Our Solution Part VII

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

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

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

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

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

Our Solution Part VI

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

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

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

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

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

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

Our Solution Part V

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

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

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

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

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

Our Solution Part IV

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

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

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

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

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

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

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

Our Solution Part III

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

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

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

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

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

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

Our Solution Part II

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

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

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

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

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

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

Our Solution

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

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

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

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

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

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

Some Rambling Thoughts

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

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

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

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

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

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

Where Will Prices Head Now?

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

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

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

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

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

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

Easter Monday

No posting today. Returning April 7, 2015.

Good Friday

No posting today. Returning April 7, 2015.

Just a Small Difference

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

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

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

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

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

Annual Report Season is Here!

This is the time of the year in which we can clearly identify who the bureaucrats are. They are the ones that are hiding under their desks while their phone rings constantly. This is the one time of the year that they need to stand up and be accountable for the mess they've caused. Questions about those skeletons that have been neatly packed and highly compressed in the closet can only lead to misery as far as they're concerned. If anyone of those skeletons is discovered the whole closet could explode due to the high numbers of them so tightly compressed. If only they could take their vacation now and come back after everything dies down.

We should expect to see some awful performances from the producers this season. Having both oil and gas prices so low was never a scenario that was considered. Shale based reserves have truly changed the dynamic in the industry. It is now an abundant industry with very high costs. I read in World Oil last week that the Saudi’s Opec representative commented on the following.

The world needs $40 trillion of oil investments in the next two decades to meet growing demand by emerging nations, al-Madi said. Demand will grow 1 MMbopd every year for the next 15 years to about 111 MMbopd, Nasser Al-Dossary, Saudi Arabia’s OPEC national representative, said at the same conference on Sunday.

We should all be surprised by that $40 trillion number. However it must have some credibility. That’s an average of $2 trillion per year which seems within the ballpark. It is also a global number. What it would be for the North American market is unknown. The point is there is an important question that needs to be asked to the bureaucrats who are under the desk, if only they would answer the phone. What is the vision, plan and idea for earning a profit on those investments? And what kind of return are you providing the industry now? Now you understand fully why they hide.

The answer is this is an industry that operates on gross margin. Bureaucrats don't consider the cost of capital in determining the cost of business. That’s probably not the right thing to say. Its truthful but it sounds stupid. As we have discussed before the past investments of the industry sit on the balance sheets of the producers. Bloating them out of all sense of proportion to their revenue streams. With the amount of depletion that is recognized, the income statements in the past few years have looked OK, but as I said we only work on gross margins, or cash flow as we call it in oil and gas. And with the low cost of our head office being such a small percentage of our revenue you'll see we run a tight ship. Just don't ask about how much of the head office staff that we have capitalized to that already bloated balance sheet.

So here’s the deal the bureaucrats will say, trust us, we’ll make you money…

Doing some simple math in terms of the $40 trillion investment should shock the average bureaucrat in believing there is a capital cost associated with the oil and gas business. A simple allocation of the $40 trillion over the 111 million barrels per day for the 20 year period brings in a whopping $65.82 / barrel in additional capital for each and every barrel. Not bad for a product that sells for $50. However if you look only at the incremental production and allocate those costs over those 15 million barrels. It comes to $487.06 in capital costs per barrel. Maybe I'm beginning to see the light as to why the bureaucrats preclude any capital costs in the calculation of their profits.

And of course People, Ideas & Objects, our Preliminary Specification, the user community and service providers are different. We include the costs of capital and overhead in the determination of profits at the property level. Then if the property is profitable it will be produced. Otherwise it will sit in the shut-in inventory where the engineers and geologists can apply all of their innovative thinking to make the property profitable. This is our plan, our vision, our idea and how we provide an incremental $5.7 trillion in profits in that approximate time period. Real profits after that $40 trillion has been returned to the investors. Not profits that are declared with the $40 trillion in investments still sitting on the balance sheet.

Oil and gas is a failing industry. Bureaucrats will fail to meet the market expectations described here. They will fail to provide a business case for the investments to be made. And they will fail in providing answers to the critical questions that are going to be asked here this month and next in what is commonly referred to as annual report season. And if the bureaucrats can get to mid-May they will have made it through another year where they can continue to incinerate more capital and maybe even think about expanding that boat launch after all.

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

Who Are We Looking For?

The business opportunity that was defined in yesterday’s post will appeal to those that are of interest to People, Ideas & Objects. Those that are intimate with the details of a process and have the fundamental understanding of how the oil and gas industry operates in terms of its operations, administration and accounting. Those people that can define and support a process that includes the elements of the industry that need to be there, and those that the producers want to be there. People who have been working in the industry for upto a few decades and have risen through the ranks to include themselves in a variety of different roles and areas. These are the people that interest us.

Those that are entrepreneurs within the industry that are able to take the opportunity that we have defined here and run with it to its ultimate expression. This is how the industry will be remade in the vision that is the Preliminary Specification. Where people will act in the best interests of the profitability of their clients, the producer firms. Without profits in the producer firms there is nothing for the individuals or society in the long term. A losing industry such as we have today is a drag on our governments revenue streams and puts the jobs of many in jeopardy of loss, unnecessarily so. We also have a job to do in terms of ensuring that society is provided with the energy necessary to maintain our way of life. That doesn’t seem in jeopardy today. However it will be if the industry continues to lose money over the long term.

All very pious and grandiose claims. The alternative is that we really are here just to shop and keep up with the neighbors latest purchase. I prefer to think that we have better control of ourselves. The point is that this ecosystem will be valuable for the people that participate here in the user community. It is they who will be the ones that fulfill the user community vision. Who will have the power to influence the business models that the industry uses and how best the industry can earn its profits. That collective wisdom will be implemented through the software that is delivered from their efforts.

It is this kind of individual that holds the keys to the future of the industry. That should be clear through today’s post and throughout all of our discussions. And this is how they can transition from the position of where they are today to one in which they can be operating their own service provider in a few years. Where the scope and scale of their operation is a substantial organization that they have built from nothing with their own skills and talents. Something that provides them with a far better standard of living and satisfaction than what they may be enjoying today. And maybe its a partnership with some of the other users that they will meet along the way. Who knows, what is obvious however is that the industry is not performing and has no plans or vision in how it can.

This motivational speech will appeal to the person that we are interested in. It will also alienate the bureaucrats that feel it is inappropriate for the oil and gas industry. Thats because they think the Preliminary Specification is inappropriate for the industry. The bureaucrats have failed miserably. They are completely out of ideas as to how to change the situation in the industry. Prayers are not being answered this year because none were asked in the run up to the winter months. What do you do with an industry that has kept your family fed and housed for the past decades and now is not performing, has no plans or vision, no ideas and most importantly not even a prayer?

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

Copyright is the Glue That Hold Everything Together

The other day we noted that the service providers would have the exclusive rights to manage their process. That there would be no competition in terms of other firms providing the same processes management. The manner in which service providers compete is on the basis of specialization and the division of labor. The way that we ensure that no direct competition is generated for the service provider is that each service provider is licensed in terms of its access to the underlying Intellectual Property based on our copyright and of course by way of access to our software to manage the process. The copyright in this case also precludes others from operating within the service providers field of operation. There are many other ways that the copyright is used throughout the People, Ideas & Objects environment that makes up the Preliminary Specification, the user community and service providers. This post will touch on those areas and give a brief overview of the manner in which the copyright is used.

I am the beneficial owner of the copyright that defines the Preliminary Specification and the contents of this blog. These ideas form the Intellectual Property contained within this ecosystem. It is on the basis of the ownership of this IP that I am able to, eventually, raise the revenue from the producer firm to support our budget. Our budget includes the cost of our developers and pays for the time of the user community. Service provider revenues are sourced from the producers directly as the replacement to their current G&A costs. This is the flow of money in this ecosystem. It is important to establish this flow as it also details the flow of the ownership of the Intellectual Property.

The first thing that is necessary is to grant a license from myself to People, Ideas & Objects for them to prepare derivative works of the Preliminary Specification and the ideas contained here in this blog. This will be in the form of software code and will be, through the license, renounced back to me as I will be the one paying for the development of the software. The user community operates in the same manner. Since they are paid for their work, the Intellectual Property that is generated flows back to me and becomes part of the total IP consisting of software code and other input. This is important as each user community participant and developer are granted within the license the right to access and prepare derivative works from this Intellectual Property. What would be unworkable would be the entire community making IP claims to their contributions as their Intellectual Property and then having to cross license each others contributions. The method that we are using in this community allows access for those that are licensed to these developments all of the necessary access and use that they need to do their work.

The user community participant is also a key member of each individual service provider. And therefore they have the rights through a specific license to manage a specific process. This license is an end user license that governs the use of the software. It is in the service providers where the user community participants will earn the majority of their capital appreciation and earnings. The user community participant also earns money for their time and effort with our developers, however building a service provider organization provides them with the opportunity to build real long term value for themselves.

It is the nature of Intellectual Property that the oil and gas industry has ignored for the better part of this century. And as a result they have lost large portions of it to initiatives such as People, Ideas & Objects. It will be the case in this century that you will need Intellectual Property in some form in order to do your work. You will have to own it outright. You will have to have a license in which to access some IP, such as the user community participant and their service provider firms. Or you will have to have access to it through your employer, such as a service provider. One of these methods will be the only way in which you will be able to work in whatever industry you choose to work in. That of course is my opinion. And we already see this happening with the proliferation of end user license agreements, etc.

One of the reasons for the Intellectual Property becoming so prevalent in the future is its ability to hold communities together. In our case it is the glue that enables the user community to do their work. That authorizes their management of the process. And precludes those from working against the interests of those that have contributed to this community and therefore have earned some rights and capabilities that are a part of the communities offering. One of the things that the bureaucrats were notorious for was to take the Intellectual Property and capabilities of a service based firm and freely pass these among their competition and sponsor several “me-to” competitors. That’s not going to happen in this environment. You will be protected as a user community member by the license that is granted to you in the process of joining the user community and contributing. It is important to note not everyone will be granted a license and only user community participants in good standing will be able to establish service providers. Since the service providers are a new sub-industry there will be large numbers of these formed. The population of user community participants in the budget have been specified at 3,000. Recall that we expect that service providers will be taking the load of the G&A of the industry which we estimate to be a large portion of the current $40 to 60 billion in G&A costs of the North American producers. Taking a rough average then, a service provider would generate $10 million per year in revenues.

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

The Service Providers Role

With the combination of the Preliminary Specification and the service providers. People can see the difference in the way that business will be conducted in the oil and gas industry. Administration and accounting will be handled by the service providers on a global industry wide basis. No longer will the oil and gas producer be constrained by their administrative and accounting capabilities affecting their growth or profitability. Having the service providers operating in the manner we noted yesterday makes these costs variable in nature. Allowing the producer to shut-in unprofitable production and therefore reduce the royalties, operating costs and overhead on the property and the firm overall. Enabling the producer to select their production profile based on the profitability of their production ensures that they, as a producer, will always be profitable. And their ability to scale up their production is immediate by accessing the administrative and accounting capabilities that support any new production through the industry based capabilities of the service providers.

Getting these concepts into the minds of the future user community participants is critical to the success of People, Ideas & Objects Preliminary Specification. We are not rebuilding the existing systems that are so deficient in providing value to the oil and gas producer. The entire configuration of the industry, where the service providers are separate from the producers. And focused on one individual process of the producers business. Demands a different perspective and point of view of how the industry operates and the systems that are built by the user community.

Our objective in making these changes is to provide the flexibility in the producers deliverability and production profile, and to allow them to focus on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. The service providers on the other hand are handling the administrative or accounting process that is theirs. They own the process and are solely responsible for the management of it on behalf of the industry. Their process is their competitive advantage. And with that they have the people to manage the process, the capabilities to make changes to both the process and the software itself through their participation in the user community. This is the critical point of failure where the quality of systems usually fail. The producer currently has no one to turn to who has ownership of the issue. The service provider, who contains the user community participant, has the power through the user community vision to enable the changes to be made. They will have the people to deal with the producers issues.

It will be the service providers process that is the source of their competitive advantage. And it will be on the basis of specialization and the division of labor that they are able to compete. Taking the data set of the industry and being responsible for it for that process is a completely different basis in which to look at the industry. It is also the only reasonable approach here in the 21st century. Having each producer develop the administrative and accounting capabilities to support their organization is a constraint and is the primary reason that so many producers are losing money. The scope and scale of the actual overhead of the producer is not that significant, however it is large enough that it requires them to continue producing in the current environment. With all the staff on their payroll they need to keep operating all of their properties to continue paying everyone. The shale revolution is declaring this business model is out of step with the needs of the industry. The bureaucrats won’t listen and continue on despite putting their firms in jeopardy. Change is desperately needed.

What we as individuals need to do is to think of the ways that the service providers will work in this new environment. That is the way that we need to go about building these new processes. First in the software itself with People, Ideas & Objects Preliminary Specification. Remember software identifies and supports the organizational constructs. That will enable the changes to be made in the organizations. Then with the user community participants developing the service providers themselves the changes needed in the industry can be implemented with the software, the process and the people operating in the manner that makes the oil and gas producer the most profitable that they can be.

It will be on the competitive basis that the service provider will use specialization and the division of labor. These will be their key tools in assisting the oil and gas producers. However, people will also need to think what the division of labor between computers and people will be. We need to stop doing the work that is best left to the computers. And begin the far more exciting work of leadership, unstructured problem solving, decisions, creative work, collaboration, research, ideas, design, planning, thinking and making the computers work for us, instead of us working for them.

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

What's a Service Provider?

Keeping with the theme of a quick review, I now want to discuss the role of the service providers. And how the user communities involvement makes them important elements of this software development environment and the means in which the producers processes are managed. If we assume for a moment that the population of user community participants is the 3,000 people that we have determined in our budget. We can see that the user is not necessarily employed full time with the development team. This is a reasonable assumption as the time necessary to evaluate, communicate, test and deliver the software from the development team is a collaborative exercise. And within the People, Ideas & Objects community the users are also the principles behind the service providers who provide the administrative and accounting services to the oil and gas producers.

Under the decentralized production model the prototypical producer is reduced to the C class executives, the earth science and engineering resources, some land and legal, and support staff. The remainder of the administrative and accounting resources are reallocated to service providers who focus on one process and have the industry as their client base. This enables them to use the principles of specialization and the division of labor to enhance the service providers offering on a continually improving basis. If a service provider was determining the eligible capital for gas cost allowance, and that would be all that they did, they could apply their focus to the best way in which to approach the industry wide data set that they and all service providers were responsible for. The principle of the service providers, who are also members of the user community, will have the influence in the software development to make the changes to the Preliminary Specification and its derivative works, and enact any desired changes.

With the movement of the administrative and accounting resources from the producers to the service providers. It will also shift the payments for those administrative and accounting costs from the producers staff to the service providers. We believe these payments will make up a large percentage of the North American industries $40 to 60 billion in G&A costs that are incurred today. Therefore the service providers will have these revenues generated as a fee for service rendered during each month there is activity. Therefore if the property is shut-in during a month, due to the producers inability to produce a profit, then the service providers would not have any tasks for that property and no service provider fees would be billed. Otherwise the billing of a service fee to each Joint Operating Committee will be undertaken each month there is production.

These process fees leave the service provider with the financial resources to support the services that are needed by the producers. It also makes up the other portion of the user community participants full year work requirement. Some of their time with the software development team working to build / enhance the software they use at their service provider. And the rest of their time incurred in managing the service provider which they own and operate. It is the user community participant that we will be looking to to establish these service providers. Since none of these service providers currently exist, all of them will need to be developed from this initiative.

Competition between the service providers will be unique. Since they are licensees of People, Ideas & Objects they will have exclusive rights to the domain that they provide their service in. They have no risk that a new service provider will come along and poach their clients for the service that they provide. The manner that they will compete with the other service providers will be in the areas of specialization and the division of labor. Establishing new concepts and methods on which to enhance their offerings and reduce their costs to their clients, the oil and gas producers.

It is in this way that the producer is able to focus on their key competitive advantages of their earth science and engineering capabilities and their land and asset base. By accessing an administrative and accounting capability that is variable, and industry based as opposed to something that has to be developed in-house within each producer firm. The decentralized production model enables the producer to become a price maker in the oil and gas commodity markets and obtain a flexible production footprint based on the profitability of the properties.

The role of the service provider in providing the producer firms with the individual process management is a critical one in the People, Ideas & Objects environment. They will be the ones who are defining and designing the process in its optimal configuration to determine the most efficient method of dealing with the industries needs. They will be the ones, as members of the user community, who will work with the People, Ideas & Objects software development team in determining what those software systems will look like and what is required. And then they will provide the software solution and the people necessary to make the producer firm obtain the most profitable means of oil and gas operations.

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

Recruitng Our Leadership Team

Another element of our focus on the user community is our recruitment of the 30 or so members of the user communities leadership team. Ideally we are hoping to have the leadership team in place prior to the commencement of software developments in January 2017. This might be possible, however it is not a critical component to our progress. The leadership team will support the user community, most particularly in their early developmental years. We have previously defined the positions within the leadership team. And this post will seek to revisit what those positions are and what is expected of them.

What I feel are the most important positions are the position of Product Owner. If I didn't already have a role in this development I would most definitely be after one of these Product Owner positions. There may be as many as 20 of these positions available in the People, Ideas & Objects development. One for each of the modules of the Preliminary Specification and additional Product Owners for the data models, user interface, etc and for example.

These are senior positions within the development team. They represent the user community within the software developer team and are their representative on the ground in the development. They are well versed in the business topic of the module that they represent and understand the software development process. They are able to troubleshoot any difficulties in terms of the miscommunication between the developers and user community and ensure that the user community understands their deadlines and commitments. Product quality is the effect that the Product Owner can make in terms of their contribution.

We have also established a Board of Directors for the leadership team of the user community. They will assume the typical role of directors in a corporate environment and will therefore provide the strategic vision and leadership of the user community. They will also be responsible for approving the annual budget that is necessary to fulfill that vision and leadership. All of the funding for the user community is sourced through People, Ideas & Objects and therefore these budgets will be prepared and submitted for funding by the leadership team. People, Ideas & Objects as the licensee of the Intellectual Property raises the necessary funds for both the user community and the software developers on an annual basis.

The last positions of the leadership team are the C class executives. A CEO, CFO, COO will need to be secured in order to manage an organization of this size, scope and scale being undertaken. I mentioned before that I will be taking the Chairman's and CEO's role. If we are able to secure people prior to our January 2017 commencement date that would be ideal. We would have no resources to compensate them at that time, however there would be compensation beyond January 2017. More is expected of the leadership team and this is typical of what is required in a startup position.

I can't stress enough the importance that I feel regarding the users involvement in these software developments. We have all seen the types of systems that are developed when the user is excluded from the development. And that will not happen here. We are committed for the next 21 months to be focused on the development of the user community and the leadership team. This will be on top of the work that we have done in the past 15 months. This is the hard work of getting the ideas into the minds of the overall oil and gas industry and creating an interest in developing and participating in a new solution. One based on the Preliminary Specification as our guide to provide the oil and gas producers with the most profitable means of oil and gas operations. If you share in this objective and believe that the industry needs to turn away from its bureaucratic, losing ways. Then have a look at what we have here. I'm sure you'll find something that interests you.

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

Accounting At the Property Level

Last week we noted the determination of profits in oil and gas was subject to different methodologies in terms of how the firms assets were depleted and hence earnings were reported. I suggested that producers had bloated balance sheets as a result of capitalizing all of the activities in the field. And this bloating was enhanced further by the slow process of depletion when using the reserve base as the method of depleting those assets. Overall this having the effect of over reporting profits for the industry. I also suggested that this was systemic, large and unreasonable. Today I want to continue with the accounting theme and look at the individual properties of the producer. And why the producer is unable to determine which properties are not producing a profit.

The main culprit is overhead. The producer has no ability to determine what the overhead of a property is. Many might consider this to be an immaterial amount, however, when you consider what the gross G&A of a producer is, you'll see that the amounts become material to the determination of the properties profitability. The other aspect is the amount is hidden and only recognized as an overhead allowance that is chargeable to the joint account. These allowances are too small to recognize the real costs associated with the overhead of the property. Therefore the property is over reporting their profits. And the majority of the G&A that is reported on the Income Statement is only the net, after capitalization of the majority of the overhead occurs.

If you look at most annual reports you will find a determination of the netback prices showing that the producer is providing positive margins on their operations. And they are. However you can also see that these calculations only include the costs of royalties and production costs. And they are averages. Included in those averages are a few properties that are wiping out all of the profits of the producer. If you include the actual gross overheads and a reasonable depletion based on, lets say the decline curve, you will find that not every property within the producers portfolio will continue to report a profit. This is only reasonable. It is People, Ideas & Objects suggestion through use of the Preliminary Specification that the producer shut-in those properties that are unable to produce a profit, based on an actual accounting of the properties costs.

This can’t be done with the current bureaucratic systems and procedures. They are using accounting policies that were designed in the 1960’s that were involved in the introduction of computers. They are stuck with allowances and estimates, accruals and a whole lotta fudge to make their systems work. To get an accurate accounting of the costs of the property would require them to reorganize the industry around different parameters. Much like what our decentralized production model does.

And the focus that we provide the producer brings two new elements in terms of increasing their profits. One is the focus on specialization and the division of labor. Two economic principles that have been responsible for all of the economic growth that we have realized since the 1790’s. The ability to focus on these principles does not currently exist due to the fact that each producer needs to build the administrative and accounting capabilities within their organizations. And there is no current opportunity for them to share in these capabilities with other producers. When each producer has to be Sarbanes Oxley compliant, each producer has to hire Sarbanes Oxley compliance people. Therefore the administrative and accounting requirements of the producer firm are a constraint and limit to the speed and capacity to grow. With the Preliminary Specifications development of an industry wide administrative and accounting capability, these speed and capacity to grow constraints are removed and the issues do not arise. By having a Sarbanes Oxley compliant service provider specializing in the legislation and providing their services across the industry.

The second element that we provide is for the producer to be a price maker in the oil and gas commodity markets. As we noted above, the ability to shut-in production at the property, when available across the industry will provide the following advantages.

• The producer actually increases their profitability by reducing their production. 
• Under the decentralized production model there will be no overhead incurred by the producer on shut-in production. Overhead becomes a variable cost based on production.
• The commodity prices will rise as there will be less product on the market. 
• And the overall cost to produce will remain lower due to the fact that you won't be adding the losses of the property as additional costs to be earned in the future. 

The fact that Exxon is borrowing money to fund their negative cash flow. And it is expected that $100 billion will be needed to fund the negative cash flow of the shale formations. People, Ideas & Objects rational story about determining profits and acting on the outcomes makes sense to me. The bureaucrats are too conflicted to be involved in our software developments. We eliminate them from the scene. And the investors are cutting and running. Looks to me like an industry that has to experience the phenomenon of creative destruction in order to make the changes to the Preliminary Specification.

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