These Are Not the Earnings We're Looking For, Part XIV

What is clearly evident in the oil and gas producers 2018 first quarter reports. Is that Calgary, Dallas, Houston and Oklahoma have no more change between the cushions of any couch’s anywhere. We noted last year that the cash crisis brought on by the withdrawal of investors and bankers funding of the day-to-day needs of the producers. Had led to a determined search for the cash that had fallen between the cushions of the couch as one of the few lucrative sources of cash open to them. And if you were unfortunate to drop a quarter on the ground in one of these cities, your best chance of survival would be to quickly get out of the way of the stampede of producers seeking to picking it up. The demand for cash was epic. What was needed then was oil prices to be within the mid $60 region in order for the producers to be profitable. Now with prices are at $70 the cash crisis that has been epidemic for well over two years has slipped into a deep, dark black hole. Almost every producer in our sample of 23 producers reported significant declines in their cash balances in the past three months, down $6.8 billion, that is if they had a balance to begin with. Declines in their working capital of $4.8 billion to $14.1 billion. With 3% working capital for the $467 billion of property, plant and equipment, something seems disproportionate here. The amount of cash that was used in the first quarter of 2018 is approximately equivalent to the amount of cash that was generated in all of 2016 and all of 2017. It’s almost as though the producers need $130 oil prices in order to survive. Who would have thought?

Profitability was also hit. Not as a result of producers taking our advice and depleting large volumes of their property, plant and equipment. Recognizing the capital costs of past production will have to wait as the depletion that was recorded in the first quarter of 2018 was lower than the first quarter of 2017 @ $14.562 vs. $12.246 billion in 2018. Even at that the first quarter of 2017’s profits were $3.9 billion vs 2018’s $3.6 billion. Moving the number of years that property, plant and equipment will need to be depleted from 8.94 years to 9.58 years. Is it that operations are just consuming the cash and profits? Are overheads that much of an issue in oil and gas? These facts provide me with two distinct understandings. Investors and bankers, who have been on strike for the past couple of years, who now see the further rapid deterioration in producers operations, working capital and cash balances, will not be running to save them on the basis that they’re managed today. They will need to see some change to the future outcomes of the industry before they’ll commit new cash to the oil and gas industry incinerator. The second point is this cash crisis will bring about the end of the “muddle along” strategy and “do nothing” operating procedure. Sitting around doing nothing while the house is on fire is a bad strategy for all concerned. Time to act.

It has always been People, Ideas & Objects contention that the industry has distorted its accounting for the past four decades. Recording the capital costs of a capital intensive business as assets in property, plant and equipment. Then depleting these costs over the life of the reserves that were discovered. Whether those reserves would last 20 years or 100 it didn’t matter. Capital was rarely recognized as a cost in the oil and gas business for these past forty years. The working capital deficiencies of this type of operation would of course be significant. Investors and bankers were expected to provide the lifeline for the producer to a) call themselves successful and b) keep the lights on. What in fact was going on was, and what has deteriorated to a significant level over these past forty years is a dependency on investors unlike anywhere else at anytime. As a result the effect of this mismanagement is that the consumers of energy have effectively been subsidized by the investors supporting the producers capital needs in these past four decades. The consumers have paid the operating costs and a small sample of the capital, the balance of the consumers capital cost subsidy is proudly displayed on the producers balance sheet as property, plant and equipment. And the size of the assets on the balance sheet is what gives the CEO his/her their proof of legitimacy, not evidence of their level of spendthrift.

To express the level that this culture is systemic and chronic within the industry there was an article from WorldOil with the following quote regarding Exxon.

CEO Darren Woods is seeking to rebuild oil and gas reserves in an investment drive targeting $30 billion in annual outlays well into the next decade. Woods’ vision runs counter to what investors are demanding from rivals, which have been restraining spending and returning cash to shareholders in the form of stock buybacks.

Exxon production was down substantially in the first quarter of 2018. Below 4 mmboe / day for the first time since the merger with Mobil. Leading the CEO to continue with Exxon’s high capital expenditure throughput. Which as noted as contrary to the investment communities desire. However, without that investment the reversal of the production profile is current, rapid and unforgiving. What the culture of the industry reflects is that it’s an either or situation. You can either have the appropriate level of capital expenditures and maintain your production profile. Or your production profile will shrink and the investors will be paid what they’re entitled to. If oil and gas was a business then the cash flow that was generated from pricing the product as a result of only producing profitable production, as the Preliminary Specifications decentralized production models, price maker strategy does. This cash flow would fuel growth in capital expenditures, the ability to pay down debt and make the appropriate returns to shareholders all at the same time, all the time. Where every year would be a “good year” in oil and gas and not just the 5 out of the last 32.

Therefore the demand for higher prices to support the costs of these capital programs is necessary. Austerity is not the answer to the issues that the industry is facing. And I don’t believe that this is the demand that is being expressed by the investment community. It is however, the choice of the bureaucrats through their “muddle along” strategy and “do nothing” operating procedure. Generally when you run a business, the business itself generates the funds to provide for the industry needs in the short, mid and long terms. What a concept, eh? And what Exxon’s CEO shows is the continuation of the attitude of having the shareholders subsidize the consumers for their capital costs of a capital intensive industry. Instead of charging the adequate price for their product, the producers would prefer to short sheet the bed for the shareholders and keep spending the money.

And now we’ve come to the third year of a self inflicted cash crisis. What to do? We will not make it out of 2018 without the actions necessary to rectify this situation. Working capital of $14.1 billion divided by the current burn rate of $4.8 billion / quarter gives you 2.94 quarters left. What bureaucrats will do without any working capital will be an interesting development. The easy way for producers to alleviate the pain would be for them to fund the Preliminary Specification. That way the investors and bankers see that there is a plan to deal with the issues and opportunities that are present in the industry, and a means to deal with the future issues and opportunities. Investors and bankers are forward looking people. They like to see what their money can do for them in the long term and with the Preliminary Specification operational in oil and gas, the future would be that of a well run business.

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 profitable 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.

These Are Not the Earnings We're Looking For, Part XIII

This week marks the 27th year that I’ve been working at developing these ERP systems for oil and gas. As far as I’m concerned I can do this forever. What producers should ask themselves is how much longer my productive career will be? Note, I had far more than a decade and a half of work and business experience in oil and gas before I started this. And if People, Ideas & Objects are not around to do this work, what fool would start their probable 30 year trek if what we’ve done here with the Preliminary Specification isn’t good enough. I personally would suggest too, that if this effort is deemed not good enough, that the ability of the industry to use it after I leave the stage is a no brainer. I didn’t do this work to watch someone else build it. Intellectual Property is the basis of this offering, if it’s deemed to be of no value to the industry then it’ll be of no value to the industry, ever. This is not to suggest that because we’ve held on for 27 years that we’re entitled. We’ve solved the current problems in the industry. The disintermediation the industry needs to go through which is being held up by the self serving bureaucrats. Who’ve destroyed the financial, operational and political foundations of the industry. I would also suggest that the big technology providers rolled out of here in the latter part of last century in Oracle’s case, and in 2005 for IBM’s. In both instances the inability for producers to sign on to any software developments was the issue for their exits. After they’ve seen a 27 year effort being refused they can only assume that it’s the same old, same old.

Speaking of self interested bureaucrats, if not for the statutory requirement to issue financial statements and face their shareholders at the annual general meeting once each year. Bureaucrats would live like kings. Reading the financial statements of the producers I have become concerned with what appears to be a trend that is well past the point of getting out of control. Many of the producers are reporting deductions to their revenues for “royalties.” Now everyone knows producers pay royalties in order to earn title to the energy they produce. This would go for Crown or Federal lands, freehold and Gross Overriding Royalties. It is my understanding, and I may need to be educated here, that these royalties are never reported by the producers as they never owned the product. Therefore, and most producers financial statements bear this out, revenues are reported net of any Crown, Federal, freehold or Gross Overriding Royalties. These royalties that are being reported are also in the range of 1 to 2.5 percent, far less than the 20, 25, or even 30% royalty rates assessed by some jurisdictions. Dare I ask is this the new form of bureaucratic compensation? Since the practice seems to be prevalent in Canada, home of the most creative accounting, that would seem to me to be the case.

According to World Oil producers capital structures have become more complex and difficult to deal with. Instead of just the “wildcatter” there are now Hedge Funds and distressed debt owners etc. Making the producers capital structures very difficult to do deals. Also suggesting that assets are not as good as they once were previously believed to be, other than the Permian. Hedge funds are rumoured to be investing heavily in the oil and gas commodities themselves. Oil specifically. Why not, if a producer only mimics the changes in the commodity price, why invest in the stock of the producers? Generating value outside of the rise in commodity prices, such as the Preliminary Specifications value proposition does, is not in the bureaucrats interest. That’s work!

Last year we were promoting that the Best Business Opportunity, Ever was an investment in a newly formed oil and gas company. Our thinking on this has changed in a material way. We can see by way of our estimate that the North American producers have what we believe to be $1.6 trillion in property, plant and equipment on their balance sheets. These “assets” as the bureaucrats would assert, are really the unrecognized capital costs of past production. They also represent the precise accounting of the amount of investment money that has been diverted from the investors to subsidize the consumers of energy. By not recognizing these capital costs of past production the consumers have never paid the full cost of a product that is a result of a capital intensive process. Therefore the need for the investors to earn their investment back in terms of free cash flow can only be achieved by recognizing the $1.6 trillion in property, plant and equipment present on existing producers balance sheets. If these producer firms ceased to operate those capital costs may be irretrievably lost and therefore would not be readily available as further costs in determining the pricing of oil and gas in the Preliminary Specifications decentralized production model’s price maker strategy. And therefore these capital costs would not be able to be retrieved from the consumers justifiably with the “new producers” under the assumption of the Best Business Opportunity, Ever. These “new producers” would appear disproportionately profitable, and the investors would not be able to retrieve their past investments in oil and gas, ever. Therefore the need to deal with the existing producers is a necessity for the investors in order to recover that $1.6 trillion in unrecognized capital costs of past production.

Maybe the investors will continue to treat the oil and gas industry as a sunk cost which was the assumption that underlies the Best Business Opportunity, Ever. The decision is for the investors to make. We are seeing a much higher level of activity in the annual general meetings with a number of the more distressed producers facing stiff opposition to their slate of board members and overall direction. Proxies are always a fun way to watch a boxing match where one fighter is paid to take the fall. Bureaucrats never lose. They control the John Q. Public shares and as a result are able to overwhelm the control block with votes from people who never read the financial statements, or vote. And then the circus roles up the tent for another year. What is needed is more active involvement by the boards of these firms and a firmer handle on the disaster that is the oil and gas industry. I’ve been saying that things are bad in the industry. And that the first quarter of 2018 would be no different. I was wrong. The first quarter is far worse than I believed was possible. Action is required in 2018 by funding the budget for the Preliminary Specification, or the ability to turn this around will be lost.

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 profitable 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.

Our 12th Module, Part V

Implementing blockchain technologies within the Preliminary Specification is mandatory for the oil and gas industry and producers. With the volume of transactions that are managed through People, Ideas & Objects system a means to provide the safety, security and documentary evidence that the blockchain provides is the only reasonable way for the industry to proceed. We are not providing a solution that is available tomorrow but one that will build value for the industry in the mid to long term. Therefore the adoption of Oracles technologies including their Oracle Blockchain Cloud Service (BCS) and Oracle ERP Cloud in combination with People, Ideas & Objects Preliminary Specification, our software development capabilities, our user community driven development and service providers fit well with the needs, opportunities and issues that the industry and producers face today and in this time frame.

Might I be so bold as to suggest. It is clear in evaluating the financial statements of the producers for the 1st quarter of 2018. That the accounting games are still being played and the lack of cash in the industry continues. No cash is being generated from operations. Nothing is being provided from the investment community and no banks are jumping back on the bandwagon. Therefore no one’s buying the industries story. Producers continue to manage as if the status quo is the only operational choice they have. This as far as any objective person can see is a dead end. I would therefore ask, what would happen if the industry proceeded with the developments of the Preliminary Specification by providing the funding for our budget. Would that change the perspective of the investors and bankers that the status quo was being discarded for the mid to long term future? The future that is defined by People, Ideas & Objects Preliminary Specification and therefore prove to the investors and bankers that the industry was a viable choice for their investments once again?

One of the areas that will benefit the most from blockchain technologies is our Material Balance Report. It resolves the processes involved in the measurement and reporting of production of oil and gas on a monthly basis. Capturing the production data in the field through field data capture and automating the subsequent processes all the way to the financial statements. Within this broad definition we have introduced the Material Balance Report as the means in which the producers within a Joint Operating Committee are able to balance the reporting of the various disparate groups that are involved in these processes between field data capture and financial statements. Introducing the ability through the report to material, system and partnership balance the production. The user community through their work will need to determine at what point and where the production volumes within the Joint Operating Committee for a property, plant or gathering system can then be recorded within the blockchain that supports these transactions. Once that production data has been captured, verified and secured then the processes and automation that we note in the Accounting Voucher and Partnership Accounting modules would commence.

Within those modules we address the never ending amendment process that plagues this area of reporting. This is a natural part of the oil and gas business and will continue for some time, I would imagine. What needs to be done in the case of volumetric amendments is that they are written in similar fashion to the blockchain. This somewhat denotes that there is a specific blockchain for the industries production volumes. Which would aid significantly in the global reconciliation processes that are instituted within the Preliminary Specification through the material, system and partnership balance reconciliation process to ensure the integrity of the reporting is either consistent with the facts of the production, or the agreements that governs the Joint Operating Committee. Whichever of those two is in effect. As I noted before it will be the user community that determines the use of the blockchain and whether we are using one or many blockchains within the Preliminary Specification. If there were many one could understand the need for blockchains for volumes, prices, fees and distributions.

The use of Ethereum’s blockchain has the added advantage of implementing smart contracts. Therefore if there was an Ethereum blockchain for processing fees then the smart contracts could be used to process the appropriate fees on the volumes that were processed through those owners assets. On a fully automated basis. This is the concept that the Material Balance Report is designed to capture. Control the production volumes and ensure that the numbers reported, which includes the amendment process, captures the integrity and unimpeachable level of confidence in the volumetric data. Therefore by doing this we are able to automate the remaining processes on an iterative and continuous basis. Providing the ability of the industry to increase the throughput of the industry through enhanced specialization, division of labor and automation. From the Ethereum website

On traditional server architectures, every application has to set up its own servers that run their own code in isolated silos, making sharing of data hard. If a single app is compromised or goes offline, many users and other apps are affected.

On a blockchain, anyone can set up a node that replicates the necessary data for all nodes to reach an agreement and be compensated by users and app developers. This allows user data to remain private and apps to be decentralized like the Internet was supposed to work.

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 profitable 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.

Our 12th Module, Part IV

Oracle’s implementation of blockchain is the general topic of discussion for this post. We are continuing to quote from the Oracle sponsored IDC whitepaper that we introduced yesterday. Within that paper there is a summary that captures Oracle’s product and service offerings, and to some extent their commitment to blockchain.

Oracle Blockchain Cloud Service (BCS) is an enterprise-grade, distributed ledger platform designed to support new DLT applications and extend ERP, supply chain management (SCM), and other enterprise software-as-a-service (SaaS) and on-premise applications by enabling enterprises to conduct business-to-business transactions securely and at scale across a trusted network with tamper-proof digital records (see Figure 2). Oracle SaaS and on-premise application suites are used in many industries as a backbone of the enterprise's information system. Extending these systems with blockchain capabilities through BCS provides significant value to Oracle's customers and can lower many of the risks inherent in adopting new technology.

Oracle was chosen as our technology partner as we believe they have the best technologies in the marketplace. And that is not by a slim margin. Oracle’s Database 18C is in my opinion well beyond what the competition are offering. It would seem to me that IBM, Microsoft and others are unable to keep pace with the developments that Oracle has been making in their database. The same goes for Java. Since their purchase of Sun Microsystems, Java has become ever more popular as the programming language for business. Particularly from a database developer point of view. And no one can stand close to the commitments that Oracle has made in the ERP marketspace. With the purchase of PeopleSoft, Siebel and JD Edwards Oracle spent $18 billion in market acquisitions for these companies. Still not satisfied they undertook a $4 billion, from the ground up, writing of an ERP system based on the Java Programming Language to produce their Fusion Middleware and Fusion Applications. I’m seeing the same level of commitment in their blockchain offering and feel that Oracle will be using their services in this area to further differentiate themselves in the ERP and other market spaces.

Pushing the concept of fair use to its extreme, I now want to quote from the IDC paper extensively. The following are their recommendations on how to proceed with the Oracle blockchain technology within the organizations that are adopting them.

Oracle's Blockchain Offering Provides Several Benefits to Enterprise Customers

▪ Faster transactions with greater resilience: Enterprise customers need distributed ledger platforms that can scale to handle increasingly large volumes of transactions. They also need resilient, highly available, and high-performance platforms to reduce transaction latency and ensure stable and secure connections.

▪Enhanced data privacy: Enterprises are concerned about the privacy and confidentiality of ledgers and limiting access to transaction details, especially in regulated industries. For example, in financial services, keeping the terms and conditions of contract details such as counterparty identities, pricing, and quantity data confidential is always a concern. In healthcare, the privacy of patient health records, patient identification, and health insurance details is paramount. Oracle's cloud services help firms build and maintain secure ledgers and smart contracts with features such as identity management with secure defense, in-depth data-in-transit and data-at-rest encryption, and multiple confidentiality domains within a single blockchain network.

▪ Simplified operations through managed services: Managed services are gaining momentum as enterprises look to get up and running faster with new leaders and new blockchain smart contract projects. Enterprises can launch pilots, run experiments, and work with production- ready ledgers on production-ready Oracle-managed servers, storage, and network infrastructure, leaving backups, upgrades, and other infrastructure management considerations to Oracle software and operations. Oracle's cloud services also support rapid onboarding of new members and governance frameworks that help enterprises maintain control and security of the ledgers.

▪ Integration with Oracle SaaS and on-premise application suites: Oracle provides integration accelerators through the adapters in its Integration Cloud Service and Java Cloud Service for SaaS. These solutions enable enterprise processes in ERP, SCM, and other application suites to rapidly integrate and connect with blockchain transactions and access distributed ledger information. The applications integration toolkits will provide samples, design patterns, and templates for specific business processes.

▪ New business models and revenue streams: BCS provides application development accelerators that help enterprise customers integrate their blockchain transactions and ledger records with new and existing applications. Oracle wrapped blockchain transactions with REST APIs, which can accelerate application development and integration and make transactions accessible both inside and outside the cloud. Oracle Cloud also offers sandbox capabilities that can support corporate IT developers and independent software vendors (ISVs) with application development environments, integrated CI/CD tooling, and prebuilt integration adapters for Oracle and third-party applications. These resources enable firms to quickly build and run experiments and proof of concepts to address specific use cases. These experiments enable enterprises to develop, test, and engage in new business models and revenue streams from deploying DLT and smart contracts. Oracle has also announced integration of blockchain APIs in Oracle NetSuite Suite Cloud Platform and Digital Innovation Platform for Open Banking. This can provide blockchain on-ramps to NetSuite customers and partners and to financial institutions looking to innovate with blockchain and fintech APIs orchestrated by Oracle API management services.

▪ Deployment flexibility and choice: Oracle's Cloud Machine can deliver enterprise-grade PaaS to enterprise customers' datacenters with deployment options behind the firewall. This can enable enterprises to develop cloud-native blockchain applications on-premise with modern platform services. On-premise options are especially important in regulated industries such as healthcare and financial services. The Oracle blockchain solution enables firms to use the private cloud option to retain complete control over their data and applications and fully manage application services behind their firewall, or deploy in the Oracle Public Cloud, or mix and match private and public cloud options in a hybrid deployment. In the future, Oracle plans to allow its BCS-based blockchain networks to accommodate members joining from outside of Oracle Cloud, as long as they are using a compatible version of Hyperledger Fabric, enabling more open network models across the broader Hyperledger community.

We’ll be discussing the Hyperledger community in a future post. We see here what I would call an explosion of the capabilities necessary to integrate the blockchain with in Oracle’s technology. Oracle is providing these services on behalf of their customers, which include People, Ideas & Objects, our user community and service providers. There’s also an offer here that no producer can refuse. Imagine each producer incurring the time and energy to develop these IT capabilities. The value that will do for each of their bottom lines. Or, alternatively, they could use the software development capabilities that People, Ideas & Objects are providing with the Preliminary Specification. Specialization and the division of labor dictate what businesses choose to be involved in the tasks that generate value. And only those tasks that provide us with the most profitable means of operations. Is IT something that each and every producer is able to differentiate themselves on? Is this where the oil and gas producers build their value? With the scope and scale of the Information Technologies available today, the pace of change, and these capabilities providing no competitive advantage other than to function in an advanced economy. Why would each of the producers continue down this road?

With People, Ideas & Objects our budget includes over $100 million in development dollars to the CPA firms to ensure compliance to the regulations are established and maintained in the Preliminary Specification during development. This provides an independent third party review of the activities undertaken during development, and a baseline for each of the accounting firms to commence their oil and gas producers annual audits. These are a check and balance on the software’s developments from a compliance and governance point of view. They are provided to ensure that the software that is developed is consistent with the regulatory and accounting needs of the producers and does not contain any inconsistent anomalies. Blockchain will also provide these assurances to the producers when the technologies are fully integrated as the user community determines. I don’t personally see any alternative providing the oil and gas producer with the most profitable means of oil and gas operations, on an ongoing basis for the next 25 years, in this complex technical environment.

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 profitable 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.

Our 12th Module, Part III

Our next step in defining our 12th module, The Blockchain, is the implementation of the technology by Oracle Corporation. Oracle Fusion Middleware and Applications are the base financial ERP application of the Preliminary Specification. These are now generally called Oracle ERP Cloud. It was soon after the publication of the Preliminary Specification that we amended our budget to move to the cloud for both development and deployment purposes. The ability to build and maintain physical hardware for our needs was a capability that we no longer needed to adopt as a result of Oracle’s cloud offerings. It has been decisions such as these that we have reviewed the entire process of what were doing in oil and gas. The question we are seeking to answer at all times is how can we deliver our product to market at a faster pace than what will be expected. By moving to the cloud we are able to shift the budget dollars from physical hardware to Oracle services and speed up our implementation substantially. Speed being the critical competitive factor in all businesses today. We see the implementation of the blockchain as a critical element in the reduction of the time we need to develop our solution. Although conceptually our offering does not change, the ability to acquire the security and integrity that the blockchain provides will mitigate much of the software development work that needed to be done to build those features ourselves on behalf of the producers and industry. That our technology provider is taking a leadership role in implementing blockchain within their ERP solution is also of great benefit to People, Ideas & Objects, our user community, service providers, producers and industries.

In this the first of two blog posts concerning Oracles involvement with blockchain we have an Oracle sponsored IDC whitepaper. I highly recommend registering for the download and reviewing this document. Oracle is looking to blockchain to differentiate their product in the marketplace and we as well as the producers are the benefactors of that. It is with that in mind that we now shift our attention to our next concern. Now that blockchain resolves much of the security and integrity of the industries transactions, with much work left to be done. Our concern is the Access Control capabilities of the People, Ideas & Objects Preliminary Specification. To suggest that we offer a unique situation would be an understatement here. Having a cloud based, industry wide solution that has the needs of a proprietary access control system such as an ERP demands is to say unique. When we introduce the Joint Operating Committee where multiple producers need access to the same data we have our work cut out for us. Which leaves me with a rather perplexed look on my face when I read the following from this IDC whitepaper.

Our research suggests that most enterprise customers are looking to build permissioned or private ledgers that only allow those with specific permission to access distributed ledgers.

I am unaware if or how the blockchain would provide this capability at this point. However we are not providing a solution that is available today. We are taking today’s Information Technologies and applying them to the business issues and opportunities that exist in oil and gas. Ours is a industry wide software development based on the Oracle ERP Cloud and focused on the needs of our user community. This focus on the user community has been our priority since the publication of the Preliminary Specification and is the only manner in which we will commence software developments. User community based developments are the only quality and usable systems in use today. Therefore with that in context, IDC notes the nature of the blockchain is somewhat in the same state. That adoption of the technology by providers like Oracle are at the very beginning and will be developing over the next few years. Which is consistent with our plans and needs.

Connectivity to existing systems is often a challenge because many blockchain and distributed ledger technology platforms available today are early-generation solutions. For example, capabilities for enterprise plug-and-play with enterprise resource planning (ERP) solutions and integration with enterprise-class system of record (SOR) are not available in most blockchain offerings. Because many solutions are early versions, multiple features that are required for enterprise deployments such as systems availability; business continuity/disaster recovery (BC/DR); and platform security are still under development.

And

The interconnectedness of enterprises with their customers, suppliers, and intermediaries is another challenge faced by business and technology teams looking to develop blockchain solutions. As a result, the distributed nature of blockchain ledgers can make it hard to provide the privacy that some customers and counterparties expect. For example, transaction records contained in buy and sell transactions and details contained in shipping instructions in the supply chain may need to be segregated into different domains to provide privacy and confidentiality. Great care must be taken to provide advanced levels of security to prevent employees or bad actors from committing fraud by posting misleading information or gaining inappropriate access to customer transaction information.

People, Ideas & Objects are a research and software development firm driven by our user communities needs. We are beginning our developments on the basis of the Preliminary Specification. These efforts are a specialization and division of labor that fills the gap between the oil and gas industry and the Information Technology providers. For each producer to have the requisite capabilities to build and deliver software of the Preliminary Specifications scope and scale is untenable based on their budget and limited resources. Aggregating the industries efforts within this new sub-industry, that we are creating between oil & gas and the Information Technology providers, is the only solution to the business and technical difficulties the producers face today. To me, having 150 producers each researching and developing the blockchain technologies and integrations into their ERP systems independently, is ludicrous. As would any aspect of our offering, which does not fall within the producers competitive advantages of its land and asset base, or earth science and engineering capabilities.

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 profitable 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.

Our 12th Module, Part II

We now begin with a description of the blockchain technology and its integration into oil and gas. Within the Preliminary Specification we’ll have many interactions and transactions that currently do not exist in the industry. The volume of transactions that will be processed through our system will be substantially higher than what is currently experienced in the industry. This would be the case with the same producers involved and the same production volumes. When using the Joint Operating Committee as the key organizational construct we are taking the data at its lowest possible value obtainable. Today many ERP systems are capturing aggregated data from spreadsheets. In addition there is an increase in transaction throughput as a result of each participant within the Joint Operating Committee being active in the property as opposed to receiving one set of accounting reports from the operator each month. This volume of increased data and transaction throughput is then extended as a result of the 3,000 administrative and accounting service providers each processing their billings for their services to each of the identifiable Joint Operating Committees. These increase the volume of transactions, and hence the quality of the data, by substantial numbers.

Blockchain is a pure Information Technology solution within the Preliminary Specification. The other eleven modules are designed around the business issues and opportunities that are currently being experienced by the producer firms and industry. Those primarily being the chronic lack of profitability and the cultural capacity to accept they have a problem with profitability. With the business models that are contained within the Preliminary Specification, producers gain our value proposition which is valued in the region of $25.7 to $45.7 trillion over the next 25 years. This differential from the status quo is the Preliminary Specifications decentralized production model’s price maker strategy that enables producers to produce only profitable production. Enabling them to pursue the oil and gas business with the appropriate cash flow to fund their capital expenditures, pay down their bank debts and return capital to their shareholders. Currently producers expect shareholders to fund their capital spending as a subsidy to the energy consumer, leaving them with disgruntled shareholders and high levels of bank debt as a result of the lack of real profitability and cash flow. These business issues are our focus, blockchain is a pure technological application that provides our systems with enhanced security and integrity for the industry and producer. Adding to the dynamic nature of our software development capability, user community and the Oracle Cloud ERP offerings we use as the base of our system.

What is blockchain and how does it work. A good description of the technology of Distributed Ledger Technology (DLT) is as follows. This summary is provided by White Hat Security.

Every time a new transaction is initiated, a block is created with the transactions details and broadcast to all the nodes. Every block carries a timestamp, and a reference to the previous block in the chain, to help establish a sequence of events. Once the authenticity of the transaction is established, that block is linked to the previous block, which is linked to the previous block, creating a chain called blockchain. This chain of blocks is replicated across the entire network, and all cryptographically secured which makes it not only challenging, but almost impossible to hack. I say almost impossible because it would take some significant computational power to even attempt something like that.

In the context of security, both transparency of the system and immutability of the data stored on blockchain comes into play. Immutability in computer science refers to something that cannot be changed. Once data has been written to a blockchain, it becomes virtually immutable. This doesn’t mean that the data cannot be changed – it just means that it would require extreme computational effort and collaboration to change it and then also, it would be very difficult to cloak it.

Finally there is a TED talk from June 2016 with Don Tapscott. In this video he gets into the details a little more than yesterday’s video and calls blockchain an Internet of Value that supplements the current Internet of Information. A good description in my opinion. Which brings up one of the areas of the blockchain and their use as coins or tokens. I’ve mentioned this before and this relates to the centralization of value in the current Internet space. The example I’ve used is of YouTube which was sold to Google for about $4 billion. That transaction is now worth probably in the area of $150 billion for Google’s shareholders, which is a good thing. However, what if the owners of YouTube were able to hang on to their company and realize the value that they generated without having to give away the store. They may have been able to realize that $150 billion themselves. Issuing a coin would have enabled them to enjoy a liquidity at all times during their ownership of YouTube and removed the need to sell the company in the long term. Enabling them to realize the full value of their ideas. What has happened is the larger Information Technology providers have been able to poach the promising ideas and incorporate them within their offerings inside Google, FaceBook, Twitter etc. and leave the owners, although financially satisfied, without their ideas and the work they wanted to do. We may be seeing the downside of this concentration of value with just a handful of companies and the privacy concerns regarding FaceBook.

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 profitable 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.

Our 12th Module, Part I

People, Ideas & Objects Preliminary Specification is almost four and one half years old. During the time that we’ve discussed the specification, the user community and service providers and all the other elements that are needed for the dynamic, innovative, accountable and profitable oil and gas producers. There were no changes to the specification, establishing it as a baseline in which the user community would begin their work. Today we begin the definition of what will be our 12th module of the Preliminary Specification. After researching the topic and grasping an understanding of the Information Technology that underlies the blockchain, today we can begin the integration of that technology into all aspects of the other eleven modules of the Preliminary Specification.

If there was one weakness in the Preliminary Specification it may have been in its ambitiousness. The ability to implement some of the technologies in the manner as described would have been difficult. Areas such as the Material Balance Report where the industry wide reconciliation process is conducted from the field data capture through to the financial statements was going to be difficult. The area of concern was in ensuring the integrity of the data and its reporting when dealing with Joint Operating Committees, amendments and the complexity of the system as described in the Material Balance Reports specification. By adopting blockchain technologies, which I find best described as distributed ledgers, the Preliminary Specification doesn’t seem all that ambitious anymore. What I knew was doable and could be implemented with the technologies that existed in 2013 when the Preliminary Specification was published, are now far easier and in many ways the only way in which the industry should proceed in terms of their ERP systems development.

The best video I found describing what the blockchain provides is from its biggest proponent, Don Tapscott author of the book “Blockchain Revolution.” This video has a number of interesting catch phrases that I think help people understand the technology.

The first quote that I would point out from Mr. Tapscott is “so what that means is the nature of a corporation and the nature of competitiveness is going to change. This is a time of great transformation. First of all, every industry will go through huge convulsions not just financial services. Resources, … Secondly, it means that every business function will change.”

The phrase that I found resonated the most with the Preliminary Specification was at around 3:35 of the video. Mr. Tapscott said “everyone has a “shared network state” where they can “look real time at everything that’s happening.” Once we’ve moved to the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producers. We take on what could be described as “a shared network state” within the industry. The Joint Operating Committees are / could be standalone investments or would be held together as a network of assets within an oil and gas producer as a firm or corporation. Joint Operating Committees are in many ways independent as a result of this “shared network state” and the manner in which they are managed in the Preliminary Specification. The concept of operator is gone and each working interest owner is an active participant at all times.

Recall we are moving the compliance and governance frameworks of the hierarchy to the Joint Operating Committees legal, financial, operational decision making, cultural, communications, innovation and strategic frameworks. Transactions between the owners of the Joint Operating Committee either in terms of the land that they lease, both mineral and surface, the capital assets deployed, the production and sales of commodities, the service industry representatives they engage, the producers earth science and engineering capabilities, our user community and service providers or coin holders will be able to operate within this “shared network state” we understand to be the oil and gas industry and service industry.

The integrity of the transactions that are undertaken in oil and gas are always the subject of heavy documentation and verification. As we move to a software driven world, yes even oil and gas, this integrity, documentation and verification can’t be ignored. With blockchain we are gaining highly secure systems by implementing the blockchain as our 12th module in the Preliminary Specification. Where it will engage with each of the other modules and provide the transaction security that is necessary. There may be one blockchain within the Preliminary Specification or there maybe many. It’s too early to determine the best implementation of the technology at this point. What is known is it will be used in at least 50 different ways that I can think of off the top of my head to provide that integrity and security that is necessary in today’s systems. Anywhere that there are interactions or transactions between producers and Joint Operating Committees there will be the blockchain securing the transaction.

We’ll be discussing the 12th module and some of the technologies around the blockchain in the next few weeks. We will be taking a short break some time after May 9th to review the first quarter’s financial performance of the producers. It’s important to understand the difference at this point between the blockchain as our 12th module of the Preliminary Specification is fundamentally different to our implementation of the blockchain for our Initial Coin Offering. They are for all intents and purposes two mutually exclusive events. One is the technology integration into the Preliminary Specification, the other is the means we are using to raise the financial resources to build the Preliminary Specification. Our coin offering will be based on the rights that are distributed through the coin to its holder that provides them with the exclusive access to the software that will be built from the Preliminary Specification.

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 profitable 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

Financial, Operational, Political, Part IV

Maybe the producers have everything under control. “The large volume of unrecognized capital costs of past production that the industry carries is only an accounting issue for the accountants to worry about. These “assets” do not have any effect on the bank balance at the end of the day. They represent only the money that was spent in the past and that is where they should stay, in the past.” More or less this is the justification for the “muddle along” strategy and “do nothing” procedure. When the producer doubled their reserves and revenues continue to grow “who cares about what happened in the past!” More or less this has been the attitude regarding the business of the oil and gas business. The money being made was in the reserves being discovered and produced. If these reserves are so valuable, why can't they be produced profitably? Profitably based on a reasonable accounting. These reserves have had nothing to do with the accounting from the accountants. What the producers have failed to see is that the money that has been invested in the industry isn’t performing. For all intents and purposes it sits forever as an asset on the balance sheet as property, plant and equipment. To perform the producer needs to take into context what was spent and how that investment has performed under their management. On that basis the performance has been the poorest possible. This new process of evaluation is how oil and gas producers are assessed and bureaucrats are not happy that they now have to account for their past behaviors.

“That people within the industry and the service industry are having difficulty seeing where the value lies in the oil and gas industry. That they don’t want to be part of a thriving, growing operation is not the producers concern.” The industry doesn’t have a problem it's the people who no longer want to work in the industry that do. “The investors and bankers that don’t participate anymore, the service industry reps that can’t fill producers needs, and others that just don’t understand how difficult and hard the oil and gas business is.” Back in the early 1990’s when oil prices were low due to overproduction it was this kind of dialog that was heard throughout the industry. Usually in the annual reports and at the annual general meetings. “Oh whoa is me, another bad year, oh whoa is me.” I think we’ll begin to see this same dialog begin to be pushed across to us from the producers in the first quarter reports and at the annual meetings. I think this year it’s not going to fly, and here’s why.

Many investors are talking. Some are proposing changes to the boards. Producers are resisting and we’ll see who wins the proxy battles. Proxy battles are futile in my opinion. A lot of screaming and yelling and then nothing happens. The chances of instituting any change is very low, no matter how bad things are. And even if things are desperate bureaucrats have their ways of ensuring their franchise is safe. The only way that there’ll be changes from a management point of view is when the bureaucrats know intuitively that the gig is up. That their opportunities are best sought elsewhere in greener pastures in other industries far away. The timing of this jump is critical to the success of their next industries perspective of them. If they wait to long then they begin to look like they may have been responsible for the oil and gas difficulties. Best to leave before the knowledge that bad management was the cause of oil and gas’ downfall and becomes common knowledge across the business community.

When, as we have documented here, the financial difficulties are as bad as they are in oil and gas. The investment and banking communities have hightailed it out many years ago. When the operational difficulties are becoming more of a logistical difficulty and causing the bureaucrats to work evenings and weekends, then you know we’re close to the time for them to bail. The one sure measure of this however is the political. When the politicians believe the lies that the business was represented as by the producers for the past few decades. Then you do not want to be around when the truth begins to be known by those outside of the industry. This could really damage the employment prospects of the bureaucrats in the industry they choose to work for in the future.

When creative destruction hits its peak in oil and gas then that’s the day People, Ideas & Objects, our user community and service providers get the call to put it all back together again. This day has always been a light at the end of the tunnel. For the past number of years my future’s been brighter. Now this light is so bright and so close that I think we could measure it in minutes. There is always the possibility that the producers extend their hold on the situation for another 25 years and keep the show on the road. I just don’t see that, and am certainly not banking on it.

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 profitable 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.

Financial, Operational, Political, Part III

We’ve all heard that producers are profitable at $12 / barrel in the Permian. So it would seem President Trump has also heard those claims. He feels that oil prices are substantially too high and have taken OPEC to the woodshed for doubling the price of oil. And he feels that can’t continue. In a Tweet last Friday he said “Looks like OPEC is at it again. With record amounts of Oil all over the place, including fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!” But let's bring in another point about Kinder Morgan’s difficulties with Canada’s Trans Mountain pipeline. The Canadian and Alberta governments are battling it out with the British Columbia government. Where are the producers in either of these political battles? Kinder Morgan is quite alone in their battle and other than the commitments of the producers for the pipelines capacity it would seem all they get are crickets. That the CEO calls the situation untenable can be fully understood and appreciated.

The point of this blog post is we’ve now hit a point in the industry where events and developments are working against the oil and gas industry. If you don’t pay attention to the business beyond the development of reserves and spending your revenues on bureaucratic niceties, then things will degrade. We’ve seen the financials degrade, the support of the investment and banking communities withdrawn, now the operational capacities and capabilities are diminishing at a remarkable rate. The problem is that all the people who were dispatched from the oil and gas, and service industries couldn’t give a damn. What’s the next shoe to fall? Oh wait it's the political winds will begin to blow against you. When you lie about how much you can produce the Permian for, powerful people are listening. Square the circle of your first quarter financial statements to your investors with the fact that the political environments expectations accepted your claims of $12 costs, that pipeline companies can’t be bothered fighting the governments exclusively on your behalf anymore and as I noted yesterday, no one’s going into the water business. Brilliant, absolutely brilliant, every bureaucrat give yourself a big bonus!

Consider for a moment that President Trump who just sold vast quantities of military equipment to Saudi Arabia. And I’m certain that there is at least an implied guarantee to them of military protection from both Iran and the Soviet Union Russia. All on the basis of understanding that oil production costs are $12 / barrel. The President then begins to apply diplomatic pressure for the Saudi’s to move the price back down for the consumers benefit. I guess it doesn’t really matter, you were never really profitable anyways. You’ll muddle through when the Saudi’s have no choice but to abide by the needs of the President of the United States. Remember he’s the one with lots of Nukes that provide the protection that Saudi Arabia needs.

Telling the uninformed that you’re profitable and your costs are $12 when the reality is a bit different doesn’t help you in the political arena. The fact is oil and gas is as political as it can get. Not to worry though you still have all the reserves and revenues. The muddle along fairy will fix this. We are moving from a financial disaster to a financial, operational and political disaster and the producers are eager to do nothing, their operating strategy. I might be wrong here, and I’ve said I might be wrong on many occasions, yet the Preliminary Specification addresses today’s issues and opportunities of the industry in wholesale fashion.

The only way in which to get the financial market back on the producers side, the only way in which the producers can begin to produce real profits, the only way to stem the operational concerns down the road and the only way to begin to deal with the political fallout that’s beginning is to implement the Preliminary Specification. Which does show my bias. The alternative is to muddle along and do nothing which will precipitate People, Ideas & Objects long term funding source, our Initial Coin Offering. My best projections at this time is this is in excess of 2 years from reality. The important thing for producers to recall is that the ICO essentially puts a claim on those reserves and revenues where ⅓ of the net after royalties and taxes are diverted to the coin holders, those that funded the development of the Preliminary Specification. How is this possible you may ask? It's important to understand that in the future, it's not important to own just the oil and gas asset. It will be necessary to own the oil and gas asset and have access to the software that makes the oil and gas asset profitable. You’ll need to speak with the coin holders about that. The other question producers should ask themselves is if they have 2 more years in which to just sit and watch the industry disintegrate in front of their eyes?

Destruction is not boring, but it's not the place you want to be. That’s the image oil and gas has. So good luck trying to reverse the political winds to support the industry. How you’d do that and maintain these dishonest practices will be a surprise to me. Maybe I’ll learn the really value and understanding of “muddle along” and “do nothing,” anything’s possible.

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 profitable 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.

Financial, Operational, Political, Part II

With all of these inflated profit numbers being reported things should have been hoping mad in the oil and gas industry! It’s just that no one has been taking care of the business for a long time. The role of the oil and gas producer is (actually was) to raise money and spend it drilling lots of wells. Now it’s just to drill wells. “Cause that’s where the money is.” People rob banks because that’s where the money is. I think there’s a direct analogy there. Drilling for oil and gas both increases the value of the producer firm with reserves and establishes revenues as a primary industry. Anything outside of this, such as pipeline capacity, the health of the business, or the health of the service industry or any other concern has never been part of the deal. Producers drill wells! The rest of the oil and gas business, which doesn’t generate any value to the producer, or for that matter anyone else, will take care of itself when the producer ignores it. This is also known as the “muddle along strategy” and “do nothing” operating procedure.  When producers take all of the oil and gas reserves and divert the cash from their revenues in a primary industry for themselves, what’s in it for anyone else? The expectation is that investors will provide for the service industry and pipeline providers. Volunteer their capital into secondary industries so that producers can then call them greedy and lazy when they submit an invoice for the work that they’ve done. Only to pray that they receive payment from the producer within the next 18 months.

Organizational methods do begin to fail. Creative destruction is one of the key enablers to our advanced way of life. As the old organizational methodologies cease to build value, new business models have rushed in to replace them. Hierarchies have had a very substantial run. From the 1920’s, or even earlier, they were able to organize and conduct large operations of substantial scope and scale. Today for a variety of reasons these no longer function to provide the value that is necessary to support our way of life. What has happened in oil and gas is we’ve travelled a long distance beyond the point in time in which we’ve collectively built value. Through accounting shenanigans bureaucrats have been able to hold on to their perch without too much difficulty. While other industries have been disintermediated by the Internet and Information Technologies, oil and gas has appeared to be immune. In reality what has happened is that the financial foundation of the industry has eroded to the point where none of the value that was built up before has been maintained. Through chronic unreported losses producers financial foundations have become incapable of carrying themselves in the future. The collective value of the industry is worthless as it generates nothing of value and requires substantial financial support just to operate. This support now comes from the fact that the industry is a capital intensive industry. The investors money that was invested over the past decades is being returned by the business in the form of cash flow. These cash flows are being diverted to keep the bureaucrats happy and the doors open. The time for change was decades ago.

As a result of the financial deterioration the next element of creative destruction has come into play. The operational capabilities and capacities are clearly disintegrating as we speak. Certainly the production profile of North America is increasing in both oil and gas production. That can be attributed more to the power of shale than to the effectiveness of the industries operations. Take the 50 bcf / day of today’s U.S. shale production away from the 80 bcf / day of today’s U.S. natural gas production and ask yourself where would we be without shale? Abuse of the service industry, pipeline companies, and all those other businesses that are part of the secondary industries that survive based on the work they do for the producers is epic.

The services that the producers have depended on for all these decades is in decline. The collective wisdom of the service industry, the people who work in that industry and those that used to work in the industry is, “who cares.” Why break your brain or back in the hope that oil and gas will possibly have one of the good years as they’ve had 5 of the last 32. There are other industries of interest with real opportunities. The boom / bust cycle is something that should have been worked out of oil and gas many decades ago. Yet, bureaucrats hold it out as a feature of their business model. People don’t invest in their education and careers to find at forty years of age they have the seniority of a construction laborer with a high school diploma. They’ve seen that scenario play out too many times in their family and friends to concern themselves with anything but getting out of the industry. “If the industry can’t manage itself then I’m outta here.”

The long term consequences of the producers “muddle along” strategy and “do nothing” operating procedure have brought us to this point. Producers load themselves up with all the value of oil and gas reserves and oil and gas revenues. These fuels the bureaucrats existence in a way they just can’t believe they’re so intelligent. As long as they build value in the reserves and build revenues that is all that they need to concern themselves with. Well we see the end result of this thinking. Financially the industry is a disaster. Operationally it isn’t that bad at the moment. The Permian is having difficulties as are other areas. These are limiting the upside of the production profile. Soon they’ll begin to affect more and more of the industry. As we mentioned yesterday the Permian is having difficulties sourcing water, sand, trucks, truck drivers etc. “What I really want to do is go into the water business in the Permian. Invest a bunch of money from some naive investors and wait until 2020 to get paid for the hard work of the water hauling I did today. So that producers can sit on their big fat reserves of oil or gas and their big fat oil and gas revenues. I can always buy balony for $1.50 a lbs and sleep in the truck until I get paid. Such is the good life today in the oil and gas service industry.”

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 profitable 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.

Financial, Operational, Political, Part I

It was during mid-February that we shifted our discussions to our user community and the 2017 earnings of our sample of 23 producers. We’ll return to a review of the first quarters earnings of 2018 some time after May 8, 2018, which is the day in which our last producer reports. And we will always return to our number one priority, our user community. You will recall that the 2017 earnings for our sample of 23 producers were $15.6 billion. A number that we reclassified to exclude the extraordinary items of the Trump tax cuts, a consistent level of depletion with 2016, Cenovus’ ludicrous reclassification of their assets based on the purchase price of the Conoco assets and the elimination of Conoco’s earnings on the sale of their heavy oil assets. The justification for these reclassifications is debatable, however, we reclassified these “earnings” to a loss of $31 billion for all of 2017 for our 23 producers. The debatable nature of these “earnings” would also have noted that these producers would have lost $173 billion if they’d adopt our recommended 2.5 year depletion schedule for their property, plant and equipment. Which I’ve noted would be ridiculous, but honest, just as keeping property, plant and equipment on the balance sheet for 27 years is ridiculous, but dishonest. If you never recognize your capital cost in a capital intensive business, then it's really not a business that your representing is it? Is your property, plant and equipment an asset or a cost? And why do producers never want to account for the money they spent?

Within the Resource Marketplace, Research & Capabilities, and Knowledge & Learning modules of the Preliminary Specification. We institute a major change in the manner in which the industry is operated. Oil and gas is a primary industry which means that it is involved in the extraction and collection of natural resources for direct sale. These generate direct revenues to the producer of the oil and gas. The service industry and other businesses such as pipelines are in the business of supporting the oil and gas industry and are dependent on the oil and gas producers paying them for their services. As secondary industries they are providing these services in the expectation of earning a profit. In the good times the secondary industries are called “lazy and greedy” and the in bad times they are the first to be laid off and as the “leeches” that they are, have their payments extended to eighteen months by the oil and gas producers. The change that is made in the Preliminary Specification is the recognition that without the service industry and companies such as the pipelines the producers would be unable to conduct any of their operations. People, Ideas & Objects create a more cooperative, collaborative and innovative environment to enhance the innovations that are generated from the service industry for the benefit of the oil and gas producers.

The CEO of Kinder Morgan says that their $7.1 billion “approved” Trans Mountain pipeline is untenable. We’ve discussed the associated gas issues in the Permian where pipeline takeaway capacity is an issue there too. Now we hear that producers are having difficulty sourcing what is needed from the service industry and staffing is difficult. Just google it and see the number of articles documenting the difficulties in sourcing water, sand, trucks, truck drivers etc. When I read stories like these I’m reminded of the stories that came out of the former Soviet Union during its collapse. How everyone, literally, was waiting in line at the bakery for bread. Methods of organization reach a point where they cease to generate value. Then they begin to destroy the value that was built before. Oil and gas is well past the point of generating value and we’ve passed into a destructive phase many decades ago. Accounting shenanigans hid the costs of the destruction from everyone while investors were hoodwinked by suspect accounting into pouring their money into the oil and gas industry each year to keep it afloat. Now the operational side is beginning to fall apart, which after the financial disasters is always the next thing to go. You can read more about this in the Preliminary Specification, which was designed to stop this crap.

Oil prices are up since OPEC’s production sharing agreement went into place. Anyone notice that oil and gas may follow the characteristics of price makers? Remove 2% of the production and receive 100% price gains! Right now the Saudi’s are talking about their goal of $80 oil which would be a good price for their production. Theirs being conventional production doesn’t cost much, and even at $60 they’re making plenty of money. I can almost guarantee that North American producers shareholders will be disenchanted with the first quarter of 2018’s performance, just as they’ve been disappointed these past number of years. $66 oil is half of what People, Ideas & Objects have determined that the North American producers cost is. Primarily due to the high levels of unrecognized capital costs of past production stored on the balance sheet as property, plant and equipment. Which I guess is better than selling oil at $29 / barrel.

Producing oil for $12 / barrel is claimed to be what it costs to produce in the Permian. That is their “breakeven” number. If the producers are making $54 / barrel they should use some of those resources to solve the logistical difficulties in the Permian and pipeline issues too. That would be a good place for that money to go because no one else is volunteering their “free” capital to burn to those oil and gas service businesses anymore, either. What I know for certain is that $12 / barrel cost is as dishonest as the day is long. It either takes the total capital cost and applies it to every molecule of reserves discovered. Which in shale is a substantial volume of reserves making the cost / barrel quite small. Or, are we to assume that royalties in the Permian are below 18% which is $12 / $66. The $12 / barrel being quoted is usually the operating costs of the producers alleged “breakeven price.” Therefore if we assume that all of the non-capital costs are included in the $12, that is not the breakeven price. That is the cost that is used to determine the contribution margin. In this case the contribution margin would be $54 / barrel which when you divide by the capital costs would give you the volume of barrels needed to be produced to achieve breakeven. Therefore the industries use of “breakeven,” as with so many other of the producers fancy financial footwork, is another sleight of hand.

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 profitable 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.

User Community Developments, Part XIII

As we noted yesterday the new oil and gas producer, the one that is enabled through the implementation of the Preliminary Specification, has acquired the business model that enables them to control all of their overhead. Their administration and accounting are handled by the service providers and charged directly to the Joint Operating Committee. Any overhead that they incur will be as a result of profitable operations and hence paid for. Any shut-in inventory of unprofitable properties will not attract any of the administrative or accounting overhead. What the shut-in inventory of unprofitable properties will attract is the hourly charges from the earth science and engineering resources time in which they’re working on these properties in an effort to return them to profitable production. These earth science and engineering resources charges would be considered capital costs in my opinion. While those geological and engineering resources are working to return these unprofitable properties they will be generating service revenues from billing the Joint Operating Committees AFE or lease for the work that they’re doing. Capturing the producers service revenues necessary to cover off the cost of maintaining the earth science and engineering capabilities of their producers competitive advantage.

Whether the new oil and gas producer is a startup or an intermediate they will be able to maintain profitability of their oil and gas production at all times. The startup producer can begin operations by reselling their earth science and engineering capabilities they’re developing prior to owning any oil and gas properties and remain profitable. The shareholders can begin their involvement as soon as the management have shown commercial use of their capabilities. In addition, participation in a few small properties is the beginning of an oil and gas producers production profile. In today’s environment this requires the staffing of administrative and accounting resources necessary to manage the firm's interest in those properties. With the Preliminary Specification and service providers in place shareholders won’t see millions of dollars being consumed in the maintenance of overhead during the startup phase of the organization. Only the fees for the service providers will be charged on the few properties that are owned by the producer. Attaining a 100% effectiveness of the administrative and accounting resources being charged on those properties vs. the extremely low percentage utilization the full time administrative and accounting resources the startup producer has to take on in today’s market. Unlike today, this will have proven to the shareholders that the management of the new oil and gas producer have an understanding of business and profitability, and will not indulge in development of a spendthrift organization such as today’s oil and gas producers.

This is not to say there will be no overhead that is not incurred at all times. The CEO, COO and CFO salary and benefits are not included in either of the two categories we mentioned. When the differences are analyzed between the overhead that is incurred by today’s producers and that which is incurred by a producer in the Preliminary Specification. They will not be carrying any of the costs to maintain and build their competitive advantages in the earth science and engineering capabilities. These would be self-supporting activities as they are a separate business model in the Preliminary Specification from oil and gas production. Direct overhead of the Joint Operating Committee will be incurred for any production that is profitable. This will involve the producers share and be offset by the revenues of oil and gas sales. Lastly there will be some overhead that the producer will be incurring above and beyond these areas in the management areas of the organization. These are not incidental costs and how the producer chooses to report them, as capital or costs, would be to their discretion.

Bureaucrats have been fooling themselves about how much they spend and where it should be classified. “Large explorers outspent their cash flow by 117% over the past seven years,” according to Barclays. “The top 15 oil companies have paid executives $2.8 billion over the past decade while delivering a smaller return to shareholders versus other industries.” That averages $18.6 million per year / producer. I can state unquestionably these are not the statistics that drive the day to day or any conversations anywhere in the industry. It is the pursuit of the engineering and earth sciences technical difficulties that occupy the minds of the oil men these days. Increasing their production profile in the face of such technical obstacles is the only thing that excites and challenges the people who work in the business. The financials will do what the financial will do.

Today the U.S. production sits at 10.5 million boe / day. This number is expected to be 10.65 million by the end of May 2018. That is 2 million boe / day higher than when OPEC implemented their production sharing agreement in November 2016. In shale the US natural gas production over past 50 years equalled.

1968: 51 bcf/d
1978: 52 bcf/d
1988: 47 bcf/d
1998: 52 bcf/d
2008: 55 bcf/d
2018: 81 bcf/d  (forecasted)

Shale, in the past ten years, is responsible for a 47% increase in the deliverability of natural gas in the U.S. Is it any wonder why the prices are so low? If industry increased deliverability by 8% in the prior 40 years, is this considered out of control? The fundamental collapse of the natural gas marketplace would seem to indicate that it is.

Conversely I don’t think producers have thought through the implications of implementing the Preliminary Specification. What happens when the $1.6 trillion in capital that currently resides in property, plant and equipment is retired through the decentralized production model? Clearly their legacy costs of oil and gas exploration and production / boe are going to go down. But only after the investors who have supported the industry are compensated and the assurance is given that they will not be directly subsidizing the consumers again. Destruction of the natural gas business was quickly followed by the destruction of the oil business. Today the financial health of the producers, when you consider the bloated nature of property, plant and equipment on the balance sheet, is astonishing. It is worthless and demands capital to maintain an operating deficiency. Even though the investors are not returning there is no discussion or understanding in the industry of what is happening or what to do about it. Returning money to shareholders who provided it in the past certainly doesn’t stir any discussion outside of this blog. There must be wells that need to be drilled.

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 profitable 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.