Options for Investors

What the oil and gas investment community should be thinking about these days is their options for dealing with the difficulties they are experiencing in oil and gas. I have to assume that at some point the story that the market will rebalance itself is going to begin to look a little tired. Someone is bound to notice that it’s the same story that’s been told for almost two years in oil, and for six years in natural gas. And its not working. We should ask the bureaucrats, what exactly it is they’re doing? Is there anything being done? How have things changed as a result of the discovery of shale based reserves, and how will these changes fix the issues we are experiencing. These I would expect would be the questions that are being asked in the marketplace.

I sat in amazement in the 1980’s and 1990’s when all of the producers, and I mean all of the producers, continued to overproduce oil into the marketplace. It was clear to me that if each producer was to shut-in some of their production, and only a very small percentage of it, then they would experience significant increases in price, revenues and finally earn some profits. This never happened and the producers only complained about how bad it was and waited for the market to “rebalance” itself. After what I think was at least 15 very bad years the market rebalanced itself and things resumed somewhat with prices that at least covered costs. Why did they continue to overproduce? Because that is the way they are structured. They can do nothing but produce at full capacity at all times. What would enable the producers to change to a more appropriate method of organization? What was that method of organization? And could it continue to meet the needs of the marketplace and to also earn a profit?

Then in May 1991 the vision of the Preliminary Specification came to me. Now not in a coherent, expressible way that made sense. I knew however that given time I would be able to solve this problem. I also knew that software was the means in which to implement the solution. I then started out with these ingredients, built a team, promoted Oracle on this vision and raised some money. We then began developments on a solution to solve this vision that I had. The history of the next six years is well documented in this blog. Unable to continue with the software developments, I was still able to work on solving what eventually became to be known as the “business model.”


In 2000 I started my MBA with the specific purpose of fully vetting my ideas through the process of that education. It was in the process of writing the proposal for my thesis that I finally determined that the Joint Operating Committee was the key organization construct of the dynamic, innovative, accountable and profitable oil and gas producer. I then ran around town announcing that it was the Joint Operating Committee that was the answer to the problem and most people looked at me and asked what exactly was the question. Many of the very senior people in the industry fully understood the implications of using the Joint Operating Committee. I also knew that although I solved the problem, the implementation needed to be determined. That is, what would the industry and the producer look like and operate as if we adopted the Joint Operating Committee as the key organizational construct.

The Preliminary Specification which represents the codified research that determines what the industry and producer would need to look like and operate as if we adopted the Joint Operating Committee as the key organization construct was completed on December 20, 2013. It total’s 175,000 words and is based on the 1.5 million words of my research that have been published on this blog. That was a little over two years ago, based on a vision that I had almost 25 years ago, about an issue that I saw in the industry around that time. Some may think I haven’t done enough, but then I’m the only one who did anything.

The point of this history lesson is that the bureaucrats have rejected the Preliminary Specification in its entirety. It eliminates the bureaucracy through the technology that disintermediates the industry. A phenomenon that is happening in every industry, and one that is being battled between the old and new ways of doing things. If there is to be a third way that is generated to operate the industry. That is if you think the bureaucracy is as much of a dead end as I do. To generate a new implementable business model could be available as soon as 2041. I wonder what things’ll be like then?

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. 

Stealth Mode

We have to focus on what we can do to solve the issues that are present in the oil and gas marketplace today. Our primary time constraint is the development of the user community. If we had our budget in hand it would be the development of the user community that would dictate the pace in which we developed the Preliminary Specification and our delivery date. Since we published the Preliminary Specification, development of the user community has been our primary focus. With the Internet we have the means in which to communicate with people of similar mindsets and prepare them for this work. Giving us the opportunity to state that we are working as quickly as we possibly can to solve the issues in the marketplace today. That those people who are out the trillions of dollars don’t see this, is one of those unique contradictions that we all know and love in the business world. Maybe they’ll realize the bureaucrats are feeding them a line and understand who is really working for their best interests. In time they may see that our efforts are to provide them with solutions to the bureaucrats failings, and that by providing them with options gives them the choice to move in the appropriate direction to solve their problems.

Our user community is the critical element of People, Ideas & Objects products quality. And they are much more than that. They are the means in which the oil and gas industry will affect the administration, accounting and operational strategies and changes in the industry. Software defines and supports the organization. As the bureaucracies have shown it turns them into unchangeable cemented fixtures. Without a dynamic user community with the power and control over the software that defines and supports the organization then there will be no dynamism in the oil and gas industry. We will simply re-cement the industry with the Preliminary Specification and live with the consequences of that. Not an acceptable outcome. We look to our user community to also provide the service provider organizations that will deliver our software and their services to the oil and gas producers.

The capability of the user community to enable this dynamism in oil and gas is provided through the user community vision. This grants them the effective control over all aspects of the software and ensures that they are the ones that are seen as the people who are able to make the necessary changes. People, Ideas & Objects software developers are blind, deaf and dumb to anyone and everyone other than the user community. We will have no Service Level Agreements with the producers. It will be the user community that is the exclusive organization in which to deal with the softwares form and function. The user community is designed to include approximately 3,000 part-time members and each will have an interest in one or more service providers that are providing a processes management to the entire oil and gas industry as their client base. Through licensing it is the user community that has full access, control and development of the Intellectual Property that makes up the Preliminary Specification and its derivative works. It is this power that will make them the effective go-to group to have the industry's problems solved. Which bureaucrat do you go to today to have your issues resolved? And if you find one, will they have the power to do anything?

We have set up a process where people can apply to become members of the user community. No one better than I understands the vindictive and insidious way in which the bureaucrats operate. This application process remains completely confidential until such time as the full resources of our budget are secure. There is no reason that anyone needs to risk their career as a result of being seen to be involved in this initiative. You can think of us as being in stealth mode until such time as it is safe from the likes of our good friends the bureaucrats.

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

My Pricing Analysis

The level of hope and anticipation that the oil price will finally begin its inevitable climb back to $100 is so strong this past week. Any news that was positive was heralded as a clear indication that things would be better soon. When you don’t have a plan. When all you do is sit around and watch the price of oil and natural gas, these can occupy a bureaucrats day. Therefore they are imputing anything and everything that is positive into any news. We also see the overall depression that sets in those days when the performance of these commodity prices aren’t on an upward trajectory each and every day. What we have also witnessed is many more people being shown the door. Those that have worked in the industry for decades, with mortgages and kids, who thought they had attained some job security are faced with the reality that they have little more than the starting laborer on a construction job. I find this element of the performance of the bureaucrats to be particularly vile as it was unnecessary. If they had only moved to the Preliminary Specification.

If you look at the recent price history for natural gas it began to decline during the financial crisis. In the first year it fell from approximately $13.50 to $2.75. Shale gas production grew from 5 - 8 bcf / day during this period. Bureaucrats who were thinking that this was attributable to the financial crisis, watched the market then move upward to a little over $6.00. In subsequent years the market fundamentally broke down from chronic oversupply. This as a result of shale gas reservoirs producing approximately 42 bcf / day today. The only time since then that the natural gas prices were on an upward trend was during the very cold winter of 2014, for the rest of this eight year period it has been more or less on a continual downward slope. Expect to see these same characteristics over the next six years in the oil price.

Rebalancing of that marketplace is therefore due to occur in 2105 by my estimates. Take for example the most recent news out of the Marcellus shale region. Production volumes had been in decline for the past year or so. As we know the Marcellus producers have been very fortunate to receive a price for their natural gas that began with a $1 in front of it. Pipeline capacity restrictions keep the prices severely depressed, yet the bureaucrats continue to produce. In the last couple of weeks additional pipeline capacity came on stream and the Marcellus region is now reporting an increase of 2 bcf of additional production.

What we have is a “machine” that produces. When oil breached $30 from its lows some investors were on Bloomberg saying they were investing in oil and gas again. Citing the opportunity of a lifetime. These bottom feeders were rushing in to buy the stock issuances of the producers at firesale prices. From the investor to the mail clerk this is a “machine” that does nothing but produce as much as it can get its hands on. Every nook and cranny of pipeline capacity must be filled at all times. No matter what the costs. Well, hell, who cares about the cost. Nothing must stay below the surface to be produced profitably later.

The other thing that was notable last week was the “strength of the producers balance sheets.” I must of heard this term being used for every class and every quality of producer in the marketplace. That they were going to “defend their strong balance sheet.” This has to be in response to my arguments about bloated balance sheets. If you want to see a strong balance sheet look at Apple’s. $76 billion in short term assets, $177 billion in long term marketable securities, $22 billion in property plant and equipment, and notably $5.2 billion in goodwill. Approximately the same amount of goodwill that both Encana and Devon have. The difference is that Encana and Devon have approximately the same amount of shareholders equity as they have in goodwill. Note too, that all three have approximately the same amounts of property plant and equipment.

These aren’t healthy balance sheets. These are testaments to the spending orgy that the bureaucrats undertook with shareholder and banker money. The subsequent elimination of most of the shareholders equity shows that the decades these bureaucrats have been in power have seen them destroy that money. Recall too that they have now written their assets down to the amount of their reserves times the prices at year end. These assets therefore represent the sum total of all future revenues of the producer. That’s not an asset! They have also destroyed the oil and gas marketplace by systemically over producing oil and gas. They did this in the 1980’s and 1990’s and they are doing it again. And if you think they will stop, you should read about the characteristics of shale reservoirs. This “machine” that they have developed, which can not be changed because it is the same “machine” that existed in the 1980’s, and shale based reserves, when combined are a toxic, destructive force. This “machine” must therefore be eliminated and replaced by the Preliminary Specification or we will have no industry left. People, Ideas & Objects is the only solution in which we can rebuild the industry to take on the challenges we face in the next 25 years.

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. 

Status of This Project

Why do producers continue to produce at full capacity when these prices do not generate profits? They need the cash. And so we have an industry, with such spectacular overcapacity, that will continue to produce for the little amount of cash that they can generate. Oil prices in the mid $30 range brought about a sense that the worst was over. And I keep pointing to the natural gas side of the business. I can announce at this time there will be no change in the operating strategy of the industry on a go forward basis. These losses and the continuation of the layoffs will not stop for the foreseeable future. We are about to enter a period of time in the oil and gas industry that I can only assume will be looked upon as its darkest ever. But the bureaucrats are safe. They’ve made it through the publication of their 2015 financial statements. They can now, once again, take the rest of the year off.

The situation in the marketplace is ripe for change, destruction is everywhere. Everyone can see this as clear as day. Overproduction in the commodities is killing the industry. There are trillions of dollars being destroyed. Our strategy was to appeal to the oil and gas investor community and to have them support People, Ideas & Objects. After all it is they who have suffered the most in terms of financial losses. Over $700 billion in lost market capitalization alone. I don’t use the label feature of this blog anymore, people can use the search feature much more effectively, but I had used the label “Investor” on 388 individual posts. This represents the number of times over the past three years that we made our appeal to the investor community. This was in addition to the many phone calls, emails and representations to those people in the financial industry. I was also aggressively pushing our message out to the international press attempting to accelerate our exposure in every area.

I am announcing today that the results of these efforts over the past three years are a complete failure. I can tell you today that the investors will not participate in the rebuilding of the industry in the fashion that was put forward to them by People, Ideas & Objects. What I think the issue is, is that the investment capital is separated from its owner and is managed by its own bureaucracy. They may see the issue as we do here, however they also see People, Ideas & Objects as regular business. There is also an expectation that a 5,000 man year software development project will be completed on a volunteer community basis that solves their trillion dollar issue, by tomorrow. They don’t necessarily see it as I do in the context of creative destruction and the need to actively make the radical changes to the industry that the Preliminary Specification dictates. Which of course is their choice and their decision to make. They have a relationship with the bureaucracy in the producer firm and will seek to work within the organizations that they’ve established. Hence they should schedule more losses in the future. It is clear to me that they need to feel more pain and misery. This will also come to be known as the time when you can find us passively waiting by the phone for someone to call.

My issue is the same issue that I have had since I first determined the Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable producer. That issue is that I glow radioactive. The bureaucrats know that I am toxic and eliminate their future in the industry. The press knows the bureaucracy will not support the initiative and therefore don’t get involved. Users, and many more of them these days, see their future in the Preliminary Specification more clearly than they do in the status quo. And we will continue to develop our user community. But we can now see that the investors in the oil and gas industry have not yet suffered enough.

Which leaves us with the question of where do we get funding. Our Revenue Model still stands and it is the producers who need to pay for the development of the Preliminary Specification. The oil and gas producers, as detailed in our Revenue Model, have a checkered reputation for not paying for the costs of ERP software developments. As a result they have to pay upfront, otherwise they’ll just abuse another vendor and I’ve played that game. It was always assumed they would pay these costs under the direction of the investors. I’ve said it a million times. Software defines and supports the organization. If the oil and gas bureaucrats never support any ERP software, then their franchise is never challenged because no “market” will be created without any financial resources. Ensuring the bureaucrats future.

How we source our funding is unknown at this time. I have never had the support of anyone in this initiative. It looks like it will be a lonely pursuit for a while longer. There is no doubt in my mind that the need for energy in the next 25 years is at risk with the current structure. That it will be more difficult to do this job is no big surprise to me. I went into it with my eyes wide open and titled our Preliminary Research Report “Plurality Should Not Be Assumed Without Necessity.” Explaining this as “It's not what you know that you do not know that hurts you. It’s what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things.” That was certainly the case at the beginning of this initiative and it certainly is the case today. Just because my job is difficult doesn't mean it doesn't have to be done. It does mean that we should brace ourselves for serious difficulties ahead. All hell is about to break loose.

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. 

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.