Participation Ribbons, All Around

The bureaucrats have found a new tool in their management toolbox. Breakeven analysis. I’ve seen the term mentioned many times over the past few days. It must be the new talking point for the upcoming second quarter reports. I would suggest that they fully explore what breakeven analysis means and the implications of what they’re saying. Breakeven takes the variable costs and deducts them from the sales price to determine the contribution margin. The contribution margin being the amount of money that the firm will use to offset the fixed and capital costs, this would also define the profit margin. So what the bureaucrats are saying is that their “breakeven is at $45” which means they're only covering their variable costs. Excellent work! Participation ribbons all around. The other problem that I have with this, which is what’s being implied by these statements, is that you can’t run an industry by just covering your variable costs for four decades at a time. At some point you will be required to earn enough money to achieve the level of what are called commercial operations.

I’m also hearing producers saying that they’re more cost competitive than the producers in OPEC. That therefore this competitiveness justifies their continued production as they consider themselves the low cost producer. However if you look at the marginal cost per barrel of oil production Saudi Arabia’s come in at around $3, UAE’s are at $7 and the U.S. shale producers are at $73. What North American producers want to show is the $104 in costs of Saudi Arabia’s society that is supported by their oil revenues, which is a specious argument. What OPEC do with their net proceeds from oil is their business. For producers to fail to identify they need to base their operations in the North American financial markets. Which are markets that are driven on profits based on standardized accounting. It is therefore within these financial markets where their focus should be on generating real profits. Comparisons to others using phoney numbers is typical of this bunch.

The last few days I’ve detailed a number of scenarios where a Chernobyl like event was going to occur this summer as a result of the inaction of the oil gas producers bureaucrats. Where oil prices would decline precipitously and the bureaucrats would seek greener pastures. Now let's assume for a moment the bureaucrats point of view that all is well and that none of the scenario’s that I’ve detailed here are of concern. Acceptance therefore of the status of the industry is the approved and general consensus by those who run the industry. How could this be? Have we lost the will to be accountable and perform. And choose instead to hide within a bureaucracy so that we are unknown, unidentifiable and most importantly unaccountable. When was this level of performance, year after year ever acceptable. And to continue on without a single initiative other than the status quo. We are leaderless and unacceptably so. We were originally told that the market would rebalance in 2016, now it's 2020, and that’s the story now for at least until 2019. Natural gas isn’t discussed anymore since it never rebalanced in 2009 or since. How would this ever be acceptable anywhere else?

Oil and gas bondholders are coming under stress again. Who cares, the bureaucrats received that money years ago. There was no shortage of Stampede spirit from the bureaucrats this year. It’s time for them to turn their attention to vacation now. Fiddling while Rome burns. With a willing media bought into the rebalancing story there is no way this gravy train could ever derail. That is the sense that I am picking up from the industry. Outside of the People, Ideas & Objects user community there is a frightful lack of concern regarding the health and welfare of the oil and gas industry. President Donald Trump gave a speech in Poland recently. In which he questions our resolve to defend our way of life. Asking specifically if western civilization can build from here? Now I see the President quite a bit different than most. I see a 70 year old man with a 757 and loads of money who can do anything he wants. And he gave that up because he was concerned. Not only concerned but did something about it. And he stands there day after day fighting for what he believes we should be doing. Setting the example, that’s leadership.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Self Preservation as Motivation

Can you sense my frustration, it's not fun adopting the chicken little stance of the sky is falling. On the Internet there are many of us who are preaching doom and gloom. It’s hard to break away from the numbers so I’ve made myself as comfortable as I can. That hasn’t stopped me from doing what I think needed to be done. Development of the Preliminary Specification and the user community are parts of that. I read late last week that OPEC’s compliance to the production sharing agreement had dipped to the lowest level in June. Reaching 78% compliance from 95% in the month of May. OPEC had been diligent in terms of their compliance to the agreement. I guess they’re giving up on making the difference. The industry executives and the IEA are also beginning to sound highly pessimistic regarding the lower for longer situation. Suggesting it will now be 2020 when rebalancing occurs.

I have to say it’s starting to get pretty crowded in the oil and gas sector of our corner of the Internet. I wanted the industry to avoid this Chernobyl situation that I’ve predicted, the one that the Preliminary Specification addresses specifically. Overproduction and oversupply are features, not a bug of the bureaucratic business model of the oil and gas producers. I think people are beginning to see how chronic and unending it really is. It never stopped in the 1980’s and 1990’s. And nothing will stop it today, other than the Preliminary Specification being implemented across the North American sector of the industry. Bold statements are my forte. It’s either we learn to live with total Chernobyl level destruction or build the Preliminary Specification. And when it comes to destruction, what do you think will be happening now as we see the optimism slipping away from the leadership of industry?

I learned late in life that things like People, Ideas & Objects didn’t get built in the normal course of business. Winston Churchill in a May 2, 1935 speech in the House of Commons stated one of his famous quotes regarding the buildup to World War II.

There is nothing new in the story. It is as old as the Sibylline Books. It falls into that long, dismal catalogue of the fruitlessness of experience and the confirmed unteachability of mankind. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong -these are the features which constitute the endless repetition of history.

Self-preservation is going to be the motivation that builds the Preliminary Specification. The jarring gong will be heard this summer as a result of the Chernobyl like events that I’ve suggested were in our future. Those being the exit of the leadership of the industry, and the collapse of oil prices. But it would seem that history tells us the jarring gong is necessary and that unfortunately is where I think we’re headed this summer.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 Deluded North American Producer

First of all I would never accuse a client of being deluded. That may be a hint as to what I think the North American producers should be doing. Some may think it unwise for me to call them deluded. I don’t, the bureaucrats will be skedaddling here very soon so we’ll be hearing a lot worse from everyone else about them soon enough. At some point producers need to recognize that their inaction is no longer working. If nothing is done by them the two scenarios I put forward yesterday have very high probabilities of happening. And if those scenarios do play out, then what? Is that the clear indication that we’re looking for that “market rebalancing” is a failure? To continue from this point without a plan of action is very foolish. If this comes about, to blame and accuse others for the difficulties in the industry will have more than this posts title calling them deluded.

If producers are so profitable where’s the cash? The industry has been run off the annual shareholder fleecing for over the past several decades. It didn’t necessarily matter that you were a good geologist or engineer. If you were a lawyer or someone with a rolodex of people in New York you too could run an oil and gas company. The only way to run a company was to ensure that you raised money each and every year of your existence. That way “spending like a drunken sailor” could be replaced by the “spendthrift oil and gas industry.” I was told who needs profits a thousand, million times when we adopted our claim that we provide oil and gas producers with the most profitable means of oil and gas operations. People told me I was many things far worse than deluded, it gives me great pleasure to pass on some of the same sentiments now. The only thing is that I propose we generate trillions of dollars in value as opposed to their destruction of trillions of dollars in value. I also carry the welts and scars of repeated sessions with the baseball bats out back by the dumpster.

The fact of the matter is that the situation is out of hand and requires immediate remedial action by the leadership of the industry. However that leadership seems consumed in pointing the finger at OPEC’s misdeeds in not reducing enough production. This is the precursor, in my opinion, to the mass exodus that we'll be witnessing once the summer is over. To adopt the Preliminary Specification as that remedial action would be too much for the bureaucrats to do, as it eliminates them from the scene. We disintermediate them like bureaucrats are being disintermediated in so many other industries today. Therefore they’ll just leave.

Speaking of facts, the configuration of the oil and gas marketplace is one in which the North American producer has every right to criticize others for. As has been noted in many places the fact is that we have adequate supplies of oil to meet the projected global demand twice over until the year 2050. So by all means the high cost producer should go about unprofitably overproducing in order to collapse the commodity markets. North American producers produce about 10 million barrels which is equal to an amount of Russian exports and 30 million in OPEC exports. Why doesn’t Russia and OPEC who are 80% of the market just produce whatever they can until they’re 100% of the market? Who’s going to rush in to save the North American producers? The investors have had enough, besides, by then the management will have hightailed it into other industries. Seems like Russia and OPEC will be close to earning that 100% market share and they didn’t have to do a thing! In fact they look like the intelligent and reasonable people trying to remediate the market by reducing production in an oversupplied market.

The one fly in the ointment of my little scenario here is that the producers do have those glowing and well defended balance sheets. Like super hero’s they’ll be able to wield those balance sheets like shields and protect everyone from harm. Well that’s what the producers think. Bloated balance sheets are useless. They’re a ruse that has the spendaholics in the industry thinking that they build value by spending money. The bloated balance sheets are tributes to the scope and scale of the spendaholics. Nothing more, and that will become very clear when once again this quarter we hear the CEO’s stating they’ll defend their balance sheets.

I’ve been trying to put the situation in North American oil and gas into context of what it is in terms of a crisis. It’s not 2008 as the limited nature of North American oil and gas is not as significant as global banking is. I think that the perfect analogy in terms of a disaster is the Chernobyl meltdown. Completely avoidable but for the bureaucrats, and certainly not a place where anyone will be visiting soon.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Clouds on the Horizon

The Preliminary Specification changes the way the oil and gas industry operates. Moving it from the position of a price taker to one that is a price maker. The industry today is operated on the assumption that no matter how much oil or gas is produced the market will take that production and there will be no impact on prices. We should be very thankful and frankly grateful for the bureaucrats who have provided us with such good data in this area. Both during this past decade and during the late 1980’s and 1990’s. People, Ideas & Objects provide this price maker strategy by providing the oil and gas producer with the most profitable means of oil and gas operations. Producers foolishly believe that producing only profitable production is collusion and will incinerate themselves to prove it. They need to get their heads around the concept of price maker and the implementation of our strategy before too much longer.

I have documented the technical differences between price maker and price taker in the Preamble of the Preliminary Specification. Please review it for further details of how the oil and gas commodities hold the characteristics of price makers. If we want to have the oil and gas commodity markets change their behavior then we’re going to have to change the behavior of the North American producers. These producer changes are going to have to be made before there will ever be any changes in the commodity markets. This will require the implementation of the Preliminary Specification. Just think of the number of years that we’ve been in this economic decline as a result of low natural gas prices. And how many years have oil prices been depressed. I can assure you, based on the history and behavior that I saw in the late 1980’s and 1990’s that there will be no changes in either the commodity markets or of the producers if we just give it more time. The level of destruction has been too severe as it stands now. If the situation is as I suspect this summer, we are about to experience a crisis of leadership and financial liquidation.

The producers have employed what could be considered strategic patience in letting the industry muddle along through this destructive phase. Now everyone sees that the North American producer has to act to deal with the situation. Everyone sees that the producers have nothing in terms of an answer for the market. Investors and bankers may form the conclusion that shale is non-commercial. There is nothing for investors in the North American sector of the industry. Except for losing their investment, joining with the bureaucrats in admiration of the producers bloated balance sheets or participating further with suicidal producer firms that require you to invest more cash, or they’ll go under. If an investor raises these points what will a producer argue? We just need more time! Enough time has been wasted watching everything go to waste. At what point will action occur?

You could argue with me about the timing of the collapse of oil prices this summer. And I agree that it may not happen this summer, but does anyone doubt that it’s in our future? Can the industry afford to lose another year due to inaction? If the investors, after employing their own strategic patience with the bureaucrats, expecting them to have done something about the situation by now, are on the verge of determining that oil and gas is uneconomic, why would it be necessary to prove it? Another year will only make it more difficult to convince the investors that you’ve subsequently obtained that old time religion of profits. Another year will also invoke that scenario of BP’s Chief Economist where the low cost producers decide to get some value for their product and just produce at whatever price. OPEC has seen what happens when they cut production. North American producers rush in to fill the void. If you wait another year, OPEC will certainly outproduce you and your investors will have lost their strategic patience. How can producers proceed forward from September 2017 without a plan in place to deal with these two highly probable scenarios?

Who will save these prices from falling further for a decade or more and who will save the industry? What can the North American producers do to prove to their investors that they have the situation in hand and will remediate it, and what actions will give OPEC the assurance that they would be premature in giving up on the undisciplined North American producer. That they indeed had become producers of profitable production and would be responsible participants in the market! To be candid I’m putting my money on Santa as being the one that saves us, because he arrives much sooner than the Easter Bunny and they call me an optimist.

We have a plan called the Preliminary Specification that the North American producers can adopt and begin developments on September 25, 2017. If they hustled they could look like they were men of action. Women too. We need our first years financing of $100 million of which, as I’ve stated many times before, I’m doing nothing about. I expect the producers to organize themselves and raise this cash. If they’re relying on me and the resources that I have, then they’ll be letting their investors and the other participants in the oil and gas marketplace down in a big way.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

And One More Thing

Yesterday I suggested that we should develop the Preliminary Specification. A little self serving and all that, however the one recommendation that People, Ideas & Objects has made for the producers to resolve these chronic and unending difficulties. Is the tripling of oil and gas revenues by tripling the price of the commodities. This is the only way in which to move forward as an industry. These higher prices will begin to reduce the capital costs of past production carried on producers balance sheets as property, plant and equipment and account for current depletion. The total of which People, Ideas & Objects have calculated at approximately $76 / barrel. These higher oil and gas revenues will help to remediate the current desperate financial position of the producers and enable them to recapitalize their organizations and develop more appropriate financial positions. Without the support of investors and bankers there is little else that will work to heal the destruction that has occurred in the marketplace and the ongoing damage of low commodity prices. Then we can approach the difficult future we have in terms of providing the energy consumer with affordable energy. This will require substantial investments in all areas of the energy infrastructure and deliverability over the next 25 years. Is it the expectation of the bureaucrats that the investment community will continue to subsidize the energy consumer for these costs over these next 25 years? It would seem so.

To suggest that we triple commodity prices and maintain affordable energy for the consumer seems to be a bit of a contradiction. I’m not so certain. Most of the cost of energy is consumed in taxes, infrastructure and delivery. The commodity itself is not a large component of the energy consumers price. A tripling of the commodity prices may see, I’m not certain of the amount, only 50% increase in the price of gasoline etc. Investors have been burned. The industry is in shambles. And the demands for capital in the next 25 years is historically high. The industry has shown no capacity to identify or deal with the pressing issues that threaten the industry. The bureaucrats are oblivious it would seem to the situation. They point the finger that it’s OPEC’s fault and responsibility, that “market rebalancing” will arrive despite their chronic overproduction and their prayers for cold winters has just not resolved the situation. I’ve seen the bureaucrats playbook, it consists of two pages, one says muddle along the other says do nothing.

The Preliminary Specification enables the producers to achieve the tripling of commodity prices by beginning the appropriate accounting of each property. Where the capital costs are recognized on a timely basis, the operations and actual detailed overhead are accounted for properly. No overhead allowances, actual overhead at each property. Then with the Preliminary Specifications reconfiguration of the producer firm to include only the C class executives, the earth science and engineering resources, some land and legal, and support staff. With the accounting and administrative resources reallocated to service providers who are focused on one specific process and have the entire industry as their client base. Using specialization and the division of labor as their key competitive advantages. Then if a property is reporting that it is profitable it continues to produce. If in the next month it is not producing a profit it is shut-in and enters the producer's inventory of shut-in properties to enable it to innovate by reducing its costs, increasing its deliverability or expanding its reserves and returning it to profitable production. No collusion, just independent business decisions being made at the property level on the basis of actual, detailed accounting information. Bureaucrats will call it collusion only to confuse the situation and avoid the work of building the software.

By using the Preliminary Specification the producer increases their profitability by only producing profitable properties. No unprofitable properties dilute the earnings of profitable properties. The commodity markets have the marginal production removed from the marketplace increasing the commodities prices. The reserves are saved for a day when they can be produced profitably and the reserves costs don’t have to carry the additional costs of successive losses on the property. These attributes are enabled through the Preliminary Specifications task and transfer network where the information that drives the work of the service providers will not have any information for those properties that are shut-in. Therefore no work will be done from an administrative or accounting perspective and as a result no billings from the service providers will be generated on those shut-in properties for that month. Creating a null operation at that property. No profit, but also no loss. Enabling the producer to scale up and down their deliverability based on the prices provided in the commodity markets. One month they may be profitable at full production of 100,000 barrel / day and another month they will be profitable at 25,000 barrels / day. The Preliminary Specification creates dynamic, innovative, accountable and profitable oil and gas producers.

How much production needs to be scaled back and which properties are profitable are unknown at this time. In order to achieve the market equilibrium it will be dynamic and changing at all times. At this point in time none of the producers can tell which property is profitable and which one isn’t due to the overhead being lumped into corporate and then most of that being capitalized to property, plant and equipment. Today properties only have allowances for overhead that are woefully inadequate to capture the real costs of accounting and administration. I understand the bureaucrats argument that these changes will take effort and a lot of hard work. However the only ones who have ever benefited from the industry are those bureaucrats. A tripling of commodity prices will keep these products as the greatest deal ever offered to consumers. And the change to the Preliminary Specification is the only way that this industry is going to move forward. That only way starts September 25, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

A Contrast in Value

The implication of stuffing the balance sheet full of every conceivable cost, including royalties, has the effect of reducing the amount of cost recognized on the income statement and therefore increasing the profits of the producers. It would therefore be assumed that the producer firms were wildly profitable as a result of not recognizing the capital costs of past production. That isn’t the case. In our sample of 22 producers who produce 7.688 million barrels of oil equivalent per day. Their net property, plant and equipment at the end of the first quarter stood at $459 billion. The amount of their cumulative profits as reported in their retained earnings over the life of these firms stands at $61.9 billion. Looking at this critically from the perspective that the majority of the costs in property, plant and equipment should have been recognized in previous accounting periods. That these balances are disproportionately outsized and obscene as a result of recording everything as a capital asset and depleting those assets over the life of the reserves, in which many cases may be a 25 year lifetime. And limiting our focus to just these points, it will take 7.4 more lifetimes before these companies earn enough to retire these property, plant and equipment balances.

I did not take in consideration dividends and other matters as I find those points to be irrelevant to the argument that I am trying to make here. These producer firms are not performing and have never performed. They have diverted the recognition of their capital costs, which include the costs of the Post-It Notes and telephone service of the receptionist, to make them appear to perform better than they are. As we noted last Friday the SEC has charged Obsidian and three of its accounting people with civil accounting fraud for the extension of this logic to include royalties as property, plant and equipment. That being the final step in the process of including everything in property, plant and equipment. What I guess the SEC sees in the Obsidian case is that the royalties are much more material than Post-It Notes. I am asserting here the materiality of the $459 billion in capital assets that our sample producers continue to hold in contrast to their lifetime earnings of only $61.9 billion. That is a lot of Post-It Notes.

Those in the industry will say that this is all just accounting and numbers, who cares other than the accountants? If we employed a reasonable test to the property, plant and equipment of these producers I would suggest they would probably be in the range of $100 billion as more representative of what “normal” would look like. That would mean that $359 billion would have flowed to the income statement and these 22 producers would have collectively been responsible for $297 billion in cumulative losses. Which is what I feel is a better representation of the bureaucrats performance in this industry. A dismal performance that would have been remediated well before now. Instead what you have is an industry of spendthrift, unaccountable bureaucrats who overproduce in unhinged fashion and think they rule the world.

The destruction of $300 billion by 22 producers is an achievement. Well the world is coming to see that maybe it's not. First there was me, I knew it wasn’t working. Then the investors and bankers caught on. We also have what I can proudly say is the beginnings of a very large user community being generated here at People, Ideas & Objects. Maybe the SEC has caught on as I suggested last Friday. This loss of $300 billion is just accounting when you consider the damage that has been done to the commodity markets. How much pain and suffering, and unnecessarily so, has been incurred by the people who work, and used to work, in the oil and gas, and service industries. Add it all up and these bureaucrats really should recieve my respect and more civil tone.

The sad part of this assessment is that this is the destruction that we can account for today. As the bureaucrats strike up the band to motivate the machinery to kick into gear again. There is an emptiness in these actions. Everyone knows all is not well and saying and doing otherwise is not going to fix the problems that are pretty much obvious to everyone. As bad as it is today I think everyone can see things spinning out of control pretty soon. That is certainly what I’m seeing. The oil price can’t hold up with continued overproduction and oversupply. It took a few years for the natural gas price to precipitously fall and break down but once it did, well we know the story. Then the “cash flow” that this capital intensive industry generates, and the bureaucrats currently count on to compensate themselves, will diminish into thin air. Then the bureaucrats who have a long history of cutting and running in other industries will do as much here. What we’re left with is an industry that has experienced this level of destruction, turning steeply downwards, where management has left, and the only thing I can recommend is that we build the Preliminary Specification starting September 25, 2017.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

To The Bureaucrats, We Say So Long

I’ve read many articles this past week stating that the ball is in the court of the North American producers. Expectations that OPEC and Russia will extend or expand their production cuts doesn’t exist. The focus is clearly on the North American producers to act. With oil prices about to fall precipitously as a result of the oil commodity market fundamentally breaking down from overproduction and oversupply. All the finger pointing that the North American producers have done over these past few years has encouraged others to act. And they have acted in a fashion that is above and beyond what the market expected of them, and then some. That North American producers want to now change the talking points from “market rebalancing” to the “demand side of the equation.” Which is effective in showing the world their ability to all sing in the same key and in perfect harmony to avoid any and all action. What the world really want’s to see is a response, or what is it that they’ll do, when faced with such destruction.

Natural gas prices fundamentally broke down in 2008. Partially I would suggest due to the financial crisis, but also the chronic overproduction and oversupply destroyed the commodities pricing for the short, mid and long terms. It will require extensive rehabilitation of the marketplace to have the natural gas prices return to levels that will earn producers profits. This began nine years ago! Nothing has been done, other than to initially state that the market would rebalance, and to continue operations as if nothing had happened. Bureaucrats have for almost a decade made out like bandits. Just as they are today. No one talks about natural gas markets anymore, primarily because there is no one to blame. There is no question that the decline in the natural gas market is solely as a result of North American producers overproduction. Is this a trend?

The Preliminary Specification wasn’t complete in final edited form until December 2013. There were however many elements of it that were published before then. The Preliminary Specification is 175,000 words and in 2008 I had published the Draft Specification which is for all intents and purposes the same thing. It contained 25,000 words. There was at least the opportunity throughout this period of time of depressed natural gas prices for these bureaucrats to do something about the natural gas business with the Draft Specification. Instead I was subjected to the repeated sessions with the baseball bats outback by the dumpster. I can assure you that there is nothing else in the marketplace today that deals with the issue of producer overproduction and oversupply that contains anywhere close to even 25,000 words. Bureaucrats claim to be innovative, they only punish innovators, they don’t solve problems, they only muddle along and do nothing.

Bureaucrats haven’t figured out that investors and bankers had figured them out a few years ago. They’ve been withholding new investment funds from the industry due to the issues that they see that remain unaddressed. The lack of cash for these past two years did not motivate the bureaucrats to do anything. They seemed to understand intuitively what I only came to understand recently. That a capital intensive industries cash flow will always support the industries overhead costs. Of which includes their compensation. All they had to do was to hang on, keep the paper flowing until the issues became unmanageable and then duck out en masse in a crowd of otherwise unidentifiable bureaucrats.

That is the status of the industry in the summer of 2017. No one likes to hear this type of talk especially when it's vacation time and the Stampede is in full swing. But before they go I thought that it might be worthwhile for us to take the time to thank these bureaucrats while they still occupy known space. Tell them that their efforts are not appreciated and don’t let the door hit them on the way out. These next couple of months may be the only opportunity in which to do so.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Oil and Gas Accounting Fraud

An interesting thought came to mind last week as I read the news about former PennWest, now Obsidian as they’re called, and three of its accounting employees, including the former CFO Todd Takeyasu, being charged with civil accounting fraud by the Securities and Exchange Commission. There was something that was said by the SEC that reflected to me a different point of view about oil and gas accounting than the one that is operational in the industry. A point of view that is more consistent with the point of view that is expressed here by People, Ideas & Objects and our concern that the industry has over reported their property, plant and equipment and profits by substantial amounts. The quotation is as follows:

The U.S. Securities and Exchange Commission alleged that Penn West Petroleum, which changed its name earlier this week to Obsidian Energy, had moved hundreds of millions of dollars from operating expenses to capital expenditure accounts. That maneuver, the SEC said, artificially reduced the company’s costs by as much as 20 percent at times, and improved metrics of oil extraction efficiency. 

The response by Obsidian to these charges is hilarious.

The law suit is based on certain historic Penn West accounting practices, discovered by the Company and reported to the SEC in July 2014. As a result of the Company’s discovery, investigation, and correction of those practices, Penn West restated its historic financial statements and results on September 18, 2014.

I read this response as saying “accounting is a joke, we overreported by a few hundred million and then fixed it, move on.” Which is typical of the attitude in oil and gas towards the accounting profession. That royalties were capitalized to property, plant and equipment is only a further extension of the “game” that has been played in oil and gas for the past four decades. The culture of capitalizing every possible cost to property, plant and equipment only went to the obscene level of including royalties with PennWest, that we know of. However it is indicative of the level that the “game” is played. The fact that this was done over several reporting periods and was several hundred million dollars worth shows that it was a known practice within the organization. It wasn’t an innocent mistake.

The Post it Notes that the receptionist uses, are they capital or overhead. The phone service that she uses to take the calls, is that capital or overhead. In oil and gas I can say with great certainty that the majority of the companies in the industry would have capitalized 80% of these costs to property, plant and equipment. And hence the “game.” This is done through an entry to take the 80% or whatever percentage of overhead amount from the overhead total and move it to property, plant and equipment on the financial statements working papers. Fifteen seconds and it's done. The history of this is the SEC’s requirement that Full Cost and subsequently Successful Efforts being the only two acceptable methods of accounting for public oil and gas companies. Obsidian being a public company, which they should probably better understand. In the 1980’s interest began to be capitalized and then the inclusion of overhead began when the oil price dropped in the late 1980’s. Since then it has been a competition, more like a race, to capitalize the most overhead and report the most profits as a result. Does anyone think you can operate an oil and gas company on 1.48% of revenues being the total overhead incurred?

To the point regarding the thought that I had earlier. Is the SEC thick and obtuse regarding the methods of oil and gas accounting? Are they unaware of the outsized and obscene balances of property, plant and equipment within the industry? Can they not see the associated value that has eroded through the process of over reporting capital assets and profits? That the inevitable methodology that the industry has employed has distorted the accounting of the industry? That the industry is claiming to “only following the rules” of the SEC and FASB.

If we look at the point of the Obsidian lawsuit the SEC is stating that “That maneuver, the SEC said, artificially reduced the company’s costs by as much as 20 percent at times, and improved metrics of oil extraction efficiency.” It’s clear the SEC do get it. To me this also say’s something that I don’t think has been heard before. That operations are operations and not capital, just as overhead would be overhead and not capital. This capitalization “game” has gone on for a long time and has become obscene by any stretch of the imagination. In answer to my questions regarding the thought processes of the SEC, I think the days are numbered when the producers will be able to continue to get away with this hokus pokus. You can’t fool all the people all the time.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

A Sad State of Affairs

The price of oil exited the second quarter on a rather strong, dead cat bounce. Ending June 2017 at $46.04. Up from its recent low of around $42.50 and down substantially from its price at the end of the first quarter of 2017 of $54. Recall that the secret to the innovations that the bureaucrats were able to employ to bring their first quarter 2017 costs down was the ability to change the rate of depletion per barrel. Going from $26.58 to $20.72 in all of 2016 in comparison to the first quarter of 2017. What has this to do with anything? The valuation of the producer's property, plant and equipment at the end of the second quarter of 2017. The reserves themselves are dependent on the price. If the price times the reserves is less than the amount of property, plant and equipment then the ceiling test will be employed. Leading to losses being reported by these innovative, depletion reducing bureaucrats.

The number of shorts on the oil commodity markets at this time is at record levels. This is after the declines that brought the product into bear market territory. When will that rebalancing take place? Clearly no one is pointing to OPEC for action anymore. Everyone sees that the issue lies with the North American based producers who just will not, for absolutely any reason, curtail production. Losing money is their right, their obligation and their pleasure. Selling out of a short position is probably what caused the rise in the price of oil last week. There is no sense in the commodity markets, with the inventories stuffed full across the planet, that these North American producers have an idea what to do. The Preliminary Specification is going into development on September 25, 2017 but the bureaucrats won’t be part of that, they’ll jump ship before they ever sign on to that. That should be evident to all at this time.

Are the shorts predicting, as I have, a fundamental breakdown in the price of oil? Where the systemic issues remain unsolved and unsolvable by the parties running the business. Therefore the prices have nowhere to go do they? Just as natural gas prices fundamentally broke down in 2008. Hope and optimism is running rampant throughout the industry. You can just feel the energy of the industry ready to break out of its doldrums and reach for its ever broadening future. Well the bureaucrats can! When a capital intensive industry that is as capital intensive as oil and gas is. Finds itself in a situation such as it finds itself today. The proceeds from past investments, that no one questions were invested with the greatest capital discipline and integrity in modern history. Are diverted to support the self serving bureaucracy, said bureaucracy can exist off of that cash flow in peace and harmony, except for one annoying blogger, for infinite periods of time.

This industry needs to be rebuilt through the efforts of People, Ideas & Objects user community. If you haven’t been working on your application I hope today’s commentary provides you with the motivation to do so. We really do have a problem here. The Preliminary Specification is the solution and its timely. There are many people who are preparing their applications now. Our needs in the long run will be substantial, however, we are in need of people to start with our developments on September 25, 2017. If you want user community driven ERP systems in oil and gas you’ll need to build them. And this is your opportunity to do so.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

More Chances?

Bureaucrats love to read the tea leaves and determine the implications of the butterfly flapping its wings on the shoulder of the Saudi King. Bureaucrats jumping to the incorrect conclusion that this is a bullish signal. More time and energy is spent reading the markets and determining what level energy demand will be at, and the price that this will produce. The word on the street is don’t worry about supply, focus on demand. This replacing “market rebalancing” as the talking point. So much time and energy wasted. It’s all part of the game of the bureaucrats to make sure that they’re able to impart their wisdom and reflect their brilliance of how the future will unfold. Why not just look at the commodity market price, if any property can make a profit at that price, considering all of the costs of capital, operations and overhead, then keep the property producing. Otherwise shut the property in until prices rise, or develop an innovation that increases the throughput, reduces the costs or increases the volume of reserves. Predictions that the market will rebalance in the second quarter of 2017 were as wrong as they’ll be for the current predictions that it will rebalance in 2018. So why not just focus on the business at hand? Market rebalancing is bureaucratic, willful destruction of oil and gas deliverability. Deliberate waste.

Last week we discussed a scenario that I thought this lack of focus by the producers might send us. Unlike the producers I have some time and energy to spend prognosticating about the future. The three likely outcomes of the summer months were a fundamental collapse of the price of oil, bureaucrats admitting they don’t have a solution to the problems and as a result leaving the industry, and the producers losses coming back as a result of the decline in prices and continued abuse of the industry by the bureaucrats. I have detailed these points in a series entitled My Argument which is available for those who may not want to spend the unnecessary time and energy projecting when the market will rebalance.

None of the bureaucrats have called me in these past few months since we announced our September 25, 2017 start date of our software development’s. They don’t have a solution to the overproduction or oversupply issue, maybe they don’t feel the personal pain everyone else is and as such don’t see any issue. Nonetheless I want to make it clear to everyone that the opportunity for the bureaucrats to participate in these developments is open to them at any and all times. I may be abusive and in a politically correct world that would be an issue, but I don’t live in a politically correct world. The fact of the matter is that these past couple of months will provide those who are in the know, and are concerned about the oil and gas industry, that the bureaucrats will never do anything to rectify the issues brought about by their self serving ways.

The best business to be in here in Calgary is a Ferrari or other supercar dealership. Home renovations are also not a bad place to be. Calgary had record dollar volume of renovations in the first quarter of 2017. These oil and gas bureaucrats are not only comfortable, but confident. This may be a mistake. A critical look at the business model that the bureaucrats employ and it is clear that the destruction in oil and gas is comprehensive and complete. The destruction of the commodity markets, the destruction of the oil and gas financial markets and the destruction of the producer organizations themselves. All on the altar of muddling along, market rebalancing and doing nothing while bureaucrats stuff their pockets full. This has not gone unnoticed. The difficulties that People, Ideas & Objects, our user community and service providers have had to face in our attempt to remedy this situation were also not unnoticed. These difficulties brought about through the turf war between us and the bureaucrats. Nothing was or has been done. Yet the continuation of the status quo for the next 25 years is all that is implied by these bureaucrats actions. Sorry, I’m not sold on that vision.

The bureaucrats have had their chance and they didn’t take it. Were these last few months the last chance in which they were given to remedy the situation? Will they be given any more chances? There are more important things to be concerned about and the profitability of the producers is the first thing we have to approach. President Donald Trump is opening the frontier areas to oil and gas exploration and production. Setting the U.S. on the course to export oil and gas, as well as other forms of energy. This is worthwhile and appropriate. There is just no way that these bureaucrats are going to be able to take these decrepit producer organizations forward as they stand today. The objective is set, now we need to organize ourselves towards fulfilling that objective and all the promise that this industry can provide. But first we must build the Preliminary Specification beginning September 25, 2017 and organize ourselves to provide the most profitable means of oil and gas operations.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Independence Day

Canada Day, Part II and Independence Day, Part I

Canada Day

Pointing the Finger, Part III

My understanding of history finds no parallel to the current situation I think we find ourselves in. The point that I cannot find a similar circumstance to is the level of inaction and self dealing that is done by the bureaucrats who are responsible for the industry. Muddling along and doing nothing have always been the strategy and operating procedure in the industry. It is the culture. But in the face of such obvious destruction and without a hint of concern is surprising to me. The best that bureaucrats have been able to muster through this past decade is that the markets will rebalance. No other thought or action has been raised. It’s truly amazing and based on my knowledge, I think without historical precedence.

My opinion regarding the recording of capital costs and the impact that causes is not misunderstood by those in the industry. Accounting is a social science involved in the timing and recognition of costs. The time in which those capital costs should have been moved from property, plant and equipment to depletion has been debated for a billion hours in the industry during the past four decades. It was always understood what the implications were as a result of the different ways that the accounting was conducted. That it took four decades and shale based reservoirs to realize the “liberal” methodologies implications in this industry is the surprise that I’ve had to experience. It’s not rocket science to know that if you defer the recognition of the majority of the costs in your organization. That makes you look rich in assets and prosperous in profit. Just by spending like a drunken sailor. The classic bureaucrats argument is that “the SEC defines the policy,” doesn’t hold water with me when each and every producer goes to the limit of their ceiling test each and every fiscal year.

Nothing is ever said about overhead to investors. Overhead is a game of hide and seek with no one knowing what those layers of people in buildings really cost. Overhead costs vary from 1.5% to 20.86% of revenues of our sample of 22 producers for 2016. Which reflects the anything but standard nature of the treatment for their handling. Another accounting principle. The financial performance of the entire industry is now so poor that I don’t think it can be compared to any other industry. It has assets that are monstrous in size. Yet such a small percentage of those assets are current, most of them being property, plant and equipment. The revenues of the producers are a small percentage of its assets size, 29.6% in our sample producers. A reflection of how long the game has gone on for and how much damage has been realized. The point is that the revenues remain significant enough that the overhead, which includes the compensation to the bureaucrats, is maintained. After that what is there.

Crisis, what crisis. The only person concerned about the situation is that sandwich board toting blogger on the Internet. Every industry has one or two of those, you can ignore them. And that is certainly the situation here. However, if I have a time, it's here and now. I can’t see this going on for much longer. The problems are just too difficult to deal with on a day to day basis and the trend is downward. Straight downwards. Either People, Ideas & Objects, our user community and service providers are funded this summer, or...

No one can tell me that producers have been prudently going about their business. That all of this was unknown and unexpected. That is not the truth and they know it. Go along to get along was the way it was done, here’s a stack for you if you keep your mouth shut. Makes it sound shady doesn’t it. Just search this blog for the word bureaucrat and see how many hits you’ll get. There has been no leadership, or discussion, or action or anything. Pursuing alternatives would have enabled the appropriate course to be taken. Now the only course is the Preliminary Specification and it must be successful as a result of a lack of choice. I am very disappointed knowing what I know about the last few years. It will be this summers marketplace that determines the outcome of People, Ideas & Objects, our user community and service providers. Have I been confused about the situation and unnecessarily proposed a doomsday scenario? Or will those things that I’ve predicted come to pass. The fundamental breakdown of the price of oil. The bureaucracy leaving the industry in a wholesale manner. Losses of the producers once again. I am satisfied that I may be considered foolish as a result. If we’re in for what I think we are, then I’m fully prepared to hang up my sandwich board.

Today President Donald Trump will be announcing the new U.S. energy policy. Suggesting that energy exports in oil and gas are the direction the country should head. Based on shale based reserves this is a worthwhile and possible objective. There is however no way that this industry is ever going to achieve this. There are not enough investors that are willing to give up title to their cash so that bureaucrats can fritter and waste. The Preliminary Specification establishes the industry on the basis of profitable production everywhere and always. It then works to overcome the infrastructure and resource constraints that need to be addressed to handle the increased capabilities and capacities. Only then can we approach the President’s goal of energy independence and exports.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Pointing the Finger, Part II

That I’ve held companionship with those who sprout doomsday scenarios on their sandwich boards is one of the unfortunate aspects of the work that I do. The Internet has made us all the more prolific. It is the company I keep. And I have done this for a significant period of time. Driven by the thought that this could be very dangerous if it was to become the nightmare scenario that I think it has now become. Oil and gas is not the banking industry in terms of its impact on the day to day of everyone’s needs. However, in the long run abundant, affordable energy is the key to the realization of our future. This is what I feel is in jeopardy and why I’ve spent so much time and energy trying to resolve this issue.

As a result of the situation that I feel we find ourselves in. People, Ideas & Objects, our user community and service providers must be successful. There is no alternative. Everything is in place, except the cash, for people to pick up and begin the hard, difficult work of building the solution to this issue. Reading the Preliminary Specification in its entirety is necessary for everyone concerned. There are fundamental changes to the way that the industry and producers are constructed and function. These need to be fully understood and realized throughout all parts of the community that we’re building. We are not replicating the failed industry that stands before us. We need to rebuild it based on the vision of the Preliminary Specification and everyone needs to understand that vision intuitively. We need to break with this failed past and look forward to a dynamic, innovative, accountable and profitable oil and gas industry and producer. We need to build the software that identifies and supports that industry and the producers within it, which also has to work for all the associated other industries such as the service industries and our new sub-industry the service providers. We are the reason that oil and gas will be successful in the future.

As a final parting gift wouldn’t it be nice if the bureaucrats wrote us the check for their share of our budget as they walked out the door. I am crazy, and there’s the proof. I’ve said it many times before that I find being crazy to be a distinct competitive advantage. Bureaucrats would never do such a thing as part ways constructively and leave the money for us to carry on, it would be an admission of guilt and they want to leave town in silence. How the money we need, our interim budget of $100 million, comes about is unknown to me. Which is not great news, but terrible news. The issue is ripening in the marketplace and we’ll see how it develops over the summer. This pending disaster is what I think will be the motivation for whoever it is that will write the check, to begin writing those checks. Recall too that this will have to be followed up in the first year of our development with the remainder of our budget so that we continue on with our developments. If this summer doesn’t motivate those who should be concerned to fuel our budgetary needs, then there is nothing that I, or anyone, can do.

I’m sure many enjoy reading the science fiction element of my writing. There is always the possibility and probability that I’m wrong. The problem is that I haven’t been so far, and the Preliminary Specification is the perfect solution for the issue of the day. In addition to being primarily an accounting related problem. Where every cost is capitalized making producers look valuable and profitable everywhere and always. Causing investors to rush in to overinvest. Creating overproduction as a result of the overinvestment. With overproduction continuing as it appears profitable when in reality it only subsidizes consumers for the costs of their energy. The amount of the consumers subsidy being recorded as property, plant and equipment on the producers balance sheets. Or the amount of the investors overinvestment.

In addition to this accounting problem it is also a software problem. What I call a modern day software bug. The industry and producers organizations are identified and supported by software that is unchanging and unchangeable. Issues continue and manifest themselves in ways that are not evident unless you’re looking for them from that global industry perspective. Industries in general don’t look at themselves from that perspective. That is to say they don’t see the consequences of these software bugs. People, Ideas & Objects and our user community are providing the software development capabilities to the dynamic, innovative, accountable and profitable oil and gas producer to ensure that any future Preliminary Specifications software bugs don’t manifest themselves into other issues.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.

Pointing the Finger, Part I

The brunt of this issue is beginning to be realized by people. Overproduction and oversupply just never stop in the current business model of the producers. Waiting and doing nothing is the most destructive thing that we can do. If there are four consecutive days of increases in the price of oil, then everything that is being learned right now will be forgotten and everyone will be looking for the good times to arrive right around the corner. It was 2008 when the shale gas volumes began to overwhelm the natural gas marketplace. That is almost a decade lost and nothing is even discussed about that market anymore. It has been destroyed through a process of inactivity and overproduction by the North American producers. A process which continued for so long that the natural gas prices fundamentally broke down. No time in the history of the industry has natural gas traded at 14.73 times to oil. Prior to the breakdown in price it traditionally traded at six times to oil. We now stand at the point, that being this summer, where the oil price is about to fundamentally break down as well. It would then take extensive remedial efforts to rehabilitate both natural gas and oil prices. Meaning time would need to be invested in doing so, and time which the producers do not have.

The financial destruction of the industry and producers is complete. The value that has been retained in the industry after the decades of time and effort, the trillions of dollars that have been invested in good faith, amount to nothing. The industry generates no value and contains no residual value in its organizations, the producers that participate in the industry. The accounting has been a deception for the past four decades where assets were the wholly grail of the producers existence. Bureaucrats then stated that profits were not the objective, cash flow was. Cash flow is only the return of the capital that was spent, in a capital intensive industry, and these dollars were never managed properly. They should have funded further capital expenditures, paid down debt and returned dividends to the shareholders. Instead the bureaucrats spent the cash flow on themselves and just went back to the capital markets for more money for next years spending needs. The net effect of this is you have a spendthrift industry that doesn’t understand the word value and has had the life blood of the industry destroyed through the diversion of cash flow to cover overhead and bureaucratic waste.

If this isn’t a crisis then what is? Which bureaucrat is going to stand up and say they’re responsible and they should be held accountable? This summer will be the time when the exits will be crammed by those that are responsible for this disaster. They can exit with their personal assets and livelihood more or less intact. They’ll find greener pastures in other industries. This is the history of these type of developments. They’re not the ones who are going to stick around and put this back together again.

This has not been unknown to these bureaucrats. I have been talking about these points for many years. It is clear to me that this was inevitable and would happen sooner or later. It's just taken 26 years for it to develop into the full blown crisis that I believe we’re about to experience. Through the period from August 2003 until now the bureaucrats and I have fought over these points continually. On no less than five occasions they’ve attempted to steal the Intellectual Property that is the basis of this initiative. If I am a raving loon then why were they fighting me and trying to take this from me?

In the donut shop analogy we convinced some investors to put some money into our donut shop so that we could quadruple our donut making capacity. We therefore began storing donuts in the parking lot, and soon borrowed the parking space of our neighbors. We then purchased some land and paving equipment so that we could build more parking lots. What’s the price of a donut? No one cared. The thing is the operation remains profitable because we capitalize the flour, oil, cashiers and donut makers wages. Enabling the manager to boast that he’s profitable and not to worry, the market will rebalance.

It is with this backdrop that we’ll be developing the Preliminary Specification beginning September 25, 2017. We need to be actively involved in resolving this issue and rebuilding the industry brick by brick, and stick by stick. There are better ways of doing this, however, the bureaucrats chose to fight the one critic of their administration instead of dealing with their business. Sometimes things only happen during or after a disaster has hit. That’s when it becomes obvious to everyone what needs to be done. That’s where we’re at now with the oil and gas industry. I think however, from a societal point of view, we’ve experienced a lot of damage as a result of the complacency of the bureaucrats. Tax revenues are down, royalty revenues are down, the service industry has been abused and lastly the people are being displaced in ways that are unacceptable to anyone who was paying attention to their business. The thing is this has all been window dressing for the garbage that is going to happen now. I see a lot of pain being distributed as a result of the bureaucrats conscious and willful act of betrayal to all those who are going to feel the associated pain. This summer will be tough.

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

No Change in Tone Here

I understand that people are unhappy with the hostility that I’m expressing here. I feel there’s no reason that this much pain and suffering needs to be realized by so many people and so unnecessarily so. I can assure everyone that in four months time I’ll be the most civil person around. And it won’t be as a result of me changing my tone. I have detailed in my series entitled My Argument what I felt was going to happen this summer and why we needed to proceed with the developments of the Preliminary Specification on September 25, 2017. How the commodity prices would collapse, how the bureaucrats would flee and the disaster that is the oil and gas industry will be seen by everyone. It’s the fifth day of summer, the price of oil has slipped into bear market territory. Worse than at any time since 1997. The CEO of Cenovus skedaddled the other day. Looks like that $11 billion deal wasn’t what it was supposed to be. Expect much more of this, the problem is there’s no resiliency in the industry anywhere. Producers are fully exposed to any crisis now. All of the industries reserves and ability to fight this off have been extinguished. We are fully exposed. Soon everyone will know why I am so angry about this.

The bureaucrats will say you only signed on for one good year out of each decade, or maybe they said it was each generation. So what’s the issue? As for me they don’t listen to people who are not civil and kind, those that kneel down before them are the only ones that get the bureaucrats business. And as we proceed down this black hole that “market rebalancing” was supposed to fix, that everyone will soon realize, and bureaucrats will admit, they have no solution to. My tone will be the reason that they enabled this level of destruction to occur. My tone will be the reason they never took any effort to fix this problem.

This Friday will be the end of the second quarter. At the end of the first quarter oil prices were around $54. Recall producers were then able to reduce the amount of depletion that they recognized per barrel of oil. Reduced the amount of depletion to the point where most of the producers were reporting first quarter profits. These profits were claimed as a result of the innovations they employed in reducing their costs. Reducing depletion per barrel is an innovation! Only in oil and gas. The problem is that oil is as low as $42.50 these past few days and those reserves will have to be valued at this new price. As a result the ceiling test may have to be employed and those reductions in the first quarters depletion per barrel innovations will need to be forgotten about. What will the point of their discussion be when the first quarter profits turn into second quarter losses?

I’ve noted before that there’s been a lot of promotion of the oil and gas stocks by the brokerage firms and the media these past six months. Asking the question, based on the movie the Big Short, if as they did in the housing crisis, the brokerage firms were promoting the oil and gas companies in order to get out of the positions that they had in these companies. Dumping the soon to be crappy investments onto John Q. Public for them to realize the losses. I’m sure it only happened in the Hollywood movies and that in real life those types of things would never happen.

Who’s winning in North American oil and gas? Bureaucrats, but that’s it. Under the Preliminary Specification everything is reversed. The bureaucrats are shown the door and everyone else gets to work in a predictable and profitable industry. Bureaucrats are afraid of our price maker strategy. They think it is “market manipulation” and therefore illegal. Which would be correct in a world where you only lose money, don’t know where you're losing it, or don’t know what you’re doing. Or in other words the oil and gas industry. In the rest of the world it’s known as business. Only producing profitable production is how businesses survive and prosper. That way their profits are not diluted by unprofitable operations and their not filling the market with unprofitable production that destroys the pricing power that they do have. It’s not a bug, it's a feature. Anything that a bureaucrat believes is set in stone and can’t be rationalized otherwise. They will go to the end of the earth before they’re led to believe anything else. And you had better watch your tone! It’s just too bad that we all have to suffer as a result of their inability to think.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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 "Market Rebalancing" Fairy

Sunday is the 25th of June. Three months before our Preliminary Specifications software development start date. Recently OPEC put together their production sharing agreement, extended it into 2018 and the price of oil continues to go down! And now the North American producer says it's time for OPEC to cut their production further to accommodate the extra shale production they’re putting on the market. Only the North American producers are entitled to produce, it’s their market and OPEC is lucky that they’re allowed in the business. Or so it would seem. History has shown us time and again that when one side employs this kind of bluster, they’re easily surprised by subsequent events! The world is awash in oil. The North Sea has more tankers being used as storage than has ever been used before. Oil has been stuffed everywhere that it can be and there is just no place left to put it. But the North American producer will continue producing no matter what the consequences are, and expect the rest of the world to accommodate them. Does anyone else see the flaw in this logic? Yet this is no different than what’s been going on for the past decade. It just took that long to get to this point.

It bares repeating. OPEC are the low cost producers. Many like to suggest that’s not the case when you consider that Saudi Arabia is running a budgetary deficit with the current prices. The costs of maintaining that society through their oil revenues makes them the high cost producer. Then to make it comparable, the debt and deficit of the U.S. and Canada should be added to the costs of our production. That would make the costs directly comparable. If we however are looking only at the operations, capital and overhead costs, OPEC is the low cost producer.

The BP Chief Economist made some comments a few months ago that should be reviewed and considered at this time. These comments reflect that the current surplus production and inventory issues are not a temporary thing. The world now has enough oil to supply the demands for the next 33 years, twice over. He suggested that this may change the way that low cost producers see the market. Instead of leaving the oil in the ground for later, they’ll produce it now at whatever price they receive, and at least generate some revenues from their reserves. As the low cost producers OPEC can do that. The North American producer is unable to compete in that marketplace as they are the high cost producers and they have to base their operation in the financial markets. Now more than ever the North American producers need the Preliminary Specification which enables them to identify the profitable properties and shut-in those that are not.

I see the situation today as coming close to being played out. Why is it only OPEC’s responsibility to cut production? If you look at this from the point of view of OPEC, and the political hand that they’ve played here, it appears to me that they’ve now turned the focus to the North American producers as the prime culprits of the overproduction and oversupply problems. They’ve done everything that they can to deal with the problem and the shale producers are racing in to fill the void from the production cuts that OPEC is making. How much longer will OPEC continue to cooperate and reduce their production in this environment? At what point will they say there’s no dealing with the situation and just employ the strategy that the BP Chief Economist says is the logical choice in an oversupplied environment such as this?

Market rebalancing is a myth, just as the moon is made of green cheese. Markets are defined by supply and demand and provide information in the form of price. That is all that markets do, they do not “rebalance” or do anything on their own particularly in the face of continued, chronic overproduction. They do not offset the stupidity of chronic unprofitable overproduction. They provide price information and that is it. Nothing else. If producers can make a profit at the price that the market is offering then they produce. Otherwise producers don’t produce unprofitable production. Markets don’t act, producers act. This is how each and every business operates in the world outside of oil and gas. You don’t produce unprofitably. It destroys value. It reduces your profitable operations. It’s foolish. Yet we continue on in this foolish manner of producing oil and gas unprofitably, expecting lower cost producers to shut-in their production because they should, and waiting for the myth that the “market will rebalance.” It’s as if some oil and gas fairy, the “market rebalancing” fairy is going to come down with her magic wand and make it all better for the North American oil and gas producer. Yes, producers you do look that ridiculous.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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. 

Hard Work To Do

I feel the overproduction and oversupply issue in oil and gas is the largest issue that the industry has ever had to face. Why is this controversial thinking? I feel we’re at a turning point now where we either address it through the development of the Preliminary Specification. Or we decline quickly in our capabilities and capacities creating even more damage to all concerned. This is certainly well beyond the scope of the corporate oil and gas producers responsibilities. That is, it’s beyond their accepted responsibilities. But I wonder who is responsible for this issue and what’s their number? I believe we have a responsibility to provide the consumer with affordable energy products. That implies we’re in business which means we need profits to survive. Without real profits people are displaced, investors lose money, governments lose tax revenues, royalty holders do not receive fair value for the royalties on their products. The only group that has consistently been winning in oil and gas lately are the bureaucrats and they’re not doing anything.

The industry has the opportunity now to undertake the hard work that is necessary to remedy this situation. That is by developing the Preliminary Specification starting September 25, 2017. It will take a greater concern for the industries health than what I am seeing being portrayed in the media. I don’t have the direct contact with the industry so I don’t know if that is the true assessment of the situation. Sitting back and waiting for this issue to resolve itself on its own has done nothing but create more damage. It will take some people with foresight and fortitude to know that the current trajectory of the industry is not one that is healthy or prosperous. They will also need to take the remedial action of moving forward with the Preliminary Specification.

Some of the hardest work will need to be undertaken by the user community and service providers. They will be the point of contact with the producers and will need to determine the “what and how” that is necessary to implement the needs of those producers. The hard part is they’ll be doing this in the environment where we’re creating the future, based on the Preliminary Specification, not remaking the past. It will be the user community that will have to exercise the hard break with this past that we’re currently living with. Determine that that element is no longer needed and that it's part of the problem, and we will be doing this instead. It’s not that we are turning our backs on the producer. We clearly need them and our user community will be working directly with them. Producers need to understand that the user community will have creative license to ensure that hard break with the past occurs.

These decisions and creative solutions will be on top of the difficult work that the user community needs to do anyway. Bringing their years of experience and understanding in oil and gas administration and accounting, on top of their overall understanding of oil and gas. They need to create and implement the appropriate software and services to ensure that the producers achieve the overall success that we’re looking for. Many ERP systems have had user involvement before. Usually when the implementation was going over budget, user involvement was the first cost that was cut from the budget. That is not what we’re doing here. Today user community developed software systems are the only systems that are effective and used in the market today. Developing anything without high levels of user involvement today would be a waste of money, particularly with the scope and scale of the Preliminary Specification.

In addition to the overall success of our initiative. Our user community will have to do this, and other hard work, to ensure that the oil and gas industry and producers are dynamic, innovative, accountable and profitable. The Preliminary Specification is different and provides a good base in which the user community can achieve these outcomes. However it will be up to the user community to be the difference. Yes, it will be very hard work.

The Preliminary Specification, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for North America’s energy independence. 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.