? Has it not been proven that the current configuration of producers can’t, won’t and will not ever change?

When I suggest that we need to rebuild the industry on the vision of the Preliminary Specification so that producers, the industry, the service industry and everyone associated with it can begin the process of putting it back together. A new North American oil and gas industry that provides for the most profitable means of oil and gas operations. Real profits, not the ones of the past 40 years. Then we’ll have a dynamic, innovative, accountable and profitable oil and gas industry that will provide for the needs of society in a competitive and exciting world that is what our future promises. What is it exactly that the current producers are offering that’s so compelling?

People, Ideas & Objects continue with our plans to raise our ICO in what will soon be two and one half years time. Review of our white paper will show that this is the only reasonable method in which we’ll be able to access the resources necessary to build the Preliminary Specification. At the same time this is not a positive period for the cryptocurrency market. These plans are also well beyond the time frame the industry has and as a result put many greater unnecessary risks into play. Our dealings and our competitors dealings with the producers regarding the development of ERP software over the past thirty years is documented in our white paper. I’m not deviating from our plans to raise the ICO in our time frame. I am certainly open to suggestions on alternatives that may reduce our timelines to deliver our products and associated services. 

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

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

Picking up where we left on Friday. I noted that on a number of the Canadian producers 3rd quarter financial statements that they’ve incurred the dreaded ceiling test write downs. It appears natural gas prices in some areas have been forecast to decline on the horizon. Precipitating the ceiling test write downs of some of the producers property, plant and equipment. Although it seems that we were just there in 2016 when most producers had to record write downs of their assets as a result of the decline in commodity prices. It seems the constant and chronic bloating of the balance sheets demands that we need to start this process once again. How widespread these writedowns will be is unknown. What we do know is that there is further deterioration in the long term natural gas prices as a result of the chronic oversupply and overproduction that has gone on unchallenged by those bureaucrats in the producers firms since at least 2010. If we expect to see further deterioration of the natural gas markets then there will be more than just Chesapeake questioning their viability as a going concern.

Some are calling shale a failure! That’s all, no solutions, no arguments or alternative points of view expressed by anyone in the industry. What better way to exit the disaster than to have it argued that “shale is a failure” and you’re therefore justified in seeking more prosperous industries outside of energy. After all as “one individual bureaucrat you weren’t responsible, and the attempts that you made to clear it up were not listened too.” We’ll have more to say about the beginning of the mass exit of the C suite in subsequent posts, today I want to focus on the viability of shale.

If we consider that oil and gas is a business that seeks to cut costs everywhere and always to ensure the consumer pays the lowest costs for their energy. That commodity prices have risen substantially from the prior century, multi-lateral fracing and other service industry innovations having unleashed untold reserves. That the costs have been wrung out of the system to the extent that they can and are still unable to provide a commercial operation in any shale basin. Then yes, most definitely, shale is a failure. What producers fail to consider is the value proposition that is provided to the energy consumer. They believe that consumers are paying full value for their oil and gas and as a result see no justification for analyzing the situation as it stands today. They’ll just use this time to make their exit from the industry in as quiet a fashion as is possible.

However, People, Ideas & Objects believe it is this lack of responsible actors that makes up the industry's difficulties and the conclusion that shale is a failure in oil and gas today. The consumers value proposition from oil and gas is substantial. Each barrel of oil equivalent provides them with 23,200 man hours of mechanical leverage. Enabling every human to expand their physical efforts by 87 times. For $60 U.S. / bbl that’s not a bad deal. What producers think is, if the price should increase too high above $60 then they’ll put themselves out of business with renewables coming in to take away market share. “If that should be the case then most certainly we should sell unprofitably everywhere and forever,” I assume is their thinking. Nonetheless, this is the best example that we have of the scope and scale of thinking in the industry.

What we believe is that producers should undertake an evaluation of the role they take in society of providing the energy for the advanced methods of organization and capabilities we as a society have obtained and currently enjoy. Without energy our standard of living will drop precipitously. How does the viability of shale’s commercial capability become a factor in this discussion? Energy is as vital a resource to the world as is the oxygen and water that we consume each day. If we exist in a market economy then we should listen to what the markets have to say about oil and gas commodities. Markets provide one thing and only one thing, a price. If a producer, whether shale or conventionally based, can make a profit at the price the market is telling them, they should produce. How does the “shale is a failure” come into question here? The only question is, does the property produce a profit, based on a reasonable accounting, and if so then it should produce? There is no magic solution to providing the market with some technical breakthrough that will drop the cost below what the consumers expect to pay. Consumers will always expect to pay the lowest possible cost. And I believe they will also pay the cost, which includes an element of real profit for the industry, and all of those who are represented in that industry, if the alternative is to give up in a comprehensive fashion their advanced standard of living.

Instead we are treated to this ludicrous and elementary level of discussion being undertaken by the producer bureaucrats. Which doesn’t surprise me. It may be the first indication that I can say that reflects some level of thinking by the producers bureaucrats since the collapse of natural gas prices in 2010. I guess the bigger question has to be is why are we waiting for those that are responsible for this mess, and its continued deterioration from chronic inaction, to do something about this? Theirs is not the thinking that is going to provide us with a solution or direction out of this. The difficulties that we’ll face if we accept their willing acceptance of their failure, is that our way of life will fail as well.

We will document in tomorrow's post the volume of people who are exiting the industry in the past month. If producer bureaucrats are shrugging their shoulders, declaring their companies are not “going concerns,” walking away and accepting that they’ve failed, what is it that we’re waiting for? We need to be building the Preliminary Specification in order to replace this serious threat to our societal way of life. Or, alternatively the little white men in the little white suites can come and take me away!

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.

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

In the producers third quarter reports we see the continuation of the issues that are detailed in our white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” There is much activity in the marketplace as these issues become more mature with producers reporting a number of actions in an attempt to mitigate them. I feel their most important issue is cash and working capital. Nothing has been done to stop the flow of cash and working capital from diminishing in this industry. Under their current business model there is nothing that will stop these resources flowing out of the industry. It is the producers capitalization policies that create this situation. First, all the activities in the field, other than operations and royalties, are capitalized. Overhead and interest are also capitalized at material percentages. I believe the industry average maybe as high as 85% however there is no verifiable proof of any of these claims. Just as there is no one who can provide verifiable proof otherwise. The last element of capitalization that is draining cash is all of these capital costs are allocated to each molecule in the reserve base and only those reserves produced in the current period will have their allocated capital costs depleted on the income statement. This is the case whether the reserves will be produced this month, this year, this decade or century.

The effect of these capitalization policies is that it allows the producers to build the handsome balance sheets their so proud of. When all you do is spend, and then recognize only a portion of that spending as a cost in the current period you’ll always look profitable, even today, but the cash is being left in the ground for the month, year, decade or century to pass before that cash is returned to the producers. The capitalization of overhead is done too, I think, hide their size and uncontrollable, fixed nature. Many people in the industry believe that overhead costs may be as little as 4.94% of revenues. as our sample of 22 producers report. If this was the case why would any cost cutting layoffs ever occur? A 10% percent staff reduction would create a 0.5% reduction in overhead costs. These don’t account for the “billions” in cost savings that are alleged. And as we noted in the white paper, taking a view of all the buildings in the downtown cores of Calgary, Dallas, Houston, and Oklahoma city would conclude, understanding that these strata of people on those floors are paid handsomely, that does not total 4.94% of the revenues of the industry. Our estimate is the well rounded number of 20%.

What we have is all of these costs, which are the majority of the costs of the producer firms, being expended each month. With smaller portions of those costs being returned by way of depletion. Therefore we can conclude as a result of these accounting methods, the full cost of capital is not being recognized in the pricing of the oil and gas commodity products that are sold to the consumer. Most of these costs are being deferred, and continually so, to the future. Leaving the pricing of the commodities deficient in recognizing the full cost of exploration and production. They do cover the royalty and operations but the majority of the capital and overhead are not cost into the commodity prices that are realized by the producers. Therefore the producers are not generating a “float” of capital, overhead and interest costs that are returned to them in the form of cash on a 90 day basis from the prices of their sold commodities. Therefore they consume cash constantly and in spectacular fashion. Investors finally realized this and stopped enabling this foolishness by replenishing the cash balances of these bureaucrats each year. The scope of this cash consumption is not as severe as it was in the past, however, it will still lead to the demise of the producers. For the nine months ended September 30, 2019 our sample of 22 producers, invested cash flow of $67.9 billion and depletion of $39.8 billion, a $28.1 billion cash drain for the nine months ended September 30, 2019. It is also notable that these producers have $520.4 billion in property, plant and equipment requiring on average 8.3 dedicated years in which to eliminate. Dedicated meaning no additional capital expenditures would be spent for 8 years in order to fully realize the amounts that are currently recorded. At the current pace they will take decades to actually remove the current balances due to the additions under the current business model. This is the justification for the cultural propensity to “build the balance sheet.” Think of this balance as what it is, a $520.4 billion or one half of a trillion dollars of cash sunk in the ground by these 22 producers. This at a time when producers starve for cash yet report great profitability. Profits, profits everywhere, but not a nickel to spend.

Certainly there is cash flow, however over the decades of this type of business model, value has steadily eroded out of the industry. Allowing the built up value that was in the industry, and the subsequent investments made by investors to seep out of the industry into the hands of the energy consumer. Which equals the amounts recorded as property, plant and equipment on the producers balance sheets. Hence for the producers to generate adequate cash flows to cover the costs of this monthly claim on cash eventually diminishes. Cash flows have become proportionally smaller and cover less of these costs today than in prior years. There is less residual value in the industry generating the value needed to sustain itself. As a result, it begins to produce less to the point, where I think we are today, that it begins the process of value destruction. Anybody want to propose a solution to this situation? How about a new business model built on resolving these systemic, cultural issues such as the Preliminary Specification does.

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 have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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.