T Minus Four Months and Counting

We began our 26th year earlier this month, now we look forward to the developments of the Preliminary Specification on September 25, 2017. Potential members of our user community should complete their applications and submit them before this date in order to be considered in this first years development. We are looking for a total of 100 people to make up 33 man years of effort in this first year. User community participation is always a part-time paid position. However the majority of the time spent and revenue that a user community member will generate will be through the service provider organizations that they develop to meet the needs of the oil and gas industry. These are substantial business opportunities, in my opinion. As the service providers are the replacements to the current accounting and administrative capabilities of the individual producers. Producers will have limited if any accounting or administrative resources employed within each of their firms under the Preliminary Specification. Instead they will engage with the service providers to manage their processes. Service providers in turn will use specialization and the division of labor, automation, innovation based on administrative or accounting expertise, making computers work for us and quality as their key competitive advantages. Managing one process, and only one process, service providers will administer that process across the entire industries data set.

In none of the annual reports or quarterlies that I’ve reviewed over the past decades, has any producer mentioned that accounting or administration were their key competitive advantages. The dynamic, innovative, accountable and profitable oil and gas producers key competitive advantages are their land and asset base, and their earth science and engineering capabilities. The closer they move to a strict interpretation of this division of labor the more focused they’ll be, and the more variable their cost base will be. The Preliminary Specifications takes all of the producers overhead costs and makes them variable costs that are accessed from an industry wide capability. No longer will each producer have to generate accounting and administrative capabilities in-house that are fixed in terms of costs, unshareable and replicated within each individual producer firm. This reorganization under the Preliminary Specification allows for an enhanced profitability across the industry.

This industry based, variable accounting and administrative capability of the service providers enables the price maker strategy of the Preliminary Specification. Each service provider assesses the Joint Operating Committee for their service fee. Not the producer itself. Therefore when the producer finds that a property is unprofitable and shuts in that property no information will be generated as a result in our task and transfer system, our system that drives the service providers. As a result no work will be done by any of the service providers and as a result no invoices will be sent to the Joint Operating Committee. Enabling that property to record a null operation. No revenues, royalties, operations or overheads. No profit but also no loss, a null operation. Therefore the producers profitability is maximized due to the losses on operations are no longer diluting the profitable properties, as they do today. The marginal production has been removed from the commodity markets, enabling the oil and gas prices to increase. The reserves are saved for the day in which they can be produced profitably and those reserves costs will remain constant as none of the losses that otherwise would of occurred would be added to the reserves cost base.

People, Ideas & Objects user community is the critical source of quality for our offering. The user community is endowed with significant and substantial power to affect change within the oil and gas industry. This is not your grandfather's user community. They will be the ones that our software developers work for. We are blind, deaf and dumb to anything and everyone else. The user community is also in complete control of the Intellectual Property that makes up the Preliminary Specification and its derivative works. As a result of these two key components, significant power is attained by them to ensure that they are not blind sleeping walking agents of whomever will feed them. And are able to develop and direct the changes that the oil and gas producers need in order to ensure that their future issues and opportunities are addressed. We do not want to lock the industry into the Preliminary Specifications business model permanently if there are better ways in which to manage the industry. Review of People, Ideas & Objects Revenue Model shows that we are change oriented software developers. That is how we generate our revenues. Through the changes that are initiated by the user community. If you want change based, user community driven ERP systems in the oil and gas industry, what are waiting for?

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Deep Soul Searching

The solution to this chronic industry malaise is for the producers to jump on board the People, Ideas & Objects, user community and service providers software developments. These are beginning September 25, 2017 with the initial $100 million in funds that will be sourced from the producers. Enough to fuel our first years developments. If the bureaucrats believed that I would be nice to them after they’ve destroyed the industry to such an extent, then they’d be mistaken. I have many competitors that would tell them all the sweet nothings that their losing propositions have mythically obtained. If bureaucrats take what I’m saying personally then they’re being unreasonable. I have tried to solve this problem for 26 years now and received nothing but a repeated and frequent disciplining with their baseball bats. If they want to fix their business this is the place in which to do so. The question they need to ask themselves is, if they undertake to build the Preliminary Specification will the investors see that as the beginning of a new industry in which they would be interested in investing in? Breaking the log jam of the investors non-participation these past number of years. Their investor's concern is regarding the commercial viability of shale reservoirs. Producers financial statements are showing that the industry is not commercially viable and as a result investors are on strike. Creating the critical cash shortfall all producers are experiencing.

Within the first year of our software developments, and well before September 2018, producers will need to fund People, Ideas & Objects entire development budget. Stopping and starting is not an option, there is only stopping and failing. User community participants need to see that the producers themselves can take the actions necessary to resolve their problems by funding our full budget. There is no other way in which these overproduction and oversupply, and unprofitability issues will be resolved. We should also be concerned with the short attention span of the producers. If the marketplace should happen to temporarily improve this may lead some bureaucrats to believe the follow on financing of People, Ideas & Objects et al is not necessary. This lack of follow on financing would be a critical and fatal mistake and something that I would point out now to the oil and gas investors.

And what’s in it for the producer to follow our recommended course of action. People, Ideas & Objects, our user community and service providers provide the oil and gas producer with the most profitable means of oil and gas operations. We do this with our business model as defined here. Our software defines and supports a reorganization of the industry and the producers to operate a new business model that deals with today's issues. Our value proposition is priced in the trillions of dollars over the next 25 years. With our price maker strategy producers will be able to only produce profitable properties which will remove the marginal production from the marketplace. Producers will then be able to recognize the capital costs they’ve stored these past decades in property, plant and equipment by passing them through to the income statement. This way they will be able to replace those balances with balances in the accounts of current assets and then be able to pay dividends, pay down debt and fund their own capital expenditures.

These changes can only be done through the deliberate act of developing our software. Any attempt to make the changes without the commensurate changes in the software first, will cause the industry and producers to regress back to what the software that exists today identifies and supports. We need to take control of the development of the software that the industry uses in order to take control of the ways and means of the industry. Spontaneous order, of which we have relied on for centuries, is circumvented by the software that we use. Software cements the organization in an unchanging structure. Until now it has been convenient for the bureaucrats to distort this fact and ensure their position remains unchallenged by never changing the organization's software. However the damage to the industry and all concerned is tragic and will only continue to escalate. We may find days which are acceptable intermingled with days where everything is falling apart. What we do know for sure is that the overall trend is on a steep downward trajectory.

Later this week OPEC is meeting to discuss the extension of their production sharing agreement. North American based producers believe they’ve proven that their costs are lower than OPEC’s and have established themselves as the priority in terms of who produces. This may be incorrect. If as the BP Chief Economist suggested a few months ago. That there is adequate oil to supply the world twice over up to the year 2050, and as a result, the low cost producers, which are OPEC, will find the economics of production at any price is better than never realizing any value. This would preclude the North American producers from the oil and gas marketplace, because of their high costs, until the year 2050. There has been an acceptance that North America is the new swing producer. However, there is a misunderstanding as to what that means in the North American marketplace. The swing producer will be the first to curtail their production to support the price. Something producers would achieve dynamically with the Preliminary Specification. I would suggest some deep soul searching on behalf of the North American producers and suggest they develop a plan to deal with the next 25 years. A plan that is consistent with the reality of shale reservoirs, which happens to be the one that we recommend and are moving forward with the commencement of its development on September 25, 2017.

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

The Producers Choice

The worst performing stocks of the first quarter of 2017, on a global basis, are the North American oil and gas producers. Even though OPEC has tentatively committed to extending their production cuts until March of 2018. Oil prices remain barely above $50 due to the shale producers zeal to fill any void left by OPEC’s production sharing agreements. Producers all claim that they’re profitable at $34. This is attributable to the fact that they never recognize the capital costs of past production. The capital costs they do recognize are so insignificant, due to the fact they recognize them over the usual 15 year period of depletion. Causing their property, plant and equipment balances to bloat excessively on their “well protected balance sheets.” In the first quarter of 2017 our sample of 23 producer’s spent $10.2 billion on capital expenditures and recognized $14.3 billion in depletion. Reducing the property plant and equipment balance by $4.1 billion to $459.2 billion. At this rate another 112 quarters should clear these balances. The point of the exercise is clearly to store these costs for as long as possible, to never recognize them and pretend that they’re profitable under the basis of a perverted SEC ruling that is the exception and counter to all other industries.

Running a producer as a business is the solution. Moving the balances of property, plant and equipment to the income statement in a timely manner would have recorded a collective net loss of $397.3 billion. Providing key evidence to our claim that producers need a tripling of oil and gas revenues to survive. This would therefore also represent the amount that the investment community, the source of the capital to fuel those losses, has subsidized the energy consumer. With these costs sitting on the balance sheet for eternity the industry will always look profitable. Oil and gas is a capital intensive industry, the real costs are in the drilling and fracing operations not in the operation of pumpjacks. This is not just ludicrous from a business point of view, but from a practical manner as well. If the producers only produced profitable production as with the Preliminary Specifications decentralized production model and price maker strategy. They would obtain the prices necessary to eliminate the property, plant and equipment balances and recognize the real costs of the oil and gas business. In turn the “business” would generate cash that could be used to pay dividends, pay off debts and fuel future capital expenditures. Their property, plant and equipment account on the balance sheet would be replaced by current asset accounts they could use. That would however require they begin running a business.

Our price maker strategy is the issue the bureaucrats point to as being unacceptable. They will never intervene in the market to “make” prices. They want to see the “market rebalance.” Markets do one thing and only one thing and that is provide information by way of price. If the price is adequate for you to produce and make a profit, you produce, otherwise you don’t. And that is the way markets everywhere and our price maker strategy work. If the property earns a profit, considering all of the costs, including capital costs on a reasonable basis of recognition, then it produces, otherwise it’s shut-in. This is not collusion as the bureaucrats claim, its independent business decisions being based on actual factual accounting information. You’re in business to earn a profit. Why would you produce if you didn’t earn a profit? You wouldn’t. With the Preliminary Specifications reorganization of the producer and industry the shut-in production incurs a null operation, no profit but also no loss. The shut-in property will incur no royalties, operating costs and no overhead of any kind. Therefore the producers profits are maximized as a result of only producing profitable properties, no unprofitable properties are diluting their earnings. The commodity markets find the marginal costs of the commodities due to the marginal production being removed from the market. The reserves costs remain constant due to the fact that consecutive losses are not added to the reserves each year. And those reserves are saved for a time when they can be produced profitably.

I’ll admit that People, Ideas & Objects our user community and service providers are part of the lunatic fringe as a result of this thinking. We are absolute evil, and how dare we suggest that the industry be operated as a business. It’s just what we do. This industry has been operated on this basis now for four decades. Most of the people in the industry don’t know anything different. It is culturally ingrained and the destruction is beginning to be recognized. Note the word beginning. When you don’t recognize your capital costs for the first few years, or even decades, it’s an advantage. Then as the balances of property, plant and equipment build up, that advantage turns into a disadvantage in order to equal things out. Mostly due to higher depletion rates, large balances of debt and large numbers of shareholders offsetting these very high balances of property, plant and equipment on the balance sheet. Where’s the upside for a new investor? Outsized balances of property, plant and equipment will be the albatross of these producers for decades to come, under the current methodology. The other consequence of not recognizing your capital costs is that you report healthy profits in the early years which draws in excessive amounts of capital. You remember those good old days don’t you. That excessive capital leads to overproduction or over capacity. Which from a business point of view, I don’t think there is a more dire and difficult business problem to overcome. Most businesses can’t survive when they’ve invested into too much capacity. The increased overhead of the surplus capacity eats you alive. The oil and gas industry has invested into too much capacity. What will happen as a result? Will it be that the producers support one another by participating in the development of the Preliminary Specification, or drag each other down? With the only source of cash being “more” production I think we have our current answer.

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

Victoria Day

No posting today.

Third Friday Off

No posting today.

Our Developments in Sight

In as little as four and one half months from now we begin the developments of the Preliminary Specification. Not a lot of time to complete the things we need to do. People interested in our implementation or our plan can follow those links. If you’re interested in being one of the one hundred or so members of the user community that we’re starting with in our first year then you should complete your application as soon as possible. Remember these are part time positions that we are looking to fill approximately 33 full time positions with. We are looking for our user community to provide us with a broad scope of understanding of the industry. To fill out a detailed outline of the Preliminary Specifications deliverables for September 2018. Therefore we need a reasonably large number of user community applications to select from. Selection for the first year does not preclude those that are not selected from joining the user community in subsequent years. We will be looking for a total of 3,000 user community members making up 600 man years of effort per year when we are in full development.

Our software developers are a different story as they are full time hires and employees of People, Ideas & Objects. We are therefore looking to fill this requirement somewhat dynamically in the first year, if that makes any sense. These will be critical team members for the long term of the project. Therefore user community members may see rapid turnover in some of the developer positions in the initial phase of this development. This is one of the reasons that we need to start this development now. Our products and services are needed in the marketplace today, but nothing like what they’ll be needed in the next few years. As long as everyone understands that I’m sure we’ll be able to work through it.

Another aspect of what our developers will be working on is having the Oracle Fusion Middleware and Oracle Fusion Applications operational in a cloud computing environment. That way the user community will be able to see the base of the applications that they’re building upon. And they will be able to see their iterative developments as the developers code is committed and run on that environment for the users to see and use. It will be this facility that will enable us to move much quicker and the user community increase the quality of their offerings. Our only constraint is the speed of the user communities ability to think. Oracle also has one third of the costs of our initial budget made available to them to begin the technology transfer from their organization over to People, Ideas & Objects. We’ll need to learn many things and Oracle will be able to bring us up to speed in the shortest possible time. They will also be able to support their applications and our developments at a much higher level than what we would otherwise be able to do. We have a large technically challenging task ahead of us. Oracle has fully one third of all of the costs of our entire budget to ensure that these objectives are achieved in the long run. I have worked closely with Oracle in this capacity during our 1992 - 1997 joint development efforts. It is the superior methodology to ensure that we mitigate the technical risk we face and achieve the success that the oil and gas industry requires.

I have been abusive towards the oil and gas producers throughout the history of this blog. We have a MAAA (Mutually Assured Abuse Agreement) in place and I adhere to the spirit of that agreement. If they want to stop abusing the group that is providing the most profitable means of oil and gas operations. Who are conducting the only issue identification and resolution in the industry. Then I’m game. We are unquestionably the personification of evil but producers could easily overcome this by funding our first year's $100 million budget in a timely manner. Producers need to think and ask themselves critically, do they have the situation under control, and are their investors convinced that they have a plan for the future? Or do they need to address the business model in which the industry is operated and implement one that provides the oil and gas producer with a dynamic, innovative, accountable and profitable footing? As I said the other day, the writing's on the wall and my focus in on getting this software and the user communities services operational in a successful manner in the oil and gas industry. They are certainly welcome to join us here at anytime before our start date of September 25, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Onward and Forward

The one thing we should be grateful to the producers for is that we now have tangible proof. Proof that spending money like drunken sailors never made anyone rich. We’re doing something about the issues in oil and gas so we don’t look like the bureaucrats, developing our software beginning September 25, 2017, otherwise we are no better than the bureaucrats who do nothing. And therefore we are at the very beginning of the delivery of the Preliminary Specification to the oil and gas industry. Key to this delivery is our user community that we see as the source for the quality of our software and the services that these user community participants will provide through their service provider organizations.

Almost three and one half years of user community development is the investment that has been made by People, Ideas & Objects. It had to be made. The user community is the critical point of success and quality of our offering. It is now the only major impediment to our speed in delivering our solutions. For the industry to move and implement the necessary changes the user community can be deployed in rapid fashion and deliver on the vision of the Preliminary Specification. It is the speed in which the user community can think that will be the constraint that we are now limited by. That multi-year investment has been made and now it's time for us to act on that investment and the vision of the Preliminary Specification.

I published the Preliminary Specification in December 2013. It provides the overall vision of how and what the industry and producer needs in order to to become dynamic, innovative, accountable and profitable. Since then we’ve worked to develop the user community. There is a saying that I think is appropriate for everyone to consider at this time.

‘Vision without action is merely a dream. action without vision just passes the time. Vision with action can change the world!’

With the participation of the user community in the development of the Preliminary Specification we can change the oil and gas industry to one that is dynamic, innovative, accountable and profitable. With no bureaucrats allowed! It comes down to the individual decisions of the people within the user community who have and will decide that enough is enough. What the producers believe today is that everything will soon return to normal. Shale is here for the very long term. Outsized balances of property, plant and equipment will be here for a long time. The debts will be here for a long time, and most probably, growing. The overproduction and oversupply issues are systemic and chronic and prompted me to seek a solution in 1991 to the overproduction in the mid 1980’s that caused the oil price collapse. Producers then just continued to lose money and increased production until the day they died. Sounds familiar doesn’t it. These problems are not going to disappear under these current administrations. These issues appear to me to be a feature of the business model that’s in use. Continued inaction, without any vision of the future, has us wasting time that is too expensive for all concerned. Which is exactly what the bureaucrats want.

I would argue that these problems will only become more protracted and difficult for the producers to deal with. The lack of cash is the current symptom that is plaguing the industry. And there are many ways to remediate that cash shortfall, none of which the producers are finding that they would consider affordable. And so they will muddle along and do nothing. It is now clear to those within the industry that shale production volumes increase at much lower price levels than first believed. Of course they would, it’s the producers only source of cash. Even in natural gas it was believed that shale production volumes stopped increasing last year. Now we find that to be untrue. Natural gas prices began their precipitous shale induced decline in the summer of 2008. Other than lose vast amounts of money and time since then nothing has been done. This business model is truly flawed. Our changes need to be made in the oil and gas marketplace and now is that time. Otherwise we’ll be stuck here forever.

It is the user community that is the source of the quality of the ERP systems that we’ll use in the future. People, Ideas & Objects have invested heavily in the development of our user community and now is the time for you to begin your participation. The issues in the industry are not being actively discussed and there is no vision and no plan to deal with them. More time will be wasted as a result and based on the financial performance of the industry a lot more money too. We can remedy this with the vision of the Preliminary Specification and the individual actions of the user community participants.

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

We Are The Standard

Yesterday we detailed the issue that oil and gas producers face as a result of their inaction and covering up the difficulties they’re experiencing. Chronic and systemic overproduction and oversupply are now a permanent feature of shale based reservoirs. And commercial financial performance has never been attained anywhere in the industry over the past four decades. This has set the investment community on strike, creating a cash crisis that deepens with each successive quarter. Continued avoidance of the issues by the producers can only continue for so long. At some point they will need to regain the trust and confidence of the investment community, and banks, in order to function as viable going concerns operating commercial businesses. How can that trust and confidence, the integrity that they have things in hand, be earned by the industry?

People, Ideas & Objects, our user community and the service provider organizations that they’re developing will be the means in which the industry regains the trust and confidence of the investment community. Primarily by providing the oil and gas producers with the most profitable means of oil and gas operations. Something that we’re dedicated too and have developed as key elements of the Preliminary Specification. Everything that is done in the Preliminary Specification is to generate the profitability that a commercial industry needs. This is done so that society can prosper as a result of a healthy oil and gas industry. People will continue to be gainfully employed. People will be able to look to the industry as an area of interest to pursue through their university education. People in the service industry will be able to develop businesses that continue as going concerns and not risk everything on the “cyclical” nature of oil and gas. These people will pay taxes, as will the oil and gas producers. Who will also pay royalties. And lastly the investors who have made this all happen will be able to see the day when their investments have actually paid off. That is how an industry contributes to society. Other than the bureaucrats, whose benefited in the past four decades? No one.

People, Ideas & Objects, our user community and the service providers are the standard of expectation and the standard of performance that the industry will attain. Our Revenue Model specifies how we are able to source the resources that we need to achieve this. We are not blind sleepwalking agents of whomever will feed us. We are delivering the systems, accounting and administration that is necessary to achieve the most profitable means of oil and gas operations. By running the industry as a business we will be able to achieve much more than what’s been done to date. What will be expected of us in the next 25 years will be the most demanding period that the industry has ever faced. Where is the current discussion of this future? Muddling along through the next 25 years will only bring more of the poor performance we’ve seen throughout the past four decades. Muddling along and doing nothing are abject failures as the strategy of every producer. It was an inane strategy, ridiculous to consider and foolish to pursue. Now the evidence shows that it’s been a financial disaster.

We commence developments with our user community of our software on September 25, 2017. Producers need to realize the situation that exists today and take steps to remediate these problems. Otherwise the end is clearly in focus. Their participation is a necessary element of this development in a number of ways. They hold the financial resources that we need to build our product and services. We need the $100 million for our first years development costs in place by our start date. We then will need our full budget in place by September 2018. Producers should ask themselves if the act of funding our budget will satisfy the investors to the point where they’ll call off their strike? Another aspect of our need for producers participation is in terms of software quality. They need to work with our user community to ensure that they are receiving the software that they need to function. If you put nothing into this development I can assure you’ll get nothing out of it. There are fundamental and significant changes being made to the producer firms and industry. Being unaware and unknowing of these would be terminal to your operation. There would also be, in my opinion, no opportunity for you to catch up once the software is operational. The speed of the producers on our system will overwhelm your performance in the marketplace.

The writing's on the wall. What will you do? Try the junk bond market again? Muddling along will certainly be the operative strategy. However the difficulties will be about as high or higher as they have been these past two years. A constant chronic and regressive struggle throughout your future. Or you can choose to make the change that will end this destructive cycle that began long before most of the people began working in the industry. The culture is flawed and needs to be shelved. We need to adopt the dynamic, innovative, accountable and profitable culture that is the by-product of the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.

ROFLOL

Earnings of the producers for the first quarter of 2017 have all been published for the most part. I have been critical of the earnings and accounting of the producers on this blog. On many occasions I’ve stated that they did not have any real profits for the past four decades and that they were not innovative. They’ve certainly proved me wrong with this first quarter's performance. In most cases the producers did report somewhat healthy profits in comparison to the past two dismal years. The problem for the producers is that there continues to be no cash. Although there were profits, no real cash was generated. Which seems odd doesn’t it? What they’ve done is increased the number of years in which their depleting their property plant and equipment. Extending it out to 15 years in some cases. Which dropped the amount of depletion recognized in the current quarter by, you guessed it, the differential in this quarter's profits. When a producer says their innovative don’t forget to include the innovations that occur in accounting as a key part of that. For the last year we’ve heard the producers claim that they reduced their costs to ensure that they were only producing profitable operations. I guess that’s true when you reduce the amount of depletion per barrel of oil, that is a reduction in the cost of oil and gas. Bernie Madoff is proud of this bunch.

This farcical and comical act reflects the bureaucracy doubling down on their positions. It reflects the position that they will stick their head in the sand and avoid the problems in the industry, at whatever cost. The quarter generated no cash, producers have no cash, no working capital and no access to any capital markets. They’ve been cutoff now for the better part of a year from the serious money that traditionally invested in the producer's annual stock offerings. I saw no money being raised by any of these firms in the first quarter. Banks have stopped all material lending of any money. Those that were fortunate enough to have raised any cash from banks spent that cash on dividends. Otherwise they would’ve had to cease the distribution of those dividends. Profitable yes, in an obscure accounting sense, but cashless.

My analysis of the quarter determined a new factor that I think effectively reflects the distorted nature of what I’ve been talking about here. That bloated balance sheets of property, plant and equipment exist everywhere in the industry. And as a result none of the producers recognize the capital costs of past production and as such have never been profitable. It does no one any good to have these capital costs, in a capital intensive industry, sit for 15 years. If the industry would have recognized them in an appropriate manner, as a business, these costs would have flowed to the income statement. Where, if they were receiving commercial prices for their products they would have been able to report real profits and return those capital investments in property, plant and equipment back into cash for further investment. This would be a commercial operation. But why would you do that when you can just hold an annual share offering.

This factor that I am speaking of reflects this distortion but also shows that the fake profits that they’ve reported over their lifetime don’t amount to a hill of beans. I reviewed 23 companies and compiled a summation of those companies into a representative sample of the industry. These are North American based producers that have 7.688 million barrels of oil equivalent per day output. Their undepleted property, plant and equipment currently stands at $459.2 billion while their cumulative lifetime earnings as represented in retained earnings sits at $61.9 billion. Most if not all of these producers are in excess of 20 years old. The return of dividends in 2016 was $8.5 billion or 1.85%. We’ll assume that has been the case for each of the prior years. Nonetheless, returning only 13.5% of that investment over the life of those assets, above the possibly 37% in dividends over that period. Is abysmal. And that is on the basis of an accounting that is highly questionable. On a reasonable accounting basis this producer sample would have reported $397.3 billion in losses.

This is the issue that the bureaucrats need to focus on. Chronic, systemic overproduction, oversupply and unprofitability. If they don’t see that problem I’d be surprised. They certainly went to great lengths to try to hide these facts in the first quarter 2017 reports. The issue is performance, and clearly there is none, and never has been. I have detailed the number of reasons that this issue exists. The remedy is the Preliminary Specification, its decentralized production model and price maker strategy which we are undertaking to begin developments on September 25, 2017. Please note the change in the date. I have moved it back three weeks.

I doubt that I am the first to look at these numbers from the point of view of an investor. I’m sure that’s why there is no further investment being made in the industry. And these first quarter 2017 accounting shenanigans will not have changed any minds. Clearly there is a problem and the investors were only adding to it by participating in the annual stock offerings. Why would that continue? I see no reason for that until the producers deal with the issues at hand. I think they’re fooling themselves into believing that this is fixed.

This is the history of the industry. And we all know that accounting doesn’t matter in oil and gas. But accounting is about performance. Clearly the industry in the past four decades has not performed. It is reasonable to state that it never attained a level of commercial operations. Investors had expressed their concerns that shale may not be a viable commercial operation. We are nowhere near answering that question. Is a continuation of these non-commercial operations for the next 25 years in the industry's future? What’s the plan? It's one thing to avoid the problem, it's another to publish quarterly reports that represent the wholesale dishonesty of what has been said in the past year. “We are profitable at $40.” etc. Integrity is a hard attribute to reclaim once its lost.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

2 millionth word

I estimate that we are now in excess of two million words on this subject.

Third Friday Off

No Posting Today

Earnings Season, Once Again

First quarter reports of the producers began being published yesterday. This will provide us with our first look at what 2017 has to bring in terms of losses for the producers. If there are any earnings I’ll be more than surprised. I have been writing in preparation for this time since late September 2016. Beginning with our series on the “Best Business Opportunity, Ever” which details the opportunity to invest in oil and gas has never been better, that is when the Preliminary Specification is operational. Our next series detailed why it is we should have the Preliminary Specification in the marketplace. This series was entitled “My Argument.” And finally in addition to proposing a product in the form of the Preliminary Specification we submitted our plan of how it will be developed beginning September 4, 2017 in our series entitled “Our Plan.” Not giant steps but certainly more than what our friends the bureaucrats accomplished.

I believe these first quarter reports will stand in direct contrast to the optimism that has been spewed over the past six months by the producers. The Saudi’s and OPEC’s agreement put the North American producer in the position where they had no one left to blame for their poor financial performance. Therefore they have been out leading the parade of promoters that all is well and banging the big bass drums as loud as possible. The increase in oil prices to $55 was all that was required for them to return to their heydays. Rigs have been put back to work at a record rate and the increase in U.S. production is breaking records too. This behavior is in the cultural DNA of the bureaucrats. They can’t, won’t and will not ever change. With no one to blame for their continued poor performance, who will believe them that “next time” they’ll get it right. That all they need is a bit more “time.” With the aggravating factor of the prolific nature of shale, you can be sure I won’t be buying it.

In the next two weeks we’ll know the truth. Is $55 oil all that is required to make producers profitable. Not even close. There is however one key component that is now irrefutable and should be common knowledge for every person that works in oil and gas. I could even see the bureaucrats agreeing to this point. The OPEC agreement has shown the industry that the oil and gas commodities are price makers. Anyone who doubts that is being foolish. Just as the Preliminary Specification enables the producers to manage these commodities. What is needed now is the implementation of the Preliminary Specification and our recommended tripling of the oil and gas prices to put the industry back on a (real) profitable footing.

Our point of view, our solution and our plan can now be critiqued against the performance of the producers. 2015 and 2016 were the two worst years in oil and gas. Nothing has changed other than a production sharing agreement between OPEC members. There is a choice that needs to be made. Which direction will the oil and gas industry proceed. One in which it continues to “muddle along” and “do nothing” or proceed with the development of the Preliminary Specification on September 4, 2017.

Our budget captures the scope and scale of the issue at hand. It’s publication in early 2014 shows that we understand that issue and what is required to deal with it. To begin our developments we are seeking $100 million for our first years developments costs. That will enable us to start developing our software effective September 4, 2017 and continue with our fund raising until September 2018 when the remainder of our budget is secured. Then proceed until we finish our product. As I’ve pointed out elsewhere I’m no longer in the business of herding cats. If the industry wants this solution they can raise the money amongst the producer firms quite quickly. For the industry to rely on me to herd cats and try to cobble together the money will only cost them many years of unnecessary and very costly time which they have none of.

I’ll be taking two weeks off from writing returning May 15, 2017. I think the world has heard enough from me on this topic. Please review the three series of blog posts that have been written in the past year. They will provide an understanding of where I think we need to go. Also look in detail at the producer's financial reports being published in the next two weeks, and ask yourself, what is it that these people are offering?

P.S. Cenovus reported their earnings on Wednesday. They have the misfortune of trying to finance the $13 billion acquisition of Conoco’s heavy oil assets. This would effectively double the size of the company. Cenovus has no capability to finance a deal of this magnitude at this time. I would suggest it's questionable whether they could finance it in the most lenient of financial times in the industry. Therefore desperate people do desperate things. The quarterly report, note I said quarterly, not pro forma, has recorded a transaction where $2.5 billion of assets that were listed for sale on March 31, 2017 have been moved from Property, Plant and Equipment to Current Assets. These assets were noted in an April 25, 2017 Motley Fool report that quoted the company as saying "Cenovus indicated that it had received “several” inquiries from CEOs of other energy companies interested in purchasing some of the non-core assets Cenovus now owns." It will be interesting, in my opinion, to see who, the CEO or CFO, goes to prison for this. My thinking is that they'll be cell buddies. This is a material misstatement of the facts. It is not an error or a mistake. It is willful and designed to deceive those that would provide the $13 billion in financing. And is therefore accounting fraud. This is what has become of our industry.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Risks

When we consider the damage that has been inflicted on society from the downturn in oil and gas. Where governments are sending out tax refunds to producers instead of collecting corporate taxes. Royalty holders incomes are stripped to the bone. The service industry, which is the backbone of oil and gas, continues to somehow survive. Investors and bankers look at the giant money pits they’ve been duped into. And the people who work in oil and gas realize maybe working in this industry was a critical mistake. The resolution of these issues, even the identification of them, is something that our friends the bureaucrats don’t have the time or energy to consider. Therefore the risk that we run by not having the Preliminary Specification implemented in a timely manner is that this situation will continue. And I would suggest that the period of time that this current state would remain would be about the same amount of time that shale based reserves will be with us. We’re humans, we have the capacity to see the risk of inaction and take the appropriate steps to mitigate the losses. That is except for in oil and gas. Where “muddle along” and “do nothing” are the strategy and operating procedure that the industry has been built upon and religiously adheres too.

Natural gas has been depressed since 2010. It was 2014 when oil prices took their downward turn. What steps have been taken to mitigate the risk of any further losses being incurred in the industry? I am unaware of any. There has been significant blame tossed around that the Saudi’s this and OPEC that and prayers for cold winters. But outside of this there’s been nothing. There is no leadership in the industry whatsoever. It is sit on your hands until things turn around. Shale has fundamentally changed the industry from scarcity to abundance. Demanding that we recognize the need for a new business model in which to operate the business. If we don’t recognize this change and solve it by implementing the Preliminary Specification with its decentralized production model and price maker strategy. Then we run the risk that we will lose the capabilities that we’ve developed within the industry, regress and begin to lose our capacities.

There are no guarantees that the Preliminary Specification is viable. At this point it is little more than a functional business model that deals with today’s issues. It needs to be built. And that requires the participation of the industry to make it work. Will that happen? Does it need to happen? The risk is that the industry never realizes productive operations again. Producers are proving that they are incapable of identifying or dealing with this issue. In the 1980’s and 1990’s it was “oh whoa is me, we had another bad year financially with record oil and gas production.” Sound familiar? The industry is not financially viable anymore. The oil and gas prices that it receives have destroyed the financial strength of all of the producers. It now doesn’t receive the prices nor have the financial strength to carry it through any more difficulties. Therefore there is no more resilience in the industry. What we do know with all of this devastation is that nothing is said or done about it. This level of risk is unnecessary and very dangerous. I feel we will have real trouble in the very near future.

I should be the one that is the happiest of all about this state of affairs. I’ve always known that the Preliminary Specification could not be implemented within the industry during “normal” times. It needs to be done during times of duress when the status quo has failed completely. That seems to be where we’re headed. Yet I and many others affiliated with this project are the only ones that are concerned. We know it's politically incorrect to care, yet feel somebody should.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Profitable Operations

One of the issues that People, Ideas & Objects haven’t been very clear on is the producers and their properties determination of profitability. We all understand what profitable means but in oil and gas there are a number of points that the Preliminary Specification resolves regarding industries current methodology. The first of course is the depletion of capital costs in the current period. The second major issue is that the method of accounting for overhead in the industry does not lend itself to determining what the actual overhead costs are of any property. Therefore the determination of profitability of the property is almost always overstated as the depletion is stretched out to decades and the overhead estimates are a small fraction of what the actual overhead is. This is why producers continue to produce everything that they have, because everything that they have qualifies as a profitable property.

Dealing with the first issue, it is in the best interest of the producer to deplete their capital balances as quickly as possible. This would therefore represent that the property has returned the investment back to the company in the form of cash for further reinvestment elsewhere. By allowing the depletion to run into the decades permits an overstatement of earning and an overstatement of the book value of the property. Note the book value of the property being fundamentally different than the market value. By depleting their properties as quickly as possible producers will have their capital assets converted back into the cash that was invested in the property returned to them quickly and effectively. This is what the producers should be aspiring too. Not storing their capital costs on the balance sheet and leaving them there for decades on end. Storing them on their “well defended balance sheets” is counter to good business practices. Balance sheets of overstuffed capital assets would then be replaced with balance sheets of highly liquid assets.

The issue of overhead is unique. A moderate sized oil and gas company may have thousands of properties. To have each of their staff allocate their time and overhead costs to each specific property would substantially increase the producers overhead. Therefore all of the costs of overhead are charged to the corporate accounts and subsequently allocated between current corporate operations and capital. The majority of these actual overhead costs are allocated to capital during the preparation of quarterly and annual reports. In place of the actual overhead costs being charged to the property, the Petroleum Accountant Societies enable the producer to charge overhead allowances on a number of different basis. These overhead allowances are a small percentage of the actual costs to operate a property.

It is a result of the extended length of time that the capital is depleted and the very small percentage of overhead that is captured by the overhead allowances that the producing property is able to report a profitable operation. In reality however that may not be the case. If we consider that the buildings in the downtown cores of Calgary, Houston, Dallas and Oklahoma, as well as many other locations, are filled with the accountants and administrators used in oil and gas. The office space that they occupy and the costs that they incur we can rightly assume that the overhead costs in oil and gas are significant. Estimates vary for a number of reasons but it may be as high as $11 / barrel of oil equivalent. Since most of these costs are allocated to capital and the amount that is allocated to capital is unknown we can only estimate the true size of these costs.

The producers are using the high throughput production model in order to deal with the high overhead costs of their operations. The producer produces everything they have in order to allocate the costs of their overhead across the largest volume of production. This will enable them to be the most profitable as a corporate entity even though many of the individual properties are not profitable. The unprofitable properties are contributing to the overall corporate profitability of the producer by reducing an equal share of the somewhat fixed overhead costs.

This is all changed with the Preliminary Specification. First we will deplete the capital of the property as quickly as the properties net profits allow. Enabling the firm to realize the return of the capital from the property. In terms of overhead we use the decentralized production model as opposed to the high throughput production model. It seeks to match costs with revenues at whatever level of production the producer produces. The decentralized production model turns everyone of the producers costs into variable costs. So when the price of oil or gas drops below the properties profitability threshold the property can be shut-in and the royalties, operating costs and overhead costs will all be reduced to zero in line with the revenues. Incurring what we call a null operation, no profit, but also no loss. This allows the producer to scale their operation up and down their production profile based on the commodities prices. If prices are high they can produce at full capacity due to the fact that everything would be profitable. If prices drop, and 15% of their production is unprofitable, they can shut-in their unprofitable properties and continue to earn their maximum amount of profit from only 85% of their profitable properties.

The decentralized production model works by reducing the dynamic, innovative, accountable and profitable oil and gas producer down to the C class executives, the earth science and engineering resources, some land and legal, and some support staff. The remaining accounting and administrative resources have been reallocated to industry wide service providers that focus on one process and have the entire industry as their client base for that process. Each month they will receive information from producing properties that they will process and generate a bill that the producer will pay as overhead for the property and their company. If the property is shut-in there will be no information generated from the property, no work will be done by any of the service providers, no billings will therefore be generated and the property will incur a null operation and the producers overall overhead will be reduced.

It is in this way that each property can be evaluated based on a detailed accounting of the actual costs of the property. If it is unprofitable then it is shut-in. Removing the marginal production from the commodity markets. Fulfilling our price maker strategy. Saving the reserves for a time when they can be produced profitably. Keeping the costs of the reserves down by not having to add the costs of the additional incremental losses to the reserves. And recording a null operation, no profit but also no loss, which maximizes the producer's profits anywhere along the producer's production profile. The service providers will be assessing the producers for the actual costs of the overhead process that they manage. Therefore oil will be much less expensive to operate in comparison to gas. And other nuances that are present in the industry will be reflected in the costs of overhead of the properties. Not every property incurs the same amount of overhead as the current overhead allowances estimate. No two would be the same, it is safe to say.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

It's a Software Bug

The dire situation in oil and gas, I believe, is attributable to what will come to be known as a 21st century software bug. Organizations are defined and supported but most importantly constrained by the software that they use. The ERP software that is used in oil and gas is quite obviously unable to deal with the overproduction and oversupply issues. The bureaucrats also know that if they change their ERP software they will lose their lofty positions and personal cash cows. Disintermediation is occurring in all industries. Therefore the continuation of this issue will exist until such time as the Preliminary Specification with its price maker strategy is enabled within the oil and gas industry. Until then we will have only the bureaucrats basking in what little cash is produced by the industry. Everyone else will have to continue with their own personal tragedies.

Bureaucrats love to think about the big picture issues of electric cars and their impact, greenhouse gases, the impact of stored electricity ya da ya da... However to get them to concentrate on the business at hand, the business of the oil and gas business, forget it. It doesn’t excite them, it’s too much like work, besides there’s always more investors that need to be fleeced. The bureaucrats personal situation has never been better. All of their personal assets are performing well and their income has remained unscathed by the downturn in the industry. For them it has been and will continue to be the best of times. Crisis, what crisis?

Therefore the capacity and willingness to change is nonexistent in the marketplace today. That is the reality and it stands in direct contrast to our September 4, 2017 start date. I don’t have to be crazy to do this job, but I do find it to be a strategic competitive advantage. For those of us who are not experiencing the pleasant days that our friends the bureaucrats are enjoying. We know that the industry is not currently and never has enjoyed good cash flow, earnings or financial flexibility over the past four decades. The culture of the industry is to account for its tragic and substandard performance as a winning culture. That engineering in a non-commercial and unprofitable environment is the objective. This is certainly the case that I see in the industry today. And if we don’t change that, I feel that the investors and bankers, if they haven’t already, will turn their back on this industry until we can prove to them otherwise. And as a result of that lack of investment capital we will atrophy and lose much of our capacity and capabilities in the process.

The solution that People, Ideas & Objects and our user community have with the Preliminary Specification is we begin to hold the industry accountable and provide the environment for the dynamic, innovative, accountable and profitable oil and gas producer to develop. This will not occur on the basis of the ERP software that exists in the marketplace today. If they had the capacity and capabilities to make these changes it may be reasonable that they would have done so by now. The industry is in desperate need of it. The only thing that our competitors have provided the producer organizations is an unchanging environment, the status quo, approximately equivalent to cementing and sealing their organizations with their software. If a producer did want to make the change, the software would continue to force the producer to regress back to the way the software was designed. What I’m calling a 21st century software bug.

In addition to the Preliminary Specification, our user community and the price maker strategy. The producers are going to need to have a defined software development capability that can ensure that the industry doesn’t get trapped in a similar situation with the Preliminary Specification. The need for our software to be able to make the appropriate and necessary changes as the industry develops. This is how People, Ideas & Objects and our user community have configured our offering. We are change based software developers. Our Revenue Model and user community vision show how the industry and producer are able to continue to develop our software and not be constrained by the current definition of the Preliminary Specification in the future.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Plan, Part XXII

Discussion with the producers always leaves one with the confidence that everything will be handled and is under control. Producers have reduced their operating costs as a result of the recent downturn. And that provides them with the knowledge that cash will flow and profitability will soar. It also represents a fundamental lack of business understanding and is the modern equivalent of running your business out of your left front pocket. Cash comes in during the day, cash goes out during the day, I have more cash at the end of the day, therefore I have cash flow and profitability. In a world where chronic, systemic overproduction and oversupply in oil and gas is the issue, the great minds of the producers focus on cost control over their operating costs! This is changing deck chairs on the Titanic.

What may not be too obvious at this point is that the overproduction and oversupply issue is what the Preliminary Specification was designed to correct. The collective overproduction by the producers just doesn’t stop. They say they have discipline, this time, but here we are four months into a production sharing agreement and the prices are about to fall as a result of higher shale volumes. It’s the same issue that was present in the 1980’s and 1990’s. The one that motivated me to start developing this solution. And it is the same issue that has fundamentally destroyed the natural gas commodity marketplace and is about to do so to the oil commodity market.

In order to solve this problem it is necessary for everyone in the industry to change “what” they do, and “how” they do it. Reading your particular section of the Preliminary Specification isn’t going to provide you with the understanding necessary to function in this new environment. You need to read the entire Preliminary Specification in order to fully comprehend all of the changes that are happening in the industry. That way the work that you do, and will do in the future, can fit into what is happening in the remainder of the industry.

The results of my industry analysis at the beginning of this year showed that each and every producer needs to triple their revenues in order to mitigate the damage that had been done to their firm and deal with the future. Running around cutting more staff to reduce your overhead. Beating up service industry representatives because you can isn’t going to solve this issue. The depth of understanding and thinking here is that when A occurs, do B. When profitability and cash flow are down, cut costs. Completely blind, deaf and dumb to the issues and opportunities that are ever present in the industry. And I have said all along that the reason for this is that we have an entrenched, complacent, lazy and happy bureaucracy who are challenged and disintermediated by People, Ideas & Objects and the user communities Preliminary Specification. Might as well through corrupt scammers in there as well. Acting stupid is just how they justify their actions and seemingly get away with it.

We can begin the process of replacing this convoluted BS by making your application to the user community. That way we can begin the process of rebuilding the industry brick by brick and stick by stick. Based on the Preliminary Specification and making the industry and producers dynamic, innovative, accountable and profitable. From stem to stern. Producing oil and gas in the 21st century should be done on the basis that all of it should be done profitably. And profitable based on a real accounting that recognizes the capital costs of this capital intensive industry. Where producers will have balance sheets that have cash and financial resources that replace the bloated balances of property, plant and equipment that now only represent the capital costs of past production.

Our plan consists of a prosperous oil and gas industry. One that approaches the next 25 years as the best 25 years of the industry's history. A time where the industry achieves profitability in each one of those years. Funding their own capital expenditures, replaces and refurbishes the infrastructure that we see decaying with greater frequency on the daily news, a future in which the investors and bankers, past and present, are treated with respect and their money treated with the appropriate accountability and not used just to fund the discount to the energy consumer. An energy future where responsible people are making the appropriate decisions at the appropriate times and dealing with the opportunities and issues as they arise. An industry that doesn’t blame the Saudi’s or OPEC, a warm winter or just the way things are on their poor performance and lackadaisical “muddle along” strategy and “do nothing” operating procedure. An industry that has respect for those who have committed their careers to the professions in the industry and expect to have more seniority than what casual labor has in the construction industry. An industry that has respect for the work that is done in the service industry and works hand in hand with those innovative and dynamic people who make the industry operate. And yes will actually pay the people who work in the industry and service industry on a timely basis. A place where it is not an honour and privilege to still have a job but a place where you can make a difference. And they say I’m the crazy one, that’s just because I expect more and dare to ask, what’s their plan?

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Plan, Part XXI

People, Ideas & Objects have established September 4, 2017 as our development start date for a variety of reasons. The first is we need to act, we are and will be no better than the bureaucrats that we’ve criticized for their inaction over the past decade. We need time to develop our software and I can assure you that the first question that producers will ask when they realize they need the Preliminary Specification is “what have you got.” We’ll need to be well on our way with this plan when that time comes. The impatience of the producers will become one of our issues in developing the software that the industry needs. The second reason for our start date is the looming crisis in oil and gas. There is a lot riding on the belief that oil prices will remain in the $50 range from this point forward, that those prices provide for producer profitability, that OPEC will continue to reduce production to accommodate U.S. based shale producers and natural gas has bottomed out. That the industry has weathered the worst storm ever and is on the comeback trail. The stock prices of the producers are far too high to fairly represent the value that these companies are providing. The bureaucrats have sold a story that everyone, once again, is believing. They need to now deliver that promised profitability in their first quarter reports of 2017 or the faith that they’ve got it under control may be eroded. We’ve been here before with the only difference being that the stakes just get higher with each round.

The only thing stranger than the high values of the producers stock is the promotion these stocks are receiving from the brokerage community. If you watch the movie “The Big Short” you can see that the banks offloaded their junk on an unwitting public just before the crash occurred. Even though it was known that the mortgage market was ripe for collapse people were hoodwinked into buying the bank's positions in these products. I think the same thing is happening here. The promotion of the producers is completely out of left field. It makes no sense to me. Commentary does not fit the producer firm that is being covered. The ability and capability of the producer to survive the next two years is in serious question, in my opinion, and the brokerages are stating that it's the next Apple.

To contrast the ridiculous nature of the commentary we will take the most extreme example available. That is Chesapeake Energy. The commentary is coming from this Financial Times column. Below I’ve separated some of the comments between those that I believe are truthful and those that are not consistent with the truth.

Some truth

Chesapeake still faces an uncertain future.

When Mr Lawler arrived, he faced a two-fold task: improving performance to make Chesapeake’s operations more profitable, and cleaning up the Augean stable of the balance sheet.

A renewed slump in prices, though, would threaten his plan to cover spending from cash flows by the end of next year, and Moody’s has warned that Chesapeake’s ratings could be downgraded again if it appears unlikely to deliver production growth in 2018.

Some mistruths

Notably, the company’s profitability is higher now with US crude prices at about $50 per barrel than it was at $100 per barrel in 2014.

Mr Lawler suggests that real success at Chesapeake would mean not just keeping the company afloat, but being able to show that “not only did we fix our problems, during the worst commodity price cycle in decades, we also positioned the company to show extremely competitive growth versus some of our peers”.

“The company’s profitability is higher now with US crude prices at about $50 per barrel than it was at $100 per barrel in 2014.” I don’t understand any of this comment. In 2014 Chesapeake reported $1.917 billion in earnings. During 2015 and 2016 Chesapeake reported losses of $19.086 billion. $4.399 billion of that loss in 2016. Chesapeake is 75% natural gas. Oil prices are not material to their profitability. These two statements provide the reader with the false hope that, with current, somewhat higher oil prices, Chesapeake has weathered the worst of the storm. It’s production profile has also declined precipitously over the past two years, from 770,000 boe/day to 575,000 boe/day.

Oil and gas is predominantly held by institutions. They certainly wouldn’t be buying this. If, as I suspect, these institutions are rotating out before the big collapse, so that John Q. Public can be left holding the losses in their recently purchased oil stocks, then the industry will be in for the reckoning that I’ve been writing about. The big, or smart money moving out of the industry is a sign of a loss of faith that there is any plan for the future. Producers can’t, won’t and will not ever change, and there is no plan. Other than drill more wells and lose a lot more money. This is why we need to be prepared and moving forward on September 4, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Plan, Part XX

A lot of the arguments against the Preliminary Specification and the commentary made here. Is that they’re accounting related arguments and therefore not really relevant to the real world of oil and gas production. I understand that point of view and would assert that it’s a point of view derived from the earth science and engineering perspective of accounting being the efficient and effective paying of bills. Accounting is about performance and our last two blog posts show that there is more than just drilling wells and paying bills to be considered in the oil and gas business. If we contrast our last two posts, with the performance opportunities detailed as a result of the Preliminary Specification, with the desperate situation that the industry is in today, we see that my critics could stand to reconcile these two perspectives. If on an accounting basis I had lost all the money that I had ever raised in the debt and equity markets I too would demean the People, Ideas & Objects arguments.

What I see in the industry are a lot of people who are the walking dead. They may have had the good life in oil and gas a few years ago. But were laid off recently. Now on one income, a small family and a mortgage the size of King Kong their standard and quality of living has eroded to third world status. With interest rates on the rise they have the added risk of becoming beholden to the banks for eternity and in death. The need to move off of this poor standard of expectation of economic performance in oil and gas is now necessary. Why has this third world status ever come to be considered acceptable for the people who had committed their careers to oil and gas? The additional frustration is that there has been a solution to what ails the industry for over three years. It however challenges the status quo and that is not acceptable as far as the handful of bureaucrats that are still benefiting from the industry are concerned.

It bothers me too that we continue to hear the bold faced lies of how costs have been reduced in the industry. Nothing of the sort has or could ever happen. Drilling operators can be raked over the coals and told to sign the deal offered at half the price it was last year, or walk away. This is not a sustainable cost reduction. And don’t let anyone tell you that this is evidence of the producer’s being innovative. Any cost reductions from the current downturn are not attributable to producer innovation. And can only apply to future projects in an abnormal environment. The rest of the producers production has to deal with the historical costs that were incurred to develop those assets. How can a producer, who developed 95% of their production profile over the last 20 years suddenly see the cost of all of that production drop? Producers said their costs were $85 / barrel when oil was over $100. The only difference is that oil is barely over $50. The costs to produce are the same, no one can go back and change the historical accounting costs that they’ve incurred on a property. They’re historical, it's a myth that they could and an outright lie that they have.

What producers are quoting are not historical costs but recycle costs. The costs that they’ve been quoted over the phone by suppliers as to what it will cost to complete an operation. These numbers are completely inconsistent with the financial statements of the producers. There the historical costs have to come into play and it is there that we see none of the producers are making any money. And that is on the basis of accounting for the capital over a period of ten to fifteen years!

On a somewhat related note when we begin developments on September 4, 2017 producers can't sit back and point fingers if we fail, they don't have that option, they have to participate in the developments of the Preliminary Specification and be the ones responsible for this project's success. What other options do they have. Coming in and holding People, Ideas & Objects and the user community accountable to the success or failure of this software development are not going to be effective. It will ensure failure. What is needed is a commitment to the success of this initiative by the producers to ensure that they have a future. Otherwise producers don’t have one.

The oil and gas industry will tell you that all is well and the future looks bright. I’m not seeing that, of course that is based on me looking at the financial statements of these producers. Something that I think the engineers and earth scientists don’t understand or appreciate. There is a myopic level of thinking going on in the industry these days. It's more along the lines of see no evil, speak no evil, hear no evil. Anything to avoid dealing with the truth. It's been many years that the industry has been stuck in this malaise. Nothing has been done. And all we ever here is that things are great and the future looks bright. One thing we can count on for certain is that the Saudi’s will continue to reduce their production to nothing so that shale can make up the difference. Delusion reigns supreme.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Plan, Part XIX

Keeping with the topic of performance. The capabilities of People, Ideas & Objects Preliminary Specification from a systems performance point of view might have been an issue in the past. If we were required to purchase all of our hardware and manage it then the producers would have had to define what kind of performance it was that they would expect from us. Build that capability and support that infrastructure. Providing the industry with a fixed cost and a fixed capability. We are a cloud computing user and provider. We are using Oracle’s cloud offerings for both our development environment and our production systems. If we need to provide better performance, then we’ll just need to define those requirements and provide for them. Cloud computing enables us to acquire variable capabilities with fixed costs.

If you haven’t had the opportunity to use a cloud computing offering I would suggest that you sign up for one and try them out. Both Amazon and Google have very good starter programs where the initial upfront costs are discounted. In the case of Google Cloud Platform they provide you with $300 U.S. in initial free use. Which is a lot of power. The capabilities of these systems is realized the first time you use them. What might have taken fifteen hours for your computer to process can be done in a matter of a few minutes for very few dollars. That is the power of cloud computing. Massive power available when it's required and at extremely low costs.

These services will provide real value to the industry when we need to process the month end for the producers. For example it may have taken 72 hours in order to conduct all of the processing on hardware that we would have had to purchased. And with cloud computing capabilities we may be able to turn that around in as little as 30 minutes, or even 30 seconds for essentially the same cost as the 30 minutes.

People, Ideas & Objects have always focused on people doing the things that people are good at and leaving the storage and processing to the computers. The things that people do well are the leadership, issue resolution, decision making, creativity, collaboration, research, idea generation, design, planning, thinking, negotiating, compromising, innovating and financing to name a few. By allowing people to do the work that we’re best oriented to then we will be more productive and I would think happier than we are with the work that we are doing now. In a related note Michael Milken, the former junk bond king and now head of the Milken Institute had an article in the opinion pages of the Wall Street Journal last week. Entitled “How Technology Liberates Human Capital” he raises an interesting point.

Through People, Ideas & Objects and our user community the oil and gas industry is being disintermediated. The positions and the types of work that will be done in the future, particularly in the accounting and administrative areas, will change significantly. Leading inevitably to some job displacement and outright losses. In the WSJ article Mr. Milken points to a McKinsey Global Institute report “that almost half of paid work can be automated with current technologies.” The knee jerk reaction to this news is one of concern and protection of one's turf. Mr. Milken suggests otherwise and has historical references to back up his opinion. That same McKinsey article notes that only 5% of any specific job could be completely automated.

But the very technologies eliminating jobs can be part of the solution for disrupted workers. To see what pessimists are missing, go back 40 years when powerful financial technology first started being used on Wall Street. The combination of mainframe computers with new types of securities and trading processes increased access to capital, especially for small and medium companies. Pioneers in the cellular telephone industry, for example, previously had a hard time convincing lenders that they could revolutionize how people communicate. There were only a handful of capital providers -- primarily banks and insurers -- that most companies could turn to. 

This changed beginning in the 1970’s when capital markets began a long process of displacing the established financial institutions as the leading sources of funding for corporate growth. Innovative fixed income and equity linked instruments helped create more than 60 million net new jobs in the U.S. over the last third of the 20th century. This proved an important formula: Prosperity comes when financial technologies multiply the sum of human capital, social capital and real assets. 

This liberation of human capital is what is the promise that our future holds. Instead of being preoccupied with the tedious and mostly irrelevant we as people can focus on the value added components of our society and do the work that we are best oriented to do. Leaving the tedious and irrelevant to the computers. That is the promise and the opportunity that stands in front of us. The performance that we can generate as a result of the user community and the service providers reconfigured in the way defined in the Preliminary Specification can open these benefits to the industry.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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

Good Friday