Put the Lotion, and the Money, in the Basket

Metaphorically speaking of course. I swear I do not have a big pit in my basement where I hold bureaucrats. The industries bureaucrats are however stuck in a pit of their own making and they will be hard pressed to get themselves out. What a disaster the oil and gas producers have put themselves in. Reading their third quarter reports was eye opening, even for me. All but the large integrated producers have any financial resources of size in order to rely on in 2016. And even at that they will be burning cash faster than pets.com did in their heyday. Those that don’t have integrated operations will be lucky to see 2016. Natural gas prices in October dipped to $2.00 before the end of last month's trading. They are currently in the $2.40’s and the future’s contracts for the winter months don’t break out of the $2.40 range. Oil prices are not much better. Recent reports from the IEA stated that oil would not recover until 2020.

The race is therefore on to produce enough to pay the bills. Ever watch the show Breaking Bad where Jesse falls off the wagon and ends up in a drug house. This is where we are as an industry. Where is Walter White when we need him and Mike Ehrmantraut to rescue us? The behaviour is set. The ability, capability and desire to change does not exist with these bureaucrats. Just like Jesse they’re just looking for their next fix. After six years of being hooked on the junk in the natural gas business, and a year of being hooked on the junk in the oil business, do you think you’ll be able to get them into rehab? Maybe I should come up with an inspirational hollywood reference that is appropriate here. Unfortunately no one has ever thought of a story this sad before.

The money that I want the bureaucrats to put in the basket, which of course comes from the movie the Silence of the Lambs, is none other than our budget. It is in that way that we can build the systems necessary for the remake of the industry based on the Preliminary Specification. Which includes the price maker strategy. It is difficult to believe that no one has determined the industry is a price maker before People, Ideas & Objects. Junkies are pretty useless in terms of any productive expectations. A reading of any economics text will show that the industries commodities exhibit monopolistic competition. Show me a replacement to any use of oil or gas. And the large price swings based on small changes in the market availability of oil and gas is the real evidence that proves that it is a price maker based business. Just don’t tell the junkies.

If we accept that as a fact then we can implement the decentralized production model of the Preliminary Specification and ensure that none of the production in North America is ever produced that is not profitable. And profitable based on an accurate accounting. Not on the SEC’s basis of accounting that defines the outer limit of what is acceptable. On the basis of a reasonable way in which to operate the business as a going concern. I know, what a concept.

To do this, all we need to do is provide for the budget, build the software and reorganize the industry. Reorganize it with the prototypical producer being reduced to the C class executives, the earth science and engineering resources, some land, legal and support staff. The rest of the accounting and administrative resources would be reallocated to service providers who are focused on an individual process and will use the entire industry as their client base. It is in this way that, based on the performance accounting at the Joint Operating Committee, the determination if the property can be produced profitably is made. And if it is profitable it produces. If it isn’t profitable it goes into the producers shut-in inventory to be part of their innovative efforts to increase the reserves, expand the production or reduce the costs and return it to profitable production. Also note that putting the property into the shut-in inventory does not incur any administrative or accounting charges from the service providers. That is because without any production activity, there is no action taken and no billing produced by any of the service providers. Doing this will ensure that the producer will be far more profitable even with a lower production profile. We have made all of the producers costs variable. The unprofitable reserves will be saved for a time when they can be produced profitably. And the commodity markets will find their marginal costs as the excess production is removed from the marketplace.

It's common sense really. However this and the other attributes of the Preliminary Specification took me 25 years to bring it to this level. One important aspect of the work that I did is that it is covered by copyright laws, that are pretty much global. Meaning, that as hard as the bureaucrats try to take these ideas, and avoid me, the more they make life miserable for themselves. That’s right folks, they’ve been busted again. This time it's McKinsey, once again. This time out of London so that they are probably unaware of the activities in their Boston office so many years ago. Anyway you should be able to read the article here if you hurry. Other than that it is pleasing to know that the bureaucrats like these ideas so much that they would hire someone, again, to try and take them.

But it just doesn’t work that way anymore. This has continued without consequence to the industry to this point. This must be stopped. Those that have been innocently duped by the bureaucrats have been notified and subsequent action taken. This is appropriate however there have been no financial consequences to the producers who continue to operate in this manner. Effective as of this date I have revised the budget to reflect that the costs of our budget will move from 50%, which is what it was in it its original published amount. And will now be valued at 33.3% with the Intellectual Property Royalty moving to 33.3% and our net earnings now being 33.3%. This has the effect of increasing our costs to the producers from the original $4 billion to the current $6 billion. Thank you. The thing is I could set the royalty and earnings at whatever level I want. Lets hope we don’t have to go there. The bureaucrats will scream blue bloody murder, or maybe just call me crazy, I don’t know and I don’t really care. Just pay the bill.

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. 

Taking This Week Off From Posting

Returning November 16, 2015

Third Friday Off

Warning, Do Not Read

We’ve seen the beginning of the destruction of the industry in terms of its capabilities and capacities. As more people are laid off and more service industry representatives are forced to cannibalize their operations. We can see the gripping that bureaucrats will do when prices of our commodities are at record highs and they can’t find anyone to manage the industry or do anything for them in the field. Will this be the point at which the bureaucrats decide that there’s a need for change? These violent swings from one extreme to the other are going to become more exaggerated as we proceed with the status quo. Deeper into the downturns for longer and harder, much higher in terms of what the highs will be and for much longer than they have been in the past. All in all a very intelligent way to operate the most important industry to society's needs. The investors will continue to sit and wonder at which point, the highs or lows, is the point where they begin to make money. As we know the bureaucrats will be devising ways to ensure that they are rewarded first and foremost, during the good times and the bad times. Seen any bureaucrats on the street these past few weeks?

It’s a good game they’ve got going. Most of the bureaucrats were rewarded with higher stock prices for a day or so after the announcement of layoffs. And I want to point out Exxon’s exemplary behavior in this downturn. Granted they have the downstream to cover off the losses in the upstream. But they stated they don’t announce layoffs. They aren't looking for that sugar high to bounce their stock. But they also said that they manage their business on the basis of the right size that is necessary at all times. They never get too fat, and they never get too lean. This is what I would expect of a company that operates in the 21st century. Exxon employees can assure themselves that if they are doing their jobs to the satisfaction of their bosses then they run no risk of being on the street as a result of those bosses mistakes. That I can only point to Exxon in this industry at this time is not very promising. Chevron alone was responsible for cutting 6,000 to 7,000 people.

You could stick around and wait your turn for the merry-go-round of layoffs to hit you. What we did see in the 1980’s and 1990’s was that bureaucrats soon start to compete on the level of their capability to cut staff. What was believed to be the first and only cuts were quickly replaced with the need for a cover story during annual report season. Then in order to get that sugar high once again, and timing is critical in this process, just before the annual meeting the second round of cuts will be announced. And it becomes a game of who can cut deeper and faster than any other bureaucrat. Then will come a time where there will be no rhyme or reason for the cuts, it's just the bureaucrats competing like you know they can.

If you're like a lot of people, whether you have been cut or not, this brings into question the whole purpose of working in the industry. Why do we have to work with a gun pointed to our head because they can’t deal with the real issues of the business? All I can say is if you think the atmosphere in the industry is bad now, just wait.

This brings up a good question for everyone though. Why are we doing this. For me it’s too important to see these idiots run society off the cliff. I know you're not supposed to care about these kinds of things, but I know I’m not the only one that does. When you have the idea of how you can solve these problems spring into your head 25 years ago, try living with yourself when you do nothing about it. And that’s the hook that I get into most people with this... whatever this is. How can you do nothing in the face of such stupidity when you know that the solution exists to fix the problem. I do want to point out that I warned you not to read this.

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. 

This Way Through

If we follow along with the scenario that we painted yesterday. The industry has a difficult job to do in the next 25 years, we need to be moving to these tasks now and the status of the industry today is in no shape to even consider anything to do with the future. I’ve had a few conversations with people in the past weeks and they see this as the darkest days of the industry. Our own 2008 and I want to suggest here that it is the end of the way that these producers operate and function, and therefore the industry as we know it. Shale is a fundamental change to the business that hasn’t been, and can’t be considered by the bureaucrats and as a result they will run the business into the ground. This third quarter has shown the beginning of the devastation. Natural gas has shown the inability to act when these trends have existed in that business for six years now. Cutting the staff and the service industry are the wrong, long term strategic, things to be doing. It should be to no one's surprise that I am writing off the existing bureaucratic oil and gas industry. It will not recover from the price related difficulties it’s in. How long it will take before the bankruptcies begin will be short due to the very poor financial structure of the producers.

As I have said, this is the process of creative destruction. The difficulty is that it’s in the high paced 21st century that we live in. Usually this is done over a generation and a firm can make some of the changes necessary to recover from the difficulties. If I were an engineer or a geologist I would be organizing a new producer for what I would call the new oil and gas industry. A producer that would use the Preliminary Specifications decentralized production models price maker strategy. And wait for the next phase of the decline of the existing industry. That being the parachuting of the boards of directors, C class executives and others that know it's over and don’t want to be around to clean up. Oh and let's not forget the bureaucrats, they’ve had their exit plans ready for a while. And secondly, and most particularly, the asset sales that will begin in wholesale volumes and at deep discount prices. We’re seeing some major sales of properties already, for good prices, what we will see in a few months is a lot of sales at fire sales prices in order to keep the rent paid and the lights on.

Our price maker strategy is based on the principles of economics regarding what makes a “price maker.” These are...

A monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes.

A monopoly is a price maker as it holds a large amount of power over the price it charges. A price maker is a firm within monopolistic competition which produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, in other words, as long as it's producing a profit.

There are no substitutes for the oil and gas commodities that we produce. Therefore it is monopolistic competition that the producers are involved in. Another characteristic of price makers is that small changes in the volume of product in the marketplace make for significant  changes in the price. No one today in the oil and gas industry, would believe otherwise. It will be the movement of the properties from the current poorly performing producers to the ones that are being established now that will execute the change. The new producers will be able to use the price maker strategy of the Preliminary Specification and implement profitable operations across a new oil and gas industry. We will still have the Exxon's, Shells, BP’s and Chevron’s, and of course we will need them. And they too will need to move to the Preliminary Specification.

All of this destruction of course was unnecessary. The bureaucrats had to giggle and do their thing. It's the hard working people in the industry who have to pay. I am coming up on ten years of writing in this blog and there has only been the one adversary throughout those ten years, the bureaucrats. And there has has only been one objective. To bring new ERP systems to the oil and gas industry based on the Joint Operating Committee. Yes I am stubborn, but that should provide you with the knowledge that these bureaucrats did it their way so they could keep their gravy train in tact and didn’t have to do any of the hard work of implementing the necessary changes. They just don’t care, if they did you and I would be busy building systems.

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. 

2040

The next 25 years will be one of the most important periods in the history of the oil and gas industry. Expectations of significant increases in demand for our commodities are common with China and India moving more of its populations into the middle class. There are also a variety of claims that the amount of investment necessary to meet that demand are estimated in the $20 to $40 trillion range. As an industry we will certainly be busy and the technical challenges to the geologists and engineers will be like none other that we have experienced before. The shale reserves that we currently know and understand will provide us with a valuable head start in making sure that we succeed in these tasks.

The third quarter reports from the oil and gas producers however don’t provide me with the understanding of how we’ll get there. None of these companies are in good shape, in my opinion. Looking critically at the industry it is fair to assess the smaller producers as catastrophe’s. Many of the mid-sized and independent producers are in very poor shape as well. The only real known survivors, in my opinion, are those that can lean heavily on the refining and marketing side of the business to see the downstream support the upstream through these difficulties. Exxon, BP, Shell and Chevron relied heavily on their downstream operations to continue with profitable operations. Here’s the thing, however, these four companies have a $20 billion cash flow shortfall to make up. You have desperately weak companies that will need many years of rehabilitation and care in order to be nursed back into viable operations. Add the fact that interest rates are about to be increased, and you have at least ten years before you see, in my opinion, a resurgent oil and gas industry. Good commodity prices or not.

If we go back to my argument about the recording of capital assets. Whether under full cost or successful efforts. For decades it has been the tradition, the culture and the SEC dicated policy that everything is capitalized. This includes 75 - 80% of the overhead that is incurred by the producer on an annual basis. Overheads can reach 20 - 25% of the revenues in most companies. The smaller companies incur much larger percentages of overhead due to their inability to scale. All of these capital costs are amortized over the life of the oil and gas reserves. Making for an escalating size of the producers balance sheet. How will we tell the future investors that we still haven’t accounted for these costs when our hand is out for more money to recapitalize these firms?

The capital assets have been built up to stratospheric levels in each and every producer in the industry. At no time is the management, in the past twenty years ever been assessed based on the costs it took to build these capital assets. The amount of depletion within any year has usually been a token amount. It should be the opposite. The industry should have been willingly moving those assets off of the balance sheet and recognizing them as a cost in order to recover the cash investment made in the first place. If they did that in the past of course they would have recorded significant losses and probably would have gone out of business. The state of affairs today isn’t any different! The producer firms are zombie corporations that in a normal environment would have gone out of business. As they stand today they are just stacked to the ceiling with unaccounted for costs. By leaving the assets on the balance sheet they never have to account for their performance, and never realized the real costs of the oil and gas they produced. As a result they continued to overinvest with the annual infusion of “other people’s money” which lead to this period of overproduction. Now they have no cash, no working capital, literally no financial resources to lean on in the darkest days of the industry. Unhappy banks and angry investors. With stacks to the ceiling of capital assets that will sit there for a decade or longer before they are ever accounted for. A very desperate situation.

Organizationally oil and gas producers are running out of pink colored paper. They forced the service industry into the mode of having to cannibalize their businesses in order to survive. Layoffs in that industry have been epic. And probably only the initial phases are over. The people that work in oil and gas are being sent home at a rapid pace as well. In Calgary you can buy a $4 million home for $1.2 million. The attitude in the employment marketplace is that there are better opportunities elsewhere in other industries. Why wait for oil and gas to get itself sorted. I find the bureaucrats are employing a 1960’s type of attitude that deals with its overproduction issues by laying off the staff and service industry. Anything but actually deal with the problem or take responsibility for it. I think my opinion is well known on this point.

We stand on the shoulders of giants. What I am saying is we have far to fall in terms of our capabilities as an industry. Investors have spent the past decades subsidizing oil and gas consumers because bureaucrats refuse to account for their performance. We have 25 years of hard work ahead of us. We are the most important industry to society. I don’t honestly know how, based on the current situation these bureaucrats have put us in, we are going to overcome the difficulties that they have created for these organizations. To focus the industry on its future is not a conversation that I can have with anyone. I do know that the only way we can see clearly through this fog of destruction is with the Preliminary Specification. I am certainly biased, but then again, I’ve been screaming about these problems for a while.

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.

Aliens, and Other Phenomenon

Reading the quarterly reports that came out last week. It appears that the low oil and gas prices are a phenomenon brought about by aliens from another planet. That the producers overproduction of oil and gas may have had something to do with the decline in prices has never entered the realm of possibilities of any bureaucrats mind. It's just amazing that the aliens would be doing this. And it's amazing that they don’t understand this basic principle called supply and demand. What would we expect though, for bureaucrats to take responsibility? We’d be as mistaken as they are.

The other aspect of this chronic insanity is what are they able to do about it? If they did take responsibility for the overproduction that would mean they were going to take steps to solve the issue. How would they do that? The organizational inertia within the oil and gas producer is so strong. So dedicated to the wants and needs of the bureaucrat. To introduce any change in the organization would require the energy equivalent of all the shale reserves available. Everybody would be interested and enthused right up to the time of the first central committee meeting. At which time we all know what would happen then.

Change on the scale of what the Preliminary Specification imputes doesn’t occur from within. It happens outside of the organization, and as a result of what has been aptly described as creative destruction. People, Ideas & Objects, our user community and service providers are doing the creative stuff. And the bureaucrats, as we can clearly see, are doing the destruction part of the equation. In that sense the oil and gas industry is in a healthy balance at the moment. What we can’t expect to happen is that these bureaucrats will see the light of their destructive ways and do anything about it, or even fund our budget. After all there are many trillions of dollars yet to be destroyed.

It's one thing for us to be timely in terms of the state of affairs of the oil and gas industry. This trend of losing money by the bureaucrats has now begun in earnest and will continue until there is nothing left. That might be as much as a year and half from now. But there is another trend that we are consistent with here at People, Ideas & Objects, our user community and the service providers. And that of course is disintermediation of the industry through the application of Information Technology. Many industries have already been disintermediated such as the cellular phone market. Anyone ever here of who the market leader in that business is? There name is Nokia. Dinosaur’s die and the biggest dinosaur in the marketplace today is the oil and gas industry.

If you believe that “rebalancing the market” will occur without addressing the new dynamic of shale reservoirs then you are a true believer in bureaucracies. If on the other hand you believe implementing a price maker strategy in an industry that reflects price maker characteristics makes sense, then you should look at our Preliminary Specifications decentralized production model. We provide producers with the most profitable means of oil and gas operations. This is done through the production allocation process of evaluating each individual property, and if it’s profitable, it will produce. And we take into consideration the entire cost of the operations. Not the convoluted accounting methods that the bureaucrats use where everything is capitalized on the balance sheet for generations. We ensure that the investor's capital is returned and a timely return on that investment is provided. We don’t build capital assets to the sky on the balance sheet until the producer is so unbalanced as to not be viable. That is to say I don’t see capitalizing everything being a good policy for the types of companies we have on this planet.

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 Dynamics of the Natural Gas Marketplace...

are a precursor to the actions in the oil market. That’s why we don’t talk about natural gas prices declining this week. Is anyone else surprised at the level of discussion regarding the tragic, systemic and chronic overproduction of natural gas. “Move along comrade’s nothing to see here.” Some people had commented that I was being too harsh regarding my commentary here. I think the contrary, these bureaucrats have been treated too kindly. What is going on is insane. Our own version of a 2008 financial crisis exclusively for the oil and gas industry. Confidence and faith in the people running this business is, and will continue to evaporate until there is none left. My disrespect of the bureaucrats is the reality of the situation and a precursor of most people’s opinions. Unfortunately a lot of good people are being unnecessarily and adversely affected by this self serving bureaucracy.

The bureaucrats, when I produced the Preliminary Research Report proposal, laughed at me and then went behind my back to try and steal the ideas that make up the Preliminary Specification. They tried at least two more times in the past ten years and I caught them each time. These actions were designed to remove the competition from the marketplace, not to implement them. When I adopted the byline of “providing oil and gas producers with the most profitable means of oil and gas operations.” They laughed at me again and said that no one worries about profits. Called me a few more names and so on. Now they face this wreckage that they’ve caused in the industry. Is there any doubt who’s responsible? Now instead of doing anything responsible about the situation, they’ll just exit.

Today we see that breaching the natural gas storage capacity has not been kind to the natural gas prices. Bureaucrats have been actively “rebalancing the marketplace” in natural gas for almost six years and in oil for over a year. Which is the critical point in this discussion but first let's note this for the collection. “Rebalancing the market,” is another bureaucratic myth that falls prey to the giant sucking sound. Bureaucrats want us to believe that their actions have no effect on the price of oil or gas. We now have proof that that is not the case. This week's decline in natural gas prices is wholly attributable to bureaucratic incompetence. Remember that giant sucking sound is the credibility of the bureaucrats evaporating. More importantly, the Preliminary Specifications decentralized production models price maker strategy can be seen as valid and viable

The solution to these issues that will be coming from the bureaucrats will of course be to build more storage. What we need to do is to adopt on an industry wide basis an understanding that every molecule of oil and natural gas needs to be produced profitably. It is irreplaceable and too valuable to be throwing away in the manner that we are doing. The cumulative loss in market capitalization over the past year has been in excess of $711 billion for the top 14 North American based producers. That is exactly 177.75 times People, Ideas & Objects budget. That could make for a handsome investment for those that want to take control of the industry away from the bureaucrats and operate the industry profitably. And recall too that our value proposition is in the range of $25.7 to $45.7 trillion over the next 25 years. Just a thought.

Our analogy to the former Soviet Union is apt when the natural gas prices behave as they have been. People would line up for days in the hope that the bakery would have bread any minute! We now see the bureaucrats will continue to produce in the hopes that the “market will rebalance itself” any minute! Hope being the constant in both communist countries and the bureaucratic oath of inaction.

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. 

How We're Different

It’s one thing to complain, argue and point the finger at the bureaucracy. And I revel in the opportunity. People, Ideas & Objects however offer an alternative to the status quo that addresses the specific issues the industry is facing. Our solution provides the oil and gas producer with the most profitable means of oil and gas operations. I want to stress however that it fits today’s issues as well as it will fit tomorrow’s. Our use of the Joint Operating Committee is the key to solving the administrative, accounting and operational issues and opens up the opportunities in these areas to be realized by both the industry and the producer. The Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable producer. It is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the industry. With this we are able to ensure that the producer attains a speed, innovativeness and profitability with our Preliminary Specification.

Our use of the Joint Operating Committee is unique within the industry. No other systems provider recognizes the Joint Operating Committee as the key organizational construct. And I would point out that whatever systems they are using now certainly aren’t working. The use of the corporate model in today’s systems is strictly focused on the compliance and governance frameworks. What we have done in the Preliminary Specifications eleven modules is move the compliance and governance frameworks into alignment with the seven frameworks of the Joint Operating Committee. This is the Intellectual Property that is at the heart of our solution. It's where we started in August of 2003 to develop these solutions. It was on the basis of this understanding that I then undertook the ten years of research of what and how the industry would operate, and what and how the producer would operate. This research was then codified in the Preliminary Specification and published in December 2013.

We are not licensing our Intellectual Property to any other systems providers. People, Ideas & Objects and our user community are using this IP as the core of our competitive offering. We have big plans for this, there’s no room for dilutive “me-to” competition. It is this use of IP that the bureaucrats find offensive. That and our scope and scale also renders them redundant. It is however a fool that pursues any business in any industry in the 21st century without the Intellectual Property secured first. Intellectual Property will be a necessary requirement of your employment soon as well. You will have to either own some of your own, have a license to access others Intellectual Property or work for someone who owns some IP or has a license. It is, as of now, not enough to own the oil and gas property anymore. You also have to have access to the Intellectual Property that makes the property profitable. Welcome to the 21st century.

All of our user community members are licensed to access all of our Intellectual Property and most importantly prepare derivative works. They are the source of our competitive capability to accommodate the changing needs of the industry and the producer. In addition to working with our developers, users are the principles in the service provider organizations that are being established to provide our software and their services to the producers administrative and accounting needs. These firms will focus on a process or sub-process of the producers or industries activities and manage it for the entire industry. The service providers are a replacement to the current producers administrative and accounting capabilities. We are shifting from a producer based administrative and accounting based capability. To an industry based administrative and accounting capability. This is done as the building of these capabilities in each and every producer is redundant, is ensuring that producers are unprofitable and are a key to our ability to turn these costs from being a fixed overhead to a variable overhead cost of the producer. Also, by doing so we are building the administrative and accounting capabilities once. Sharing them across the hundreds of producers which is far more efficient than each producer developing the same capabilities as all the other producers and each of the producers sharing none of them.

Our ability to build value over the current bureaucratic nightmare is through what we call the decentralized production model. The service providers that I mentioned bill each producer for the cost of the process they manage to each Joint Operating Committee. Therefore if the property was unprofitable based on current commodity prices and a full accounting of the costs of the property. The Joint Operating Committee could then shut-in the property and all of the activities in our “task and transfer” system would not trigger any action to be taken by any of the service providers for that month. Therefore the service providers would not have anything to bill to the Joint Operating Committee. Achieving the variable nature of the administrative and accounting costs for the producer.

This then would allow the producer to reduce their production profile to the level where only profitable production occurred. If they were overproducing in the current system at 100,000 bbls / day. Then, with the Preliminary Specification, they would be able to determine with exact precision which properties were profitable and keep them producing. Their production profile would drop to 75,000 bbls a day, as would all of their costs. The advantage of this is that their actual profit would soar. And that’s without any change in commodity prices. The producer will have saved the shut-in properties reserves for a time when they can be produced profitably, removed the marginal production from the commodity marketplace, putting a floor on commodity prices and be very profitable on all of their production. They will also have an inventory of non-producing properties in which they can innovate in terms of increasing those reserves, reducing those properties costs or increasing the production in order to return the property to profitable production.

Today what we have amounts to insanity. Breaching inventories with systemic and chronic overproduction isn’t the end of the bureaucrats destruction. They can’t, won’t and will not change. Ever. Someone has to take it away from them. Our solution is appropriate for today. However I have to stress that the Joint Operating Committee provides us with the means to deal with all of the industries administrative, accounting and operational difficulties and opens any and all opportunities to be fully realized.

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. 

"That Giant Sucking Sound"

To quote H.Ross Perot when he ran for president. That is what he thought the North American Free Trade Agreement (NAFTA) was going to do to jobs in the United States. The giant sucking sound you here on the streets today is the confidence in the bureaucrats evaporating. Faith has been placed in the powers that be, that all was under control. Today we begin the reporting for the third quarter which will show the full scope of the devastation these bureaucrats have created. They put their reputation that all was well on the line. Now we’ll see exactly how they have been doing.

Recall that the earnings reports were one of the three issues we felt that bureaucrats would not be able to overcome in the month of October 2015. That there were three issues. The third quarter report, the breach of natural gas storage capacity and the bank review of their lines of credit. We originally raised these points in a blog post entitled “In Summary” on September 16, 2015. What we stated was these issues would prove that these bureaucrats will never, ever change. That what was required was to throw the bums out and start with the development of the Preliminary Specification, our user community and the service providers. Then we will have a dynamic, innovative, accountable and profitable oil and gas industry.

As we speak the natural gas prices are doing well. All sarcasm aside, what do you think these people will do on the oil side of the business? Keep producing until the storage is filled to capacity. I don’t know what happens operationally when 15 bcf / day suddenly has no market, but we’re about to find out. Bureaucrats have been overproducing natural gas for almost six years. It's a continental price. This isn’t OPEC’s doing. We have heard that they are “rebalancing the market” for these past six years. The devastation that is happening now in natural gas is 100% attributable to the bureaucrats. They have no one to blame and they have spent all of their political capital in terms of having any say in the management of the industry. It’s therefore time to throw the bums out.

The oil market is no different than the natural gas market. Other than slightly more advanced issues in terms of time. What OPEC has done is said that their production will be the one constant in the market. And others will have to fill the swing producer role. The higher cost producers will have to occupy that swing producer role. And as a result the bureaucrats argue that the Saudi’s need something like $185 / barrel because of the high social costs of their government's budget. And that the Saudi’s are therefore the higher cost producers. Then in the next sentence they state they’ll be profitable at $20 / barrel. The fact of the matter is these are lies. If you used the same basis as they used to calculate the Saudi’s costs, the American producers would need $10,000 / barrel. There is also no way that they can even account for their overhead with $20 production. These bureaucrats have lied and abused the goodwill of our governments, the press and society in general for so long they think they can get away with saying anything. What they really should do is run for the democratic nomination!

The fact of the matter is they don’t know when to stop, they don’t know how to stop, it's an engineering induced nightmare. Today is the first day that we will see the producers third quarter reports. I could be wrong but I think that people are going to be surprised that bureaucrats would think that they could continue producing when they are losing so much money on each barrel of oil and mcf of natural gas. Why would anyone continue to do things that are that destructive to themselves? They don’t care! And that will be evident to everyone. Look for the bureaucrats argument that the writedown of assets is a sunk cost. Well those sunk costs represent the money they took from the investors and promised a return. And if we are to ignore these sunk costs in terms of your third quarter report, when exactly do we consider their performance with those investments. It is systemic throughout the industry that you never have to account for the money that you took from the investors. The fact that you consistently diluted them and abused them during the good times means that they will continue to take the abuse now. So why quit?

Sunk costs are one issue but the fact that oil and natural gas is unprofitable as soon as you dislodge it from the rock to begin the production process is the other. Operating losses will be horrendous. Losing money on basic operations on this scale is something that only a fool would do. This is the end of the credibility of the bureaucrats who run the show. That giant sucking sound will be getting much louder as the next few weeks pass and the scope and scale of these issues begin to be realized. Watch our twitter stream after today’s close to enjoy the show up close and personal. The bigger issue here for the bureaucrats is that they have built a house of cards. They have no cash, no working capital, no credit facilities, no access to debt or equity markets. Basic operations burn cash. And they have the fixed overhead that on a good day would consume 25% of their revenues. And they produce until the storage can’t take anymore. This is the end of the oil and gas industry as we know it. Our own unique style of 2008 type of failure. Join me as I watch and enjoy those who laughed and laughed at me as they have their credibility shredded and destroyed by their own hands.

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. 

A Long History of Overproduction

During the 1980’s and 1990’s the price of oil was very low. In the late 1990’s it was predicted by the Economist magazine that oil would fall to $10.00 a barrel and stay there. Thankfully 2008 has taught us not to listen to economists. The point was that it always appeared to me that a small amount of production being withheld from the marketplace would have a significant increase in the price of oil. That the industry was in fact a price maker. This theory was untested as I was looked upon as I was somehow missing the point, and OPEC was actively in the mix with significant non-producing capacity. Nonetheless the difficulties in the industry were two fold. In reality you could not tell which property was profitable no matter how hard you tried. And secondly there was no mechanism to fairly allocate production between producers. Who would be the one to shut-in their production.

Nonetheless I continued and was unable to solve the problem until the summer of 2003. I was doing the proposal for my master’s thesis and it came to me. It was the Joint Operating Committee. Now this was not my most eloquent argument. When I told people that the Joint Operating Committee was the solution. It was the equivalent of blurting it out in a crowded theatre just before the movie started. A few of the senior bureaucrats in the industry did however understand the implications. One stating that “this would solve all the administrative problems in oil and gas for the past 50 years.” And we know what they did with the knowledge of the discovery of using the Joint Operating Committee. The legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the oil and gas industry.

What was clear to me was that I needed to spend some time to fill in the blanks of what the idea needed. To determine what the producer and industry would look like if we had the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. This took a bit of time and was a bit harder to do than I had initially realized. After ten years of researching this I was able to publish the Preliminary Specification in December 2013.

As luck would have it producers fell into the same patterns of overproduction in the natural gas business around 2010. And they began the trip down the same rabbit hole a year ago for Oil. The issues that motivated me to act in 1991 to develop software are back and they may take as long as they did to resolve themselves as they did in the 1980’s and 1990’s. And as I recall that was a different time a different place and a different industry. As I have said rebalancing the market” is a blunt instrument and that applies to the experience in the conventional market. In the unconventional market it will never work. It was what seemed to be decades of low oil prices that plagued the industry before. Natural gas wasn’t as affected as there was the U.S. gas bubble and gas wasn’t used as much as it is today.

Can this industry stand to wait for a “market rebalancing” like last time? Of course not. The difficulty today is that we are not dealing with conventional reserves. We are dealing with the prolific nature of shale and the dramatic effect they have on every aspect of a producer. Higher costs. Greater reserves. High flush production. Higher operating costs. And longer life. A producer can go out and find a TCF of gas or a billion barrels of oil as easily as it was to generate one hundredth of the value of those reserves. And that is the prize, the reserves. However the high cost of the shale reserves dictate that you have to produce to pay for them. And so we get into the overproduction problem.

If we had a proper accounting at the Joint Operating Committee of the actual costs that it takes to produce. The revenues, less royalties, less operating costs, less actual overhead to manage the property and less an appropriate amortization of the costs of capital. And determined that only the properties that were profitable based on this accounting would produce. Then the producers overall revenues would not only be higher, all of their costs would be covered, and they would be profitable in their operations. Withholding production from the marketplace is the only way that the industry is going to stop the difficulties that it’s in. The solution is the Joint Operating Committee, if that means anything to you today. And we have the Preliminary Specification, the user community and service providers to help provide that.

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. 

Hedge Funds "Can't Miss"

The Wall Street Journal is reporting that hedge-fund and private-equity managers are caught in crude oil’s fall.

Hedge-fund and private-equity managers over the past year began piling into debt issued by troubled energy companies, hoping to profit off a reversal of oil’s slide. They raised billions of dollars for the effort, in many cases telling backers it was a once-in-a-generation chance to pounce. But crude has continued to fall, slamming the companies and many large investors who thought they had bought in near the bottom.

The problem is they didn’t consider the effect of shale based reserves in their calculations. Hedge funds were using history to determine what will happen in the future. Which is what made this a “can’t miss” investment. They need to consider what the effect that the shale reserves will have on bureaucratic behavior. Shale is prolific. It can overwhelm the marketplace with flush production. And there is a lot of shale properties. The behavior of the bureaucrat is that it will be someone else's problem. In this case the hedge fund investors.

“A lot of hot money chased into what we believe are insolvent companies at best,” said Paul Twitchell, partner at hedge-fund firm Whitebox Advisors LLC, which he said steered clear of the trade. “Bonds getting really cheap doesn’t mean they are a good buy.”

In March, Carlyle co-founder David Rubenstein said at a conference that he was looking to “buy now” on the theory that prices would rebound.

“People got crushed. They really got destroyed,” said Blackstone Group LP Chief Executive Officer Stephen Schwarzman

The bureaucrats problem today is that the losses being incurred by the hedge funds. The losses being incurred by private equity. The losses being incurred by the banks. The losses in the junk bond market. And the losses that are being incurred by the shareholders. Are forming the basis of a new history in which to be used when they determine how they will approach an investment in oil and gas in the future. The question I guess is who’s left? Grandma might have some money stuffed under her pillow. Outside of that everyone in terms of any type of classification of oil and gas investor, their toast. Burned at the stake. And roasted by these incompetent and self serving bureaucrats. Tell me honestly, looking at the situation in the industry today. Knowing what we know, would you stick around to try and fix this?

Oil and gas producers are now the proverbial junkie. Strung out and desperate for a fix. They will do anything including begging, borrowing and stealing to make their day better, man. They also have the financial health of what a junkie would have in terms of their personal health. Diseased and infected with limited life expectancy. The producers financial health was predicated on high levels of capital assets listed on the balance sheet. A reflection of their propensity and capability to spend money. A skill that everyone in the world has. And that is it. The assessment of performance over the past few years has never considered any of the costs of those capital assets because “those are sunk costs!” Well now the assessments of the value of those “sunk costs” is far below what they have been recorded at and the performance criteria will begin to look somewhat like it should have been for the past decade. Soon everyone will realize these bureaucrats have built a paper empire! An F- in terms of grade. After all what do you expect from a junkie, man?

This is the beginning of the end of the oil and gas industry as we currently know it. There is no hope for it when this level of damage has occurred. We are now breaching the natural gas storage capacity as we speak. Oil will soon do the same. Watch for sizable downward price adjustments based on the reduction in demand. The bureaucrats have their running shoes on and the door is open. People, Ideas & Objects, the user community and service providers will have to pick up the pieces I guess. And implement the Preliminary Specification without anyone responsible holding the fort in the meantime. Brilliant. One thing for certain, this is going to rekindle the confidence that hedge fund managers have in synthetic CDO’s.

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 Ultimate Doomsday Scenario

People, Ideas & Objects, our user community and service providers have a timely solution to the issues that the oil and gas industry faces. This week I have expressed my point of view regarding the scope and scale of the issues that the industry is facing. We’ll see the extent of the damage in the oil and gas producers these next few weeks. I expect people to be surprised at the extent of the damage that occurred in the third quarter. Producers are weak from a financial point of view. When they were told to build their balance sheets they expanded their asset base by spending more on capital expenditures. That is not what a firm does to build its balance sheet. Today the producers are asset heavy, heavily indebted, cashless, have negative working capital, no lines of credit, and no access to debt or equity. They, I think, are also operationally losing money if you consider the costs of the overheads they have to pay for. They are stuck with this poor financial performance that has also been jaded by the bureaucrats stiff arm towards the investor class over the past number of years. I can’t paint a more dire picture. Systemic and chronic overproduction is leading to a steady and further erosion of the commodity prices as inventories begin to breach their storage capacities and commodity prices begin to collapse completely.

The press have given the producers a pass based on the goodwill they had built up over the years. The bureaucrats have been spending this goodwill by stating they are making money and surviving these difficulties ok. This downturn will be devastating to the producers from the point of view of the structure and capabilities of the industry. A numb, mute and unthinking bureaucracy is about to be taken over by caretaker administrations that will appear to make the old bureaucrats dynamic. Those bureaucrats that are responsible will naturally exit the stage faster than you can believe. They’ve been lining their cribs for many years now so they’ll be ok. No one will be able to find them in the disaster that the industry will have become. For lack of a better analogy, this is what 2008 was for the banking industry.

Who wants to stick around to fix what is most likely unfixable. If it was fixable why would the producers, after almost six years of declining natural gas prices, be selling Marcellus Shale gas for $0.66. With the Marcellus region producing 28% of the U.S. natural gas this is not an immaterial point. There is no such thing as business as usual in oil and gas today. A failure has occurred that can not be handled by the status quo. The dynamic that can not be managed is shale based reservoirs and the abundance of supply that those reserves provide the oil and gas producer. Putting those reserves on the market only makes the situation worse and yet no one, not a single bureaucrat has called me to ask how they can get the price maker strategy of the decentralized production model operational in their shop. That commotion you hear is the rush to the exits!

What I need is my budget funded and I don’t expect it to come from the bureaucrats. They are conflicted and for all intents and purposes gone. Mentally and figuratively. The investors who have been betrayed by the bureaucrats will need to step up. That’s a highly charged sentence, even for me. I’ll have to write that down somewhere and keep it for my collection. It's true that the investors have been betrayed. No question. And it is the investors that must fix the situation as without them their will only be the government. And no one wants or needs that. And to fix the situation it is necessary to fund the Preliminary Specification and the user community. Then we will build the software necessary to implement the price maker strategy and turn the industry into a profitable, dynamic, innovative and accountable one. Imagine that.

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. 

A Bureaucrats Thoughts

What does a bureaucrat do before they skedaddle? That's the question of the day. If you had the power and control of the oil and gas industry. Saw that it was in the state that it was in, wouldn’t you do something to rectify the difficulties? Why do we get the cartoonish blank stare and blinking of the eyes from the bureaucrats instead of any action? Is it that they are waiting for the starter's pistol to begin their exit out the door? Blaming everyone else and cutting costs is only making the problems more difficult in the future. They're on autopilot. There is no rational thinking or solutions being discussed, or actions being taken anywhere in the industry. They are blind, deaf and dumb.

We’ve all had those jobs in our career that were, how would you say, not necessarily your favorite. But you pushed on through waiting for the day when you would be moved again into something more to your liking. In the meantime you had these tasks that you despised or had difficulty in fully comprehending. And there always seemed to be a few exceptions in those areas that made life a living hell. Over time they were unresolved in this job that you hated and they became what are known as the skeletons in your closet. No one knew about them and no one was going to know about them. You would just strategically leave them in the in-basket for the individual that followed you. Until then you looked for that other job, kept your mouth shut and fingers crossed.

That’s what's happening here. The problems in oil and gas are beyond the current bureaucracies capacity to deal with them. Today’s performance is the skeleton in the closet of all of the bureaucrats. They don’t want to deal with them, or anyone that has a solution, or anyone that wants to discuss them. “Please just go away.” They will say. We’ve all been there and understand the mental gridlock that this kind of situation creates. The problem is that this is a bit more than just a clerical error or processing problem. The entire industry is effectively being destroyed by the inability to act to rectify the problems in the business. Selling gas for $0.66 in the Marcellus region this past week is clear evidence that bureaucrats are operating on zero corrective capacity at this time.

Technology looks like a strong industry in which to move to. It also looks interesting. If the bureaucrat can push their resume out that way then maybe they can get a new job where no one knows their name. And then they can start with a fresh new slate and the freedom of a good night's sleep. When people ask why the oil and gas industry didn’t fix itself, the bureaucrat can respond by saying “that they did everything they could.” And off they’ll go. The good thing about Obamacare is that it has been great in terms of its demand for bureaucrats. So there’s another avenue to ply their trade.

So under this bureaucratic silence is a lot of paper being transmitted by these bureaucrats looking for the exits. Exactly “what difference does it make” to quote Hillary Clinton if they leave. They are just one individual. They’ll think they are too old and too tired to stick around and deal with the problems. Not only the problems that are pretty clear to everyone today. But the future ones like finding the people to run the industry. Encouraging investors to come invest. Or the dreaded search for service industry representatives. That will only make their jobs more difficult on an exponential basis. So it is best that they just blink and keep their mouths shut until they finish that fifth interview for that cool job in the technology industry, or the sixth interview in the health industry. Both of these industries seem to appreciate that oil and gas bureaucrats will work for so cheap.

This is called CYA in the bureaucratic handbook. You don't want to feel the full impact of the kick to the posterior so you get it covered. Looking at the calendar the time for accountability will begin with these third quarter reports, and anyone left in the industry in April 2016 are on their own. These are the thoughts of the bureaucrats who are in power and control of the industry. Expect to see many announce their retirement here in the next two weeks. That's because CYA implies cut and run.

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. 

How We Need To Be Structured

Any opinion about what the future oil and gas demands by consumers will be, might get you a cup of coffee. There are a wide range of scenarios including the prospect that electricity will fill batteries magically and we’ll use that as a replacement, to a doubling of the world consumption of oil and gas. Nonetheless it's fair to assume that the competitive differentiation of oil and gas will continue and therefore the demand for our unique products will remain for the rest of this century. Under any scenario that is plausible, the demands on oil and gas will be significant. I think it will be the most robust time in the industries history. We can approach the situation from a North American marketplace point of view and become the energy superpower that some have suggested. But not with the industry we currently have, run by these bureaucrats. They are not structured to succeed, organized, capitalized or staffed appropriately for the job.

Getting to the level necessary to approach the next 25 years will be difficult. How will they convince the capital markets that they can make money? Where have they been successful before? And who is prepared to operate these organizations for this challenging time? I’m sure this quarter's financial statements will provide many of the answers to these questions. I on the other hand propose a different approach. One that is different and more than capable of answering these questions today. The difficulty with my approach is that it eliminates the bureaucracy once we are finished with them. And that is a critical point. Once we are finished with them. We need them to keep the ship running while we are building the software and services to replace them. As it stands today the bureaucrats are not talking to us and are, whether they will admit it or not, going to skedaddle soon. Then we’ll all be in a pickle. But that’s the point as far as the bureaucrats are concerned. All they want is to send postcards from the tropics asking if we miss them yet. A more responsible approach would be to involve People, Ideas & Objects, the user community and service providers in the development of the Preliminary Specification. And then transition to it. But I don’t currently see that happening.

To answer the three questions that were asked at the beginning of this post. We will be able to convince the capital markets to invest in the oil and gas industry on the following basis. The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. This is at the core of the software, the user community and service providers and the structure that we put in place. If the property isn’t profitable, it doesn’t produce. Implementing a price maker strategy across the industry. We also recognize that past capital expenditures and future capital expenditures are not a sunk cost. We understand that they are a critical component in how a producer is evaluated in terms of performance. Therefore the determination of those profits will include the capital costs that have been incurred to date. Those assets that are sitting on the bloated balance sheets of the producers today. And we will include the future capital expenditures amortized on a rapid basis, within at least three years. This will provide a return on investment and return of capital that is necessary to instill the confidence in the investment community to invest the needed resources for the next 25 years.

We will need to provide a basis in which the differences in how we operate the industry will be different. There are few places in North America that the oil and gas industry operates that can be stated that are successful. They are engineering marvels and commercial failures. The need to address the past capital expenditures is one aspect. The other is to recognize that the way the business was done was not successful and that a new structure is to be put in place. That is the Preliminary Specification and the use of the Joint Operating Committee as the key organizational construct of the dynamic, innovative, successful, accountable and profitable oil and gas industry. Then with elements such as the decentralized production models price maker strategy, the structure will be in place for the industry to be successful.

The last question regarding who will operate this industry is a difficult one. Certainly the engineers and geologists who recently graduated from the universities might have an idea or two. They can be reached at the local Starbucks for comment. Or maybe the high school graduate who sees their cousin now working at the Starbucks might be convinced to be the one to lead the charge in oil and gas by following their cousins lead. Or maybe all those people who begged to be laid off and start their early retirement could show those two cousins how a real barista does it. The fact is the industry has done a god awful job in this area. They have been going “oh whoa is me” that no one wants to work in oil and gas in order to replace the soon to retire brain trust. The fact of the matter is the industry has always had a clearly identified issue burning in the background here. They’re just dumping gasoline on it right now.

And the service industry has had nothing but the full throttle or full brake being applied to them by the oil and gas producers. These violent cycles make it hard for them to manage their business. What it also does is make it very hard to innovate. As much as the bureaucrats like to take credit for the innovative ways of the industry. It's only after decades of “marketing” a new idea to the deadbeat bureaucrats that they finally try something like coil tubing or Packers Plus. As an alternative I propose a steady profitable operation over the decades to come which will help to smooth out the ridiculous manner in which the industry has been operated. The bureaucrats are fools in this area particularly. And the Preliminary Specification deals specifically with how these will be mitigated.

To listen to the bureaucrats talk about the issue of overproduction. It's the field service operations that need to be scaled back to solve the problem. And since that isn’t working they’ll now just lay off the head office staff instead. Our solution addresses the issue of overproduction. And this is how we’ll structure the industry for success. Capital can begin to reform on this basis and the people can be comfortable in knowing that dedicating their career to the industry is a possibility. Which is a novel thought I know.

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. 

Earning Season is Upon Us

It is this week that we will begin to see some of the producers report their earnings. Remember the line that will solicit our sympathies is “oh whoa is me.” There will be nowhere to hide the scope and scale of the difficulties producers will be reporting. The loss of any material hedging expired in June 2015 and it is believed that only 11% of production is currently hedged. If you were, or expect to be, laid off, have invested in these firms or are actively cannibalizing your service industry firm. Make sure you show a little sympathy for the bureaucrats who brought us to this difficult and unnecessary place.

There does not seem to be an end to the drop in commodity prices. Natural gas prices will see a significant step downwards towards the end of next week. That is when the natural gas storage facilities will be full and there will be no place to put the excess 14 - 15 bcf / day that is currently going into storage. The other aspect of natural gas prices is that the bureaucrats either felt embarrassed about the fact that they were praying for a cold winter a few years ago. Or maybe with all the work of putting the boat back into storage for the winter. They seem to have forgotten to pray for a cold winter. Whichever, it was recently noted that the long term forecast is for a very mild winter this year. Certainly won’t do anything for the demand of natural gas or its price.

When we see the financial reports for the third quarter I think people will be shocked that producers have been continuing on with such poor financial performance. Why would you continue to produce if you were losing such large amounts of money? There won’t be any earnings. There won’t be any positive margins. There never has been positive cash flows from operations. The producers will have been burning cash in the process of producing and even that didn’t stop them from continuing. And don’t expect them to change. What we will see is a number of producers cut the staff right to the bone due to the lack of cash. Even when these firms were “healthy” they had no working capital. The industry for the last ten years has lived off OPM. Other people's money. And there is none of that anywhere. The companies in other industries that have already reported in the third quarter of 2015. Who were losing money have been dealt with very harshly by the stock markets. The oil and gas stocks are rallying in anticipation of good news, it therefore might be a good time to sell.

The concept of an industry raising its own cash from operations to fuel its capital expenditures is so foreign a concept that we won’t even go there. The idea is to produce. And do we ever have a lot of that. To offer an idea that would mitigate the issues that the industry faces is the wrong thing to do. Trust me I know. These bureaucrats have it well in hand. Is it surprising to anyone that I have not received one call from any of the bureaucrats? They know what they’re doing and they will be the ones to ride off into the sunset. Remember what we stated yesterday, bureaucracies do fail and when they do, bureaucrats skedaddle. An element of moral hazard at play.

The trick is not to think of the loss of these shale reserves in terms of the waste and destruction of good valuable property. $0.66 that the Marcellus producers were getting for their gas last week is of value! Who’s to say that that’s wrong? The decline in commodity prices have happened before and the bureaucrats have been able to turn things around by doing nothing before. So have some faith!

On top of all these self inflicted difficulties it seems that the economy is taking another dip into the recession category again. People are seeing that interest rates are going to go up in the next few years and are concerned with how they will pay for their debt service costs. Therefore they are starting to hoard cash. Here’s a tip if it ever happens again. If someone offers you a half million dollar mortgage make sure you run in the other direction as fast as you can. In Calgary there are probably about a million mortgages of that size. Just a thought. The idea since 2008 should have been to pay the debt off, not acquire more debt. The point here is that the demand for oil and gas, on a global basis, could decline if we do fall into a recession. It just gets better and better for these bureaucrats.

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. 

Langlois on Chandler

I went through some of the earlier posts on this blog looking for a reference to Alfred Chandler’s comments about how the bureaucracy had failed before. It was through a couple of posts that I was able to pick up a couple of interesting quotes from Professor Richard Langlois who has made Chandler a key area of his study. I can remember those days doing the ten years of research that are codified in the Preliminary Specification. I nearly broke my brain, some may think I did. Whichever the case, the work is done and the product can build value for the industry, the people that work in the industry and society in general.

The references for today come from Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.” From it I summarize the process of how a different kind of failure could occur in the oil and gas industry today.

• Management have little to no stake in the producer firms. 
• If a crisis were to strike a firm, the management would resume elsewhere. 
• It is the investor and debt holders who would shoulder the costs.
• Management currently hold the reigns, and are mindful that their options may lay elsewhere. 
• Ownership, in the same fashion as the Merchants will need to start over. 
• Starting over begins with supporting People, Ideas & Objects, our user community and the service providers.
• Chandler noted that management have failed before. 
• During the great depression. 
• A time when government had to increase its involvement in the economy.
• Management may not see the more global picture, and therefore, may fail again.

Today there is a clear global picture. Shale based reserves have changed the dynamic in the industry. The global picture can be seen by everyone. What is unknown is why the producers don’t act to mitigate the overproduction in the commodity marketplace. I have asserted repeatedly that the ability for producers to know the actual costs of any property is unavailable to them. Therefore they can’t answer the question of which properties to shut-in. They also have to cover off the costs of their high overheads. Overheads of approximately 25% of revenues that would seem disproportionate at anything other than full production. So they produce. See if you can spot the similarity in what Professor Langlois notes here.

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron ... called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

It is here that Langlois best describes the futility of our current pursuit of “best practices.” The inability to know the costs, and particularly the opportunity costs, is also a prevalent issue with the producers. These producers opportunity costs are our value proposition. The loss in value of the oil and gas commodity prices as a result of overproduction and the inability to do anything about it. So what can we do about it and how can things change. And it is on this point that I think history will provide us with the best answer.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

I see this as a strong endorsement of this community to work within the Preliminary Specification and build out the software necessary to run the industry. This is how it has been done in the past and will be done in the future. I am not aware of any other ideas that exist in the marketplace today. Based on the amount of time that I had spent developing the Preliminary Specification, do we have the time to take any new ideas to the level that the Preliminary Specification exists today?

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. 

Third Friday Off

A Sad State of Affairs

Natural gas prices in the Marcellus region reached as low as $0.66 last week. A clear indication to anyone, that after almost six years of very low natural gas prices, bureaucrats won’t, can’t and will not ever change. The Marcellus region represents 28% of all of the natural gas that is produced in the U.S. What should also be clear to the people who are being laid off, the investors who were told that gas had value, and the service industry that is being forced to work for their meals is that they are not the concern of the bureaucrats. They quite obviously could care less. What is this mindset of a bureaucrat to produce at any price? Certainly there are hedges and other financial devices used by bureaucrats. However, look at the business, it is suffering from a small amount of overproduction that is causing massive price declines! Dumping product onto the market at $0.66 is what a fool would do.

What is needed is the change to the Preliminary Specifications decentralized production model. Enabling the price maker strategy. This is the only way in which the industry is going to get out of this difficulty. It may be radical surgery, but the cancer that is eating at the industry is certain to kill it. After six years of overproduction in natural gas. Where there is never any consideration that the industry is a price maker or a price taker. We find the producers dumping 28% of the natural gas. That’s 20 bcf per day on to the marketplace for as little as $0.66. What do we expect to happen in the future that will correct this situation? Why will this situation rectify itself? Why are we sitting around and writing in the quarterly reports “oh whoa is me?”

The plan is to wait until the reserves that the investors paid so dearly for are used up and dumped onto the market at $0.66. Then a gas shortage will occur and the bureaucrats will have their heyday once again where prices would skyrocket to who knows how high. This is called “rebalancing the market” by cutting capital expenditures. The most blunt instrument known to mankind. Its production that’s the problem, not the level of field activity. When natural gas prices skyrocket in this scenario. It will be “oh whoa is me” that the service industry is being greedy and lazy. That is both of them, because that’s all that will be left of the entire industry by then. And that they can’t find any engineers or geologists to run the industry. “Oh whoa is me.”

It’s almost a cycle. Predictable and automatic. The problem is the extremes are becoming more and more acute. Maybe I’m wrong but I don’t think we can have an industry that is this important to our society bouncing being the extremes of abundance and rationing. What we do know is the response to higher commodity prices will be muted due to the poor financial capabilities of the producers and their exceptional record with the investor class. As a result prices will go ever higher to the point where you’d be crazy not to be invested in oil and gas. This is when the bureaucrats can begin pouring the foundations for the west wing of their cabins. I wonder what I’ll be doing?

As a point of clarity. The other day we discussed how the surplus capacity costs of the producer weighs it down financially in the current high throughput production model. Citing the Nissan case as an example. Some people have asked why this doesn't apply in the People, Ideas & Objects Preliminary Specifications decentralized production model. It is because the costs of administration and accounting will have shifted from the oil and gas industry to the new sub-industry we call the service providers. It will be the service providers who will shoulder the administration and accounting costs of any shut in production. And will understand that at any time their revenue streams may be cut by 15% as a result of shut-in production. As a result they will be able to control those costs. This providing oil and gas producers with the capability to be able to control their administration and accounting costs without having to lay people off.

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.