A New Business Model Based On Value
What the decentralized production model involves is the reduction of the footprint size of the prototypical oil and gas producer. Focusing on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. The producer is stripped down to the C class executives, the earth science and engineering resources, the land and legal, with some support staff. The remainder of the firm is reorganized permanently to service providers who are focused on an administrative or accounting process. And use the industry as their client base. It is in this way that the service providers are able to focus on their key competitive advantages of automation, specialization and the division of labor. As a result they are able to provide their clients, the producer firms, with better services at lower costs than what would otherwise be provided under the corporate model, or as we call them, the bureaucracy.
There are additional benefits as a result of using the decentralized production model. Each of the service providers are billing their services directly to the Joint Operating Committee that is incurring the administrative or accounting item. For example if the lease rental payment processor, or the production, revenue or royalty accountant processed a unit of activity for the property that month. Then they would charge that Joint Operating Committee for a lease rental payment processing fee, a production accounting fee, royalty accounting fee or revenue accounting fee. The real value comes into play if the producer decides, if the property is unable to cover the costs of operations and is indeed producing a loss, to shut-in the property. At which time the costs for the production, revenue and royalty accounting process service providers would not have any activity for the month and no administrative or accounting service fees would be incurred for the month where no production was produced. Note there may still be a charge for the lease rental payment as that is a charge that is incurred irrespective of production. And may be classified as a capital charge.
The point in having the administrative and accounting charges for the property to cease when there is no production is to have the property report a null operation. This is simply no loss, and no profit. The revenues less operations less overhead costs of the operation are null. This provides the producer with the benefit that the loss that was previously realized is no longer recorded. That the reserves that were being produced at a loss can be saved for a time when they can be produced at a profit. And the commodity markets can have an effective floor placed under them to ensure that there are no future declines in the commodity prices and that their other production receives a reasonable price.
If producers were to remove 15% of the production from the North American marketplace. The natural gas prices would rise to the point where the remaining natural gas production would all become profitable. This can be done under the decentralized production model without any of the producers being punished or harmed as a result. The reduction of your production profile has an equal effect on the G&A costs of the producer. If you reduce your production to 80% then your G&A would immediately scale to 80% as well. And the profitability on your remaining production would soar. This is the benefit that all producers would achieve under the decentralized production model and the reason for the high value of the opportunity costs.
The service providers would be the ones who would shoulder the loss of revenue as a result of any production cuts by the producers. However they are also the ones that are able to address the costs that they incur in providing the services to the producers. In essence, it is the service providers that are indirectly providing the producers with the ability to control their G&A costs for the very first time in the history of the industry.
The Preliminary Specification provides the oil and gas producer with the most profitable 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.