Oh My! They Don't Have it Covered

The disaster that is the oil and gas industry will not be the one that provides the stable, long term supply of oil and gas to the energy consumer. The next 25 years will be one of the more difficult times in terms of the technical challenges that the industry faces. Thankfully we have the abundance of shale to see us through, we’ll be needing it. Many have lost their jobs in the industry and in the service industry too. If you listen carefully they're not looking for work in oil and gas anymore. This may be the beginnings of a permanent decline in our overall capabilities.

As we noted yesterday the banks have cut the funding that they were providing to the industry. I’m sure those bottom feeder investors that jumped in when the oil prices leaped 50% are regretting their impatience now. That the bureaucrats didn’t have it covered after all is making even them look bad. These sources of funding will now have to come from somewhere else, or we’ll have to wait the seven or so years for the banks to have confidence to invest in the industry again. With the bureaucrats talking about the normal process of market rebalancing while their “Titanic's” are taking on water. It will be a while before anyone has confidence in what’s going on in the industry. We know now that it didn’t have to be this way, that the Preliminary Specification was available in a timely fashion. We just needed to consider the bureaucrats self interest first.

It will be these bureaucrats who are the first to the lifeboats when the water becomes obvious to everyone. Watch out for their sharp elbows. I’ve stated here many times that leaving the place in shambles is the history of the bureaucrats in other industries. The oil and gas industry is a lost cause and they know that there is nothing that can be done. They are essentially saying so by not offering any solutions. Being constructive and proceeding with the Preliminary Specification is suicide for them. They won’t do that if there is the possibility of one more day's pay. And there will be some who do stick around for lack of anything better to do. They know that the banks will need someone to run the day to day. Very strategic.

This is what happens when a business model fails. Its seeds were sown when the SEC began their full cost and successful efforts adventures in creative accounting. Blowing up the balance sheet and never recognizing the costs in a capital intensive business will inevitably lead to overproduction. That’s because it always appears that everyone is making handsome profits in that industry. The over investment leading to the inevitable overproduction. The shale reservoirs just make it obvious that no one can make money in the oil and gas business. As the weight of those that are failing eventually pull everyone else down. This industry will “muddle along” like it is for a decade or more. Although I don’t know where the cash will come from, and believe me the cash is so critical right now. Then it will eventually turn around and oil will be at $400 and gas at $45 due to the shortages. But that’s in 2026 and think about all the damage that has to happen before we get to that one golden year.

There is a different way. The Preliminary Specification. It deals specifically with the issues of today and provides for the basis of operations for the next 25 years. Where the consumers can rely on a steady and stable supply of oil and gas at reasonable prices. Investors can bank on reasonable returns on a limited risk basis. And people can pursue their careers with slightly greater job security than the starting laborer on a construction site. Running a business like a business provides such things. Today only the bureaucrats are happy. Well not completely happy, there is the never ending issues they have with me.

It's the investors, the bankers, the people who have been working in the industry and in the service industry that need to start working together to remake the new oil and gas industry. That’s how this nightmare is going to end. Creative destruction is a process that has worked to wipe away the old, tired and nonfunctioning methods and to bring in the new ones. Today however we live in a world where nothing works without the software being in existence first. We have to deliberately make that first step, plan it and execute it. That is People, Ideas & Objects Preliminary Specification.

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

The New Normal

We start this week with another turn in the giddiness of the bureaucrats who had it all figured out when oil was moving from $26 to over $40. Did anyone notice the attitude towards the difficulties they were facing somehow lost urgency? We’re dealing with attention spans of two to three days at best! When People, Ideas & Objects discuss the structure of the industry, and the capabilities necessary to deal with the demand for energy over the next 25 years we must make the bureaucrats giggle. There is not one single thought that there is a problem in the industry, any discussion is what has traditionally happened in a downturn and that they are waiting for those days to pass when the prices begin to rise. Also known as doing nothing. Doing nothing is not an option. Not one producer is making any money producing at these prices. They are in fact burning far more cash in the process of production than they generate. The trouble is they will burn far more cash if they stop producing. The structure of their organization is that it's a fixed cost that exists if they produce at 100%, 50% or 5%. These high overhead costs do not change and therefore they are forced to produce at 100%. In the abundant era of shale based reservoirs this will be the end of the industry as we know it. It is a failed business model that only works if there is abundant sources of other people’s money.

I have noted on this blog the critical situation regarding the cash resources of the industry. When you capitalize everything for decades, and as a result report that your profitable during that time. When you either borrow or source your existence on the annual share distribution. You are in fact a spending machine that depends on others for cash at all times. The industry never made any money, even during the time when prices were $100 for oil and $15 for gas. If they did they wouldn’t be processing charges to their asset base for 2015 that wipe out their capital base. The fact is these companies have been wasting their time and your money pretending to be companies. Therefore the need for cash is not a crisis. That severely underestimates the issue. This is an issue that I don’t think any other industry has ever faced before. These companies will not be able to pay their people very soon. Some of the smaller ones are already facing these difficulties.

Banks have caught on to the difficulties. The industry was concerned about going through another bank review in April and having their lines of credit cut. So in March many producers went and tried to access the remaining portion of their credit lines. In many cases the banks stopped these producers and shut the remaining lines of credit off. In some cases banks turned the agreements around so that all the cash coming in would pay down the line of credit. A full 180 degree change in the attitude of the banks from October 2015 when the last bank reviews were done. Recall then that the banks said they were going to provide funding for the producers while the “market rebalanced.” Seems the banks have lost faith. Who’s going to pick up the banks share of the industries cash needs?

This is the problem that the Preliminary Specification is designed to solve. And I am at a loss to tell you why we have such difficulty in getting moving. We do remove the bureaucrats from the scene, we don’t need them and we don’t want them in the future of the oil and gas business. Does Uber need a taxi commission or taxi dispatchers? Does AirBnB need to have check-in counter clerks? They’re saying every business is a software business now. These oil and gas bureaucracies are showing us why every business needs to be a software business. And it's not enough to own the oil and gas asset anymore, you also have to have access to the software that makes the oil and gas asset profitable. People, Ideas & Objects Preliminary Specification provides the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations.

Well I guess there are always more people to lay off. When did this become the acceptable means of dealing with a crisis? Why are the people who work for the producers and the people who work in the service industry being forced to pay for the bureaucrats failure? First the natural gas business collapsed, then the bureaucrats said it would be rebalanced, then it crashed completely. Now the oil market has collapsed, we hear the bureaucrats have it under control, it needs to rebalance and we are about to see that market crash as well. Is this now the acceptable level of behavior and performance, the new normal? I’m glad I’m persona non grata in the industry. That I was kicked out for proposing the ideas in the Preliminary Specification proves one thing, all of this destruction was unnecessary. And the bureaucrats who took the baseball bats to me to try and stop me know this.

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

The Battle of Ideas

What better way to enter these next six months, a time when the oil and gas industry will engage in a battle of ideas. With a review of some of the key elements of the Preliminary Specification. Putting People, Ideas & Objects Preliminary Specifications ideas back in the mind of this community so that we can win this argument and proceed with the development of the Preliminary Specification, our user community and service providers. Today I just want to give a highlight of the eleven modules with a brief description of each. Then we can move into a broader discussion of the details over the next six months as issues become topical in the marketplace.

The first module in the specification is the Security & Access Control. With the use of the Joint Operating Committee we have every element in the industry, and every individual affected by the change to this organizational construct. What we seek to do is to provide each person with access to the right information, at the right place and at the right time. This is standard fare for an ERP system that is looking forward for the next 25 years. But what the Joint Operating Committee and the Preliminary Specification make particularly different is that a Joint Operating Committee is owned by many producers. And each property will be provided with the services of many service providers that manage the administrative and accounting requirements of the Joint Operating Committee and producer. Having security and access that meets these requirements and still meets the compliance and governance requirements regarding data access will be challenging. These are just some of the highlights of the Security & Access Control module.

What we introduce in the Preliminary Specification is the concept of marketplaces. These are places where producers, people and Joint Operating Committees go to acquire, sell, deal, trade and bargain for the things they do and need. In oil and gas there are three marketplaces that we are replicating. The Resource, Petroleum Lease and Financial Marketplace modules. Each marketplace module contains a variety of interfaces where the user can virtually access these marketplaces. Take for example the Petroleum Lease Marketplace module. This would be a place where users would be able to go to find all of the Petroleum Leases that are available in an area and see who owns and operates them. See which were available for bid, farm-out or sale. Or alternatively they could promote that they were looking to secure a position within a region that interests either the producer or Joint Operating Committee. A dynamic module replicating the environment that is the industries petroleum lease marketplace.

Next we come to the two primary accounting modules. All of the modules would have elements of accounting and administration in them but the Partnership Accounting and Accounting Voucher modules are predominantly accounting related. In the Preliminary Specification we introduce the concept of pooling in order to deal with the Joint Operating Committee and the shortages of technical resources in the earth science and engineering disciplines. Having the partnership represented by the members of the Joint Operating Committee pool their technical resources, which will be specialized in different areas by each producer, and use the division of labor to enhance their productivity, will need new accounting tools like the Partnership Accounting module to enable their technical capabilities to be pooled across the partnership.

We also introduce the Work Order that is a comprehensive tool that works throughout the industry and records the time and appropriate charges of the technical resources to the appropriate Joint Operating Committee. These charges could be sourced from any of the producers within the partnership and that are consistent with an AFE or other authorization. The Work Order also has the innovative feature of being able to dynamically create “study groups” of producers or Joint Operating Committees to research and study specific elements of interest. The Work Order’s interface does not create the bureaucratic disaster that these groups create today. It was through our research that we determined that these study groups would be the foundation of an innovative oil and gas industry.

The Accounting Voucher is a document that captures the transactions and processes that are necessary for accounting purposes. These evolving templates change each month to capture the change and growth in the producer or Joint Operating Committee. Each service provider will have individual Vouchers for each producer or Joint Operating Committee client of theirs. That will be how the data is captured and processed by the service providers staff and the People, Ideas & Objects software.

Once again moving to the Joint Operating Committee introduces changes to the way that things are done in the industry. Working through the partnership becomes the norm. The research, capabilities, knowledge and what needs to be learned within the Joint Operating Committee to undertake an operation, based on an evaluation of the available capabilities within the partnership will be necessary. No producer will be able to provide the broad scope and scale of all that is required of an operator. Specialization and the division of labor is necessary to increase the throughput of the earth science and engineering resources from an industry point of view. This will move the broad capabilities necessary to be an operator outside of the commercial domain. It is the pursuit of this capability that is destroying large elements of the profitability in the industry even today. Therefore a means in which to pool the specialized capabilities of each producer within the partnership will be necessary to proceed with any operation. These will be provided through the Research & Capabilities and Knowledge & Learning modules.

One thing we will be doing in the Preliminary Specification is expanding the volume of transactions of the producer. Many of the service providers will be processing micro-transactions for their services. Deployment of the unlimited addressing of Java and IPv6 networks enable us to address any size of database. Data will become exponential in terms of its volume and value. Therefore the use of that data will need to have special tools. And in the Preliminary Specification there are two modules, the Analytics & Statistics and Performance Evaluation modules. One is for the producer firms data and the other is for the Joint Operating Committees data.

And finally we come to the Compliance & Governance module. These frameworks are the driving force of a producers focus today. The compliance and governance frameworks which include the tax, accounting, SEC and regulatory environment that the producer must comply to is currently the sole focus of most bureaucrats. They forget about the oil and gas business, it has nothing to do with these compliance and governance frameworks. And the software that is used by the producers today, in most instances, are focused around ensuring compliance to some element of the producers regulatory environment. This is the tail wagging the dog. Compliance & Governance in the Preliminary Specification are the result of the business that is being transacted and the processes that are being managed within the various modules. We have eliminated this focus on compliance and returned it to the business of the oil and gas business and how to earn profits in the oil and gas industry. A comprehensive innovation in comparison to what is done today.

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

Profits? What Profits.

Many producers today are stating that they are profitable at today’s prices. It has been our argument at People, Ideas & Objects that this determination of profitability excludes two significant costs from the equation. Capital costs of the property and the overhead of the producer are not included in the determination of what producers are claiming they are profitable on. If we include these costs, and apply them retroactively through the past years we believe we would find that the producers have never been profitable. Even when oil prices were over $100.00 and natural gas was over $15.00. This seems to be a significant difference of opinion between what is being claimed today and what People, Ideas & Objects are asserting. How could things be so disparate?

First of all the producers are not doing anything technically wrong. They are following the SEC regulation and the financial statements are being audited each year. It is interesting to note that other industries that conduct research and development must have their costs expensed to the Income Statement in the current year. For software companies none of the costs of development are capitalized. Why is oil and gas exactly the opposite? Our argument is therefore with the eligibility or methodology of capitalization of the capital assets that the SEC prescribes. Since approximately 1977 it has been either Full Cost Accounting or Successful Efforts. Either method enables the producer to capitalize all of the costs involved in the drilling, completion, equipping, gathering and plants developments. In a capital intensive industry these are the costs that drive the business. Essentially any cost involved in the development of a property is capitalized to the Property, Plant & Equipment account on the Balance Sheet. These costs will then be depleted based on the amount of the production volumes produced that year, over the reserves that the property has booked and verified by the independent engineers. And as I mentioned these are all audited by the public accounting firms, therefore they are reasonable in terms of their accuracy and in compliance with the SEC.

The difficulty that this provides the oil and gas producer is in the effective deployment of their capital resources over the lifetime of the properties. As work is continually done to the property the reserves continue to increase and these increases are recognized by the independent engineers. Therefore reducing the amount of capital recognized in each year's calculation of costs. Oil and gas being principly a scientifically based business where the principals who operate the producers need to be from the earth science and engineering disciplines. Feel that having a large balance sheet with high balances of Property, Plant & Equipment reflect a healthy producer. Which of course it reflects nothing of the sort. It only shows that the producer spent x amount on its capital assets. Ideally, these asset categories should be turned over as quickly as possible so that the capital that was used in developing the property can be recognized in the Income Statement, evaluate the performance of the management, and in turn, return the cash resources used in developing those assets back to the producer by way of cash and profits earned. That is the theory, the flaw comes by way of the oil and gas commodity prices are inadequate to earn profits.

There is an attitude that the oil and gas industry does not operate on the basis of earning profits. It is operated on the basis of cash flow. It is this accounting methodology and this belief in cash flow that have jointly conspired to operate the industry on the basis where the investors have been subsidizing the consumers of their energy products. This is done by keeping the assets on the Balance Sheet for long periods of time and never recognizing these costs as part of the business. Hence the investors are consistently asked for additional money, the prices received are inadequate to capture and recognize all of the costs profitably, and the producers never have the money they invested in the capital assets returned to them to reinvest in the business.

Most producers operate on the basis of two accounting reports for operations. The Statement of Expenditures reports the amounts of capital that has been deployed over the life of the project. These at no time show the amount of depletion that has been recorded. The other report is the Statement of Operations. This reflects the actual revenues, less royalties and operating costs. Note the Statement of Expenditures is rarely matched with the Statement of Operations. Included in the operating costs of the Statement of Operations are the overhead allowances that are permitted through the various Petroleum Accounting Societies. These seek to allow an amount for overhead to be recognized. These are in the thousands of dollars and are woefully inadequate to provide the operator with an offset to the real cost of the overhead of their operation. So when they say the property is profitable it is on the basis of the Statement of Operations that it is. The actual costs incurred in terms of overhead by the producers as reported on the financial statement is an immaterial amount of 5 - 10% of revenues in the General & Administrative category. However these are the net costs after 75 - 80% of the overhead has been capitalized to the Property, Plant & Equipment accounts. And the percentages that I am using here are generalizations of when the commodity prices were much higher, at these lower commodity prices the G&A will be a far greater percentage of the revenue of the producer.

We have seen many producers being forced to take significant write downs of their capital assets in the 2015 financial reports. Eliminating essentially all of the profits that were reported over the past few decades. Supporting my thesis that based on an appropriate accounting, oil and gas has not been profitable at any time this current century. This is why there is a constant demand for capital. The money goes in, and never comes back because the prices charged are inadequate to cover the costs to find and produce oil and gas. What is needed is the price maker strategy of the decentralized production model in the Preliminary Specification. It uses a pricing calculation that includes the actual costs of the overhead of the producer. This in our system will be the service providers administrative and accounting billings that are incurred if there was production. There will also be consideration of the capital necessary to produce the property included in the pricing calculation. One that amortize the capital costs of the property within a reasonable period of time. I think it should be three years. Setting up an interesting dynamic in terms of what is profitable and should be produced and what is not profitable and should remain shut-in.

Oil and gas is a capital intensive, mature business. Profits are the measure of the management's performance. What I am suggesting here is we begin operating and evaluating the industry on that basis. Continuing to invest irretrievable volumes of capital each year is not doing anyone any good. I’m surprised it has gone on for this long. It needs to stop and that can only be done through the development of the Preliminary Specification.

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

Really Smart People

With the investment community that supports the oil and gas industry taking a pass on People, Ideas & Objects. Stating that we haven’t done enough to solve their trillion dollar problems. I recently heard PJT Partners Tim Coleman say that the oil and gas producers have many very smart people. However, those very smart people have driven the industry into the ground, and they are certainly not immune to the technologically driven disintermediation that is happening in all industries. We’ll see how much longer these investors think the bureaucrats are very smart when the banks begin to withhold all their further loan advances and the producers look for that additional capital shortfall from the investors. Having a junky needing yours and other people’s support is probably a fun place to be. Even if they are the smartest people you’ve ever met.

This week marks the end of the first quarter of 2016. We’ll soon see in the producer's published quarterly reports who’s been swimming naked as Warren Buffett always says. Cash is at a premium in the industry. There have been a few equity and bond issues that have enabled some of the senior intermediates to raise the funds necessary to weather the storm for a year or so. Most of the companies however are unable to feed at the equity and bond markets as they used to. For these companies the next six months are going to be the absolute worst imaginable. Many will be forced to sell their crown jewels for one month's payroll. We saw this in PennWest last week where they sold some of their shale assets so they can refocus on the Cardium formation. Banking that the Cardium is your future is the surest sign that it's over as a viable going concern. Expect to see this type of activity on a daily basis. Unfortunately the amount that oil and gas is being sold for these days barely covers the payroll. Therefore the need to cut the payroll, I think, is going to be the bureaucrats priority for the next six months. Which will lead to a period that we will come to know as the darkest days in oil and gas.

It's difficult to see clearly when you're in the middle of a crisis. I’ll concede that to the bureaucrats. However there has to be some discussion of the issues and how to resolve them. The stark nature of the commentary coming from the producers that the sky is blue and the future is bright is diminished by the reality that it’s really dire in the industry today. The cash drain created by simply producing oil and natural gas will bankrupt everyone in time. The ability to curb the deliverability of the industry doesn’t exist in the shale or any era. The producers that are desperate for some cash will always figure out a way to increase production. This is happening every day, and will forever, this overproduction will not stop. The producer used to have to look hard, and work hard, to find and then produce oil and natural gas. Now it just happens as a result of people looking to generate some cash. And this pursuit can only get worse. The capital that is being provided today will only accelerate the decline in commodities prices. Think about that.

In the McKinsey video of John Chambers yesterday it was noted that the initiative to change the organization could not come from within. If the change initiative was to be accountable to those that are within the current organization, they will run it into the ground. People, Ideas & Objects are about as distant from the industry as could possibly be. By bureaucratic design. If there is any sense left in the powers that be then they should initiate this change, and let us get to work. The bureaucrats have proven they can’t, won’t and will not ever change. And change is what is so desperately needed. We need to think of the consequences of continuing on without addressing the difficulties in the industry. With the oil price up $10 it's maybe a bad time to be asking for this but the problem is not going to go away.

All a producer can do in the current environment is keep producing in order to make their payroll. If they stop producing their payroll still needs to be paid. They are trapped in a spiral where they can’t get out. It’s an organizational and industry based phenomenon that can’t be solved within the current organizational structure. It must change to something that can accommodate the needs of an industry based on the abundance provided by shale.

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. 

John Chambers on Where We're At

We have highlighted John Chambers, the Chairman of Cisco on this blog before. He is articulate and well versed in both the business and Information Technology domains. McKinsey have a 4 minute video of him summarizing his opinions of where we stand in terms of the disintermediation of industries.

If you’re a leader in today’s world, whether you’re a government leader or a business leader, you have to focus on the fact that this is the biggest technology transition ever. This digital era will dwarf what’s occurred in the information era and the value of the Internet today. As leaders, if you don’t transform and use this technology differently—if you don’t reinvent yourself, change your organization structure; if you don’t talk about speed of innovation—you’re going to get disrupted.

I think he is stating these points in the context of a business that is doing well in a traditional sense. That those healthy businesses are under threat from technology. In oil and gas, I prefer to think in terms of the next 25 years. Are these bureaucratically congested producers the ones that are going to carry us through the next generation? The industry has been decimated by low prices. Investors have lost most of their investments. Banks have written off much of their oil and gas loan portfolio’s. Nothing has been done to address the issues around the systemic overproduction. Is this the environment and foundation that we can look towards the next generation with? Or, has the bureaucracy failed?

Using the Joint Operating Committee is a fundamental shift in the dynamic of the oil and gas industry. It changes everything and aligns it within the organization that has been developed to deal with the specific property that it was created for. A producer simply consists of many interests in many Joint Operating Committees. In our Preliminary Specification it is the Joint Operating Committee that drives the organization. Not the corporate model of today, which is driven by accounting, tax, SEC and compliance requirements. Those frameworks, the compliance and governance, are brought into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee by People, Ideas & Objects Preliminary Specification.

When many people think about this, you want to think about the intelligence of an architecture, where you can get access to any data, any point and time you want. It’s simple to describe, but it really means you’re dealing with intelligent networks—a next generation of the Internet, if you will. But connecting 500 billion devices doesn’t get the job done. It’s the process change behind it. So you’ve got technologies like cloud or mobility and cybersecurity and the Internet of Things that are very important. That’s actually the easy part.

The hard part is how do you change your organization structure? How do you change your culture to be able to think in terms of outcomes for your customers? It’s all about speed of innovation and changing the way you do business. The majority of companies will be digital within five years, yet the majority of their digital efforts will fail, which speaks to what a CEO has to do differently.

It is this alignment to the Joint Operating Committee that provides the dynamic, innovative, accountable and profitable oil and gas producer with the speed, innovativeness, accountability and profitability. The Preliminary Specification was developed specifically with innovation as its foundation. Using the research of Professor Giovanni Dosi and others as our foundation. We applied their work to our understanding of the oil and gas industry. Innovation is the core of the Preliminary Specification. And this is where the value in the oil and gas industry will be generated in the next 25 years.

She or he has to think much more outside the box. They have to reinvent themselves. They have to reinvent their company. Not stay doing the right thing too long, if you will. That’s what got companies in trouble in the past. But the rate of change then was much slower. Today, you’re talking about digitization being an integral part of the fabric of a company’s business strategy or the way it interfaces its supply chain with its customers. Not enabled by technology—technology will become the company.

I have stated the similar effects of Information Technology many times before on this blog. It’s not enough to own the oil and gas asset anymore. You must also have access to the software that makes the oil and gas asset profitable. Without the Preliminary Specification operational in the industry the systemic overproduction will continue. In natural gas six years of overproduction continues and it doesn’t stop. Bureaucrats don’t change. Prices are in the $1.80’s and there is no positive outlook for prices. The natural gas producers went through a period, like today in oil, where they believed things would get better, they just needed to “rebalance the market.” Eventually things became so oversupplied that the market and its price collapsed and continues to do so. This is where the oil market and its prices are headed. To an oversupply driven collapse. Until the industry has a method in which to deal with shale, the industry will systemically overproduce. Only the Preliminary Specifications decentralized production models price maker strategy enables a method in which to allocate production fairly and equitably, on the basis of profitability determined on a detailed and accurate accounting.

The first step is merely making it an independent group, because if you do it inside your organization, your existing culture will kill it. So why do these transitions fail or succeed? Companies fail to understand the implications of how quickly this technology will transform their business. And they underestimate what it really means to their economic growth or that of their competitors.

Secondly, they stay doing the right thing too long. And that’s what gets so many of us trouble, because we’re trained to get a 3 to 5 percent increase in productivity. To just crank it: do a little bit better each year; cut expenses a little bit; grow the top line. This is about exponential change.

There are exponential and trillion dollar value propositions to be realized in this new manner of economic reorganization. For those that participate. There is a rapid demise for those that don’t. Oil and gas bureaucrats have been successful in asserting that theirs is the only way. These next six months are going to provide a different vision. A war of ideas. In the meantime we have work to do, the user community is developing, and we need more people to join.

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. 

Record Natural Gas Production

Some interesting facts came out of last Thursday’s Wall Street Journal. “U.S. natural-gas production hit its highest level ever over the winter even in the face of low prices, a conundrum at the heart of one of the year’s worst-suffering markets.” And in the U.S. Energy Information Administration’s March 24, 2016 weekly update they stated that the “EIA forecasts natural gas will overtake coal as the primary source of generation in 2016.” In the same report they state that “Working gas stocks are at record high levels for this time of year.” And lastly the EIA estimate of “unproved technically recoverable” shale gas reserves is at 622.5 tcf for the U.S. and 572.9 tcf for Canada.” U.S. production of natural gas is approximately 25 tcf / year providing almost 25 years of natural gas and 130 years for Canada based on their production profile.

Its as if the oil and gas industry's current business model exposes all of these reserves to the commodity markets at once. These are overwhelming numbers and prove that the basis of the industry has fundamentally changed. Instead of an industry based on the scarcity of the commodities it’s an industry that needs to understand that there is an abundance of their product available to the market. The business changed when the shale volumes produced became material to the overall deliverability of the industry. We can’t go back, we wouldn’t want to go back, and we are now wholly dependent on the high cost shale production. Without shale the conventional sources would be inadequate for our needs. With this change in the oil and gas business it demands that we change the business model of the industry to accurately deal with the situation on the ground.

In a scarce environment it is appropriate for the producer to produce everything that they can. A market for the energy that is produced will always be found. The producer accepts the price that is offered and continues with the business of finding and producing more oil and gas. In today’s abundant shale based reality this old business model over supplies the market with the energy resources that it needs. Simple supply and demand principles dictate that the price must therefore decline to reflect the over supplied nature of the market. Over time producers are eventually unable to earn enough from their production to cover their payroll. There is however significant discussion in the market that today’s production is profitable for the oil and gas producers. I have argued here that the true costs of the operations, which includes the overhead of the producer and the capital that has been expended, are not being taken into consideration when those comments are made. We’ll be discussing this point tomorrow.

The method currently used by the producers to deal with the market's oversupply is called market rebalancing. Effectively reducing capital expenditures until production volumes fall in line with demand. This is a blunt and ineffective instrument. This was used during the last downturn in oil. Beginning in 1986 and lasting for the better part of 15 years. Rebalancing is inappropriate for today’s shale based oil and gas industry, particularly with respect to the work that the industry has to undertake in the next 25 years. We have waited six years for the natural gas market to rebalance and as we see we are at record production. It's two years in oil and there is no hope in the foreseeable future for rebalancing there either.

Unlike the natural gas markets the oil markets were precipitated by a change in strategy by Saudi Arabia. What the Saudi’s did in changing their production strategy is logical to me. Moving from their traditional swing producer role to dedicating themselves to their specific customers, and not letting anyone take those customers away from them by competing through lower prices. They see shale production in the U.S. as the high cost production and therefore feel that the U.S. should occupy the swing producer role. If the Saudi’s were to maintain the swing producer role and leave the shale producers to produce as much as they wanted to. They would eventually have both low oil prices and no customers. They are defending their business against what they believe are the high cost producers, the U.S. shale producers.

The decentralized production model of the Preliminary Specification solves this conundrum by enabling the dynamic, innovative, accountable and profitable oil and gas producer to shut-in any unprofitable properties, and to only produce profitable properties, occupying the swing role producer in both the oil and gas markets. Shutting-in any unprofitable production leaves the property with a null operation, no loss and no profit. This is as a result of the reorganization that is done through the Preliminary Specification of the producer and of the industry itself. Enabling People, Ideas & Objects to provide for the most profitable means of oil and gas operations.

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

Good Friday

No posting today.

The Speed of Change

People, Ideas & Objects is all about change. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer introduces change everywhere and to everyone. Nothing within the oil and gas producer and the oil and gas industry is untouched by making this fundamental change. What we are doing is moving the corporate model’s focus on the compliance and governance frameworks, and aligning those frameworks with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks. With the alignment of these nine frameworks we achieve a speed, accountability and profitability in our producer organizations, and a platform in which to operate for at least the next 25 years.

The establishment of People, Ideas & Objects has with it our user community which consists of the people who supply the tacit knowledge of how the industry operates. They provide our developers with the understanding of what and how they need the People, Ideas & Objects software to operate to do their jobs, based on the alignment of the nine frameworks to the Joint Operating Committee. The user community members are also the people who have a financial and operating interest in the service providers who provide our software and their services to the oil and gas producers. It is this reorganization of the accounting, administrative, land administration, production administration and exploration administration that enable the producers to achieve these positive outcomes. Bureaucrats would have you believe that their accounting proficiency is their competitive advantage.

The structure of the producer is changed fundamentally from the configuration today to a stripped down version in the Preliminary Specification that includes the C class executives, the earth science and engineering resources, some land, legal and support staff. The service providers process the accounting and administrative processes on behalf of the industry. Replacing the need for each producer to build the redundant and unshareable accounting and administrative capabilities within each producer firm. Focusing on the industry as their client base, the service providers use specialization, the division of labor and automation of the individual process that they manage for industry to achieve the greatest administrative efficiencies. Having control of the software as a user community member they are able to change the process they manage by changing the People, Ideas & Objects software through the user community, and if necessary, with changes to the people in the service provider itself.

The advantage of our Preliminary Specifications decentralized production model’s price maker strategy is that it turns all of the producers costs into variable costs. If the producer finds a property is no longer profitable based on the price in the commodity markets. They can shut-in the property and none of the service providers will receive any data in our task and transfer network to process anything, and no subsequent service provider billing will occur. Creating a null operation on that property as opposed to that property incurring a loss as it does in today’s environment. Therefore increasing the producers overall profitability by only producing profitable properties, reducing their future capital costs by not having the costs of the losses added to their reserves capital base which needs to be recovered in the future, reducing the volume of the commodity in the marketplace allowing the commodities price to seek the marginal costs, and increasing the profitability of the producers other properties by having higher prices received for their production.

I haven’t calculated our value proposition for at least a year. The last time I ran the calculation it was in the range of $25.7 to $45.7 trillion. The $20 to $40 trillion is the amount of capital that is projected to be expended in the industry in the next 25 years. Our value proposition calculations include all of these capital costs being depleted over the course of at least three years. This returns the capital to its owners and is a critical part of our value proposition. The current bureaucracy like to let capital rot on their massively bloated balance sheets. Leaving no way in which to return the capital to its owners. In addition to the $20 to $40 trillion we have included in that number the amount that exists on producers balance sheets today. These capital costs will be included in our pricing calculations and is in essence the money that was invested in the industry in the past and will finally be returned. The $5.7 trillion is the amount of money that the oil and gas prices were able to provide in a profitable industry vs. what they are receiving at the time of the calculation. Oil was priced at $60 then and gas was much higher than today’s $1.90, therefore this element of our value proposition is at least double. But I don’t want to make the bureaucrats look too bad now do I.

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. 

Canada Eh!

We’ve noted these next six months will be difficult in the oil and gas industry. Then again maybe Opec will solve all the overproduction issues by cutting their production and shale producers can then produce as much as they want and continue drilling for more! Bureaucrats should notice that proposed cuts in production do have an upward increase in prices which supports our Preliminary Specifications price maker strategy. Has anyone noticed these stories out of Opec seem to be serially produced fairy tales, or are bureaucrats really buying what they’re selling. Maybe I’m wrong, and something will come out of the meeting. Before we would know we’d need to see the formal seating plan for the members at the meeting. If that issue is ever is settled then I might begin to believe. Here in Canada things will be very desperate for the next six months and will dive into the deepest of ditches after that. The desire to fix the overproduction doesn’t exist in Canada either, and we are about to begin significant overproduction of natural gas.

I read the other day that the Marcellus regions producers are focusing their marketing efforts on the Ontario and Quebec marketplace for their natural gas. This market has traditionally been serviced by the Western Canadian based producers in the form of a multi-billion dollar pipeline from Alberta to those markets. With this distance you can be sure the tariffs are significant which makes the Marcellus gas attractive at one sixth the overall distance. Canada used to produce 16 bcf / day and now produces only 12 bcf / day. This is mostly due to the lack of export demand into markets in the U.S. that are now serviced by the American shale producers. If U.S. shale begins to provide Canada’s two largest populated provinces with their natural gas, there will be little demand for that current 12 bcf / day of Canadian production.

Our current federal government is about to bring about its first budget which I think in traditional Trudeau fashion is going to shaft the province of Alberta by cancelling any pipelines under review, in the name of global warming. Therefore I think it’s going to be a hard time in Canada for the next few decades to find work in the oil and gas industry. Bankruptcy trustees aside. There is a notion in the snowboard instructor, bar bouncer of a Prime Minister that we have that we should be more focused on the manufacturing areas of the economy. The oil and gas, and coal are dirty and really beneath Canadians. We Canadians like to just tag along when the going is good. My recommendation is don’t buy real estate in Alberta.

Somebody else will always fix the issues in the oil and gas marketplace. That’s the position of the bureaucrats who reside within the investors and producers. No matter what, they don’t have to do anything. Someone else will fix their trillion dollar issues for them at no cost to them. I really should have accepted this logic when I began this initiative so many years ago. I could have started coding the Preliminary Specification at the start and we would therefore be only 4,975 man years from completion. Which is what I think is missing from the equation in being assessed as not doing enough, I can’t produce an iPhone app that organizes the industry in the manner of the Preliminary Specification. With the user community, and service providers where the producers only produce if it’s profitable based on a detailed accounting. This of course would sell for $1.99 and be available in an Android version as well.

Well I know what I need to do now, that $1.99 will come in mighty handy I can tell you. But then that just shows you the value of technology today, solve a multi-trillion dollar industry wide issue with a $1.99 app. Who would have thought.

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.