Our Solution Part XII

I have a few ideas lurking in the background that need to be discussed. These ideas don't warrant an entire blog post of their own and seem to be orphaned from the conversation to this point. I thought therefore that I would dedicate a paragraph to each one and ensure they didn't fall through the cracks.

The first is the discussion of the service providers and how they will support themselves. One look at our budget and it is noticeable that the user community is fully supported within our budget, however, People, Ideas & Objects provide no funding to the service providers. Each of the service providers generate their revenue from the services that they provide to their clients, the oil and gas producers. They are replacing the administrative and accounting resources that are present in the North American oil and gas industry. These resources currently cost a large percentage of the $40 to 60 billion in annual G&A costs of the producers. It will be a reallocation of these G&A costs to the service provider firms as their source of revenue. The user community participant will have a financial interest in these service provider firms. They are the key individual we are looking too to establish these firms. They will also be generating revenues from their work with People, Ideas & Objects software developers. Therefore having two distinct sources of revenue.

It may have been confusing in terms of discussing the investments made in oil and gas. And my assertion of how the investors have not been able to make any money in the business. This has been my point in the discussion regarding bloated balance sheets and the fact that none of the capital costs are considered in the calculations of the prices of oil or gas. I have asserted that the investor is being short changed in terms of their investment by the bureaucrats in this scenario. However, as many are able to point out, many individuals, as investors, have been able to earn large returns on their investments in oil and gas. And that is most certainly the case. What we need to do is to separate the investor who is building the business and is making the long terms investments necessary for that purpose. And those investors who are trading in equities on the stock exchanges. What I am focused on is the investors who are investing in the business of the oil and gas business not the traders of stocks. The best analogy would be to state that used car salesman can always make a living, that doesn't make GM profitable.

There are 5,000 man hours in terms of mechanical leverage in every barrel of oil. The 130 million or so barrels of oil and natural gas that we use each day therefore provides us with approximately 382 million man years of physical work per day. That’s 140 billion man years of work that we benefit from each year. Twenty times the world's population. What would we do without the oil and gas industry? Do the bureaucrats, and their zeal for the biggest cottage, understand the responsibility they have to ensure society continues to have these resources available to them at all times? Are we dependent on oil and natural gas? Yes, and Tesla batteries will not do a thing about this. They need oil and gas to fill them just as everything else does. We might like to think of oil as “icky” and “dirty.” However there is really nothing that we can do about this situation. The oil and gas industry has constructively approached the environmental situation at every turn. What we need to consider is the possibility that we are focusing on the wrong issues of alternative energy initiatives and not on the most important issue to us. Maintaining our capabilities to keep the 140 billion man years of effort going forward. There are no alternatives to our use of that much energy. So if that energy costs $100.00 or $300.00 per barrel. People will know that it truly is the deal of the century. We have a job to do, lets do it profitably.

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

Our Solution Part XI

People, Ideas & Objects argument that bloated balance sheets don’t provide any value to anyone may miss the essential point for their existence. Large balance sheets can more easily support inordinately large amounts of debt. That is, the large debt will look less out of place if there are assets, and plenty of them, to offset them. The primary benefactor of the large debt balances would of course be our good friends the bureaucrats. Not being able to generate real profits, the money that fuels their machine has to come from somewhere, and that somewhere is either the debt or equity markets. Since 2008 the equity markets have not been friendly to the oil and gas producers. That is to say it wasn’t fueling the party the way it used to. The movement to debt instruments was the logical choice, and hey, look at those interest rates.

The lessons that were being dished out in 2008 were related to the volumes of debt that were being created. Too many people were buying too many houses they could not afford. Mechanisms in which to finance the probable defaults became innovative and this party carried on for a decade or two to long. The solution of course was to drop interest rates to zero and ease the burden on those who were indebted. This would buy them the time they needed in order to repair their financial position and then the economy would continue on. Well its been six years and the problem is that no one is repairing their financial positions. For example the Chinese who entered the great recession in pretty good shape have quadrupled the amount of debt that the governments, industries and people now owe. Just in six years. Oil and gas producers have to have a strong source of capital in order to fund a capital intensive industry. But when they run it with the commodity prices so far underwater, then they really need money. So debt is what has fueled the party for the past six years. But remember its at low interest rates!

And here we are today. The bureaucrats cabin is in fine shape. Able to handle the retirement years of the average bureaucrat in the style of a king. The only real concern to their retirement plans is what will it cost to fuel the boat? If you believe that the bureaucrats are going to be sticking it out through the disaster that they've created then you have a higher opinion of them than I. If they could have fixed these problems in the past, don't you think that they would have? The fact of the matter is that change is not their forte and they are being forced to perform now, or will be soon. And that’s hard. Don't assume that the situation that exists today will last much longer and for them to be able to deal with the outcome. Here is a comment from the Wall Street Journal regarding the Fed and the ability to deal with the poor performing economy.

It’s heresy to say so, but maybe after six years of zero-interest rates, and long after the financial crisis ended, the Fed should wonder if its policies haven’t become an impediment to faster growth. Maybe letting markets begin to set interest rates again would lead to a better allocation of capital and less economic uncertainty. At the very least the Fed should start analyzing why its forecasts have been so wrong for so long.

If interest rates do rise. Something that is a given because they certainly can’t go down. Those with bloated balance sheets, whose purpose is to hide the high levels of debt. Who have not been honest with the total costs of what it takes to produce. Have been overproducing for many years. With that overproduction being undertaken to cover the cost of the overhead of the huge bureaucracy. It should be clear to most that this is the brick wall that is a few feet away from the bumper of the speeding vehicle. We should have made the changes in our velocity a while ago, but their was also the cottage that needed many, many things.

2008 was a wakeup call for everyone regarding the debts that they were carrying. Time was provided through quantitative easing and other antics to deal with our debts, not to incur more. How much longer will low interest rates go on for is the question. Its kind of like during that game of musical chairs that we played when we were younger, anticipating when the music would stop. Has anyone told the investors and bankers that there are no chairs? If anyone expects the bureaucrats to come with a plan, a vision or an excuse, don't wait too long. It doesn't matter what the bureaucrats do. These forces are well in play and will have them removed from, or see them leave, the scenery. What we need to do is to continue to focus on the development of our user community, and then to rebuild the industry around the Preliminary Specification.

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

Our Solution Part X

People, Ideas & Objects service providers are the sub-industry that we are developing in our ecosystem that will provide for the oil and gas producers administrative and accounting functions. These will be in replacement to the internal capabilities that the producer has currently developed. Making the change from a reliance on these internal capabilities to a reliance on an industry wide administrative and accounting capability. As we have mentioned this is a key element in our ability to provide the value proposition that we are able to provide the industry. And it should be noted here that the scope and scale of the processes that are managed by the service providers would include those that fall under accounting, land, production and exploration administration domains. Some have argued that this would never work. That the broad scope and scale across the industry would be too difficult to undertake. I would point to our value proposition is well within the trillions of dollars and that the service providers have as their competitive advantages several tools that are not otherwise available to the current producers.

Take for instance the principle of specialization. Most producers do not have the scale in terms of their processes management that can use this principle in their organization. What may be required is a production accountant for the new property and the work required by that property would total 1200 man hours per year. You would naturally assign that work to one individual and there would be no means in which you would be able to apply specialization to any of those processes involved in the position. Whereas with the service providers, we can take each element of a producers accounting and administration and strip it down to the basic elements and design them to be managed by one specific service provider. That service provider will then staff that process in the manner that provides the most effective and efficient means of processing the industries transactions and data. The service provider isn't manually processing these transactions and data, they are applying the most advanced management sciences to reduce the costs and increase the quality of the information that they provide. Specialization and the division of labor are the two principles that are responsible for all of the economic growth that we have experienced in the past 250 years. Constraining ourselves by using just the capabilities of the producer provides us with no capacity to improve the performance of the administrative and accounting capabilities. By establishing the service providers we are able to apply the principles of specialization and the division of labor to the administrative and accounting processes. And in so doing, increase the throughput of the industry.

Currently computers are used within the oil and gas producer to assist in the management of the processes that they are responsible for. Up to this point in time they have been of great assistance in helping people to do their work. However, they have never really been able to have an impact on the productivity of the people that are employed in the industry. In many ways the people who are working in the industry are doing the same things that were done in the industry in the 1960’s and 1970’s. To make any changes requires a wholesale investment of time and money, like what People, Ideas & Objects budget requirements dictate, in order to achieve the differences that are required. These investments in software development and process definition have been too expensive for one producer firm to undertake on their own. There has also never been an initiative that undertakes to raise the funds and organize these developments across the industry until People, Ideas & Objects has. The service provider who works to enhance the process they manage with specialization and the division of labor. Who also has the software development capabilities, and user community of People, Ideas & Objects permanently available to them. Has a new and robust environment in which to conduct the constant development of their processes.

It is harder for me to see how the industry continues on in the fashion that it is. The ability to develop software for each producer's individual administrative and accounting capabilities has quite obviously failed. As there is no one who is successful in the business. There are limited scope and scale applications available to the producer firms, however none that provide an overall vision or value proposition such as People, Ideas & objects. What is expected from the existing software developers is that producers will cobble together the works of several independent software developers in order to cover off a reasonable amount of the scope of the producer. So that it is impossible for People, Ideas & Objects, given our budget and value proposition, to put together the process management of the industry with the help of our user community and our service providers. However, it is expected that each producer does this within their own shop with their limited budgets, out of applications that have no shared vision or value proposition. It sounds to me that the arguments that are against People, Ideas & Objects, our user community and service providers are coming from bureaucrats who are defending their own turf! Not some reasoned explanation as to why our solution won't work.

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

Our Solution Part IX

To provide the software for the next generation of ERP systems. There is one aspect that can not be overlooked. The method in which they are developed. It is with that understanding, with the scope of what we are undertaking in People, Ideas & Objects Preliminary Specification. And my personal belief that systems that are developed with close user involvement are far superior to those that are not. That we are user community based software development. Our primary focus is the development of our user community. Spreading our message throughout the industry and connecting with like minds who know that there is a better way in which to operate the oil and gas industry. It is the user community that we are developing who will have the power and capabilities within the new environment to affect the changes in the oil and gas industry. It will be the user community that will remove and replace the bureaucracy and put them in their retirement homes.

The mechanism that the users have to make this change is detailed in the user community vision. The mechanism itself is the Intellectual Property that is contained within the Preliminary Specification and any of its derivative works. When change needs to occur within the industry it will be the user community that has the capabilities to make the changes to the Intellectual Property. The People, Ideas & Objects software developers will only look to the user community for their development direction and details. They take orders and directions from none other than the user community. If a producer wants to see a change in the way that the system operates within their firm, it is the user community that they will need to discuss this with. No one else has the power or capabilities to make any changes to the Intellectual Property or to the software code itself. Only the user community.

It is the user community participant that is also the principle in the sub-industry of service providers that is being created. The service providers are the replacement organizations to the producers current administrative and accounting resources. In the environment where the Preliminary Specification exists, the prototypical producer is reduced to the C class executives, the earth science and engineering resources, land, legal and some support staff to enable their focus on their key competitive advantages of their earth science and engineering capabilities, and land and asset base. The service providers will focus on a specific process and have the entire industry as their client base. Therefore focusing on their competitive advantages which include the principles of specialization, the division of labor, automation and many others. It will be through this window of their service provider operation that the user community participant will see the actions and interactions of the producer firms. It is the service provider who is the ultimate user of the software that they have developed in the user community. And they will be able to bring new value and efficiencies to the dynamic, innovative and profitable oil and gas producers.

It is this ecosystem of our software developers, the user community participants and the service providers that will provide the means in which the oil and gas industry has their administrative and accounting needs handled. This will be an industry wide administrative and accounting based capability. Freeing up the individual producers from having to develop the administrative and accounting capabilities themselves. Consider that today, each producer has to develop their administrative and accounting capabilities in order to function in the industry. Each producer replicating the same administrative and accounting capabilities as each of the other producers. Yet none are able to share these capabilities in the current environment. This inability to share these capabilities is a major impediment to the profitability of all producer firm’s today. It will become an even more difficult impediment in the future as the government regulations and requirements continue to expand.

It is this industry configuration that provides the producer with the flexibility in terms of their production deliverability. If a property isn't profitable at the current commodity price the producer can shut it in. And in so doing they will reduce their operating costs, royalties and the overhead costs of their operations. That is because none of the service providers will receive any of the input variables from a shut-in property. Therefore they will have no work to conduct on that property and hence no billing will be generated to that producer for that property. Enabling the producer to realize a null operation, which will increase their firm's overall profitability. It will also save their reserves for the day in which they can be produced profitably. It removes the marginal production from the commodity marketplace, placing upward pressure on prices. And keeps the capital costs of their reserves lower, as a result of not having to add the losses on operations that otherwise would have occurred.

The user community is the critical resource that enables the business model of the oil and gas industry to be employed and deployed. If changes are required it will be able to implement them. This is what the industry needs for the 21st century. The capacity for change. With People, Ideas & Objects we provide a software development capability that includes the user, the service providers and that critical capacity.

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

Our Solution Part VIII

We have been highlighting the major points of difference between the Preliminary Specification and the status quo bureaucracy in a series entitled “Our Solution.” Today I want to have a look at the Partnership Accounting and Accounting Voucher modules Material Balance Report which is a critical process / document within the specification. The purpose of the Material Balance Report is to balance the production and flow of products within a Joint Operating Committee. It is also designed to balance the production of the industry by using the information within each Joint Operating Committee as the inputs for an overall industry wide balancing. By doing so, the information that is contained within each Joint Operating Committee will become unimpeachable in terms of its accuracy. This system balance, as we call it, will provide each producer with the understanding that their production is accounted for accurately.

There are many sub-processes that are derived from the information that is contained within the Material Balance Report. These include all of the production accounting, revenue and royalty accounting, nominations, marketing data, inventory and many others. Since we will have balanced the Joint Operating Committee with the “system balance” across the industry. We will have also balanced the production, inventory and sales volumes across the partnership with the “partnership balance.” And have balanced the material with the “material balance” that deals with the allocation of production of by-products back to the individual Joint Operating Committees. This will provide an integrity in the value of the information contained within the Material Balance Report. This integrity enables the next step of the module, automation of the follow on business processes.

First, everyone knows that these volumetric values are subject to what seem to be an endless stream of amendments. And there is little that can be done to change the number of amendments throughout the process. What we can do however, is automate the processes based on the volumetric values that are processed at any time. Understanding that at the ultimate end of the process the accuracy of the volumetric information will be there, all of the information that was processed up to that point in time can be automated. Therefore all of the processes that use volumetric information within the Joint Operating Committee, producer firm and the industry can be developed with the understanding that they are automated based on these assumptions.

What we will be doing is removing the work that people are currently doing that is best suited to being done by computers. Now everyone fears that computers will be taking over, and that fear has been proven false many times over in our history. The fact that so many man hours are consumed in the processes that are involved in the Material Balance Report. This time could be better used elsewhere which is part of the larger point that we are undertaking in People, Ideas & Objects. We are leaving the work that is best suited to computers, the storage and processing. And enabling the people to do the value added work that involves the leadership, issue resolution, decision making, creative, collaborative, research, idea creation, design, planning and thinking. In essence we are making the computers work for us as opposed to the current situation where we are working for the computers.

Automation of these key business processes will eliminate a large and difficult franchise of the bureaucracy. Those that are part of the bureaucracy will probably leave the industry through retirement or other means. Those that find this to be the appropriate direction to be taking in the industry will join People, Ideas & Objects user community and establish themselves as a future service provider in one of these many processes. Does anyone believe in this day and age that these processes should be managed in the manner that they are today? Is this how we move forward in this industry? We all know there is a better way. And the moment we are freed from this cumbersome and time consuming burden, then we can begin to develop the potential of what this industry can do.

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

What Our Tactics Are Part II

There are two major trends that People, Ideas & Objects are capitalizing on in order to make the necessary changes within the oil and gas industry. The first has been the focus of most of the discussion that has taken place here on this blog. That being the unsustainable business model of the current bureaucrats in the industry. With them there is no future, no plans and no vision. Just more of the same losses and nothingness. The other trend that is as strong and is accelerating each and every day is the impact that Information Technology is having on our lives. People are experiencing change at a rapid pace in their personal lives. What could not be done a few years ago can now be done by the average four year old. It is truly remarkable. To disregard technology, which has been the attitude of many people, is now a dangerous position to put oneself in.

The effect of Information Technology in the business environment over the past ten years is of course a different story. The unchanging bureaucracy know that if they adopt the new technologies they lose control of their dominance and their desired form of organization. They need to stay in control and the way that they do that is to ensure that no technologies enter the organization that will ultimately render them even more obsolete.

So where do we stand in terms of the overall Information Technology horizon. I think that to state up to this point, the whole exercise has been a great exercise. The technologies have not been mainstream or powerful enough to make the promised changes. They have needed to mature and round themselves out in order to deliver on the promises that have been made. This history is one of the main reasons that people point to them as being irrelevant in the current marketplace. I think they are wrong. But its not too late. Now is the time in which to get on board and ride this train to its ultimate destination. Industries such as oil and gas will be fundamentally different as a result of the Information Technology revolution. And People, Ideas & Objects, I think, is the beginning of this trend.

When I began this journey in 1991 there was no way in which to implement the vision in any manner. The Internet was still a half decade away. Oracle’s technology was as dominant then but it was unable to carry the load. And computers, servers for that matter, were no better than what we have in our phones today. Probably most importantly was the problem of the user. How would they fit in? Its different today. I don't need anything more from Oracle other than for them to continue in their innovative ways. The Internet is more than capable. Computers and servers can do what we need in no time. And on that point there is an excellent article from the Wall Street Journal on where we are headed. And lastly the user is well educated and capable in the use and application of technology for their needs. I have what I need to implement the Preliminary Specification within the oil and gas industry. Something that until very recently I was unable to state.

So where do you fit in? Do you think the oil and gas industry needs to change? Is Information Technology an enabling capability to where you think it can go? Do you have ideas on how to improve the way in which we work? What will you do about it? I expect the bureaucrats to self select in the overall process. Either through the implementation of People, Ideas & Objects Preliminary Specification or not. They will retire from active employment in the oil and gas industry. Why do you think they have been spending so much of their money on their cabins these past few years? Either they will leave the industry to us, or they will leave it in shambles, they don't care. Their pensions are vested with the insurance industry. The point should be, what actions will you be taking as a result of this opportunity?

If we look at the Wall Street Journal article and understand the consequences of Information Technology in the workplace. Where can the individual go to implement these technologies and ideas in their business and realize the opportunities that are intimated in that article. In oil and gas people can move with People, Ideas & Objects. A vision of how the industry could operate captured in the Preliminary Specification. One that has as its primary focus the user and the importance of their role in the industry and the software that they develop and use. Its an exciting time to be alive. The next 25 years in oil and gas, and what that means in terms of the application of Information Technology, is as interesting as I think it gets.

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

What Our Tactics Are

Over the past few weeks we have been able to define a few issues within the oil and gas industry. We have also been able to show how People, Ideas & Objects Preliminary Specification would provide the capabilities for the dynamic, innovative and profitable oil and gas producers. All of these were focused around the capabilities of enabling “price maker” strategies for producers. And what was included in the costs of oil and gas production to ensure those prices were capable of ensuring profitable operations. What we have proven is that the average North American producer is losing money on operations in both oil and natural gas. And that the capital costs of the industry sit on the balance sheets of the producers where they provide no value other than to subsidize the consumers of these commodities.

These elements are some of the components of the Preliminary Specification and are part of the business model that is included within it. There are also many other components that add value to the producer firm. The quantification of all of these elements for the next 25 years stand at $45.7 trillion in incremental value over what the bureaucracy are offering today. Our value propositions base case of operations will be on display in the next two weeks as the earnings are announced by the various producers. It will be important to remember that the costs of capital should be included in their profit / loss calculations. When it costs 30% on average for a producer to maintain their production profile. With all of these costs and more being capitalized. And they only recognize 6-10% of their asset base as their annual depletion. They are inflating their asset base on an annual basis. This takes away from the investor, and the producer, the opportunity to ever earn a return on their invested capital.

Now we will see the extent of the issue with the earnings that will be announced in the next two weeks. Tomorrow we have two of interest in BP and Hess. Wednesday will have our friends at Penn West, with Exxon and Conoco. Thursday will see Chevrons. And then next week we will start with Occidental, Anadarko, Pioneer and EOG. Tuesday Husky, Chesapeake and Tourmaline. Wednesday is Apache, Canadian Natural Resources and Marathon. And Thursday we'll finish with Bonavista Energy.

People, Ideas & Objects have put our plan and vision forward. What is the bureaucracies? We need to look at the next 25 years and how it is that society will be provided with the energy that consumers need. Will this be at the expense of the investors? Those investors who have built this business to this point? Or will there be a change by the industry to the Preliminary Specification that provides for a sustainable business model. I don't think we could frame our solution any better than what we have by providing the Preliminary Specification. Which uses the industry standard Joint Operating Committee as the key organizational construct of the dynamic, innovative and profitable producer. The Joint Operating Committee is the legal, financial, operational decision making, cultural, communication and innovation framework of the industry. By identifying these frameworks in our software and aligning them with the compliance and governance frameworks of the hierarchy, we achieve a speed, accountability and innovativeness in our producer organizations. It is through these frameworks and their alignment that we are able to approach the issues of the industry, whether they are in the administrative, accounting or operational domain, and provide solutions for them.

What do the bureaucrats have. Fudged numbers of how they have been managing this industry. Continued overproduction in the natural gas industry as a result of shale reserves is the precursor to continued overproduction in the oil industry. Yet you hear nothing of this phenomenon and any approach to fix it! It has been five years in the natural gas business since prices have been destroyed. Not a word. No action. This being the first year in which the oil prices have declined. What we have is the same behavior. Not a word. No action. What is it that is expected from this unchanging and incapable form of organization? What we need to do is build the industry from the bottom up based on the Preliminary Specification. That way we will have the capabilities to deal with the industries issues and opportunities in the next 25 years.

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

No Postings This Week

I will be taking this week off from posting, returning April 27, 2015.

Our Solution Part VII

Now that we have established our accounting methodology is different from the status quo. I want to reiterate the value proposition we have in providing the oil and gas producer with the most profitable means of oil and gas operations. Through the decentralized production model, and the accounting methods we have discussed here this past week. We are able to generate $5.7 trillion in additional profits over what the bureaucracy will provide in the next 25 years. By accounting for the capital costs of the industry in the price of the commodity we are returning the capital that was used by the industry. Providing a return on investment back to the investors. If the expectation is that the industry will be spending $40 trillion in the next 20 years. Then the investors, under our methodology, can look for a return of those funds as well. Providing, at a minimum, $45.7 trillion more than what the bureaucracy have traditionally provided. And as we all now know, bureaucracies can’t, won’t, will not, ever change. As we have seen in the past few days. The price of oil has shown some strength due to the possible decline in U.S. production. This is the elasticity of supply and demand at work in the pricing. This however won't stop the bureaucrats. Expect more of the same of what we have been seeing the past few years to happen in the future.

Like most people I’m happy with our value proposition. Reading this blog and the Preliminary Specification shows that it is a valid model that will work within the industry. The thing is there’s much, much more. The basis of the Preliminary Specifications research was on innovation. How can an industry that is based on the earth sciences and applied science of engineering become more innovative in its makeup? What we learned in the publication of our Preliminary Research Report was that innovation can be a defined and replicable process. Therefore, what would be required within the industry in order to enable those people with the innovations to come forward and enable them? The answers to this question have been captured and implemented in the Preliminary Specification.

Take as an example our Work Order system. There are two key aspects of the system and the first is a means in which to capture costs within the producers organization. Having the earth science and engineering resources accounting for their time and efforts on a daily basis. And in turn having these costs charged directly to the Joint Operating Committee to which they are working. These people are not overhead. The overhead of the producer has been shifted into the service providers. These are the people who are working in the projects that are Authorized for Expenditure. It will be to the various AFE’s that the majority of the earth scientists and engineers time is allocated to. In the Preliminary Specification there will no longer be a cost associated with being classified with operatorship as the earth science and engineering resources will be charged directly to the Joint Operating Committee.

The innovative aspect of the Work Order is its ability to work within the industry across producers and service industry participants. The ability to organize an ad-hoc group of companies to research or study some idea or innovation. These types of activities have occurred occasionally in all producers. They are however an accounting and bureaucratic disaster awaiting the individual with the innovative idea. These bureaucratic disasters are the constraint to these individuals and producers and the reason they are not undertaken more often. In an innovative, science based industry such as oil and gas. Where the demands of the consumer will become more difficult for the oil and gas industry to supply. The need for high volumes of these research and study groups to be undertaken will be necessary. Significantly higher volumes. Therefore we needed to create a system that would enable the innovator to organize the like minds from within the industry, raise the resources, both cash and other means, and deploy those in a manner that was less onerous than raising an AFE, or the current bureaucratic ad-hoc approach. One that employed a system where the commitments of each producer could be obtained and employed. The bills incurred and paid and the results of the research shared by those participants. And this will be done through a simple interface that eliminates the bureaucracy from this process. And doesn’t question the innovators integrity with questions from accounting each quarter.

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

Our Solution Part VI

Through People, Ideas & Objects the accounting that is carried out will change significantly when we implement the Preliminary Specification. With the decentralized production model enabling the price maker strategy for all oil and gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. And the determination of what the costs of that property will include is the capital costs on an accelerated amortization schedule. This will bring the costs per barrel much higher and into the territory of what it actually costs to produce. Requiring higher commodity prices for the producers to meet the criteria of producing any property.

At some point in every industry this transition has to be made. In the beginning the build out of the industry has to be undertaken by the investment community. Then when the assets of the industry mature, it is then time to earn the profits from what has been developed. Oil and gas is a mature industry. The bureaucrats continue to consider that it is other peoples money that they need in order to fund their operations. This is inconsistent with reality. The industry should be providing the investment community with a return on the invested capital, and an annual profit on those as well. Instead the bureaucrats let the assets sit on the balance sheets to eternity and never let the costs flow to the income statement. This subsidizes the consumers of oil and gas by paying for the capital costs of the industry. The prices of the commodities never adjust to the real costs of the industry.

Under this change to People, Ideas & Objects methodology the makeup of a producers balance sheet will ultimately change. From having a dominant position in terms of fixed assets, and negative cash positions. To having high values of liquid investments and much smaller amounts of fixed assets. They will be financially much healthier. They will be able to dividend out large portions of their earnings to the investment community. Pay down debt. And fund large portions of their own capital expenditure programs. All as a result of finally realizing the real cost of oil and gas exploration and production!

It will be the level of capital expenditures in the past three years that dictate the oil and gas prices. It will be these properties that carry the higher costs per barrel due to the large balances of capital they still have to amortize to each barrel of oil equivalent produced. If we are generally writing off all of the properties assets in the first three years of the life of the property. It will be these that have to meet the criteria of being produced or shut-in first in a low commodity price environment. Those properties that have exhausted their asset balances will be able to produce large profits no matter what the oil and gas price is in the marketplace. However, it will generally be the work done in the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil and gas prices will have to reach to bring on the past three years production. In an industry that has the elasticity of supply and demand characteristics that the oil and gas commodities have, it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model.

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach that limit. However, the bureaucracy are taking the limit as the standard in terms of what “should be” used as a method of depleting the capital assets. This, I believe, is unreasonable when it is taken to the extent that the bureaucrats have. Bloated balance sheets provide no value to anyone. It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the bureaucrats, that will use a much more aggressive three year method of writing down all of the capital assets. That way prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through the decentralized production model. And the investors can freely invest in the oil and gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit as well.

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

Our Solution Part V

Only People, Ideas & Objects provides the oil and gas producers with the most profitable means of oil and gas operations. That is our focus and our drive. As we have noted here many times, the bureaucracy have been too busy lining their own pockets to concern themselves with the interests of their shareholders or anyone else. The discussion we had yesterday should have been made many years ago, and been resolved at that time. Then, as is now, all that we hear are crickets. I find the level of self interest by the bureaucracy to be very questionable. It is People, Ideas & Objects who have researched and published the Preliminary Specification. A means to operate the industry in the 21st century based on the Joint Operating Committee. We have published the decentralized production model that provides the producers with the price maker strategy. And now our argument regarding bloated balance sheets proves the industry has been allowed to sink into a groupthink mentality of never fully accounting for the costs of their operations.

Our focus on profits is critical to a well functioning society. Without appropriately calculated profits the producers will not have the resources to develop the industry in the manner that is required. They will not be able to hire the people necessary to make the industry what it has to be. And it will not pay the taxes and royalties that help to fuel our governments needs. Continuing on in the manner that they are will not provide society with the energy that it needs to fulfill its opportunities. Will the United States be the first country to willingly reduce its energy consumption, and hence economic output, as a result of the industries inability to meet society's demands? Or course not, then who will? With the recent publication that the breakeven for energy production was now $72. That means each barrel of oil is being produced at a loss of $20 per barrel. And “breakeven” does not consider any of the invested capital that was used in the production of that barrel. It is therefore expected that investors will provide another $20 per barrel in further capital investment so that the bureaucracy can sit and do nothing regarding this issue. An industry that is well on its way to bankruptcy. Quickly.

Currently the business model is flawed, the bureaucracy is conflicted and incapable of changing this situation. We are therefore subject to the forces of creative destruction. However, how much damage would society realize during the downturn in capabilities of the existing industry? And can we afford to experience that pain without a “Fed” willing and capable of intervening with the ability to flood the market with deliverability? We should therefore carefully consider the situation we find ourselves in today and determine what the self-interested bureaucrats are doing. There is a risk.

But then again I am selling my book as they would say. And I am the one who will benefit greatly by raising our budget. Our budget would be a significant cost if the project were to fail or the bureaucracy miraculously transformed. So there is that risk too. I don't have to make the decision, I'm here to argue the facts. Taken in the context of the next 25 years of the oil and gas industry it would seem to me be a slam dunk of a decision. How the industry needs to operate will be based on the Internet and not on the innovations of the 19th century. How these changes are made is the question.

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

Our Solution Part IV

Allowing the producers to have their balance sheets bloated with assets that are never written down. And as a result, their income statements realizing only small portions of the real costs of capital incurred in the production process. Leaves the investors twisting in the wind waiting for a return of their capital from the industry. Although the bureaucrats may report profits. They really are just the gross margins of the producer firm. The actual overhead and the capital costs of the property are never moved to the income statement. The overhead of the producer is capitalized to the balance sheet and sits there for eternity to pass. The net result of this process is the producers look spectacularly effective in their operations. Their assets continue to grow as long as they spend. Their profits are high no matter what they do. However in terms of really producing anything of value, forget it. As the investors are now learning, oil and gas is a lost cause.

The focus of People, Ideas & Objects derision of this process has been squarely on the SEC and the public accounting firms. They want to relate to the world that they are cool and understand the sciences of geology and engineering. So they've come up with this contrived process of capitalizing everything that the producer does and recognizing almost nothing in terms of the annual depletion of its capital costs. But who is it to say that what they do is wrong? And what’s to say the manner in which People, Ideas & Objects calculates profits at the property is the more appropriate method of dealing with the costs of capital?

If you look at the average oil and gas producer. And yes I am making generalizations here. The producer is expending approximately one third of their asset base in current year capital expenditures. These capital costs are what are required to sustain and grow the deliverability of the firm. These are all being added to the asset classes on the balance sheet. In addition the accountants capitalize most, if not all, of the overhead that is incurred in the head office. You will then notice, that most producers, take approximately 6 - 10% of their asset base as their depletion for the year. These capital costs are moved to the income statement of the producer. Leaving the asset life approximately equivalent to the reserve life index of the reserves. In most cases the reserve life index is ten years and the assets on a simple mathematical basis would therefore also be written off in ten years. This is what the public accountants would say they are doing. Matching the capital costs of the business to the life of the business.

To whose benefit does this provide any value. In a capital intensive industry the oil and gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do you assess the effectiveness of their capital deployment? According to the accountants using their process, you need to look at the firm from the point of view of the capital assets life, or reserve life index, or in this example the ten years. I feel the horse has bolted from the barn and locking the gate is useless. Investors need to have a more timely gage in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit for a while longer yet. I suggest that we look at what the costs that were incurred to maintain and expand the deliverability. That this cost in the current fiscal year is the cost of capital necessary to maintain and grow the deliverability of the firm. And is therefore a cost that is spent. That this cost has been expended and is irretrievable, and therefore should be expensed in the current fiscal year. Or in other words the size of the capital asset depletion should be the same or even much larger than what the amount is expended in the current year to maintain and grow the deliverability of the producer.

Only then, when the capital costs of the producer firm flow from the balance sheet to the income statement, can the investor assess the performance of the producer. It will become apparent quickly who is wasting money and who is building a sustainable firm. All of the producers will be passing large costs to their income statements each year. If they are unprofitable then they are not going to be in business for long. Something that we can not assess of the current crop of producers. If they are profitable then they are operating the firm in a manner that is consistent with good business practices. If this is done in the short term as suggested by People, Ideas & Objects method of accounting for all of the costs at the property level. Then the investor has the ability to make the assessment of the producers performance. And they will conclude, as I have, that the investor will need to stop subsidizing the oil and gas industry in terms of the prices that are received for the oil and gas commodities.

Measurement of a firms assets and the timing of their movement to the income statement is a key principle in accounting. I think the public accountants and the SEC have messed it up badly in oil and gas. Leading to the investment community essentially subsidizing the oil and gas consumer by funding the capital expenditure programs of producers with no expectation of any return on investment, ever. This has to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $40 trillion in investment that is alleged to be necessary with nothing but disgruntled investors is not going to do it. Sure investors sit on producers that are well capitalized in terms of their assets on the balance sheet. But they never make any real money. And at the end of the day, all that happens is that a new day begins with the bureaucrats who run this business. We need a change.

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

Our Solution Part III

The only way that producers are going to be able to make any money in this business for the next 25 years is if they institute some form of production allocation. The current business model that has the producer delivering all of their production to the marketplace will only continue to depress commodity markets. There will be no change in this situation until such time as the producers change. And as we have mentioned here many times before, bureaucracies can’t, won’t, will not ever change. There are many industries in which we can look too to prove this fact. Bureaucrats are the fundamental, necessary, precursor to creative destruction. Without bureaucrats nothing would ever die or otherwise fall apart.

Our solution provides, as an alternative, the industry wide capability to make decisions based on facts. To produce a property, or not, based on profitability. Something that no producer is able to provide in terms of the information they produce today. Ask a producer what it costs for a property in terms of its royalties, operations, overheads and a reasonable allocation of the capital cost and they will work for decades trying to find that factual information. None of them can. They can provide estimates of what the overheads were based on, which were allowances. But to know the actual overhead necessary to operate a specific property it is impossible for them to ever know in the current system.

Yet it is the overhead that they incur in developing their fixed administrative and accounting capabilities that cause them to have to produce everything that they can. It is the high throughput production model that needs to be operated at full productive capacity in order to ensure that all of the “high fixed cost machinery and organizations, variations and interruptions that leave significant overheads uncovered” are covered off. This business model has worked somewhat for the oil and gas industry when the oil and gas resources were scarce. Now that the oil and gas resources are in abundance, it is an absolute failure. What is needed is a new business model that takes the high fixed cost organization of the current producer and makes them the variable overhead cost of the Joint Operating Committee.

With the Preliminary Specifications decentralized production model. The industry will have a business model capable of dealing with the abundance brought about by shale. Employing a production allocation methodology based on profits is a fair and equitable means of determining who can produce and where. The decentralized production model ensures that the entire industry is employed in profitable operations. And employed in real profitable operations. Not the gross margins of revenue less royalties and operating costs that are claimed by bureaucrats these days. Profits based on the revenues less royalties, operating costs, actual overheads and the real capital costs of the production. Real profits, not gross margins the bureaucrats try to get away with today.

It is on this basis of accounting for the actual costs of operations that our business model, the decentralized production model, provides $5.7 trillion dollars in additional profits over the next 25 years. A bold claim, and one that can be verified by reading this blog and the Preliminary Specification, and understanding how it is different. A new way for the industry to operate. One in which the future investors, whoever they may be, will actually have with that promise of higher profits, and because we include the cost of capital in determining the cost of production, their investment in the industry returned to them as well. Currently producers are using accounting methods designed by the SEC and public accountants that allow the balance sheets to be bloated and the income statements to never see any of the real costs of capital. Leaving the current oil and gas investors to wonder when it is that they will ever get profits or even their investments back.

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

Our Solution Part II

Our user community will be the key to the quality of our software and service solution. There is much work to be done to take the Preliminary Specification and define the software that will be used by the industry. It is this work that the user community will undertake. The detailed work of determining what is needed in order to ensure all of the producers processes are covered off and managed in an effective way. This work will require the full understanding of the industry and involve the estimated 3,000 members of the user community. Taking what they know about the industry, designing new software to define and support the work that they will do in the new oil and gas industry.

It will also be the user community that provides the foundation and entrepreneurial spirit behind our service providers. It will be our users who will form these service provider firms on an exclusive basis. Using their understanding of what they’ve developed in terms of the software processes and the need to manage these processes by their people. It will be their opportunity to build a service based organization to provide the services and software to the producer firms. This will be done under license and provide the service provider with the exclusive rights to the domain of the process they manage.

Therefore from a producer point of view the difference between the way in which the industry is operated today and the way it is done in the future will be significant. First they will no longer have any of the administrative or accounting people on staff as direct employees. This allows them to be freed from the fixed costs of the overhead that is currently causing them to lose money. It also relieves them from having to build the administrative and accounting capabilities needed to operate within the industry. Producers can then acquire these capabilities from the service providers on an as needed basis, based on production at each individual Joint Operating Committee. And it will be the service providers focus on specialization, the division of labor, control of the development of the software and automation of the processes that will enable them to provide the producers with better and more cost effective services than what the producers were able to build themselves prior to the industry changing to the Preliminary Specifications decentralized production model.

It is this change from the reliance on the producers administrative and accounting capabilities to a reliance on the industry based administrative and accounting capabilities that provides the production flexibility needed in the shale era. When a property falls below the marginal cost to produce. Then it can be shut-in without penalty to the producer firm. It will actually be of financial and long term benefit to the producer to shut-in their unprofitable production. Their firm will perform financially better, with only profitable operations being produced and none of these being diluted by unprofitable operations. The reserves will also be held for a time in which they can be produced profitably. And of course the commodity markets will have less of the commodity in the marketplace, leading to overall higher commodity prices. A win-win situation that occurs due to the fact that when the production is shut-in no operating costs, no royalties and no overhead will be incurred by the property. Only the costs of capital are uncovered during times when properties are shut-in.

It is the service providers competitive advantage to provide a quality service to the producer. This will be in the minds of the users when they are in development of the software that will be derived from the Preliminary Specification. How can they make this environment, where they are building the industry based administrative and accounting based capabilities, far better for the producer firm? By using specialization and the division of labor, control of the software development and automation of the processes they manage. The user community participant and service providers will be able to develop far more significant value than what each individual producer is able to generate within the constraints of providing the administrative and accounting capabilities themselves.

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

Our Solution

Members of the user community will provide the oil and gas industry with a solution to the issues that I so frustratingly discussed yesterday. We will have changed the manner in which the producers are able to manage their operations so that each property can be engaged based on its optimal strategy. And only if it is profitable. The producers will be able to do what is in the best interests of the property and their shareholders, whoever they may be. A change from the focus on increasing production at all costs. To a focus on increasing profitable operations. Specifically we are moving away from the high throughput production model to the decentralized production model of the Preliminary Specification. In Professor Richard Langlois writings he has described the decentralized production model as follows.

In a world of decentralized production, most costs are variable costs; so, when variations or interruptions in product flow interfere with output, costs decline more or less in line with revenues. But when high-throughput production is accomplished by means of high-fixed-cost machinery and organization, variations and interruptions leave significant overheads uncovered. p.58

We have applied the decentralized production model to the oil and gas industry in the following manner. In order to make the overhead costs of the property variable. We have to turn the fixed overhead of the producer into the variable overhead cost of the Joint Operating Committee. It will be in this way that when the property is shut-in, due to its inability to earn a profit in a low commodity priced environment, the property will be able to incur no overhead in the Joint Operating Committee or the producer firm. And when we talk about the overhead we are talking about all the administrative and accounting costs incurred to own and operate the property. We do this by stripping the prototypical producer down to the C class executives, the earth science and engineering resources, some land and legal, and support staff. The administrative and accounting resources are then reorganized into service providers who focus on a process or subprocess and use the entire industry as their client base. Therefore when the property is shut-in no activity in the property is incurred and no administrative or accounting resources of the service providers are used during the month when production is shut-in, and therefore each of the service providers generate no billing or charges for that property.

The property then incurs a null operation. No profit and no loss from operations. And the producers other profitable properties will not be eroded by losses on the poorly performing properties. The commodity markets have less of the commodity on hand, raising prices to the marginal price. And the producer doesn't have to make up for the properties current losses from future operations. Making the Preliminary Specifications decentralized production model the most profitable means of oil and gas operations. Any producer that continues to produce unprofitable properties will be dealt with by the investment community. As there will be no justifiable reason to continue to do so.

This structural change in the way that the industry operates will provide the flexibility in terms of the industries production profile in both oil and gas. With high cost shale being as prolific as it is today it is necessary to ensure that this flexibility is afforded the dynamic, innovative and profitable oil and gas producer. The ability to overwhelm the markets with flush production from the shale formations has shown the capability to collapse both the oil and natural gas commodity market spaces. This is unfortunate and a reflection of the elasticity of supply and demand of the commodities. With little excess demand or supply of the commodity in the market, the price of the commodity reacts significantly. Therefore any overproduction must be mitigated before the price declines precipitously. Creating a means to allocate production amongst independent producers will only lead to difficulties if it is not seen as being fair and reasonable. And the only reasonable and fair method of allocating production in an environment such as the oil or gas industry is on the basis of profitability of the property itself. And the only way that we are going to be able to implement that method is through the adoption of the Preliminary Specifications decentralized production model.

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

Some Rambling Thoughts

Some might argue that our criticism of the bureaucracy would seriously affect our revenue stream. I can assure you that it hasn’t yet. As it is not in the bureaucrats best interest to be supporting People, Ideas & Objects. We eliminate them from the landscape of the oil and gas industry with the Preliminary Specification. So our criticism is more sporting than it is of a practical deficiency to us. This has always been the case and the bureaucrats have certainly never let an opportunity pass to take a swipe at us. One thing that is a negative outcome is the fact that this blog and all our communications are handled on essentially public facilities provided by Google. One should find this humiliating and embarrassing. Not to toot my own horn here but we appear to be the only ones that are addressing the profitability and pricing issues of the industry. The only ones who are offering solutions to these issues. And I do hope that the bureaucrats are humiliated and embarrassed that this is how these issues have to be resolved. A multi-trillion dollar industry has its issues resolved outside of the industry on a shoestring budget.

The bureaucrats “deer in the headlights” appearance might be acceptable if only they didn't have their own best interests as their priority. The concern for the business has been lost for some time and they have expressed no interest in making things right. After all what’s in it for them. Mostly just hard work. If I am at fault of anything in my derision of the bureaucracy is that I am pointing out what clearly needs to be stated. The truth about the situation in the industry today, and what it looks like in the future with the status quo bureaucracy that needs to be stated. The failure that we are experiencing is the danger that we need to be concerned about. Not only from the point of view of the failure itself but for the fact that these bureaucrats may cut and run to brighter pastures if their personal cash flows become jeopardized, or the problems in the industry become too difficult to overcome.

If the bureaucrats do turn out the lights and lock the door then they certainly will have created the type of situation that puts us all in jeopardy. Instead of preparing alternatives like the Preliminary Specification to provide a means in which to manage the industry they will have moved on from a difficult situation irresponsibly. I have worked in oil and gas for 38 years and I can't think of a more precarious time for an industry. Banking prior to the 2008 fallout is probably the best example of another industry that was hiding from its obvious difficulties. Maybe I'm being alarmist but I have stated before that there is no Fed that is capable of flooding the market with deliverability if the industry should fail to meet the markets demands. That might be an odd thing to say when overproduction is the issue of the day. However the overproduction is laying the groundwork for the inability to meet the markets demands of tomorrow.

What I do know is that the way the industry is operated now is fading in all industries. The Internet is becoming the means in which to organize people more effectively, everywhere. Bureaucrats are out in terms of a future. The issue is that they still control the money and the power in oil and gas. And that puts us all as secondary considerations to their personal needs. I don't know how to break this situation in a timely fashion. I thought the owners and shareholders would be wise enough to see these difficulties coming. Aparently not, nor are they motivated to do anything about it. What we are seeing is the failure of the corporate model as it was conceived in the early 1900’s. Creative destruction is our future.

And it might well be that the Preliminary Specification, our user community and the service providers will not be the means in which the industry is reorganized. It is difficult to say one way or the other. I know that I will keep pushing this model of user based software developments as the means in which the oil and gas industry can deal with the issues of the industry for today and tomorrow. And who knows maybe we'll get that big break that we need. That is what I think we really need to make sure that this industry keeps operating.

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

Where Will Prices Head Now?

It seems now might be an appropriate time to note that the natural gas prices in North America are ripe for another major step downward. Natural gas storage facilities are already starting to show signs that they have completed the seasonal drawdown and will soon begin the rebuilding process for next winter. Storage volumes are up to 575 bcf higher than they were at this time last year. And the turnaround in the inventory rebuilding process appears to be about a month ahead of last years. Not bad considering last years storage volumes were depleted severely by the cold winter. The one constant in the makeup of this storage situation is the deliverability of the natural gas producers. Particularly from shale formations. It now appears that shale gas production exceeds 40 bcf per day and has no signs of slowing. The trajectory of the shale gas production increases remain the same over the past six years that natural gas producers have been suffering from low natural gas prices. And that is the point that we need to understand regarding the behavior of our friends the bureaucrats.

Which brings up the concern we should have for oil prices. Everyone believes that producers will soon curtail production in order to keep the prices from declining further. Oil storage is about to reach capacity which would put a limit on the ability of the market to absorb production. The inability to absorb the oil production would affect the prices in very negative ways. I think these past few months will lead the oil and gas producers to think back to these times as the best of times.

Surely the producers will realize the overproduction is the issue with respect to oil prices? Well they haven't learned that overproduction is the issue with natural gas prices. And that has seen almost six years of pricing that doesn’t support profitable operations. What will change and cause the producers to see the light now and curtail their oil production? Nothing. The only thing that will cause them to change would be a change in the business model to the Preliminary Specification with its decentralized production model or the exhaustion of the shale reserves. Remember bureaucracies can’t, won’t, don’t and will not ever change.

And that is the point. The Saudis understand well the characteristic of the oil shales performance. Unlike the natural gas reserves of the shale formations, which will last for decades or a half century. The oil shale reserves will only last about a decade. At which time the Saudi’s will be able to swing back into action and become the swing producer once again. Unless the high cost producer, being the shale oil producers, learn to allocate production based on profitability, a lesson that they have refused to learn in the natural gas side of the business, the next decade of oil prices will remain depressed. The Saudi’s have stated clearly that they believe that the high cost oil producers should not push out their low cost oil from their market share position. From a business point of view the Saudi’s position is 100% defensible and the shale oil producers position is 100% certifiable.

And so it is that we will take one more downward step in terms of the natural gas prices this spring, with oil following not far behind. How much pain can these bureaucrats really create for themselves and their shareholders. What we do know is that neither of those two groups will do anything about the losses that are piling up in the industry. It is deemed to be acceptable for the industry to be losing money as there is nothing that anyone can do about it. This lack of imagination will catch up to them soon and the realization that the industry has accumulated too large of losses to sustain operations will one day occur. And it will be at that time that those that have the foresight to disintermediate a dying industry will be able to come in and scoop up the value from these dinosaurs. And the fact is that day is not as far away as it seems.

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

Easter Monday

No posting today. Returning April 7, 2015.

Good Friday

No posting today. Returning April 7, 2015.

Just a Small Difference

What we had identified in yesterday’s post is a significant difference in our value proposition in terms of the amount of money that is returned to the owners of the producers. We have asserted and supported our value proposition provides $5.7 trillion in additional profits over what the bureaucrats are able to offer. The is over the next 25 years. What we have been able to establish is that our method of accounting at the property level is going to provide a return of the capital that is invested in the business in addition to those incremental profits. So in summary, over the next 25 year period. Assuming it is correct that $40 trillion were invested in the industry. And we don't know what share of that would be attributable to the North American marketplace. And if the current bureaucrats continued as they were they would provide an approximate $1 trillion in profits, I'm sure I'll be accused of creating a biased estimate. People, Ideas & Objects accounting methodology based on the decentralized production model would return $46.7 trillion to the owners of the producers. And the bureaucrats in their current configuration would provide $1 trillion.

The basis of the difference once again is the fact that we are using the cost of capital and overhead in the determination of what the cost of the property is. That no property will produce unless it can produce a profit. Imputing that the oil or gas revenues would need to be adequate to cover all of the costs. Fixed, variable, operational and capital. No matter what the type of cost it would be included in the calculation of what the property required in order to earn a profit. This would therefore remove the production from the marketplace that was being unprofitably produced. Leaving only profitable production in place, based on a complete accounting. Therefore removing a large percentage of the production profile of North America for oil, and most particularly gas. Imputing that much higher commodity prices would be required before the production from shale returned to the market. This would create the market conditions in which shale could be produced profitably. When you have a commodity that can be produced abundantly, this is the only reasonable methodology that will extract the industry from its current situation.

The fault for being in the situation that we are in is mostly attributable to the accounting firms that apply the SEC regulations of full cost accounting and successful efforts. Accountants have had a miserable life. From having their briefcases taken in grade school, to being bullied throughout high school. And some of the accountants that I know are still paying their lunch money to kindergarten bullies! For them to be cool and hip, the center of attention is something that is foreign to them. So when the producer wants to report high levels of profits by leaving the balance sheet bloated. All they have to do is flatter the partner at the accounting firm. As a result the industry ends up with a valuation on the books that is so unreasonable that it makes no sense. It also makes no sense to declare that these producers are profitable. What they really are is marginally cash flow positive. And that is all that they are. As a result of this, they are creating a dynamic which creates a production profile that is inconsistent with the commodity price.

It should be the objective of the producer to have their capital costs depleted fully in a three to four year time frame. From a business point of view there are many reasons to want to do this. We don’t need to go into them here. Full cost accounting and successful efforts define the limit of what can be capitalized, not what is reasonable from a business point of view. If after three to four years the property will achieve the point where it has returned all of its capital and will be able to earn a profit from that point forward. Or at least it should be able to. In the process however the commodity prices are high enough that the return on that investment can be adequate to provide a good return of the capital. Which is something that a ponzi scheme is consistently unable to achieve.

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