Deliverability Declines!

There is a material decline in the deliverability of the United States production of oil. There is no denying that. The bureaucrats can take pride of ownership in this accomplishment that they have so feverishly pursued. Their dogged approach to “market rebalancing” is having the destructive effect that is desired. Whether this is the reason that oil prices are up almost 70% in the last two months is the question. As I have stated I think its Annual General Meeting season and the capability of the producer to influence prices in the short term. We saw a similar situation in last run up to the AGM and if you look at the futures prices for oil, they have not moved at all in this recent runup. Bureaucrats need a narrative in these meetings and “market rebalancing” is all that they have. I think that what we have learned from the Saudi’s from their last meeting is that they will continue to hold on to their customers as their key strategy. That they will increase their production by up to 2 million boe / day. And I think it is reasonable to impute that they will do this to gain new customers in direct competition with Iran. Rebalance that market.

Why spend the time, effort and money to change the industry to People, Ideas & Objects Preliminary Specification? Acceptance of “market rebalancing” is just a mental process that needs to be processed by those in the industry, and particularly the investors. The wholesale destruction and damage that is done in the process is largely irrelevant to the bureaucracy that exists today, and tomorrow. This acceptance, whether as an investor, an employee who has been laid off, a service industry provider or a student who has so foolishly pursued the engineering and earth sciences as a course of study, only hurts if you focus on it. Forget about it. Move on. It is what it is, and always will be. Party on dude! That narrative is the bureaucrats message to all those that might still be listening.

The quarterly reports that are coming in are as bad as I thought they would be. No one is making any money. And that is based on the SEC’s creative accounting methodologies. Most of the producers are consuming cash. All are projecting that their deliverability will be increasing by the usual annual increment. In light of all that has been stated here what is the future for oil prices in the next couple of years?. More of the same? Where do I invest? Is there any other business that would get away with this? Yet an entire industry is able to muddle along in a fog of “oh whoa is me” in which action to solve their problems isn’t a point of discussion. Any alternatives are actively punished and ignored. I hear from many people that they are unable to read this blog on their work computer. That is because we are on the industry blacklist of websites that are not permitted through a producers firewall.

And so market rebalancing will continue. We’re down about three to four hundred thousand barrels per day in the United States. With the Saudi’s and Iran going at the “new” business with their 2 million a day each, we’ll need to be rebalancing the market for about a decade. The U.S. will clearly have to decline from 8.8 to 4.8 million barrels to just keep the prices where they’re at. To “rebalance” they will also have to reduce the current daily production surplus of about 1.5 million per day, and then also reduce the well over half billion barrels of inventory just in the U.S. That’s a lot of rebalancing. So let's add another decade on top of that first decade that we’re idly sitting by and losing money, to total 20 years before the industry can start to make any money. Sounds reasonable to me.

Rebalancing of the natural gas marketplace is not discussed. At least I have not read anything anywhere that deals with that topic. Again the Saudi’s are the ones that are conspiring to make those prices fall to the levels that they are at today. Natural gas being a continental commodity. Natural gas storage in North America is filling at a remarkable rate as the Saudi’s continue to overproduce the commodity. It’s never the bureaucrats fault, “oh whoa is me” the Saudi’s are this or the Saudi’s are that. Even the Saudi’s in their plans to deal with their country's energy future have identified the bureaucracy as something that they need to eliminate. The big boy pants are still in the closet, pressed and cleaned waiting for the oil and gas producers to take responsibility for the mess they’ve created. Implementing the Preliminary Specification is suicide for the bureaucrats, but I think this alternative of “market rebalancing” is, as far as everyone else is concerned, not such a good choice.

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. 

Specialization and the Division of Labor

One of the key concepts that is missing from the world economy at this time. The reason that we are stuck in this slow growth environment. Is that the bureaucracies in the world have ceased to use specialization and the division of labor as part of the toolset to expand the economy. It hasn’t helped that many people see government as the solution to the problems that have manifest themselves since the financial crisis of 2008. People are still unhappy with the situation and are seeking new solutions. Donald Trump being one of those, and the other being the removal of the bureaucracy from industries.

Within the People, Ideas & Objects Preliminary Specification there is a defined reliance on specialization and the division of labor throughout the specification. It is a key part of our toolkit which includes specialization, the division of labor, quality, automation, making computers work for us, not the other way around, innovation, and accounting and administrative expertise. These are inherent in all aspects of everything that People, Ideas & Objects, our user community and the service providers are doing.

What we do is restructure the industry to create a sub industry we are calling the service providers. They are situated between the oil and gas industry and the technology providers. There is currently a gap between these two industries. Neither industry is able to understand the other completely and are working at cross purposes. A miscommunication is causing issues to develop further over time as opposed to being resolved. When we see gaps such as these between two industries, that is when specialization and the division of labor can be effectively applied. Our service providers will be sourced from the oil and gas industry for their fundamental understanding of the oil and gas industry. And they will be selected based on their technological aptitude, skills, attributes and extracurricular education.

We will also reorganize the oil and gas producer to enable a greater focus on the specific competitive advantages of the producer. These changes consist of the revised prototypical producer consisting of the C class executives, the earth science and engineering resources, some land, legal, and support staff. The administrative and accounting resources of the producer will all be moved to the service providers where they will be providing their services to the industry as a specialized capability. Focusing on one process or subprocess and using the entire industry as their client base. This specialization on one process will enable them to build value for their clients by providing the most efficient management of the producers needs. This reorganization is also a key element of the decentralized production model which generates the majority of People, Ideas & Objects value proposition. A value proposition in the neighbourhood of $25.7 to $45.7 trillion over the next 25 years.

It is People, Ideas & Objects claim that we provide the most profitable means of oil and gas operations. With the decentralized production model that claim is substantial and clear to all who work in the oil and gas industry. However, if the decentralized production model didn’t exist, specialization and the division of labor would still build significant value for each and every producer. With the producer focused on their key competitive advantages of their earth science and engineering capabilities, and their land and asset base. They would be able to increase their firm's value as their primary focus. And with the service providers specialization and division of labor, producers will be able to increase their throughput in terms of their oil and gas deliverability from the same administrative resource base. These attributes are not quantifiable and are not calculated in our value proposition but also generate significant value for the dynamic, innovative, accountable and profitable oil and gas producer.

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.

Bureaucrats Love Government Involvement

We saw in the lead up to the 2008 financial crisis that we can gloss over issues for a significant period of time before the day of reckoning comes. Issuing mortgages to people who had no capability to own a home was the straw that broke the camel’s back. Making the issues evident to everyone by way of a crisis. We certainly have difficulties in oil and gas. And I have asserted that they go back to the late 1970’s when the SEC began their experiment in creative accounting with full cost and successful efforts methods. Essentially capitalizing everything that the producer touches to the balance sheet for eternity. After several generations of this practice the culture in the industry is that no one is concerned about profits, it's all about cash flow. And bureaucrats state that those costs that were incurred in the building of an asset are “sunk costs” that are never considered in any calculation of corporate profits or costs of operations. As a result the industry has appeared profitable to the investors who have supported it based on this creative approach to accounting each and every year. Without the annual capital inflow from the investors and banks the industry would collapse. Which it now is. In the past, overinvestment based on the reported inflated producer profits led to overproduction eventually leading to depressed commodity prices. This is best represented in the natural gas business. Six years and they just don’t stop producing. Bureaucrats state that they are making money and they will continue to make money at even lower prices. The final straw is the business consumes cash and without capital injections it's slowly eating itself.

In any other industry, this type of accounting would be filling the prisons with “fresh meat.” It's just that in oil and gas it’s allowed and is the prescribed method dictated by the SEC. This maybe regulations finest hour. Maybe we should start prosecuting regulators. That I think would be a worthwhile innovation. What we have today is a desperate situation by anyone’s standard. However, I don’t think its enough to shake anyone out of their complacency. Everyone knew no one was going to be paying those new mortgages that were being issued. Just as everyone today knows that cash is King in oil and gas. It took the absolute ultimate demise of the banking industry to be displayed in front of everyone before anyone stood up and took action. And that is maybe the level of crisis we need to go to before anyone does anything to fix the difficulties in the North American oil and gas industry.

It’s in the high 70 degrees here in Canada today. No one will feel the freezing in the dark for at least six months. The government had to step in to ensure that the banking industry did not fail in 2008. Stating that it’s systemically important to people’s confidence that it be stable and strong. Having a stable and strong oil and gas industry I think is far more important. There is no Fed capable of providing the marketplace with quantitative easing in terms of increased volumes of oil and gas. With the resultant level of government regulation and oversight in the banking industry, a failure in oil and gas is obviously what the bureaucrats are looking for here. They want to really entrench themselves in the industry and make for a secure and long term future. Bureaucrats love more regulations and oversight, it’s one of the key reasons for their existence.

This willing destruction of the business, or “market rebalancing,” has had to of had a purpose. Energy is the lifeblood of our society and certainly the bureaucrats feel that they should be entrenched for all of time. They see the battles with the Ubers and AirBnb’s and think to themselves that this is their moment where they have to take a stand. Otherwise People, Ideas & Objects will succeed and they will be out. If you look at People, Ideas & Objects history, the history of the natural gas business over the past six years, the history of the oil price declines in the past two. And you understand the ability for ideas to spread through the Internet. Why haven’t the producers acted to do something with the Preliminary Specification? Simply it's a productive action that is counter to the best interests of the bureaucrats. The bureaucrats want to continue to willingly incinerate capital, enjoy the good life and not change. They can’t, won’t and will not ever change a fundamentally flawed business model. I have prepared an alternative business model in the Preliminary Specification that addresses these issues and sets a foundation for the industry for the next 25 years. What do the bureaucrats have?

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. 

Bureaucrats Response to Distintermediation

I have a reputation for providing the oil and gas producers with the most profitable means of oil and gas operations and for fighting the bureaucracy. This fight is because they put up such a good fight themselves. When Information Technology challenges them and their livelihood they respond. I’m sure many people feel that I am over the top in terms of my approach here at People, Ideas & Objects. Making a mountain out of a molehill, sort of speak. The fact is bureaucrats will never, ever make the changes necessary to enable the Preliminary Specification to become the method in which the industry operates. They will drive the industry into the ground before they submit to losing control of their franchise and giving up to the likes of us.

Up until recently I had no evidence of the type of response that I invoke within the oil and gas bureaucrat. I had no proof that the bureaucrats were, as I’ve stated, in such staunch opposition to this initiative. But now I do. Calgary has a checkered past with the use of Uber. It has been available for about two weeks over the past few years. Each time it finds the legal environment that it can operate in, it’s slapped with another injunction or legal proceeding that shuts it down from operating. Currently the regulations that have been adopted by City Council are so onerous that Uber says that it can’t provide the service. Our Mayor, Naheed Nenshi is the leader of this anti-Uber campaign and is the public face of the otherwise faceless bureaucrats.

He was invited to MIT in Boston to give a speech. And while in Boston took an Uber car to one of his destinations. What he didn’t know was the driver was live streaming his day. The Mayor took the opportunity to colorfully pass on his opinion of what he thought of Uber. A summary of the key parts are in the following video. Warning, the language is strong.

The full 30 minute ride can be seen here and here.

What’s his beef? Does he have a dog in this fight? Yet here we see an otherwise rational man. A man who has a masters degree from Harvard. Going ballistic over the personalities of the people at Uber. This has subsequently been in the news in Calgary trying to determine exactly who the criminal sex offenders and violent criminals that he mentions were. Does the City incur any liability in doing this? Why would he state such a thing if it wasn’t true? Why would a City go out of its way to prove a commercial business was not adequately screening its employees?

Disintermediation eliminates bureaucrats. It renders them powerless and removes them from the comfort of their environment. It disrupts their lives and challenges them in a way that has never been done before. People, Ideas & Objects eliminates bureaucrats. Read the Preliminary Specification and you can see clearly that the way the industry is managed today is over and done with. The people who are in power and control are diminished to the point of redundancy and are eliminated. Not deliberately or on purpose, it's just how Information Technology works. It’s more efficient and effective. When people are challenged at this level it invokes the fight or flight mentality and they chose to fight. I can’t express to you the shock I experience at the scope and scale of the hatred that I face every day. It is at the scale that this otherwise competent Mayor is in this video.

It is important to keep the people who are members of our user community protected from this environment. This has been our policy since the beginning and it will continue. These bureaucrats are relentless and will do anything and everything to their “enemies.” It’s important for me to express our concern and to show the level of animosity from bureaucrats that people will receive in mentioning they are working with People, Ideas & Objects. For lack of a better term, we are at war, and we have a big fight ahead of us. If you enjoy that, you're more than welcome here.

I also raise this as a point regarding our progress. We have not and will not receive any support from these bureaucrats. I am a little frustrated with the expectation that I have not done my job and had this initiative further down the road. We are not operating in a normal environment. Uber has a market capitalization of over $60 billion that provides them with the ability to fight these issues. We don’t and never will. The oil and gas ERP marketplace is too small to be on anyone's radar. And with the bureaucrats in control of the producers checkbook it’s difficult to see how we’ll ever be funded from the industry. Our appeal has been to the investors of the oil and gas producers and their expectations of me are unaware of this conflict. When they call the producers the bureaucrats say it's all “happiness and rainbows. Nothing here to see.” We’ll keep fighting here, the need in the marketplace is significant and the Preliminary Specification is the solution to these problems. Theirs has no future.

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. 

We'll Miss it When it's Gone

This attitude of waiting for the production to decline to meet demand. Being the strategy the bureaucrats are implementing. Is really reckless and dangerous for our well being. Letting the industry decline on purpose could get out of hand. I would suggest that it is. But then that’s just me. Alarmist and all. With so many environmentalists running around with “scientific” authority, and the idea that now would be a good time to switch from carbon based energy to renewables. With no one standing up to these fools to state unequivocally that that is delusional. We find ourselves quietly sailing our ship out to the edge of the earth. Sorry the earth is round, falling off doesn’t happen, anymore. If we could think of ways that our advanced societies would fail, a lack of adequate energy would be an effective tool.

In Canada, the northernmost country in the western hemisphere, well ok, the world. We have a political party that sat in opposition in the last term. They, seeing that they have lost favor with the Canadians in the last election have adopted a new policy. One that sees Canada off of fossil fuels by 2030. Remember humans are the intelligent beings. The Americans would be wise to erect a wall to keep the Canadians out of their country first. They could start quickly with a temporary wall made out of ice, then build a permanent one out of spent batteries, solar panels and wind turbines. All sourced from Canada.

The most hysterical and ludicrous extent of this thinking is best captured in the comment that “Tesla’s home batteries will enable consumers to move off the grid.” Of course. When our countries are paved with solar arrays and wind turbines and we can’t get from point A to point B then we’ll miss those times when we could just gas up and go. Or turn up the thermostat to feel the bern, as they say. Those days when you maybe didn’t appreciate the size and energy value of your neighbors trees. It may be another cold winter and you could really use that heat.

In all seriousness society can go leap off of whatever cliff it wants. That doesn’t absolve us of our responsibility to ensure that we provide adequate supplies of energy at reasonable costs. Which is our responsibility and our obligation. The bureaucrats don’t see it from this perspective. It’s just a gravy train to keep them in their personal comfort and enjoyment. Therefore it is our responsibility to ensure that they don’t screw it up. That we offer an alternative and make sure that we replace them when they start to make a mess of things. Like today.

Oil and gas are not your regular commodities. They are what have enabled us to live the advanced lifestyle that we do. In otherwise uninhabitable places. The convenience and freedom that is provided by oil and gas is why we are what we are. No one stands up and defends this way of life. It's all considered “bad” now and should be eliminated from everyone’s lives. Why not instead just stop eating? It’s about as intelligent and as fruitless of an objective. So when a bureaucrat goes about destroying the oil and gas deliverability of the North American marketplace. When they have destroyed the businesses ability to be a viable going concern, earn a profit, sustain itself, expand and prosper. There is no one standing there saying that we should do something about that. That this demise is a bad thing. There is only the peanut gallery and their associated “scientists” cheering on the demise of the industry.

We should all take a serious look at what it is we’re doing. Is that really a viable and profitable choice? Are we willing to sacrifice the way of life that we have. Or will we do something about this? Now that the industry is in decline it’s probably a good time to think about it.

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. 

Commodity Prices Explode

Oil and natural gas prices have performed handsomely since Opec decided not to implement a production freeze. I had predicted that oil prices would decline precipitously as a result and I stand behind that prediction. Nothing in the marketplace has changed. There were some temporary outages in other countries, most material was 1.7 million boe / day in Kuwait. Those have been resolved. The only thing that I can think of that is holding the price of oil, and natural gas up, is the desire of the bureaucrats to get through their Annual General Meetings. They’re very capable of affecting the market in the short term. To make the situation appear different than what it actually is. The question that should therefore be asked is why has natural gas performed so well?

Looking at natural gas there will be a big step down in prices in about fifteen weeks from now. That’ll be when natural gas storage facilities are full, in mid August. And the performance of the price of natural gas in these past few weeks is that it’s up over 20%. Fool me once… Right now is the time when there is no demand for winter heating, and air conditioning hasn’t kicked in either. And the price jumps over 20%. Storage facilities are taking in almost 75 bcf / week which indicates that production is 10 bcf / day higher than demand. Expect this surplus to double in the coming weeks which will quickly fill the storage to capacity this summer. I don’t expect natural gas prices to survive this amount of abuse. The only thing that can save the oil and gas investors from this devastation is to implement a production allocation methodology that is fair and reasonable. One that is based on profitability at the Joint Operating Committee, like the Preliminary Specifications decentralized production model.

What we will most certainly see is a healthy natural gas price for the remainder of the Annual General Meeting season. Or two more weeks. Has anyone noticed that the narrative is that the “market is finally rebalancing” and then, after the meetings, the bureaucrats will skedaddle off to the cabin for the rest of the summer and the market price of gas will do its thing. History repeats itself and this is what we saw last year.

Oil inventories continue to fill and all we hear about is the decline in distillates or gasoline inventories at the refineries. After that failed Opec production meeting, the Saudi’s said they would increase their production by as much 2 million barrels per day. Iran and Iraq are both increasing production, though what we hear is that Americans are driving much more than they were last year. There is a narrative here that is counter to the facts. One that keeps the focus on “market rebalancing” as the magic potion that cures all that ails in the oil and gas industry. Let’s call it what it is and that is it's a deliberate destruction of the value and capabilities that have been built up by the investors. It’s not enough to destroy the investors money by not providing them a return, it's also “good business” say the bureaucrats to destroy the value of the asset and deprecate its productivity.

I can’t be the only one that is tired of these stories that are being hoisted on the allegedly gullible oil and gas investor and public at large. The bureaucrats are fooling themselves if they think they’re fooling anyone, anymore. Each time they tell these tales they lose another chunk of credibility. They’ve spent a lot of their credibility now but as I keep saying, they don’t care. They’re only there to collect the goods. They will leave and trash the place when the going gets tough and it's time to account for their actions. Which by my watch is pretty soon.

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

This Destruction Was Deliberate

The investors who have built the producer firm, where the bureaucrats work, don’t call back. The bureaucrats feel they really need to talk. The bank keeps calling, don’t want to talk to them. Partners of the Joint Operating Committees are calling now too. They want to know where their money is. And of course the thousands of robo calls from the service industry. Logistics is now an art of the possible. Getting a truck from point A to point B is a masterstroke of engineering. The staff are all beginning to take on that deer in the headlights look. This is not your confident bureaucracy.

Capabilities. Progress usually denotes that what you did yesterday can be repeated today and at will any time in the future. We don’t have that anymore. We are regressing in terms of our capabilities and the thing that should be realized is that this is what it looks like and it's deliberate. This is indeed what “market rebalancing” is all about. Have the industry erode to the point where the production volumes decline to where they match demand. Uncreative destruction if you will. Brought to you by the progressive and thoughtless minds of the oil and gas bureaucrat.

Well if this is all planned then they should have a solution to get us back to where we were just a few short months ago! I don’t think so. I think this is permanent. We won’t see any “building” process come out of the oil and gas industry until such time as there is a fundamental change in the operation of the industry. Doing the same thing over and over and expecting different results, is the sign of a bureaucracy. I think that’s how that saying goes. Action is required to change the music that’s playing. Without action and a different business model, this is what we will have.

There won’t be anyone jumping into save these carcases. There is too much pain to be realized before any money will be fronted to the bureaucrats. You’d just lengthen the misery and pain for longer and maybe deeper, and as a result lose your investment. Most of the money that has been invested in the industry has already been lost. The perspective that I have been pushing here about bloated balance sheets is becoming clearer in the minds of many. What is the answer to that critique that I have levied on the manner that oil and gas has been managed. Silence.

The investors see that something is wrong. The bureaucracy has done nothing about it. I have been pounding the pavement for over three years with the investor class about my ideas. The situation has come about as I had predicted and the solution to this situation is the Preliminary Specification which the bureaucrats have rejected completely. Who has the better story now. And I don’t really care what the price of oil and gas will be in the future. The reputations of the bureaucrats have been set in the mind of the investor class. The bureaucracy deliberately let things erode to “rebalance the market,” rejected all alternatives, destroyed the business and the investors money. This is all well documented and pretty clear.

A failed business model only becomes evidently clear when it completely fails. I may be premature in my declaration of the oil and gas industries business failure. I should've probably held off for another week or so. We should thank our bureaucrats for being so thorough. They have done a fine job. The difficulty now will be their exit from the scene. They will just disappear in most cases and never account for the mess that has been made. Because that is what bureaucrats do. In every situation such as this, they are the first to jump ship and leave the remains in a complete shambles for others to deal with. Let someone else answer all those phone calls. What’s their upside, as they always like to say?

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

Third Friday Off

No posting today.

An Interesting Dilemma

In terms of building value, the oil and gas industry has been anything but. The money goes in and is never seen again. The bureaucrats take from the banks and investors, spend like drunken sailors, lavish themselves with handsome compensation, destroy the business on a deliberate basis, if I understand “market rebalancing” correctly, and then? What is the next step? I always thought the point of everyone getting in their car first thing in the morning and going to the office was to build value. That the purpose was to increase the worth and welfare of organizations, people and society. This is a matter of perspective as well, possibly, and maybe I need to reorient mine to a more realistic possibility. I don’t think so either.

Cash is king. Meeting payroll has become the task that will never be satisfied as we look at the next six months of difficulties. Extreme difficulties. The difficulty with a cash crisis at this level is that everyone knows it's a cash crisis at this level. Which means that everyone grabs their wallet and hangs on tight to it. Leaving only production, and more specifically new production, as the bureaucrats only source for more cash. This will be difficult to do as well.  As bad as the oil and gas industry currently is, the abuse they have levied on the service industry has been epic. They probably don’t have any gas for their trucks to get to the site to do the job. Nor do they have the food energy to do it anyway. Remember how Encana called these people lazy and greedy just a few years ago. Despicable. The point is the only way the service industry is going to conduct any field operation is with cash paid up front. And only after their years of accounts receivable have been cleared.

As we stated yesterday, Northwestern has the exceptional situation where they have the cash to survive the next six months. This assumes prices remain as they are in the mid $40 range. I wouldn’t be surprised if they toppled back to $26 which would make this the greatest disaster in corporate history. I have been arguing about this situation for many years now. I have spent 25 years coming up with the solution to this problem. The Preliminary Specification deals specifically with the issues facing the industry today. It also renders the bureaucrats redundant. And therefore I have experienced the most abusive treatment at the hands of these bureaucrats that I know anyone else ever has. Am I the only person that saw the difficulties and the flaws in the business model of the oil and gas industry? Maybe. I am however the only one that did anything about it.

Now the producers have put themselves into a situation that is very difficult. The Preliminary Specification costs $6 billion U.S. and has to be paid up front. If you thought we would go forward on a pay as you go basis then you thought that I was a fool. Would you build the Golden Gate Bridge on a pay as you go basis? People, Ideas & Objects budget is beyond what the industry can afford now. So what do they do? Our value proposition is in the range of $25.7 to $45.7 trillion and is proven to provide that value to the producers. It is the best investment the industry can make. It is the best investment any producer could make. Without the Preliminary Specification they have proven that our value proposition is unavailable to them in their current business model. We went through this in the 1980’s and 1990’s. And we’re going through it again. Only now with the added feature of shale based reservoirs to make systemic overproduction a permanent feature of the industry. This has been going on for six years in natural gas and over two in oil. And no resolution.

The producers can cobble together the last cash they have to pay for the development of the Preliminary Specification. And end the reign of the bureaucrats and set the industry on the path of generating value again. Or sit and deteriorate further and faster each passing day. It’s an interesting problem. Who’s going to come to their rescue? They blew every bridge that existed between them and those investors and banks that might have helped. Now they have no way of getting to the bureaucrats, and certainly no desire to get there.

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. 

Energy Self Sufficiency?

It has come to my attention that there is some confusion regarding the determination of profitability in the oil and gas industry. Some people are assuming that if we only produce profitable production then the North American industry will never grow to the size where they can service the North American marketplace. That to achieve self sufficiency in terms of our energy supply would never be possible under the Preliminary Specification. That last sentence I think captures the issue correctly and sets the point for this post. I disagree on both sides of this issue. That we will never achieve energy self sufficiency if the current producers continue to incinerate investor capital. And that the only way we are going to achieve energy self sufficiency is through a dynamic, innovative, accountable and profitable oil and gas producer.

We’re producing all of our natural gas consumption and approximately half of our oil. Therefore in order to double our output of oil production we would need approximately the same amount of investment that has currently been incurred, invested again. That may be simplistic, but for the purposes of this example adequate in terms of logic. We currently have disenchanted investors and bankers. There has been chronic investment in oil and gas for the last few decades. Even when commodity prices were high the amount of the annual investor squeeze didn’t seem to abate in the least. Is it on the basis of this poor performance that we should consider the industry should achieve energy self sufficiency?

Let's take for example the first quarter report of a producer. A random sample provides that the first producer to report is Southwestern Energy Company. They received a 15% bounce in their stock on the basis of the publication of that report. I think the key attribute of the report is that Southwestern was able to tap their line of credit for $2.6 billion before the bank was able to evaluate them. Precluding them from the cash crisis that is the oil and gas industry. However that will be temporary in nature. The results of the lifetime of the company are not that positive. They are now reporting the cumulative losses have totaled $2.3 billion. Meaning that most of the investor money that was given to them was wasted. The key however is to look at the remaining asset value of the company. It still maintains net property, plant and equipment of $6.5 billion. These are the bloated asset balances that I consistently argue against. If the company wasn’t capitalizing everything they touched, these costs would have hit the income statement by now. And under any reasonable assessment, the company is losing money today and is questionable as a viable going concern, in my opinion. The $6.5 billion would be added to the cumulative loss for a total of $8.8 billion.

This is a matter of perspective. I see the company unable to have earned a profit during its lifetime. Its current operations are unable to sustain the organization without investor or banker support. That support has now terminated. Looking to achieve a doubling of output from this base of producer in order to attain energy self sufficiency is delusional. The increased output would cause further erosion in the price of oil and make the situation worse.

The Saudi’s have a three year plan to continue to satisfy their customers. Meaning they will continue to produce at the level they are at or above for the next three years. Southwestern doesn’t have that opportunity. Although it has net cash of $1.4 billion remaining. Just the line of credit will require a commitment of over $800 million in order to keep that facility in place. Operations are going to take at least $400 million during 2016 and the current portion of long term debt could take another $800 million. Overhead costs will therefore put them into a tight cash situation within as little as six months. Remember, they were one of the very few who were able to access their credit facility before the banks review began this April. Many producers were not as fortunate as Southwestern was and we will see which producers that was in the next few days.

The policies of the current producers is that they are unable to economically sustain their current production profile. Or what they call “market rebalancing.” If they let the industry economically deteriorate to the point of destruction of productive capacity, then prices will rise at which time they can start fleecing a new batch of investors and bankers. Brilliant. And it is on this basis that the United States and Canada will become energy self sufficient?

The only way we can achieve the objective of energy self sufficiency is to set out a new basis for the industry. And that is that if the property can produce a profit based on a detailed actual accounting that evaluates all of the costs reasonably. Then the industry could grow its production profile. As the highest cost producers in the world this will not be on the basis of setting out production profile goals. It must be on the basis of operating a profitable industry first and foremost. Only then can the industry conduct itself in a manner that provides society with the energy resources that it needs to fulfill its promise.

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 Material Balance Report

My frustration with the status quo is at fever pitch. I find it best to fight this battle with ideas from the Preliminary Specification. Today I want to discuss the Material Balance Report which resides in and between the Accounting Voucher and Partnership Accounting modules. Traditionally the material balance report was a document used in the downstream part of the oil and gas business. It was used to balance the systems that a refiner and marketer would employ during the month. Either storage or tank car, gathering and processing systems were balanced across what the owner was responsible for. These were required to balance each month and provide a basis of the reporting that is done by these owners.

The issue that the Material Balance Report in the Preliminary Specification resolves is the automation of the administration and accounting processes involved in the production of oil and gas. Today production accountants are employed by the operators to conduct this work and prepare the information to the various stakeholders. These include working, royalty and regulatory interests. Additional information is derived from these such as marketing, revenue and royalty accounting. The process of production accounting is complex and involves the reconciliation of many variables across a plant or system. These can take upwards of a number of months before all of the actual facts are provided to the accountants and they are able to submit the final production numbers. This entire process is currently highly labor intensive. Each change has implications for all the people within the process to amend their information. Several amendments are required in order to eventually balance the system. And what can seem like a complex, disorganized and difficult process is really quite simply the balancing of the production of the facilities, realizing the appropriate prices and inventory implications.

What if we balanced the oil and gas production across the North American producer population. Where the integrity of that system, after a reasonable time had passed to collect the facts, was unimpeachable in terms of the integrity of the production information. I know that the Alberta Government has balanced the province of Alberta’s oil and gas production in this manner for at least the last few decades. And they assess any shortfalls on the producers who they think are responsible for the royalties on those “missing” production volumes. And if we had this level of production data within the People, Ideas & Objects application. Where the industry has their cloud computing provided. Then on the basis of the quality of that data we could automate the subsequent processes that are dependent on the volumetric production data. This can be done.

There will be a variety of modes in the Accounting Voucher that is a Material Balance Report. The Accounting Voucher is the mechanism that we are using to ensure the integrity of the system. The Material Balance Report is a part of an Accounting Voucher with the inherent necessity to balance the financial elements of the voucher. The production volumes will be balanced via three modes known as system balance, partnership balance and material balance.

We are not dictating production allocation methodologies. If a Joint Operating Committee has adopted the chemical composition as the basis of allocation then that is what the production accountant will use. If there is an agreement amongst the participants in the Joint Operating Committee as to what the production allocation will be, then that will be the basis of the allocation. Whatever the current policy is, or future policy of the property is, that will be the allocation method that will be used. What the Material Balance Report provides is the assurance that it is balanced within the property, within the royalty and working interests and the overall production environment as a whole.

I understand the scope and scale of the undertaking of this task that we are setting out for ourselves. To build a system today that does not automate these processes to the highest level, and then iterates on that would be a wasted opportunity. We have budgeted the necessary resources to approach the engineering required to achieve this objective. A budget that is well beyond what is possible for one firm to pursue. It is also something that a single producer is unable to pursue on their own. This must be done from an industry wide perspective so that each producer can benefit from these software developments. Based on my background in oil and gas I know that this can be done. And I know in the Preliminary Specification it will be done.

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.

Game, Set and Match

I kept quiet last week out of a false sense of respect for the bureaucrats. It's not everyday that you have your future painted in such stark and bleak terms as it was last Sunday. We didn’t see any real action in the price of oil, yet. The Kuwait labor situation kept the price high for a while longer. These temporarily higher oil price dynamics should prove to those last few doubters that oil and gas falls under the category of price makers. We had all that build up to the meeting of Opec on Sunday. That an agreement between the parties would eliminate the problems in the marketplace and it would bring sunshine and rainbows to oil and gas again. Didn’t happen. Now we here that the meeting wasn’t that important and that ya da ya da ya da. T. Boone Pickens even tweeted

“#OPEC #Doha sideshow a joke. More significant: Major bullish outages in Kuwait, Venezuela, Nigeria & Ecuador past 7 days. Those matter.”

Well actually those outages have mostly been resolved, and the meeting does matter because it affects the prices today, and what they will be in the future for as long as we can see.

What the outcome of the meeting was is that there is no outcome. Further that some countries, like Saudi Arabia, may increase production by as much as 2 million barrels per day. The Saudi Prince is taking over administration of the Saudi strategy. The Saudi oil minister was mute after the meeting. Leaving the comments to the young Prince. The Prince will be making a major speech on Saudi oil policy soon in his National Transformation Plan and we will see the extent of their commitment to their customers. Just to note, this is no time to be proposing plans, now is the time to accuse others and hang on to fleeting rumors. Anyway, if the Saudi's were to concede the market to the high cost shale producers, eventually they will have low oil prices and no customers. Their current strategy has them holding on to their customers. Theirs is a rational strategy. The North American producer is clutching at straws trying to find some solid ground in which to secure a foothold. Last week we heard that there may be a meeting in Russia in May to reset the production freeze. That Iran is now considering joining in that agreement to freeze production. These are the rumors that you want to base the future of the industry on.

There is no solid ground in the North American oil and gas marketplace. If you take the People, Ideas & Objects hypothesis that the SEC accounting is at fault. That the bloated balance sheets have led to inflated profits, which have led to overinvestment, which has led to the current overproduction. Then the fact of the matter is that after six years in natural gas, and now for over two years in oil. These companies have extinguished every nickel that was ever available to them. They have raided the kids piggy banks and they’re begging for money down at the homeless shelters. Taking this scenario one step further, the companies with bloated balance sheets have borrowed extensively against that spend fest of a balance sheet. Meaning that they are now all highly levered. So badly leveraged that the cash generated, even in a low interest rate environment, cannot pay the interest. They are unable to weather the slightest of storms for any period of time. In the meantime they criticize the Saudi’s for losing money. The Saudi’s have all the money they need to weather this storm for at least three years. What are the bureaucrats going to do for this period of time? Blame others and hang on to rumors?

This is a failed business model. It doesn’t work. The Saudi’s know it. And the North American oil and gas producers better stop coming up with excuses as to why the “other” guy has bigger problems. The biggest international issue in oil and gas is the imminent demise of the North American industry. We can run around in panic or start dealing with this constructively. Ask yourself why is People, Ideas & Objects, through the Preliminary Specification, capable of providing the most profitable means of oil and gas operations, having such difficulty convincing an industry that is in this state of financial affairs? Is it because I’m unkind to bureaucrats? I think someone should be telling the truth about the situation that is going on in the marketplace. It’s because the bureaucrats don’t care! And that is unacceptable.

If you believe that this will be resolved in 2016. It won’t. It won’t be resolved until 2025 which will be the day that North America stops any and all oil and natural gas production. For good. Then of course it will be someone else's fault just as it is someone else’s fault today. When are we going to put the big boy pants on and act accordingly? You don’t like being talked to this way, tough. I don’t like seeing a major industry flushed down the toilet due to bureaucratic laziness and self interest. Particularly when it’s unnecessary.

And let's not argue that we’re profitable. The cost to produce in North America is well over $100 / barrel by my calculations. Those numbers floated around that say producers can produce at $30 / barrel are what are called “recycle costs.” Show me the video of the CFO of any firm stating unequivocally that his firm’s costs are $30 / barrel. Recycle costs are fairy tales. Not one accountant was employed in their production. Not one CFO will stand behind them. They are fudge. Not one historical fact is included in them. Not one actual cost was employed in the development of them. They are myths. Based purely on the fact that today’s price of $40 means we can produce profitably at $38. And tomorrow when the price is lower the cost will be lower, just like that.

We’ll be seeing the extent of profitability starting this week with the 2016 first quarter earnings. If all these producers were making profits at $30 then it should be clearly evident. Otherwise we can continue down the road with the story of the day scenarios for as long as the bureaucrats want. The fact is these stories are getting tiresome and their switching from one to the other as soon as they are proven wrong is beginning to be noticed. And these financial statements will show there is just no cash. Action is needed now to fund the Preliminary Specification. We have many years of work ahead of us and much to do.

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.

Our Work Order System

Within the Preliminary Specification, in addition to the Job Order we discussed yesterday, we also have what we call a Work Order system. It serves two roles in the dynamic, innovative, accountable and profitable oil and gas producer. The first is that it captures the costs of the technical resources of the producer and charges them to the appropriate cost centre of the producer or Joint Operating Committee. Secondly the Work Order provides a means in which producers are able to quickly organize an ad-hoc working group to study or research specific elements in the technical fields. The simplicity of the concepts surrounding the Work Order are complicated in the Preliminary Specification when we move to use the Joint Operating Committee as the key organizational construct.

As we have discussed in the past few weeks the sources of revenue of the oil and gas producer under the Preliminary Specification consist of oil and gas revenues, and the deployment of their earth science and engineering capabilities to the Joint Operating Committees that they have an interest in, and to other producers who may be looking for the specialized capabilities of the producer's talents. Therefore we need the Work Order system to collect the costs of these resources and either bill them to the joint account or an internal overhead account. Or alternatively they will be part of the Cost of Goods Sold in the sale of these capabilities.

Staff of the producer firm will need to be charging their time to an overhead account or Joint Operating Committee AFE or lease at all times that they are on the job. This will record their time, their payroll costs, and the fees at which they can be charged to the Joint Operating Committee. It will also be necessary to determine what a charge out rate will be for these resources in the event that they are billed to a third party producer. Under the Preliminary Specification this system will be intuitive and simple to implement for each of the staff. Through a smartphone app they will be able to detail exactly what work they are doing and who is responsible for their cost while it is being incurred.

As with everything that we do in the Preliminary Specification. We are never limited to the sole producer in terms of the application of our domain. Frequently we need to look at the situation from the point of view of the industry. And that is the case with both roles of the Work Order. The Work Order that would be billed to a Joint Operating Committee will need either an AFE or a lease code to ensure that approval of that time is authorized. This authorization would occur at the time the user logged on to the specific Work Order. The Work Order that the staff from producer A may be working on an AFE for a Joint Operating Committee of producer B that producer A has no working interest in. The need for the Work Order to scale across the industry is a feature of the Preliminary Specification. This is also a critical element of the second use of the Work Order.

What we learned in terms of what an innovative oil and gas producer needs is captured in the Preliminary Specification. One of those needs is that the base of the industries research needs to expand. Critical to this expansion is the ad-hoc working groups that independent producers set up to study specific elements of interest. It is People, Ideas & Objects opinion that we need an order of magnitude increase in volume of these working groups to be established to enhance the innovative foundation of the industry. It is also our opinion that the impediment to this is the bureaucratic nightmare such a volume of ad-hoc groups would create for the industry. Participation in these is low due to the high level of moral questioning undertaken by the accountants trying to reconcile the costs to how the deal was structured. Leaving the earth science and engineering people to swear never to attempt to do such a thing in the future, and reinforcing the love affair between accountants and engineers.

What the Work Order does is establish an interface that is industry based in terms of its domain where the elements of the “deal” can be captured in the Work Order. Company A will contribute the seismic, company B will contribute cash, company C will contribute the staff, etc. All will share in the outcome, the results and the data. An accounting nightmare. However, once a deal is captured in the interface of the Work Order, the participants will know that the accounting will be processed on that basis and none of the accounting questioning, if any, will be about their moral fibre. Then the ability of the industry to accelerate its innovativeness on the scientific basis will begin.

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 Job Order System

It's a battle of ideas so far this week. I mentioned the Work Order and Job Order systems of the Preliminary Specification and how they enable the producer and Joint Operating Committee to implement the tacit knowledge of the producers within the Joint Operating Committees. I wanted to discuss these further and reflect on how they enable greater levels of innovation to be generated through the industry. We’ll discuss the Job Order today and the Work Order tomorrow.

The Job Order system is a means in which the Joint Operating Committee is able to document the command and control of their operations. Within the Preliminary Specification we resolve the demand for earth science and engineering resources, the talent that will be retiring in the next decade, and the demand of the sciences to expand based on a further specialization and division of labor. Hypothesising that these two elements will disable most producers ability to attain what is commonly known as “operator” status. The breadth and depth of these resources within one firm will require such scope and scale that their costs will no longer fit within the commercial environment.

We resolve this through the concept of pooling these technical resources through the Joint Operating Committee. As each producer within the partnership focuses on their specialized and key competitive advantages in the earth science and engineering capabilities. It will be necessary to pool the specializations of the producers in order to attain the “operator” status from many producers. Including producers who are not party to the Joint Operating Committee. Therefore a means of command and control over any operation within the Joint Operating Committee is going to be necessary from that Job Order system. A system that spans the organizations represented in the Joint Operating Committee.

In order to facilitate this there needs to be a command structure that is put in place over the technical resources that are dedicated to the Joint Operating Committee. Within the Preliminary Specification we call this the Military Command & Control Metaphor. A bad name I know but it will be up to the user community to come up with a better one. This will allow the technical resources to recognize a chain of command and to enable the designation of authority and other attributes necessary for the organization to function and document the activities within and throughout the operation.

Multi-lateral and Multi-frac wells are rather large and expensive operations. For that matter drilling a conventional well is a large risk for most producers. The need for operational control is not a nice to have, but a necessity. Innovation is not the counter to tight operational control. If anything you can’t have innovation in a free for all. The need to have integration of the oil and gas and service industries to the level discussed here in the Resource Marketplace module is a large and expensive undertaking. In terms of operational control the “Capabilities Interface” of the Research & Capabilities module provides a means to have everyone on the team operating from the same hymn sheet. Everyone knows what the plan is and everyone knows what everyone else is doing. Now we need a means in which to execute the plan. In the “Planning & Deployment Interface” as well as in some of the other interfaces, users will have access to the “Job Order System” of the People, Ideas & Objects application. This will provide the ability for a member of the operational team, with the operational authority as designated in the Military Command & Control Metaphor, to issue a Job Order to execute a certain operation. Simply nothing is done during any field operation without the Job Order being issued.

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. 

Our Price Maker Strategy

The overproduction in both the oil and gas market will continue for the following reasons. Bureaucracies don’t change, ever. Shale formations are prolific. Introducing the motivation to expand the value of the firm substantially by increasing shale exposure. And the accounting for the past 40 years has created a culture where the balance sheet stores the capital costs incurred forever. Leaving the revenues to never recognize the high costs of capital of the business, overstating the reported earnings, leading to overinvestment and overproduction. A trend that we saw play out for almost two decades in the 1980’s and 1990’s. Now People, Ideas & Objects have come up with the Preliminary Specification and its decentralized production model. These, in addition to many other attributes, provide the dynamic, innovative, accountable and profitable oil and gas producer with a price maker strategy. What is this, and how does it work.

Price maker is the economic definition of the marketplace for the oil and gas commodities. These commodities have been misunderstood by the producers to be price takers. That any production of theirs will not have a material effect on the price of the commodity, therefore the structure of all of the producers is to produce at 100% capacity. This is the high throughput production model which seeks to cover the high costs of their overhead with full production. Price makers will only produce volumes of production if the production is profitable. Applying these principles to the price taker marketplace of bottled water we find that no matter how much bottled water you produce the consumer will always pay approximately the same for the product. Whereas the oil and gas commodities prices have collapsed upwards of 70% and more on the basis of as little as 2% overproduction. Characteristics of a price maker. Oil and gas commodities are price makers and the Preliminary Specification corrects the industries misapplication of price taker. For further clarification of the technical requirements of price taker and price makers, see the economic definitions here.

The next change we need to make is to the accounting for oil and gas. In order to determine if the Joint Operating Committee or property is profitable we are going to have to have a clear and concise accounting. We have as the basis for this the foundation of the Statement of Expenditures for capital costs, and the Statement of Expenditures for operations in the oil and gas industry. These are enhanced in the Preliminary Specification by the removal of overhead allowances and replaced with the actual overhead charges of the service providers that we will discuss in a moment. These service providers will be charging their actual overhead costs of accounting and administration to each Joint Operating Committee on a monthly basis. Therefore we will have a clear revenue, less royalty, operating cost, overhead and capital allocation to determine the profitability of the property. If it is profitable based on this detailed, actual cost accounting it will continue to produce.

The structure of the producer and the industry are changed in order to obtain the price maker strategy for each producer. The prototypical producer will be a stripped down version of the current organization. It will consist of the C class executives, earth science and engineering resources, landman, some legal and support staff. The remaining accounting, administrative, production administration, land administration and exploration administration resources are reallocated to the service providers that we mentioned before. The service providers are headed up by the user community members of the People, Ideas & Objects user community. They focus on one process and service the entire industry as their client base. Therefore if the property is unable to produce a profit, based on that detailed, actual accounting, the property is shut-in. The service providers therefore do not receive any information from our task and transfer network in which to work on that property. Therefore there will be no billing from any of the individual service providers. The Joint Operating Committee will therefore be recording a null operation. No revenue, royalty, operating costs or overheads. Some capital costs may be incurred during times when a property is shut-in. These null operations will replace the losses that are being incurred in the industry today and are diluting the profitable operations of the producer. These null operations will also stop the costs of the current losses having to be recovered from the existing reserves, in addition to all of the properties capital costs that exist today. They will remove the commodities production from the commodity marketplace allowing the marketplace to find the marginal costs, based on a detailed, actual accounting. And will raise the prices realized for the producer on the other profitable properties that they are producing.

The bureaucrats need to be in control of the industry. The Preliminary Specification disintermediates the bureaucrats in the manner that Uber eliminates the need for taxi commissions and taxi dispatchers. The Internet doesn’t exist, and will never exist in the bureaucrats world. So we must wait until they tire of beating me or retire from the scene. One way or the other the Preliminary Specification will be the method that the industry operates. Just don’t mention that to 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. 

Processes and Capabilities

Working to win the battle of ideas in these next few months we were recently discussing how the Preliminary Specification was built on the foundation of innovation. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable producer. Whereas People, Ideas & Objects aligns the compliance and governance frameworks of the hierarchy with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. Doing so provides the oil and gas producer with the speed, innovation, accountability and profitability that we seek in our organizations. How this is done is partially through the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. It is through these two modules that we manage two large processes within the producer firm and the Joint Operating Committee.

The first key process is the development and deployment of the innovations that are generated. What is unnecessary and should be avoided at all costs is each Joint Operating Committee field testing their own ideas on what to do to expand the sciences and the capabilities of the producers involved in the Joint Operating Committee. This would be redundant and lead to a disorganized mess in no time. Having anything of value generated would be happenstance. With the ability to deploy any innovation further within any of the producer organizations coming close to a lottery in terms of its probability of success. That is not how the industry can move forward constructively. The Research & Capabilities module enables the producer firm to structure a division of labor between those that will develop the research and innovations within the producer firm, and those that will implement and deploy the innovations within the Joint Operating Committees. This deployment is through the Knowledge & Learning module.

The other key process that is managed in these two modules is the removal of a major conflict that exists within each oil and gas producer. That is an organization must either move the knowledge and capabilities to where the decision rights exist, or alternatively move the decision rights to where the knowledge and capabilities reside. In oil and gas the producer designated as operator has the knowledge and capabilities to operate the properties. They however do not have the decision rights. Those decision rights are held by the Joint Operating Committee in the operational decision making framework. These are defined by agreement at the beginning of the project and are voted on by the representatives of each producer at the Joint Operating Committee. To remove this conflict we can either move these decision rights to the operator. In which they would have de facto control of the property. Or we can move the knowledge and capabilities to where the decision rights reside. In the Preliminary Specifications Research & Capabilities and Knowledge & Learning modules we enable the process to move the knowledge and capabilities of the producers to be available to the Joint Operating Committee.

Finally I want to revisit the question that we answer in great detail in the Preliminary Specification. And that is, what are capabilities? We have a variety of excellent academic definitions of the capabilities of a firm which include the following. Quotes are from Professor Richard Langlois “Transaction Costs in Real Time.”

‘Routines,’ write Nelson and Winter (1982, p.124), ‘are the skills of an organization.’ p. 106

What we capture in the Research & Capabilities and Knowledge & Learning modules is the explicit knowledge of the organization. The tacit knowledge can not be captured, however is deployed through our Work Order and Job Order systems.

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organizations probably begins with Edith Penrose (1959), who suggested viewing the firm as a ‘pool of resources.’ Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied ‘how to’ knowledge useful for particular classes of activities. pp. 105 - 106.

Professor Carliss Baldwin provides us with a further definition of capabilities as “knowledge beget capabilities, and capabilities beget action.” Lastly Professor Richardson also notes that capabilities are the “knowledge, experience and skills.” (1972, p. 88) I would note that People, Ideas & Objects have added “ideas” to that to read “knowledge, experience, skills and ideas.”

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

How'd This Happen

As I write this it’s unknown what the outcome of the meeting of Opec members is. The outcome is irrelevant to People, Ideas & Objects, our user community and service providers. We will continue to harp away at the issues that we see in the industry until the Preliminary Specification is adopted. I would also suggest that the outcome of the meeting is irrelevant to the North American oil and gas producer. If Opec should decide to reduce production and prices doubled, we would only be back at this same situation as today in as little as two years. The systemic overproduction of oil and gas in North America has not been resolved. It hasn’t even been discussed or raised as a concern in the industry. It is a non-issue as far as the bureaucrats are concerned. All of this is Opec’s fault.

To the issue of the day and how we ended up in this situation where oil and gas production is so far in excess of what the market can handle. Even in natural gas, which I guess would be Opec’s fault as well. I see two components driving the overproduction, the accounting policies of the SEC, and the muddle along strategy of the industry. These two conspire to ensure that systemic overproduction in the industry is obtained at shareholder and investor expense. And that nothing will be done about it, other than sitting around and waiting for the “market to rebalance.” We saw this in the late 1980’s and the 1990’s in oil. When overproduction caused the prices to be depressed and incapable of providing returns to the shareholders. I thought at that time if we could fix this method of operations in oil and gas, we could have a healthy industry in both oil and gas at all times. That is the Preliminary Specification and what I did not know until well into this century is that the bureaucracy are incapable of action and generally protective of their turf. That only bureaucrats make money in a downturn which is the only concern in the industry.

How do accounting policies of the SEC cause systemic overproduction? By capitalizing everything that is ever spent by the oil and gas producer on to the balance sheet under property, plant and equipment. The balance sheets of these producers bloat year after year as a result of their enhanced spending binges of investor cash. Making them appear to the untrained eye to be well capitalized and healthy. Whereas to the critical eye they are nothing but testimony to the bureaucratic spend fest, and if these statements were fairly stated would reflect highly leveraged organizations. Conversely, realizing only small portions of the property, plant and equipment costs each year as depletion on the income statement has the effect of overstating the earnings of the producer. After two years in the industry you wouldn’t know if the financial statements you're holding are from the company run by the greatest oil man of all time or the village idiot. These overstated earnings make it appear that oil and gas in North America is a good business to put investor money. Therefore it flows into the hands of those that have achieved ever greater status at spending velocity. This money goes to find more oil and gas, and as a result, all of the oil and gas production is immediately put on the market. Eventually overproduction occurs as it did in the 1980’s and 1990’s, and today. Only today we have the high cost shale formations that flood the market with the commodity much faster and makes the industry overproduction more obvious.

Producers have been raised to believe that the annual capital issuance is a given in the business. They don’t understand that if they let the property, plant and equipment costs flow to the depletion account on the income statement they would have a clearer accounting of the situation. They would also be earning less. Or I would suggest they would begin to report the correct amount of earnings. As more and more of the assets flowed to the income statement the cash that was tied up in the investment of the property, plant and equipment would be released back into the organization. Enabling the producer to self finance its exploration and development. As a result there should be no need for annual stock offerings to meet the capital budget each year. Having the capital budget financed through the organization. By not doing this in the past, the oil and gas producers have trapped all the value of the shareholders investments in the properties they own. And are therefore subsidizing the consumers of energy by not generating adequate revenues to offset all of the actual costs and earn appropriate profits. Or in other words oil and gas prices need to be higher in order for the North American producers to be classified as a viable business. This is the way things have been managed  since 1978 and what seems like the way the business is done is culturally ingrained. It is fundamentally wrong and leads to periods of time such as we have today.

The second attribute being the muddling along strategy of the producers. Which is really a capitulation of any active involvement or analysis of the business. It is what it is. And shoot the guy who says anything different such as the treatment that I’ve received.

It should be noted that the discussion last month of a supply freeze from Opec had a remarkable effect on the prices of the commodity. It’s almost like it was exhibiting a price maker characteristic. If only someone would have thought of that and developed a means in which the oil and gas producers could use a price maker strategy in North America. Until then we’ll have to live with the price maker strategy of the decentralized production model of the Preliminary Specification. I do find it comical the number of people who were declaring that the overproduction issues in oil and gas were over. Just like that, without any fundamental change to any fact, they were able to deem that the entire industry was going to be sunshine and rainbows starting this week.

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. 

You Reap What You Sow

This Sunday is the day that all the Opec countries have agreed to meet to discuss production freezes. I don’t expect too much to come from the meeting but we may be surprised. With the state of financial affairs in the North American producers, taking the pressure off of the high cost producers would be bad timing for Opec at this point. After all, the countries that are meeting are still making money. It's the shale producers who are not, and that was the point of Opec’s strategy, to cause North American producers pain and have them adopt the swing producer role in the global markets for oil. The difficulty is that you can’t tell the North American producer this. You have to force them out of business first. Then when they put themselves back together, maybe they’ll adopt the Preliminary Specification and the swing producer role.

The price of oil certainly has behaved as if something good was going to come out of the meeting. And maybe it knows something that we don’t. If it does the bureaucrats have won a reprieve and will be able to keep their lofty positions in the industry for a while longer. If there is no agreement then the price of oil is going to drop precipitously next week and the failure of the bureaucrats will be fully exposed. Is this the best they have? Hoping that the markets are turning upward on the basis of chatter out of Opec? I think the people who had the faith that these bureaucrats had good governance of their investments will begin to think twice about this.

Now I have called this point in time on several occasions. And since I’m writing about the possibility again it would seem that I was wrong before and may be again. I think that my timing has been off but my message is accurate. I do find the timing of this meeting to be rather opportune in terms of leveraging the bad news to the investors of the North American oil and gas producer. It is as little as a week or two away from the earnings release of the first quarter financial reports of 2016. Followed quickly by the annual shareholders meeting. Now I don’t expect anything to come about as a result of these meetings. We have gone through several years of poor performance and nothing has happened so far. Why would it happen this year. This is however the one time of the year where the bureaucrats do have to be accountable to their shareholders and face them directly.

Those bureaucrats that do survive the annual meeting will be treated with the nine months or so of bliss that they’ve always enjoyed in this industry. It's the rest of the year in which they can do as they please, and that’s why they’re probably still around. It’s not that they do anything during these nine months, it’s actually that they do nothing, and as a result nothing changes. We could see some more layoffs and certainly a lot more losses but those are other people’s problems right now. There is the east wing of the cabin to concern the bureaucrats with now.

The banks have all but shut down the last financial spigot into the industry. The cash necessary to produce no longer exists and therefore a heavier reliance on the service industry to extend terms on their services will be demanded. Extending credit on receivables over several years is very common in most industries, the bureaucrats will state. Anything to make payroll. We saw a number of equity and bond issues in the beginning of 2016. Oddly enough, none since. Maybe the investors don’t see the benefit of investing in oil and gas anymore. Left to their own devices the bureaucrats will need to get the cabin ship shape in record time. With all the labor that has been laid off in oil and gas, finding good qualified labor to build that east wing of the cabin should be no difficulty.

Everything for them is looking like a pleasant summer after all. Just need to get past the pesky shareholders in a couple of weeks and we’re home free. All the bureaucrat has to do is stay at the cabin for the entire summer and wait until their paychecks bounce and then submit their resignations. Pensions will kick in and that will be that. A job well done.

It was Opec that was the one that was going to be hurting as a result of Saudi Arabia servicing their clientele as their priority. Leaving the swing producer role to others. They and the other Opec countries are not draining cash to produce. Their countries may have costs that are causing them to draw down their reserves, but if you want to include the U.S. debt and deficit in what the producers need to cover as their costs then we’ll need a bigger boat. Optimism in the face of such a looming disaster is comical to me. What the oil and gas industry needs is a plan to deal with its overproduction for the long term. The Preliminary Specification does that and needs to be adopted. It should also be understood that we have years of work ahead of us! I can’t just flip a switch. As I said many times I have received no support whatsoever from the oil and gas producers. And we have 5,000 man years of work to do.

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.