Differing IT Strategies

I read a comment the other day regarding how the oil and gas industry might solve its Information Technology related issues. The point being asked was, would there be a large solution like People, Ideas & Objects in the marketplace or a continuation of what I would call the ad-hoc approach of today? I found the argument they put forward was interesting in that it seemed to be attempting to refute what was becoming the consensus in the industry, that the large solution was the answer. Whether this is just me being optimistic or there is that consensus building is unknown to me. These are the thoughts that I have about this topic and why we need a comprehensive solution like what People, Ideas & Objects have proposed in the Preliminary Specification.

The first point that I would make in our argument is that People, Ideas & Objects are not the comprehensive, “big-bang” style of solution that it may be perceived of initially. If we look at the user community and their related service provider organizations these are fully independent organizations that are specializing in their particular area of the industry. The Preliminary Specification is using specialization and the division of labor to expand the throughput of the industry. This can’t be done in a centralized fashion, only a decentralized market can approach the type of scope and scale that the oil and gas industry presents. We believe that too much reliance is placed on each producer to develop the accounting, administrative and IT capabilities within each producer. That these capabilities are redundantly replicated within each oil and gas producer and are therefore unshared and unshareable. They are certainly not core to the producers competitive advantage. Therefore having each producer building these requisite capabilities to meet these demands and each one of these producers capabilities being redundant in terms of building the overall capabilities for the industry, is one of the key reasons for the lack of profitability in the industry.

People, Ideas & Objects are dedicated ERP software developers providing the Preliminary Specifications development. Providing a change based software development capability to the oil and gas industry. One that will accommodate the needs of the industry as it develops in the future. This capability is wholly missing from the marketplace at this time. There are a number of ERP systems providers and many developers working on these applications within the producers and within other software vendors. The industry has however fallen into a situation where it is leaderless and directionless. Software occupies a much larger role in our lives than we probably recognize. To leave the future of the industry in the hands of a disparate marketplace without leadership and without direction will only leave us with the same issues. I have believed for many years that there is only one type of business. That being the software business. Anyone who thinks otherwise is quickly going out of business. In oil and gas it’s not enough to own the oil and gas asset, it's also necessary to have access to the software that makes the oil and gas asset profitable.

The question becomes how much financial damage have the producers and industry sustained? What are the prospects that these can be resolved and overcome with the industry moving forward with a dynamic, innovative, accountable and profitable future for all? The media would have us believe that the shale producers have OPEC on the run. The only missing element of that vision is the continual fresh injections of your cash into the shale producers. I see the financial consequences of these issues for the producers for the past decade as permanent and terminal. There is no coming back from this for the current producers. Are we to feebly limp along as a damaged and destroyed industry that makes its best efforts? Or should we take control of the development and management of software that is proving to be such a critical element in our society today and realize the full potential that exists for these next 25 years. The answer to this question I think is the same as the answer to the question that we began with here today. Is the solution to the industries IT needs a large solution like People, Ideas & Objects or a continuation of the ad-hoc approach we’ve seen for the past 40 years.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Markets

During our research phase one of the topics that we spent significant amounts of time on was the study of markets. This was primarily through the work of Professor Richard Langlois and several other prominent researchers. Review of our work in this area can be sourced from here and here. The important question that we needed to ask was; if producers were too bureaucratic and inefficient today, what organizational method would facilitate a more dynamic, innovative, accountable and profitable oil and gas producer and industry. The answer of course was the use of markets in allocating resources, developing capabilities and organizing the industry. Only then could the performance trajectory of the industry begin to be addressed and we begin to move away from the constraints of our current organizational issues. Therefore for the oil and gas industry to change its future prospects it must change its organizational methodology.

Within the Preliminary Specification there is a decided move toward markets. First we establish the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable producer. Align 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 to achieve a speed, innovativeness and accountability that is unobtainable in the current organizations. Then by establishing the Resource Marketplace, Financial Marketplace and Petroleum Lease Marketplace modules as part of the Preliminary Specification we have the software to define and support these frameworks and markets.

We then take the concept of markets one step further by establishing the marketplace of our user community that defines the software that is developed by People, Ideas & Objects developers. For all intents and purposes this is a stand alone market established for providing the quality software that the oil and gas industry needs. In addition we have established a market for service providers who will provide the administration and accounting services to the producers in connection with our software.

Without these structural changes to the producers and the industry then no change will occur to the behaviors that we see today. And particularly in this day and age where we are so dependent on software to define and support our organization's, changes must be planned and implemented in the software before the changes can take place in the organization. We see a number of businesses today believe they can make the transition from one business model to another when the time comes. Yet I have never seen it happen in real life outside of the forces of creative destruction. You have two seemingly opposing objectives of growth and profits. Where profits are foregone at the expense of growth. This was the model used by the oil and gas producers. It is the model that is currently being employed by Amazon and Tesla. Amazon has made such little money in its lifetime that it’s strategy of being everything to everyone will only fail as that strategy has failed so many times before. And Tesla has proven itself, like oil and gas to have great technology, no profits and no cash. Elon Musk has also displayed the propensity to spend money like only oil and gas producers can.These organizations can not now just hit a switch, say they’re going to make the change from growth to profits, as the producers are parroting today, and transition to a profitable organization. It has to be built from the ground up, brick by brick and stick by stick. Like Apple who have experienced phenomenal, substantial and real profitable growth throughout its second life.

Creative destruction has always been the force in which People, Ideas & Objects implemented these changes. Today the financial performance and structure of the industry is in desperate condition. Producers believe that their well defended balance sheets with large balances of property, plant and equipment reflect value. It is an illusion. These are the unrecognized capital costs of past production and are supported by equally bloated share distributions and debts. Who wants to invest in an unprofitable, spendthrift operation that forces you to dilute your interest to a negligible value at closing? The revenue of these firms barely cover the cash costs of production as the industry experiences a cash crisis like no other. The transition to markets will begin soon as the status quo becomes untenable even to its current cheerleaders. This is creative destructions finest hour and the beginning of a markets based approach to oil and gas.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Like an Ostrich, With It's Head in the Sand

Although it’s a myth that Ostriches stick their head in the sand when confronted by a predator. For our purposes here we can draw the parallel of the producers with their heads in the frac sand. Unable, or most probably unwilling, to comprehend the business that they operate extending beyond the well bore. Critical review of the third quarter financial statements of the producers should have embarrassed those that are responsible. There is a tragedy unfolding and they’re oblivious to it and their involvement in it. All that we’ve heard from the media and PR departments is how comprehensive the producer's control over the science and technology of the oil and gas shale operation. And that in the face of chronic, unprofitable, full production, everywhere and always, that markets will rebalance.

In business you have to be tough and be able to fight. When you get knocked down you pick yourself up and get moving again. Over and over, year after year. Resiliency is a characteristic that ensures you’ll be back another day. Success is the only objective and that can only be measured in profits. For the past fourteen years I’ve detailed the deficiencies in the oil and gas producers business model and offered an alternate solution to those issues. Although initially times were good in oil and gas and the Preliminary Specification was easily ignored. The problems began soon after the 2008 financial crisis. Natural gas prices declined in early 2009. Oil prices followed in 2014. Nothing has been done to remediate these issues while the producers have spiraled downward in their capabilities and capacities. Today with no support from their investors and bankers they pretend that they’re viable going concerns because their field operations continue to attain great scientific and operational performance. The problem they don’t see is that they’re in desperate financial condition with little time to deal with significant issues and currently have no alternatives in which to deal with them. Resiliency therefore is not a characteristic of the oil and gas producer.

Commodity prices have responded well to the OPEC production sharing agreement. What we can determine from their actions is that the commodities of oil and gas follow the characteristics of price makers. Removing 1.8 million barrels per day has effectively doubled the price of oil. A small sacrifice enabling everyone to win. The difficulty with the production sharing agreement is the method is bureaucratic and uneconomic. What is needed is a more reasonable methodology of production allocation that would preclude the need for any agreement, include the North American producer and be fair and equitable. People, Ideas & Objects propose the only fair and equitable method of production allocation. Where only profitable production is produced.

This reasonable business approach to the oil and gas business. To only produce what is profitable is considered to be collusion by the bureaucrats in power. What I think we can now prove is that in both the oil and gas commodities North American producers, for whatever reason, are colluding to keep prices down. Why any business would do this and incur the kind of financial losses and damage that oil and gas has experienced is an interesting situation that I think we’ve never seen in business before. Our efforts to convince them to make the changes to improve their businesses have been met with nothing but violent resistance. An undying, misguided faith in the myth of “market rebalancing” providing the cover story for their inaction.

With an overall increase of 12% in the price of oil during the third quarter of 2017 producers anticipated good times. However in the second quarter our sample of 23 producers reported $6.33 billion and in the third quarter reported $7.83 billion. A $1.5 billion increase in suspect accounting profits for the three months. Clearly 12% isn’t going to be adequate to solve the issues of the day. Our calculations show producers need close to $150 / bbl in order to deal with the financial damage they’ve incurred and be profitable in the current environment. The question then that needs to be asked is, what is it that they’re doing?

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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. 

Maybe the Investors Will be Happy

Bloomberg’s Alix Steel was interviewing Conoco’s Chairman and CEO Ryan Lance on the floor of the New York Stock Exchange. During the interview he stated the following.

If you asked me to be a betting man today and I had to average the price over the next five or six years, we’re not making bets on a higher price. I think if you need that higher price to bail out your business model, you’re going to be really disappointed.

I think Mr. Lance is mistaken about the purpose of our business model, the Preliminary Specification, with its price maker strategy. We are not focused on raising prices we are focused on producers earning real profits. If the property can earn a real profit considering all of the actual costs of exploration and production, based on a reasonable accounting then that property will produce. If it can’t generate a real profit then it is shut-in until such time that it can. What is it that the oil and gas industry is doing? Diluting their profitable properties with unprofitable production is a fool's game. If you shut-in your unprofitable properties, your profits would increase. It’s also true that commodity prices would rise however that would then stop the investment community from subsidizing the consumer for their energy needs.

Several years ago investors and bankers abandoned Mr. Lane’s “business model” due to its misguided adventures in destroying their capital and not charging enough for their products. None of the producers have ever made any money if you consider that the capital costs of past production are glaring at everyone in the property, plant and equipment account. In Mr. Lane’s case he’ll be depleting Conoco’s $47 billion in assets over the next 9 years. Why? Are your investors that patient that they can wait for that capital to be returned to the company for reuse? It’s a capital intensive business, doesn’t that impute that capital should be reused again and again or is it as these producers suggest that capital is used just once in the lifetime of the business? And what about Conoco’s $2.4 billion in losses so far in 2017? I know, profits don’t matter in oil and gas. It's how efficiently you inject the sand into the formation during the frac that makes the difference.

Although $1.5 billion in third quarter earnings may be satisfactory to the likes of the oil and gas producers. It’s a poor performance when you consider that property, plant and equipment totals $478 billion for our sample of 23 producers. Though earning 1.25% annual profits on conspicuous accounting would be a big step up from last year. Cash continues to bleed from these producers at a rapid pace. Without the annual injection from investors of free money to spend, and the business not performing as a business, because we’ve determined it to be a consumer subsidy, I’ll accept Mr. Lane’s criticism of the Preliminary Specification. Recall too that producers claimed that they’re profitable at as little as $30 and prayed for $50 oil to return. These profits and the hemorrhaging of cash show that even with the prices that they prayed for, and the deferral of the recognition of their capital costs for decades to property, plant and equipment, the bath tub that is oil and gas continues to drain at a remarkable rate.

The fact of the matter is that any producer will say anything on any specific day. Today it’s profit’s over production, tomorrow they’ll say they're committed to energy independence. There is no plan other than to drill and complete that next well. The entire focus of the organization is on the technical aspects of oil and gas exploration and production. Thinking that the business end of the business will take care of itself. The problem with that is there is a crisis undergoing in the business of the oil and gas business and no one is paying attention or listening to what others might be saying.

We learned last week that crude oil production reached 9.66 million barrels per day. This being the highest point of oil production in the shale era. It’s a good thing that producers are focusing on profits and not production, so they claim, otherwise who knows how high this number would have been. The issue is that there is no control whatsoever over the volume of oil that a producer will produce. It is full production everywhere and always. I’ve completed my review of the third quarter reports of our sample of 23 producers. With a 12% increase in the price of oil much was expected from these producers. I’m afraid that we’re not in the position, as an industry, to continue on in the manner that this industry is proceeding.

These comments from the CEO of Conoco, and comments from others are evidence of one thing, in my opinion. The producers are not enamoured with our free money strategy. That we are proceeding with our developments without their involvements is not something that we could have contemplated earlier or what they would have considered possible. Our coin offering will create one of the producers largest costs in the future of the industry. A cost that is incurred in providing them with “real” profitable operations. Something that they’re unwilling and incapable of accepting as necessary. That the Preliminary Specifications price maker strategy is openly criticized now is good news for us.

What the third quarter reports show is that the trend in which the decline in producers performance and financial health has continued unabated. No remedial action can be seen on any of the producer's behalf regarding any aspect of their organizations. These third quarter reports also provide evidence that their investors still believe that shale is, and never will be commercial. Action on part of the producers is what the investors have been waiting for. People, Ideas & Objects provided an alternative for producers but we have chosen to build our software with our free money strategy. Oil and gas investors were previously only on strike, now they know producers haven’t done anything, and most importantly, now can’t do anything. It sounds to me like action by those investors is necessary and probable.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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

Thanksgiving

No Posting Today

Still Under the Weather

Need a few more days to heal.

Will be Taking This Week Off

Remembrance Day / Veterans Day

No Posting Today

Bright, Shiney Object

Successful implementation of shale technologies in China and Argentina are the news of the day. Other areas of the world such as Africa are also pursuing the technology. There is little in the way of each country accessing these technologies to develop their shale reserves. The United States holds 17% of the world's shale reservoirs. Just the initial phase of the implementation of the technology has had the effect of destroying the global oil and gas commodity prices and the financial health of the North American producers. The real question to ask is what will be Saudi Arabia’s strategy when the world is awash in shale based production. Will they continue to forgo their low cost production in order to support a price that somewhat covers the high costs of shale? Or will they, as it is suspected, soon after their IPO of Saudi Aramco, just produce their low cost fields for whatever price they can and at least obtain some value from them? Leaving the price issue in the hands of the shale producers. What then is the logical strategy for each side to pursue?

What we may see is a continuation of the low price environment that we’ve all come to know and love. With continued and increasing unconstrained production of everything all of the time the oil and gas industry is destined never to be a commercial enterprise again. This must be what the investors see for the business and can only find verification of these facts with each of the producers quarterly financial statements. Where is the mid to long term logic and strategy for shale? A technology that has in as little as ten years increased the global oil reserves to the point where we have double what we need for the next fifty years. And why is it that the only strategy being pursued is full production everywhere and always? Is oil and gas still a scarce commodity or did shale change the business of oil and gas exploration and production?

North American producers have not resolved this issue in the first phase of shales implementation. As shales technology goes global it will be beyond their scope to deal with as countries such as China may satisfy their own internal markets. Reducing the global demand in the supply - demand equation. People, Ideas & Objects are currently focused on the North American producers however there is no reason that once our technologies are developed they can’t be deployed globally. Maintaining a global discipline where all production of oil and gas is profitably produced.

Of course all of this is as clear to anyone who’s familiar with the industry. Why producers don’t hedge their bets and pursue two opposing ideas at the same time, that is continue with their current strategy but also develop the Preliminary Specification is beyond me. Maybe they know something that I’m unaware of. If they’re unable to implement a dual track strategy now how will they do it when shale is produced globally? Maybe we should see this as evidence of the terminal nature of their approach and their business.

All of this can be attributed in large part to the deferral of recognition of the producer's property, plant and equipment. As I should have noted yesterday this makes a young producer look very profitable as they have flush production and can defer most of their costs. Causing investors to rush into what appears to be a highly profitable enterprise. Creating the overproduction of the commodities that appear, even today, to be profitable. As producers age to the level the industry is today the buildup of property, plant and equipment conspires against the producer. As time passes, they begin to recognize more of those deferred costs while their production curves decline steeply downwards, in a marginal enterprise where investors are frustrated with performance. In a capital intensive business it makes no sense to defer the recognition of your capital. A business competes by turning over its capital quicker than other businesses and other industries. Why oil and gas is permitted to defer the recognition of its capital for decades is a unique situation that should never have happened. Accountants should have known better that accounting is about performance. Competition for capital is why we assess performance in the accounting that is produced. Therefore why would you defer the recognition of capital assets for decades? Of course this argument is rendered mute due to the fact that oil is up 1.5% on the day.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry 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 our future Initial Coin Offering (ICO) that will fund these user defined software developments. It is through the process of issuing our ICO that we are leading the way in which creative destruction can be implemented within the oil and gas industry. 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.