Dead Cat Bounce

In an industry that is as capital intensive as the oil and gas industry is. Where all of the costs are in the capital costs of drilling, completion and equipping of a well. Where the monthly costs to operate outside of the royalties are minimal. Isn’t it odd that the bureaucrats choose to preclude the capital costs from the accounting of their performance. “Those are the sunk costs, we don’t consider those in calculating our costs to produce.” When senior intermediates like Devon Energy are depleting their sky high capital costs over the course of 13 years. You see the extent of the game that is being played in the industry. It is elementary accounting that you let your costs flow to the income statement. It’s how you recover the capital that you incurred when you spent the money. Are there no accountants employed within those vast layers of bureaucrats?

Oil prices rebound on speculation that some countries would freeze their production levels at the current output. I think this has led to the speculators covering their shorts. But we’ll see in the next few weeks what the market has in store. Mark me down as expecting to see further erosion in the price of oil. Why so pessimistic? Have you seen the price of natural gas. Into the $1.60’s this week, the sixth year of systemic overproduction. We went through a period of time in the 1980’s and 1990’s when there was chronic overproduction. All that was needed was for each producer to reduce some of their production in order to increase the price. It never happened and they all kept producing at full capacity year after year. Now we see the same phenomenon happening, if only they cut global supply by 2% they would realize an $70 increase in price, cover their costs and provide their shareholders with a return. Which as we calculated, is what is necessary to earn a profit. Now we have the overproduction phenomenon again, but with the added excitement of shale based reservoirs.

What is needed is for the industry to come clean on its accounting. What has gone on in the past has destroyed too much. And it is here that I blame the bureaucrats 100%. So much is being destroyed and we are seeing the irrational decisions of people such as Aubrey McClendon. I have to ask what would have happened if he had the Preliminary Specification operational during his tenure at Chesapeake? That is what I think we should look forward to in the next 25 years when people like him are able to do the building of the industry. And do so in a manner that is properly managed. Not one that is summarily destroyed by an uncaring, self interested bureaucracy.

I don’t hold out any change in the status of the industry. The bureaucrats are fine as they are. There’s no need to make any changes or to disrupt their lives in the downturn that we’re in. This downturn is being experienced by the shareholders, the bankers and the people who do the work. Cutting to the core of the organization leaves the bureaucrats in place and able to continue their lives as long as they maintain control. Who is going to make that change? A blogger? Which is what they have effectively reduced this initiative too.

I will be taking this next week off and will return on March 14, 2016.

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. 

Corrupt Accounting Practices Part III

We are left with an accounting of the costs of production and royalties in determining what the actual costs of production are for the oil and gas industry. These costs should be relatively straightforward and present no difficulty in determining the final number. We will then summarize the total costs of production on a boe basis. Beginning with the production costs, we’ll keep with the information that we used in the overhead and capital calculations, Devon Energy’s 2015 report.

For 2015 we have the Lease Operating Expenses and Production and Property Taxes that total $2.492 billion. These cost do not present any issues as they are all expensed in the current period and therefore reporting would not change under the Preliminary Specification. The calculation would therefore be to allocate these across the throughput of the company for the fiscal year. Devon produced 571,000 barrel / day and therefore these costs are $11.96 / barrel of oil equivalent.

Royalties are a bit of a difficult calculation to undertake. Most, if not all producers report their production as their share only. Royalties are the compensation paid in order to earn the title to the products produced. They are therefore in theory never the producers products and to report them as their products is to overstate their revenues. Therefore, in order to determine what the cost per barrel is we’ll have to calculate the royalties that were paid. There are two ways of doing this. I am going to take it from our cost point of view because we are in essence determining what the producer needs in terms of price in order to cover their costs. Therefore the costs to produce today consist of the overhead of $11.10, the capital $49.71, and the operating costs of $11.96. These total $72.77.

To impute a fair and reasonable royalty I’ll use what I think is an average industry value that is reasonable for both oil and gas. That is 18% royalties on all of the production. Therefore the prices needed to generate a 10% profit would be $101.05. If Devon were using the Preliminary Specifications price maker strategy they would immediately shut-in all of their production. As would every other North American producer. Which would lead to the solution to the problem. Then as the prices rose to around $80.00 they could start to bring their lower cost production back on stream. This is an extreme example that I am suggesting here. I only suggest such an extreme example to counter the extreme example that the producers chose to do when they mindlessly produce oil at $30.00 / barrel.

If your tactics are to produce to cover your cash costs then you will continue to produce no matter how much it costs you, and you will continue to do so for as long as you remain in control. There are other motivations that are in place that are leading the bureaucrats to continue to produce at these prices. And I think we have covered that topic. “Recycle costs” is the name of the game and it is played by determining what the price of oil is. Asking what cost would be necessary to be profitable at that price, and then stating that that is your cost of production. The significance behind the recycle costs is that the use of accountants, historical accounting figures and logic are not the necessary ingredients. You can make up the number that you need no matter what the price of oil or natural gas is. When someone asks you how you reduced your costs in such a dramatic way, in a capital intensive industry, that is based on historical accounting, tell them that you have been innovative in the field! There is a reason that this series has been entitled corrupt accounting practices. People generally go to jail for these kinds of comments and slights of hand. Just one mans opinion.

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. 

Corrupt Accounting Practices Part II

In the second part of this series we want to determine what the capital expenditures would be for a producer. Yesterday we determined that the payroll costs of a producer totalled $11.10 / bbl. It will be through this series that we’ll determine what the actual costs are to produce a barrel of oil in the current exploration and development environment. If we look at Devon, we need to determine a reasonable capital cost per barrel of oil produced for the 2015 fiscal year. We are not going to apply any ceiling test or incur any impairment of the assets. We’ll leave the balance of the assets as they were. However, we’ll look critically at the two components of the capital costs. The first being the capital expenditures in the current year. And secondly the amount of depletion recorded in the normal environment. We’ll assess these values, based on the asset balances, on a more reasonable basis to determine what I would, and I think most investors would determine to be a reasonable method of depletion.

When you capitalize everything under the sun, you significantly reduce the capital cost per barrel of oil. My thesis has been that the annual stock offering of each producer has subsidized the consumers of energy through this mechanism. The investor believing that the producer is growing their balance sheet by building value and reporting profits based on little to no costs being recognized, has distorted the actual costs of the industry. Only now after chronic, significant and unrelenting overproduction brought about by over investment do we see the extent of the performance of the oil and gas producer. The accounting, only now, seeks to remedy, in a single charge to the income statement, that which it should have done more appropriately each fiscal year before. Recognizing the actual cost of oil and gas exploration and production.

If the producers did recognize the actual capital costs of each barrel of oil in the appropriate manner these costs would have flowed off of the balance sheet onto the income statement. It would have been at this point that the producer would have been able to report a profit or loss and the investor could assess the capabilities of the producer's talents. Instead nothing was recognized, and any revenue was also essentially reflected as a profit. This distortion worked against the producer’s best interests. If they were recognizing their capital costs and reporting profits they would be realizing the return of their capital in the form of tax free cash from the prices they were charging the consumer. Generating the money needed to invest further in their business. Ceasing to issue stock annually to raise the capital expenditure program would also cease the chronic dilution of the investor base. This never happened, and with the overproduction, the prices were never high enough to truly make the industry profitable other than through convoluted accounting.

If we look at Devon Energy we see that they recorded capital expenditures of $6.324 billion and depletion of $3.129 billion. We need to reduce the capital expenditures by $1.2 billion for the recognition that it was G&A in yesterday's calculation of the $11.10 / bbl making it $5.124 billion. Before we make any calculations I want to question the substance of the depletion number and determine if it adequately captures the true costs of the production that year. The net capital recorded on the balance sheet sits at $36.296 billion as of December 31, 2014. Adding the 2015 capital expenditures the total becomes $41.420 billion This represents approximately 7.7 times the 2015 revenues. A high number. However, Devon is only depleting their capital costs by $3.129 billion or over 13.24 years. An even higher number. Again the question is why are we harbouring these costs for this period of time. Let them flow to the income statement so the cash that has been incurred to develop them can be retrieved. Are these precious works of art that must be kept for ever?

Let’s therefore reduce the amortization of the capital costs from 13.24 years down to 4 then the depletion for 2015 would therefore be $10.355 billion. Now we need to determine what the throughput of the organization was for the year and determine what the capital costs were for each barrel that Devon produced. That was 571,000 boe / day. Therefore the capital costs per barrel is $49.71. Now those that might find this calculation to be unreasonable may want to recall that Devon reported a net loss of $14.4 billion in 2015. Which is a net loss of $69.09 per barrel of oil produced. The key difference is my method would produce the same results for at least the next four years. Probably for all of the future years based on the level of capital expenditures in the current year. Whereas the actual 2015 loss is once in a generational accounting. And with the price maker strategy of the Preliminary Specification, prices of the produced products would exceed their costs and these capital costs per barrel would be returning to the producer in the form of cash. So we should really state that the company would have a cash balance at the end of 2015 of $10.355 billion in incremental cash. What do you know, a business! Wait, $49.71 plus $11.10 plus more costs to come, $30.00 oil price, maybe not so much of a business after all.

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

Corrupt Accounting Practices Part I

When there’s distress in a business or an industry why is it that the accounting always seem’s to be in question. Up until now the accounting these producers had been putting out was accepted as fact. I want to kick off the discussion here for the next few months about how the accounting in oil and gas is really a pile of s___. I have been barking for a number of years about bloated balance sheets in the industry. What we have today with Devon, Chesapeake and Apache are losses that are essentially saying, “everything that we have been doing these past decades has been a fraud.” You thought you were investing in a viable going concern, that just hasn’t been true. This post will help to clarify how I see the situation and add a little credibility to my past arguments about capitalization of assets in oil and gas.

If we look at Devon, Chesapeake and Apache they are each recording G&A expenses that are 4 - 17% of revenues. The first question we have is if the G&A is this low why lay anyone off? If you slash half your staff you’ll save the shareholders 2- 8% of the revenues. Is this a worthwhile exercise when you're recording $23.1 billion in losses for 2015? The G&A number on the financial statements is the residual number after the majority, and I do mean majority, has been capitalized to the balance sheet. For whose purpose is this slight of hand being developed for? What is the objective in capitalizing G&A and why, in most producer cases, is it 75 - 80% of the total G&A that is capitalized? Competitive pressures? I think the producers need to come up with a better reason here.

If we look at the Devon text on page 3 we find that they are looking to further refine their G&A and operations staff in the coming year.

Devon’s workforce reduction program, which includes G&A as well as operating personnel, will decrease Devon’s employee count by approximately 20 percent in the first quarter of 2016, bringing the total workforce reduction to more than 25 percent over the past 12 months. These workforce and non-personnel related cost reductions are expected to decrease G&A costs by approximately $400 million to $500 million on an annual basis, exclusive of reorganization charges, and are designed to maintain capacity to respond appropriately to increased activity levels when the commodity price environment improves. 

I read this as saying Devon’s G&A costs, including operating personnel, could be as high as $2 billion in total. No wonder their balance sheet was so big. The reported G&A expense of Devon was the 17% factor and was $847 million. Therefore we can impute that $2 billion would be approximately (I’m using only their oil and gas revenues) 37% of the revenue going to G&A in operating staff and overhead items for 2015. These are the cash outlays that Devon has to make. If we use the 37% to determine what the “cash costs” are for “overhead, operating staff, administration and accounting” you would come to .37 x $30 / bbl or $11.10 bbl. We’ll take that number from this point forward, it is much lower than my original analysis that showed $15 to 18.00. However comparing my number to the $1 - 2 that most producers claim, I’m at least playing within the city that has a ball park.

The culture within the industry is that everything that moves is capitalized to the balance sheet for eternity. The outer limit of what is acceptable is the value of your oil and gas reserves times the price of the commodities at year end. Which at any end of the year period is going to represent the total gross revenue that the company will ever achieve. The write downs that are causing the $15 to $23 billion in losses is so that the producers can fit within their total reserves times the price of the commodities at year end. So the company is still valued at the gross revenues of what the company will ever receive, it's lost up to $23 billion, it's worth nothing, produces no value and has no cash. Once again I have to ask where do I invest? Encana which now has negative $202 million in retained earnings. Has the audacity to keep $2.79 billion in Goodwill on the balance sheet! What Goodwill? Write this Goodwill off and report the proper $2.992 in negative retained earnings.

The argument might be that the situation in oil and gas is the commodity prices are low and that is creating the desperate situation. And that is true, the oil and gas industry is a price maker and the bureaucrats are making these prices. It is also the reason that I’ve been working to get them to change to avoid this scenario that they’re in. If they had employed reasonable accounting principles of capitalization over the past few decades these producers would have gone out of business long ago. They would have been forced to account for their performance within the fiscal years they were spending like drunken sailors. The SEC defines the outer limit of what is acceptable. It does not mean that each and every producer reach that limit each and every fiscal year.

If we wait until 2021 the market will have rebalanced and the inventories will have been drawn down. That assumes that you're believing this story and keeping these corrupt crooks in place! I have a vested interest in promoting the Preliminary Specification. Which I have been doing for as long as these people have been destroying the industry, which is a long time now. I feel very good about the work that I have done in the past decades. I can say that I did what I thought was right and necessary, and tried to make a difference. But I can also say thankfully, that this lot kicked me out of the industry in August of 2003 and took me to the woodshed because of my ideas. No wonder, they’ve been conducting themselves in ways that I would not have been part of.

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. 

Choices to Make

The alternatives could not be more stark. Stick with the bureaucrats and live in a mushy, blah day to day existence based on the producer's cash balance, for the rest of eternity it would seem. Or begin the developments of the People, Ideas & Objects Preliminary Specification, user community and service providers which will set the industry on a prosperous and dynamic course for the next 25 years. We have laid out the vision of how this will happen in the Preliminary Specification. The business models, organizational structure and strategies that will be used are included. The implementation through the user community to fully define what it is that is needed for them, as service providers, to ensure that their producer clients are provided with the most profitable means of oil and gas operations is clearly defined there. Our budget defines how we will build our systems and the services needed to operate the industry on this revised methodology. It’s all right there in People, Ideas & Objects.

So what’s with the name? People, Ideas & Objects is derivative of Professor Paul Romer’s new growth theory. It used to be that if you wanted the economy to grow you needed to invest in expanding the base of the economy in three areas. In transportation, finance or communications. New growth theory suggests that this has changed and is now based on People, Ideas and Things. Since we are object based developers we simply changed things to objects. How do we expand the economic output of the oil and gas industry? Not with the bureaucrats I can assure you. What it is they’re doing I am not sure of, but it doesn’t seem to me to be anything that is positive. It seems to me to be self-interest that is driving them and in turn destroying the industry at a rapid rate. The need for change today is significant, the industry can not withstand too much more of this destruction. It needs to begin addressing its long term needs and building for that. Therefore it needs to reorganize and start that process fresh.

When I first published our budget in August of 2014 the bureaucrats laughed. It was well before the decline in oil prices and they only saw the difficulties in the natural gas side of the business. They also assumed that those would subside once the “market rebalanced” itself. The scope and scale of our budget is the most significant software development that has been undertaken in the oil and gas industry, and that is why it’s so costly. When I proposed it I knew it was controversial for those reasons, however, solving the issues in the industry can’t be undertaken with a shoestring budget. I think my approach, as represented in my budget accurately captures the scope and scale of the issue that we all face today. I’m sure the bureaucrats would have been happier with a $6 million budget, that would be more in line with their level of thinking.

Managing expectations and setting timelines that are well into the future are the only things that the bureaucrats are able to do at this time. To discuss the issue and any resolution to them would have to consider their elephant in the room, People, Ideas & Objects. And they can’t do that. It’s suicide for them. It’s as if they’re taxi dispatchers in the world of Uber. They’re redundant. So they will hang on saying and doing nothing for as long as they can before someone comes along and kicks them out of their chairs. Until then they still get paid and can talk about “market rebalancing,” thinking that people are buying the story.

We’re at a critical time in our evolution as a solution to the industry. I can look back at the work that I have done and know that I wasn’t wasting my time. We have a bright future ahead of us in the oil and gas industry. The probability of success of the People, Ideas & Objects initiative, our user community and service providers is on the verge of being 100%. We have some very difficult work ahead of us. Each of us has the opportunity to contribute to solving this issue for the industry. And in the process establishing for yourselves a valuable position as a member of the user community with ownership in a service provider that will become a significant part of the new oil and gas industries infrastructure. An opportunity in a lifetime really, and I think some of the best work that we’ve ever had the opportunity to get our hands on.

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 Timing of Our Revolution Has Been Set

The International Energy Agency. That’s the IEA, not the EIA which is the U.S. Energy Information Administration. States were all good. That is the rebalancing will be completed in 2017 and a “price spike” will occur in 2021. They assume that between 2017 and 2021 the excess inventories that have been built up until 2017 will have been worked off by then. What can I say, the bureaucrats are correct. Sitting around doing nothing is the correct operating procedure after all. I’ll make sure that I delete this blog and the Preliminary Specification this weekend. Can you imagine the monumental mistake that would have been if we had secured our budget and completed the development and reorganization of the industry by 2021? It would have been a wasted effort! Oil leaped 8.1% on this IEA news!

What did I say yesterday about short attention spans? We are dealing with the reactions of an entire industry that is watching the price of oil at each and every minute of the day. Obtaining relief that all will be well when the slightest uptick occurs. And the massive depression that sets in when the price inevitably goes down further than it had before. It's good that we have the IEA to be able to know what the future has in store for us. I was also pleased to see Deloitte & Touche came out with a paper that summarised the strategies that a producer can employ in these difficult times. They actually had five different scenarios in which to follow, all of them being just a rehash of the status quo.

But wait a minute. Doesn’t the IEA’s projections assume that the industry has the financial resources necessary to get them to 2021? Even the Deloitte & Touche paper states that the producers are operating on negative cash flow, and in some cases, negative equity. “These are just details that will not cause any real difficulties in the long run,” we hear the bureaucrats say. The cash crisis will be a critical issue that will start in the next one to five months, I’ve stated here many times. Remember that PennWest announced it was living “week to week” based on its available cash. We’re going to see many companies unable to make payroll, I can assure you. Making it to 2017 will be a miracle, 2021? where can I invest today!

If we look at the heart of the issue. The overproduction brought about by shale, has been unaffected by any of these newsworthy items. If the IEA were 100% correct we would see the rush to drill and complete the frac log to bring on new production to overwhelm the “profitable” prices in 2021. And so it will go. Without the mechanism to fairly and equitably allocate production in the industry that the Preliminary Specification provides. Based on the real profitability of the property, based on an actual accounting which includes capital, operations, royalties, administration and accounting costs at the Joint Operating Committee. Not until then will the industry normalize. For evidence of this look at the natural gas industry. Gas is in its sixth year of overproduction. If only those Saudi’s would stop producing natural gas, too.

If one looks at the situation in natural gas we see rainbows and unicorns there as well. The EIA this time, not the IEA, is projecting that natural gas storage will be around 2.2 tcf at the end of the winter season on March 31, 2016. Getting a $1.80 for your natural gas is something that, as a producer, you might want to hedge your future production on. These are going to seem like good prices come April 15, 2016. But this is uniquely a natural gas situation. It shares no known characteristic with oil! That is other than the overproduction from shale is chronic, systemic and unforgiving, with no remedy from our good friends the bureaucrats. Remember the shale revolution began in the natural gas business before it was used in oil. Oil is just catching up to natural gas in terms of the market dynamic that shale brings to its markets.

Unless and until the producers have a means to allocate production, overproduction will continue, and I would say more likely until 2031. Bureaucrats don’t want to do anything for a variety of reasons. It takes their eye away from the screen where the oil price is displayed. They would have to work very hard on building the Preliminary Specification. And they’re eliminated from the oil and gas scene in the Preliminary Specification. Self preservation being the driving force behind the antics we see displayed in the industry. If you believe the facts you might want to have a look at what we’re doing here at People, Ideas & Objects. If you believe in fairy tales look at what the IEA, Deloitte & Touche and the bureaucrats are selling. Nonetheless they have set in place the expectations of when the timing of the return of “normal” oil prices will be. I should thank them for setting it five years from now. All that they are trying to do is to buy time and manage people’s expectations. Unfortunately for them, I know, that’s unacceptable to a certain group of people.

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 Elephant Sitting Next to You

We need to talk about the elephant that has been occupying space in our living room these past few years. This elephant is none other than our initial development budget which sits at $6 billion U.S. What is particularly difficult for the bureaucrats to accept is the allocation of our margins between earnings and Intellectual Property royalties. Our margins are consistent with any other software provider. That we detail how they are being allocated in our budget is to provide clarity and transparency in how the money will be spent. What the bureaucrats should be pleased with, is that we don’t include my Intellectual Property royalties as part of People, Ideas & Objects costs. Bureaucrats who take issue with the distribution of our margins, or with the size of our budget need to focus more on our value proposition. Did I ever mention that in the next 25 years we provide $25.7 to $45.7 trillion in incremental value to the oil and gas industry. If any bureaucrat raises the issue of our budget or margin allocation with the current state that the oil and gas industry is in. I would suggest that they’re not interested in solving the underlying issues of the industry. And as I indicated in yesterday’s post, we do not cater to, or expect any support from the bureaucrats regarding our initiative.

Identifying oneself as a member of the People, Ideas & Objects user community, the critical element of the quality of our offering, will give the bureaucrats a newly identified target to destroy. This has been the case with myself since the publication of the Preliminary Research Report in May 2004. When we proceed with the developments we need 3,000 people to join our user community and to take high profile positions within the industry. They will be active with many of the producers and investors. Having bureaucrats attack them is something we will learn to deal with as time progresses. We however can not have our people involve themselves in any career risk as a result of being involved in the user community of People, Ideas & Objects. The same can be said for our developers. Bureaucrats have long memories and are particularly vindictive. Our users and developers will be able to handle the abuse, however, there is no reason for them to risk their careers in the oil and gas industry as a result of the bureaucrats cutting our funding and leaving these people to twist in the wind.

Therefore People, Ideas & Objects needs to be funded in its entirety before any development work can begin. The protection the users and developers need to receive will be in the fact that they can finish the work that we set out to do. That we will be able to establish the alternative methods of organization and operate the industry in the manner proposed in the Preliminary Specification. If we do this on the basis of a pay-as-you-go type of development we will be subject to the manipulations of the bureaucrats and their flighty attention spans. These latter two issues also raise the overall business risks that People, Ideas & Objects would otherwise have to overcome.

As I documented yesterday, the history of the industry with respect to the development of any real software systems consists of serial failures. Bureaucrats have shown no initiative and no desire to challenge themselves to do more work and effort than what is required. Secondly, they have never invested the kinds of resources that are necessary to make the changes that are needed. Otherwise the oil and gas industry would not be in the situation that it’s in. For us to proceed without the producers having some skin in the game. Something that will keep their attention beyond the 9% spike in oil prices next Tuesday. It will be necessary for them to be financially involved. Whom is the benefactor of the Preliminary Specification becoming operational?

If I undertake the developments of the Preliminary Specification without the money secured then I am setting myself up for failure. The bureaucrats will ensure that my failure happens. The efforts that I put in from the point where the money is secured will have little to do with the success or failure of this initiative. It will be down to the user community. Establishing their independence is critical for them to succeed. And their motivation is to build themselves the types of organizations that will be the user / service provider that are critical elements of the future industry infrastructure. To get there they will need to have the risks of their businesses mitigated during our initial development. It is the producers, again, who will benefit as a result of this reorganization.

To take into context the $6 billion U.S. that is our budget. Both Chesapeake and Devon each incurred three times our budget during 2015 just in terms of their asset impairments! Also if we take the value of the price declines that are attributable to the overproduction issue. We come to roughly $70 per barrel. $6 billion divided by $70 comes to 85.7 million barrels of oil. That is 9.38 days of U.S. oil production in terms of the opportunity costs that the producers are incurring to develop the Preliminary Specification. And that is just on the oil side. So when the bureaucrats bark about our budget, ask what is it that they are really saying.

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. 

Comparing Capitalization Policies

One issue with the producers 2015 financial reports that I find interesting is the impairment charges that are being realized. In some cases these impairments are as large as the capital structure of the producer. Even Devon Energy, a senior intermediate, has an impairment charge of $20.8 billion that takes out much of the firm's total shareholder equity that stood at $26.3 billion as of December 31, 2014. We also saw Chesapeake’s third quarter 2015 report incur a $15.4 billion impairment. This severely damaging the $18.2 billion in total shareholders equity that they had in December 31, 2014. Isn’t it odd that these are not the numbers that the bureaucrats and the press talk about. They prefer to talk about the gross margin of the firm, so that they can state that the firm’s production remains profitable. What these numbers state, unequivocally, is that the investors and the people in these companies flushed their investors money, time and effort down the toilet for the past number of decades. It's been an exercise of taking people’s money, spending it foolishly on unproductive activities and having nothing of value to show for it. Note that it’s these things that Bernie Madoff is in prison for.

But of course we don’t talk about the impairments. No one cares about these in the industry. They are the sunk costs of the operation and have no effect on the cash position of the producer. All very true. And apparently you can fool all of the people all of the time. Devon was in the market recently, increasing their stock offering to $1.3 billion due to the demand for their shares. This after a drop of 48% of their stock price in 2015, and another 42% drop in 2016. The way that I look at this, is that these capital costs should be considered in determining the performance of the management of the producer firm. Of course they don’t want to be assessed on the same basis as Bernie Madoff but what better example is there? The investors have put their money in, and the stock of the company is, in Chesapeake’s case, worthless, and the activities that they spent their money and time “investing in” are not a self supporting business!

The Preliminary Specification takes particular concern regarding the capital assets of the Joint Operating Committee. (And recall our price maker strategy used in our model.) The SEC requirement is that the producer shall not breach the reserves value times the price of the commodity at the end of the fiscal year. Therefore any reasonable method of capitalization would suffice. The Preliminary Specification wants to achieve a much faster write down of the assets of the firm. Within at least a three year window. Capitalizing only the controllable equipment. Expensing the non-controllable and intangible capital costs will force the management's evaluation of their performance. In a capital intensive industry, the commodities prices necessary to produce profitably will then consider these costs of capital and therefore, while these capital costs are being expensed and written down, the cash from the higher commodity prices, which offsets these expended capital costs is returned to the producer in the form of tax free cash. That is how a business operates. It cycles its costs through the income statement. Storing capital costs on the balance sheet for eternity only leaves the producer with high asset balances, supported by high debt levels and never any cash being generated from the business itself.

Our methodology imputes that the oil and gas industry is an actual business. A viable going concern that is able to support itself without the assistance of constant debt and equity issuances. The bureaucrats never want to account for their performance. Each year they let the capital that they spent build up on the balance sheet as opposed to report their actual performance. When they can no longer hide the fact that they’ve been fooling everyone, and are forced to write these assets down through an impairment, they say these costs are of no concern and are the sunk costs of the organization. These capital costs represent the capital that has been taken from the investors and the banks. Again, oil and gas is a capital intensive business! The bureaucrats desire to ignore the capital that they spent is representative of the fraud that they undertake.

The need for the change to the Preliminary Specification is necessary to rectify this situation. The decentralized production model, our price maker strategy and other aspects of our business model will ensure that a proper accounting is done. This is important to establish the credibility of the industry and begin to address society's needs for the real energy they will need this century, from oil and gas. The focus on profitability is also necessary from the point of view of the future of the industry. It’s not becoming any cheaper to find or produce oil and gas. Each year we can expect to see increases in the costs per barrel of capital, operations, administration and accounting. Clearly accounting for these and having them recovered by the prices that the commodities sell for is what a business will do. And that is what we propose, is to put this monkey business out of business and run it like a business. The bureaucrats should be ashamed of themselves for not accounting for their pathetic performance.

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 Dismal Performance is Now Permanent

I feel somewhat liberated today by having the opportunity to mention our good friends the bureaucrats. Doing nothing by these people will be the operating procedure for the oil and gas industry for the foreseeable future. Is anyone else amazed at the persistence that these bureaucrats have. They want to ensure that there are no jobs or people left in the industry anywhere. That is the only logical conclusion any reasonable person could come to when they see the current situation. How bad is it? This is certainly the worst that it has ever been in the time that I’ve worked in the industry. I don’t think there was a time before that was as difficult. We should also note that we didn’t experience any bouncing paychecks in the mid February time frame. The last paycheck of the month will be covered by the end of the month production receipts. That leaves mid March as the most probable first time that paychecks from the producers will start bouncing.

When we see senior intermediate producers slashing their dividends and cutting their capital budgets in the manner that they are in these past few weeks. We can impute that cash is King. Producing at these prices is a fool's game. Yet everyone continues to produce at 100% of capacity despite the prices. This is the same behaviour that was displayed for almost 15 years in the oil market from 1986 onward. Oil prices dropped to $10.00 at times and they did nothing. Expect to see the same outcome from the same behavior continue until such time as the Preliminary Specification is adopted by the industry. Has anyone noticed or questioned why there is no discussion about our alternative in the marketplace? Odd isn’t it. Over ten years I’ve been at this blog and it still remains a secret! The fact of the matter is the dozens of people in the press that I have contacted over the years are aware of this alternative. They speak to the producers who advise them otherwise, although I don’t know precisely what they say. And the bureaucrats sit back and say that there is no solution. This is also in direct contradiction to the four times that they’ve hired other research firms to attempt to take the Intellectual Property of the Preliminary Specification away from me. Odd isn’t it that those initiatives never continued?

The cash crises that we are currently experiencing is particularly acute. The industry never ran on real tangible profits. The profits they did report were based on never recognizing any of the capital costs of the properties. And capitalizing everything under the sun. Cash flow was the measure of the producer. Little did they seem to understand that their cash flow numbers always included the annual stock offering and the incremental increase in the bank's line of credit. The sales of oil and gas were never high enough to support the business on its own. What they have been doing is taking banker and investor money and subsidizing consumers for the costs of their energy. Look at the working capital of any producer over the past decade and if you find one with a positive number, I would be very surprised. Bureaucrats always ran the producers on negative working capital. Forcing the service industry vendors to wait six months as a minimum to get paid. The effect of all of this. Particularly when the annual stock offering ceased its annual ritual in 2008. And the bank started short sheeting the bed. Is that producers have been hollowed out of any residual value or surplus resources to turn too when times get tough. Well times have been tough in gas for six years. And times have been tough in oil for almost two years now, and there is absolutely not one thing left in the cupboards anywhere to live off of.

You can rob Peter to pay Paul for a period of time. And these are desperate times indeed. The logistics can become messy in a rather complex business. The imposition on others begins to take its toll as well. The service industry begins to atrophy and the people you’ve laid off can’t help anymore. You're certain the prices of the commodities will turn around if you can only make it through this day. And so it will continue as it has for the past six years in natural gas. For those who think this downturn is a temporary situation I would point to the post 1986 period where there were subsequently 15 years of poor prices. This current situation in terms of oil and natural gas prices are a permanent fixture in the industry today. I don’t see any change coming about in the next five to ten year time frame. Shale is a permanent change to the dynamic of the industry. The industry therefore must change in order to accommodate shale and that requires them to only produce profitable production which demands the Preliminary Specification be used.

The problem with our solution is the bureaucrats are eliminated from the industry in the Preliminary Specification. That’s why they say there are no solutions. They want to make sure that they keep their paychecks as long as they can, they don’t care about the rest of the stuff. Have you seen a bureaucrat hurting anywhere?

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 Business Based Solution

During this post I promise not to say the B word. You know the one that I am always blaming the downfall of the industry on. Doesn’t leave me with a lot of material left to deal with, but here’s a shot. People, Ideas & Objects, our user community and the service providers that those users will generate are all focused on the issues and opportunities that are present in the oil and gas industry. We are an Information Technology based company. However that is not the method that we use to solve the issues and present the opportunities in the industry. At least not exclusively. It is from the business side that we approach the industry.

There have been many technological solutions presented to the oil and gas industry in the past decades. Yet we still have the problems that are ever present in the marketplace. Technology is not the issue, it is a tool that can be used to help solve our difficulties, however it is not the tool that can solve anything on its own. When used in partnership with organizational change and a fundamental business understanding is when it becomes its most powerful. The Preliminary Specification relies on a high level of technological infrastructure. When we proceed with the development and deployment of the Preliminary Specification we will be putting these technologies to the test.

By selecting Oracle as our technological provider we are selecting the best technology in the marketplace. This is not even in question. Larry Ellison the founder of Oracle has the understanding of databases that clearly no one else does. He also has the power and control of Oracle to make their products superior in every way. Oracle is decades ahead of IBM, who I rate as second best. And the remainder of the marketplace is scattered with a variety of also rans. It will take the full power of the Oracle database to deal with the way we manage the oil and gas industry. I don’t know if the other vendors products would be able to handle the load that we are going to be placing on Oracle.

Our budget has set aside a significant portion, approximately one third of our costs, to Oracle. These are for the various licenses and cloud computing infrastructure that we will need in the development and early deployment of our applications. The bulk of the money that we are setting aside for Oracle is going to be for their developers. These are for a variety of purposes. First is to ensure that our team is up to speed on the latest Oracle technologies. Secondly is to ensure that there is a high level of technological transfer from Oracle to People, Ideas & Objects. Our team needs to be as good as Oracle’s in terms of their technological capabilities. And then we will need to be better than they are. Not a simple objective, or a reasonable one from an unreasonable man such as myself.

We have determined that we will be using Oracle Fusion Middleware and Oracle Fusion Applications as the base of the People, Ideas & Objects offering. These applications were developed from the ground up and were written in Java within the past decade. The first and only one to do so. Essentially the only modern applications to use the Java technologies as their base. Products such as SAP are legacy applications from the late 20th century and will need to be replaced, in my opinion, in the next decade. Replaced with new products based on object oriented programming languages.

We have a history with Oracle. Some of it not that pleasant from our point of view. Nonetheless I have rectified the manner in which we are approaching this development and we will not have the difficulties that we had with previous Oracle developments. That I can assure you. What we will have is a system that each and every oil and gas producer will have their administrative, accounting and operations managed successfully on. That’s a bold statement and a necessary one. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable producer demands this high levels of integration and usage. Each and every element of the industry and producer is affected by the change to using the Joint Operating Committee. We can’t just do half of the industry, half a producer or half of the scope and scale of our applications. Its our job to rebuild the industry in the manner that is necessary, and the Preliminary Specification and this technology deems that necessary. All that and no B words.

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. 

Choices the Bureaucrats Make

It is generally agreed that we have 1.7 million barrels of oil per day of overproduction. Causing a 70% decline in the price of oil. So, as a bureaucrat, of course you will sit and do nothing. Is it better to give up 2% of global production, or experience price declines that lead to losses of 70% of your revenue. Well we know the answer don’t we. The U.S. production is by far the most expensive production in the world. Yet we hear that some producers will still be profitable in some of the shale areas at $23.00 / barrel. Its times like these that people should learn to read financial statements. Understand what it means to be profitable, learn what break even and marginal mean. This terminology is not interchangeable and is well defined as to what it does mean. Right now no producer anywhere is making money. That I can assure you. Their financial statements may state that they are, but when you capitalize everything, any revenue turns profitable. That is the game that is being played in the industry today. Justifying their inaction because it continues to be profitable is how they continue on. Just don’t count the cash.

And so it will continue. If you thought that the end would soon appear you have to look at the situation in the marketplace and ask yourself, how will it change? If everyone is profitable at whatever the price is, remember our discussion on “recycle costs,” there will never be any behavioral change. And even if there was a behavioral change these organizations could not change to become the dynamic, innovative, accountable and profitable producer that they would be under the Preliminary Specification. Organizations don’t change, but people do. And that is why we will be successful in our initiative to change the oil and gas industry. We are focused on developing the user community that will be the key lever to make the changes to the new organizational model in the Preliminary Specification, the Joint Operating Committee.

What the oil and gas producer will be configured as in this new environment will be fundamentally different than the manner in which they operate and are organized today. They will still be driven to grow their overall production numbers as they have before. The key difference will be that they must increase their profitable production numbers. Increasing your production is the easy part. Just look everyone is doing it. Increasing profitable production is hard, as we can see that no one is doing that. And what will stop the producer from producing unprofitable production in our new organizations? They simply will not be able to afford it. It drains the organization of the profits that were earned on other profitable properties. It also increases the costs of the reserves of the unprofitable property by the amount of the losses that need to be recovered from the future. Making it even more difficult to produce the property profitably. Investors who see producers who cheat and produce properties unprofitably will be dealt with by a general lack of confidence in their management and in their assets. Not something the producer wants to test.

Carrying unprofitable properties that have been shut-in will be less costly for the producer than what it is today. The configuration of the producer in the Preliminary Specification is stripped down to the C class executives, the earth science and engineering resources, some land and legal, and support staff. The administrative and accounting resources have been reorganized across the industry into service providers who are providing their services directly to the Joint Operating Committees. If there is no activity in the property, then there is nothing for the service providers to do and hence no billing from any of their service providers is sent to that Joint Operating Committee. As a result a null operation will be recorded in the months that the Joint Operating Committee is shut-in. These null operations will have the effect of neutralizing the downside risk of owning unprofitable properties. They can therefore be kept in a portfolio of shut-in properties where the focus of the producers innovations can seek to return them to profitable production.

These changes can not be made by the current bureaucracies. The accounting is not precise enough to know what is profitable and what is not! The overhead and administration costs in the industry are estimated by me to be approximately $18 / boe and most of these costs are capitalized by the producers. Today the Joint Operating Committees sees nothing of these actual costs. They are only charged for allowances which are woefully inadequate to capture the scope and scale of the true administrative and overhead burden. What we are talking about here is a complete new dynamic in terms of how the administrative and accounting of the industry is handled. Enabling the price maker strategy to be employed by all of the producers. This strategy is as simple as if the property is profitable it produces, otherwise it’s shut-in. In today’s environment there would be no profitable production, prices would therefore adjust quickly.

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'll Rebuild the Service Industry

In a world where I can send you, in all likelihood a stranger to me, any amount of money in as little as two hours. Why does it take an oil and gas producer six months to pay someone in the service industry? Someone who they’ve done business with many times before, and someone who has always done a stellar job! Because that’s how long it takes for next year's financing to close! That’s a statement of fact, not a joke. The six months that it took for producers to pay the service industry in the good times was the punishment that the bureaucrats felt that they deserved. So it therefore became the norm to use six months as the general rule in how vendors were paid. That was in the good times. Now there is no money to pay them and the service industry is going to have to wait for the good times to return before they see any of the cash that they are owed today.

You may recall the days when the bureaucrats called the service industry representatives lazy and greedy because of the fees they were charging for their services. Those high fees are as a result of times like these. How many companies in the service industry will be able to withstand their customers not paying them for the work they’ve done. Not many. And those that do will be financially scarred for decades and unable to invest in their businesses as if it were a normal going concern. And what about the people who worked in the service industry? These people are also being forced to look for work in other areas and in other industries to feed their families.

So the next time that the producer wants to drill a well and there is not enough drillers in the marketplace. They better not ask why. And when they do find one, they best keep their mouths shut about the amount that the driller might charge for their day rate. It's the 21st century, yet we’re still subjected to the idiotic thinking of the bureaucrats that operate the oil and gas producers. The ones who piously looked down on the service industry and called them lazy and greedy not two years ago. It is a surreal world of the oil and gas bureaucrat. One snap of the finger and you can have anything that your heart desires, and at no cost apparently.

The Preliminary Specification is designed to eliminate this boom bust cycle in the oil and gas, and service industries. First by implementing the price maker strategy the producers will be able to bank on secure earnings. And it will be because of those earnings that they can turn to innovation in the field service industries. Where they can develop the resources and capabilities that are necessary to support the oil and gas industry. Through the Resource Marketplace and Research & Capabilities modules the capabilities and development of the service industry is front and centre in the mindset of the innovative producer. This is what we should have been doing two years ago when the bureaucrats were calling people names, investing in the service industry to expand its capabilities. We’ll have a lot more difficulty in attempting to resurrect the capabilities that we’re going to need from the service industry in the future as a result of the bureaucrats actions today.

Its really frustrating to watch the industry being destroyed in the manner that it is. I also find it surprising the amount of sympathy that the press gives these bureaucrats in terms of the dilemma that they’re in. They’re the ones that have caused this disaster and they’re getting the sympathy! It won’t be too long before the press starts to realize the rebalancing story that is being told is the same as the story that was told last year and the year before that. And that it doesn’t work. Then they might begin to ask questions as to why they would continue to produce when it costs their cash and destroys the business. What fool would do such a thing?

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. 

No Posting Today

In recognition of Presidents Day and Alberta's Family Day holidays.

Don't Shoot the Messenger

As each week passes the destruction of the industry becomes more significant. This week was particularly dire for a number of the senior intermediates. I would have thought that they had greater staying power than what they are displaying this past week. Could it be that I have underestimated the difficulties? Give them a few more months and they will be empty shells of their former selves. The scope and scale of the devastation that is occurring at this time can not be underestimated. Producers believed their own convoluted financial statements that showed their legacy of overspending provided them with “strong balance sheets.” The problem is that no one let these capital costs flow to the income statement where they could evaluate the performance of the bureaucrats, and as such, they also believed they were making money because no capital costs were ever recognized. The fact of the matter is that even in the good times the producers were not making any money because they have never accurately accounted for their capital costs. These spend fests went to die on the balance sheet where they still reside, and today, as they did in years past, provide no value to the producer. If they would have let the capital costs flow to the income statement, these capital costs would have returned abundant cash to a healthy profitable producer. Cash that they could have used today. What we have now is an industry with sky high assets on the balance sheets, supported by debt, and no liquid resources, anywhere.

This shortage of cash is not a minor issue. It is the only issue for the foreseeable future. As it is stated by, and what I am hearing from the bureaucrats, the oil and gas production is covering the cash costs of operations. It is however not covering the costs of administration and overhead, or the payments for the money they took from investors and banks. The overhead and administration costs are not relevant to this calculation, I hear the bureaucrats state. It is too when the paychecks have to be written for all the staff. These paychecks, and the rest of the overhead, like lights and rent, have been calculated by me to approximate $18 / barrel. That’s why no one is going to be paying any dividends. Therefore your production is currently costing you approximately $15 / barrel in cold hard cash to produce! Sorry investors you just don’t count.

This is the logic that has overcome the industry since 1977 when the SEC instituted either Full Cost or Successful Efforts accounting as the methods to be followed. Everyone has been raised by the “capitalize everything” and never “recognize any depletion” attitude in the industry. I’ve been told a billion times, its cash flow stupid. And I have always responded that earnings are more important. And the bureaucrats have laughed at me for that as well. They felt as long as they could sell a property for multiples of what it cost, who needs profits? This game continued on and more competitors entered into the market seeking the “opportunities” to make “spectacular” money. Eventually with all the fools rushing in, the industry was overbuilt and the over investment lead to overproduction. Why don’t they sell a property today if they need cash! The problem is they can’t, there is no market. You could buy PennWest for $330 million. That’s 60,000 barrels per day, or $5,500.00 per barrel. Such a deal! But there is that debt, and you’d have to support that cash drain, maybe not such a good deal. And certainly not the market that PennWest thought would exist to sell assets into.

If you listen carefully the bureaucrats state there is a need for the market to rebalance only 1.7 million barrels. Imputing that the total oversupply is just the 1.7 million barrels. But it's not, that’s the overproduction per day. The amount in inventory is closer to a billion barrels of excess storage. To draw that down so that prices can recover means that we have to lose 3.4 million barrels of oil production per day for approximately 2 years. Then the prices will rebalance. We are a long way from that. Sorry investors it will be a while before you see any money.

Take for example the natural gas prices which have been depressed for the same reasons for the past six years. The Marcellus area is lucky to receive a natural gas price of $1.25 at any time in that region, the most prolific shale area. Recently the EIA reported that production in the Marcellus region was up! Rebalancing is a myth in the shale era.

When you have a destructive mechanism such as this, built within the DNA of the producer organizations and the industry itself, you will always have these difficulties. The shortage of cash is horrendous at this time. The balance sheets of the producers never had any working capital even in the good days. They always ran on high levels of negative working capital and now they’re producing significant negative gross margins. Meaning you can’t expect the service industry to extend you much more credit. And that means if there is any cash in the industry it is being tossed on the fire. What does an industry do with no cash? We are going to find out in as little as two, but no more than five months.

Expect to see a slew of bad news after the close of markets today. Everyone will want to get the bad news out before the weekend and have everyone forget about it by Monday morning. Chapter 6.2.1 of the bureaucrats 2016 handbook.

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. 

Creative Destruction and our User Community

Anyone expecting the bureaucrats to make the necessary changes within their organizations. To deal with the overproduction issues of today will be waiting a long time. The Preliminary Specification is such a fundamental change to the producer firm. Moving it from a price taker to a price maker. In order to do this we will be making changes to every element in the industry. The point here is that organizations don’t change, however, people do. The way that we are making this change is that we are using the forces of creative destruction to break down the bureaucracies. And building the user community as the replacement.

We should send a thank you note to the bureaucrats for following our script so closely. The forces of creative destruction are evident throughout the history of our western based economies. When things become too inefficient and incapable, new solutions rise to replace them. Overproduction will continue until such time as the Preliminary Specification is operational in the oil and gas industry. It is what has been done in natural gas for six years now and in oil for two years. Do we see any response to this overproduction? It was recently stated that there were globally 100,000 barrels per day of oil shut-in during 2015. That is the level of response our friends the bureaucrats can achieve to the overproduction dilemma.

Muddling along is the operating strategy of all producers in any situation involving a crisis. That is the only thing that can be done. The producer firm is a deliberate building of organizational capabilities designed to operate oil and gas facilities based in some geographical region. That is their sole purpose. These organizational capabilities are unique to the formations that they produce and explore. The accounting and administrative capabilities are developed to support an organization in the regulatory, tax and compliance environment that the corporate organization exists within. And that is their domain. To determine if a Joint Operating Committee is profitable, in absolute 100% accurate accounting terms is impossible. Most of the administrative and accounting costs are capitalized and the Joint Operating Committee is charged with overhead allowances based on industry accepted principles. All that bureaucrats know is if the property is generating cash. They only find out that they're not profitable when they publish corporate level financial statements.

And so they continue because they do not have the appropriate information and cannot make the appropriate decisions as to which property is and isn’t profitable. The decision itself, the operational decision making authority resides with the Joint Operating Committee, and even if the operator decided to shut-in an unprofitable property it would have to be put to a vote at the Joint Operating Committee. This conflict doesn’t occur because the systems and procedures within the oil and gas producer do not recognize the Joint Operating Committee or its legal, financial, operational decision making, cultural, communication, strategic or innovation frameworks. It only recognizes the corporate frameworks of compliance and governance of the tax, regulatory and the SEC requirements. Recall what we are doing in the Preliminary Specification is we are taking the compliance and governance of the hierarchy and aligning it with the seven frameworks of the Joint Operating Committee. This alignment provides us with the speed, innovativeness, accountability and profitability that we seek in our in our oil and gas producers.

How we get to the point where People, Ideas & Objects is funded and the user community begins the development of the software defined as the Preliminary Specification is unknown at this time. What we do know is the producers that exist today are not going to be around for much longer. Slowly each and everyone of them will continue to lose so much money that they can no longer continue as viable going concerns. Cash is becoming a significant issue in the marketplace today. This is accelerating the demise of many producers and will make the transition to our user community that much quicker. How we get there is going to be an interesting journey. There’s plenty of room for everyone to join in our user community at this time. It's not that organizations won’t change, it's that they can’t. The people who join our user community will be the ones who are making the change in the oil and gas industry.

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. 

Task List for the User Community

As a group, the user community has some specific tasks that need to be completed in the first iteration of our development. These apply only to our initial development and will change once the software is operational in the marketplace. If we look at these tasks from a global perspective we are taking the Oracle Fusion Applications, applying the vision of the Preliminary Specification, developing and integrating that across the industry. In terms of technical risk, I assess the project as moderate, we are using proven technologies on a very large scope and scale. The vision within the Preliminary Specification is comprehensive and has the benefit of unifying the user community in the appropriate direction for successful implementation.

The first step in this initial development phase is therefore to implement the model that is the Preliminary Specification. This vision provides the broad outline of what and how the applications need in order to operate. The details of how each individual's work needs to be handled is the work of the user community to fill in, define and ensure that our developers provide you with the systems that you want and need. For example, if you are working in an area where the Material Balance Report is part of the domain of your work. You will collaborate with others to determine what is required, ensure that it is correct and iteratively develop the functions and processes that will be managed by the software and the service providers. In many ways we are capturing the manner in which the industry operates today from an operational, administrative and accounting manner and redefining it around the Joint Operating Committee and the vision of the Preliminary Specification.

What we don’t need in this first iteration is to have any innovation completed by the user community on the business models contained within the Preliminary Specification. What exists today in the vision works in terms of its global perspective. It may appear that in some small area it might be better to change an element of the model to accommodate some other condition. What we will not know is if this change will upset the global perspective and put the overall vision out of sync in terms of its operational capabilities. The first iteration is not a time in which to innovate on the business models of the Preliminary Specification.

What we can do, and what brings about the greatest value from the model is exploring and implementing the interactions and implications of our model. When we move to the Joint Operating Committee as the key organizational construct of the producer. We are changing every aspect of the oil and gas producer, the industry and service industry. Not much is unchanged in terms of the effects of implementing the Preliminary Specification. The interactions and implications are where the dramatic value is generated for the various stakeholders in our targeted market. It is here that I expect to see the value of the model to be in the forefront of the user communities search for delivering on that value in the first iteration of the development.

Once we have the software fully operational in the marketplace then we will be able to innovate on the model, and determine further interactions and implications within the various domains of our operation. We are focused on providing the oil and gas industry with a dynamic, innovative, accountable and profitable oil and gas producer. This requires that constant change be part of the user community and service providers. People, Ideas & Objects Revenue Model is structured to generate revenues based on changes within the industry. That is the dynamic that keeps this community moving forward. Software has the effect of becoming concrete to an organization. Turning it into an unchangeable beast. If an organization needs to change, it is the software that needs to change first. And in order for the software to change, the user community has to be the ones that make the changes through the mechanisms they have to affect that change. And in People, Ideas & Objects that is our user community vision.

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

What If the Bureaucrats Win?

You may have been distracted the previous time that I noted our value proposition. People, Ideas & Objects, our user community and service providers provide the oil and gas industry with $45.7 trillion in incremental value over the next 25 years. We also have the added feature of putting the industry back on a profitable footing. Enabling it to reclaim much of the greater than $1 trillion in lost market capitalization over this past year. But today I think we can add to these small industry incentives to act to implement the Preliminary Specification. By adding the losses that the producers are incurring during the 2015 fiscal year to the list of things that would not otherwise happen if the Preliminary Specification existed. Some may think that this is a simple double counting of the value proposition, I as you can imagine, beg to differ.

These losses represent the incineration of the capital that the bureaucrats were entrusted with. They could have used the Preliminary Specification to ensure that they are providing their shareholders with the most profitable means of oil and gas operations. However, they are not doing that and have instead chosen to destroy the industry. I see these as two separate and distinct acts. Both as a result of the deliberate carelessness that our friends the bureaucrats are becoming known for, but the losses are different than the value proposition. They are, dare I say, like the loss in market capitalization, more real.

If we calculate the losses of the producers that have been reported as of last Friday we find that the total comes to $8.043 billion for the fourth quarter of 2015. Not bad for three months work. And that is just eight producers. Anyone notice that the amount that these eight producers have lost is higher than our budget? I guess no one will be giving us any grief about our budget anymore. After all if you're willing to lose this kind of money in a quarter, you surely would not mind spending it in productive ways.

I have a great deal of difficulty understanding why any of this is acceptable. There is no bureaucrat that seems too concerned about the situation. Is it that the bureaucrats are frozen in fear, or is it that they don’t care? They’re all singing from the same hymn sheet and stating that the market will rebalance. Let's give them the benefit of the doubt and assume that happens. They’ll then need to work off the huge balances of oil in storage that has built up in the world. Rebalance that! But nothing effective is done other than to get the press off their backs! Sure they changed the oil export restrictions, but how has that worked out? I think they just stare out the window dreaming these dumb ideas up. This is the muddle along strategy in its finest hour. Shrug your shoulders and assume that nothing can be done and go on doing the paper shuffling thing that they do. Hoping that nothing bad happens to you. Absolutely brilliant!

The Preliminary Specification is designed to make the industry dynamic, innovative, accountable and profitable. None of which it currently is and never has been while I’ve worked in it. The current business model was developed in the 1920’s and has had no changes to it since. In the dynamic, fast changing world we live in, we end up with a bureaucracy that is so out of tune with the times that it can’t even defend itself. Are we to expect that we’ll keep this in place for the foreseeable future. Will this be the way that the industry is managed in 2025, 2040?

Why would anyone give more money to these bureaucrats to lose. The industry has had no response to natural gas for six years. No response to oil for two. Is anyone else seeing a trend? What do we think will happen tomorrow or ten years with this bunch? That is exactly what the bureaucrats want. To ride this through with no expectations of performance and then to resume normal operations where investors line up for the next round of fleecing. Then the bureaucrats will be so established and permanent that we’ll never be able to get rid of them. I say if we don’t toss them out in this current environment, and soon, we’ll end up paying for it for a long time.

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. 

No News Here

We should be building the oil and gas industry to address the needs of society in the next 25 years. Instead we’re hunkering down hoping that our most recent paycheck wasn’t our last. Here we are with all the intelligence and technology in the world to deal with our difficulties. And we can’t overcome the inertia of the organizational methods that were established in the 1920’s. I’ve provided so much comedic relief to the bureaucrats over this past decade. It's good to know they’ll at least have the thought that they knew better. It’s pretty obvious now, as it was in the 1980’s and 1990’s, that the lack of production discipline is with us as long as the bureaucrats exist. The news is here we sit, no change in the status of this initiative, other than the bureaucrats don’t laugh anymore. They can’t, won’t and will not ever change. We apparently have to completely destroy the industry before they're convinced they're wrong.

As far as I’m concerned the damage to the industry has and will be extreme. We have only begun to see the pain that we will need to endure. Sitting around hoping for higher prices and stating that the market will rebalance itself is sticking our heads in the sand. It appears to me that every producer is hurting except for Exxon. I think half of the industry will end up in bankruptcy. And the people who make this industry work will have had enough. What we’re talking about here is a generational time frame in order to rectify the damages being done now. I haven’t seen the rush to the door by the bureaucrats yet, but trust me that is coming, and they’ll take that aspect of the industries capabilities with them as well. Leaving us with that hole to fill on top of everything else.

We have, and will have, work to do. I have budgeted 5,000 man years of effort necessary to put out the first iteration of the Preliminary Specification. This is going to be very hard work to do and will demand a lot from the people who are involved. I guess the point is why do this hard work, disrupt the entire industry in the process, if it's not necessary. Just let the market rebalance itself as it always has. And that is the decision that is made. Muddle along and do nothing, let the forces of stupidity take hold and the good times will resume.

I don’t see that happening this time. First of all you need cash to buy the time to get there. We’re in February and there is less and less cash each day that passes. Getting there also assumes that the prolific nature of shale is somehow eliminated. That overproduction, which is systemic, unforgiving and destructive will be solved in the long term. Which it won’t and we’ll be back here at $30 for oil and $2 for gas in no time, assuming rebalancing does raise prices. Hope does spring eternal.

I can see the tombstones of some of the walking dead already. These are the firms that are no longer going to be with us. Give it a year and no one will remember them. Chesapeake, Encana, PennWest, Pengrowth and Bonavista. A lot of Canadian names in that bunch but all of them are trading at less than 10% of their all time highs. Which reflects a complete capitulation and lack of any faith in the managements or assets capabilities to be able to return to a viable company. Zombies.

It didn’t have to be this way. Disintermediation is a trend that is shaping industries across the business landscape. Technology with organizational changes are building substantial value propositions, as do we, and are the reasons that companies are moving in that direction. Why didn’t the oil and gas industry? What is the unique characteristic that caused them to oppose this initiative from the start and refuse to consider it? I don’t think we’ll ever know. But one thing is for sure, the opportunity in oil and gas is on this side of the fence. This post may seem dire, but I think I’m telling it like it is, it really is pretty sunny over here on this side.

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.