Shale is Viable

One of the falsehoods that the bureaucrats have been hiding behind is their bloated balance sheets of the producer firms. People, Ideas & Objects have been hammering on the oversized balance sheets for a number of years and have taken significant flak from the bureaucrats, with the requisite number of giggles. If I lined up all the bureaucrats that laughed at me in the past ten years I could walk across the pacific. What they are finding here today, in this wonderful financial environment that they’ve created, is that their balance sheets, the things they thought were so magnificent and significant, are really quite useless. And in most cases, with the large asset write downs that some producers are getting out of the way before the big rush at year end, turning out to be the proof that the past decade has been a complete waste of time and money in terms of their administrations. Who would've thought something like this would have happened? Giggle.

The phenomenon of the bloated balance sheets has shown that the bureaucrats have obtained the same characteristics of each and every twelve year old girl. They can spend money. If you take the “profits” that they may have reported in the past ten years and look at the size of the write downs that are to be taken for fiscal 2015 they come to a handsome negative number. If you take the current working capital of the industry, outside of the integrated producers, you have a handsome negative number. This does not mean that the past ten years have been for nothing. There are the many handsome cabins and boats that the bureaucrats have. And an assortment of other luxuries. The fact of the matter is the losses that are being realized on the current production, I am talking about the gross margins of the business, another handsome number that is negative, there is nothing of value that is or has been generated in this business.

What good did bloated balance sheets ever provide any producer? Evidence of the ability to spend money. Check. The evaluation of the bureaucrats performance is what accounting is all about. In oil and gas it has become fashionable not to consider “your sunk costs.” It is this thinking that has lead to the overproduction problem. If everyone is evaluated only on the gross margin of the business then everyone is going to rush in to invest. Overinvestment and overspending lead to overproduction. In the past ten years no one has considered the costs of the capital that went into exploration and development because those were “sunk costs.” Making an evaluation on this basis is what a fool would do. What the producers did on top of this foolish behaviour is they capitalized everything that moved. Generally 80% of the overhead of the producers General & Administrative costs are also capitalized. PennWest even tried to capitalize its royalties. Which shows the systemic desire to capitalize as much as possible.

The appropriate position or attitude would be / is to remove these capital costs from the balance sheet and have them hit the income statement as quickly as possible. Evaluate the performance of the management on a reasonable, going concern basis. That way the performance can be evaluated appropriately and the future decisions made on the basis of actual performance. Oil and gas producers have been reporting bloated profits because they never accounted for the cost of capital by leaving all of these costs on the balance sheets. The limit to the amount that they could record as assets was, and is, the sum total of all of their reserves times the current oil and gas price. Which is the sum total of all future revenues! Ludicrous. As it stands today with the write downs that are being realized in the industry. The balance sheets will still be bloated because they will still represent the sum of all of the reserves times the current oil and gas prices. Ludicrous, or did I say that. The fact of the matter is the sum total of the value of the entire industry is south of zero. It loses money therefore you’d have to pay to get rid of it.

If producers realized the costs of the capital assets on a reasonable performance basis, these capital costs would be replaced on the balance sheet by other asset types. Asset types that include cash, accounts receivable, short term investments and other working capital items. That is because they would have had to sell their products for a profit, which generates cash. All that the industry has done in the past ten years is subsidize the consumer of oil and gas by fleecing the investor.

This hasn’t been a business since the 1970’s when the SEC approved Full Cost accounting. This is the net result of that decision, financial armageddon and systemic overproduction. In defence of the SEC they define the outer limits of what is acceptable. The auditors should have said that it is unnecessary for the entire industry to push the outer edge every year. Pick and choose your own culprit from these three groups.

What the Preliminary Specification, our user community and the service providers provide the oil and gas industry today is a go forward basis in which to operate the industry. One that is reasonable and evaluates the performance of the producer in an effective manner. Without the People, Ideas & Objects and our associated communities the oil and gas industry will continue on in this spending exercise with the same discipline as any twelve year old girl. Shale can be profitable, but only with our system in place. The industry therefore has to choose, and quickly, because in six months they will otherwise be out of business. Do they have a sustainable plan to operate the industry on a go forward basis? With the Preliminary Specification, our user community and service providers that’s a definite yes. But they’ll need to decide, and soon. If they don’t have a plan in place in six months, fill in your own blank here...

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 More Cold Hard Facts

It is the user’s, our service providers and our developers who provide the oil and gas producers with the most profitable means of oil and gas operations. It may be altruistic to state this, however I see it as a clear division of labor. Producers will find and produce oil and gas. And we will make the producers profitable. Without us, there is this, this malaise and bankrupt style of operation that has been going on in natural gas for six years and in oil for the past year. Maybe bureaucrats will figure out what to do. I’m banking on the fact that bureaucrats have never been able to change their stripes, like a Tiger it fails every time. I expect them to hightail it out of their positions when the heat gets too much for them to handle. That is their history, look it up in the history books. Creative destruction is the process that is well under way in oil and gas. If producers don’t have a viable plan in place by the time they run out of money, about six months for most producers, then their toast.

So it's goodbye bureaucrats, hello users and service providers. We’ll be taking over soon, as soon as we build our organizations and applications. Before we can do that however we need to secure our budget. You would think with the state of affairs that we would be able to do that! No, bureaucrats are stubborn people. It's not their money their burning by incurring these losses and it's not their profits that are in jeopardy in the future.

I also expect that when we get to the point where we take over from the bureaucrats. They haven’t trashed the place like some adolescent punk rockers. I expect the place to be clean and neat, the floor swept and mopped, the garbage taken out and the place in as good of shape as is possible. The bureaucrats are failing in their responsibility to appropriately manage the business, that doesn’t mean that they can just trash the place and leave a mess behind for us to clean up.

I’ve heard a number of times now that what the industry needs is a vision of how to deal with the difficulties that it's in. And it has one in the Preliminary Specification. If that is inadequate then you can start the process and end up with a workable model in about 25 years. I wish you luck and hope you enjoy the ride. It truly is an adventure. I think that whoever invented copyright law was a genius of the highest order. But that’s besides the point. In addition to leaving the place in good condition once the bureaucrats leave I expect even more from the producers. Let's assume after all the noise and argument, the People, Ideas & Objects Preliminary Specification fails. I’m sitting on an island in the pacific drinking pina coladas having the time of my life. With the configuration of the budget I can guarantee that. The question that needs to be asked is what will the producers do then. It is this opportunity that they have today, the Preliminary Specification, user community and service providers that the producers need to be involved in. Don’t expect one individual to be the solution to all of the difficulties. I’ve done my hard work, the producers hard work is to come.

And that hard work will be working with our user community participants and detailing what it is you need in your producer organizations now and in the future. Don’t expect someone to walk up and provide you with a custom tailored suit without ever seeing you. The producers direct participation with our user community, the only manner that you have to deal with your needs, is the key to the success of your organization in the future and the success of People, Ideas & Objects Preliminary Specification.

This is the structure of how successful systems are developed, and how successful organizations are managed in the 21st century. The producers have trillions of dollars on the line here. If they expect someone else to deliver the solution to them. A solution that meets their unique organizational needs and delivers that value without their input. Then I have some property in Florida that I’d like to sell you.

The only thing worth owning here in the 21st century is Intellectual Property, or a license to Intellectual Property or working for someone who has Intellectual Property or a license. It’s not enough to own the oil and gas asset anymore. You have to own the oil and gas asset and have access to the software and user community that makes the oil and gas asset profitable. Now and in the future. This is the new reality and the source of the difficulties that I have had in delivering People, Ideas & Objects to the marketplace. The bureaucrats could ignore me before, but now they can’t because they messed it up so bad. Now the search for a vision usually takes what is available in the marketplace. Anybody see any other viable business models floating around?

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's the Weather?

I think I’m on record to state that all is well in the general economy and we’ll have smooth sailing from here on. That 2008’s financial crisis shook out the demons that were present and we have a clean slate once the Fed and its cohorts begin to remove their quantitative easing initiatives. Here’s some bad news for the oil and gas bureaucrats in the industry. I’ve changed my mind in terms of the overall general economy. I think that the interventions by the Fed and others have to cease as soon as possible in order to put some reality back into the financial markets, and health into the overall economy. Zero interest rate policies are for crisis, not for the day to day economy. We have gone on too long waiting for the Fed to act to raise interest rates that no one believes they will. And when they do act it will be so small that the effect will be minimal, or they will only do one rate increase and be done. I think I see the effect of all of this quantitative easing starting to create the difficulties that we would expect to see in such a false economy.

What Ben Bernanke did in 2008 and subsequently was needed and brilliant in my opinion. The continuation of that however beyond 2011 has been unnecessary and damaging. I would go on to say that it might be that the Fed has been politically motivated in continuing without raising interest rates for so long. Whichever, the time has passed and we need to get to a normal economic environment as quickly as possible.

The thing that changed my mind is this short video from Bloomberg. We’ve all known about the events that are being discussed in the video however, I didn’t realize the extent, frequency and significance of each of these. Obviously the transition from the current false economy to the one that we need to get to is not going to be as smooth and as natural as we would think. If there is this much turmoil in commodity, equity, bond and currency markets, and it has been building for the past five years, there will be a day of reckoning. I think the day of reckoning will be triggered by the inaction of the Fed to make the necessary changes to increase interest rates. They say that they will be making the change in December, but they have been saying they were making the change for years. And when the time does come they make up an excuse not to act.

The great depression was, in most of the history books, a result of a failure of government. We have had a lot of change in the past seven years. None of it positive in my opinion. The New York Attorney General is said to have launched an investigation into Exxon's climate change practices. Essentially looking to prosecute it for what it knew and what it believed. Students at Yale are protesting free speech and dedicated people are thrown out of their jobs for not acting decisively enough in Missouri. Hope and Change successfully implemented. The failure of the Fed to have acted in the objective manner that is required has been questioned by many people. I can’t be the only one looking at the United States with a curious look on their face. If a failure of government were to occur, in my opinion, the federal government of the United States would be my choice as the prime candidate.

We need to focus on the elements that are important to our future. Ensuring that society is provided with the energy that they demand. The only way to do that is to have a healthy and profitable oil and gas industry. What we have today is at least ten years away from being in the position of contemplating that. Thank your bureaucrat for that. If we have a downturn as a result of the disruptions in the commodity, equity, bond and currency markets. What else is there? It won’t be just the oil and gas industry in need of a fix. We’ll be starting over from an economic base that is at a pretty low level of economic operations. Energy will be how we continue on. There is a lot of pain being experienced in the oil and gas industry today. People are paying the cost for the inaction of the bureaucrats regarding the overproduction of the commodities. As bad as this storm is, and it is the worst storm we have experienced in oil and gas. I think the forecast is for even worse weather.

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. 

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.