Sources, Procedures, and Microeconomic Effects of Innovation, Part III

One of the outcomes of the Preliminary Specification was the understanding that innovation can / is a defined and replicable process within organizations and industries. With that understanding we can see that Apple is not that lucky, but that skilled. A purpose built organization with high standards of quality and innovation in the consumer electronics marketplace could be a really valuable firm. It seems so easy when it’s set out as the goal and objective of an organization to undertake the possible and viable task that Apple has achieved. It does eliminate much of the magic and mystery to the story though. It was through Professor Giovanni Dosi paper Sources, Procedures, and Microeconomic Effects of Innovation that we learned this and what is required of an organization and industry in order to enable innovation. In today’s post we’ll begin to get into the detail of those specific requirements of an innovative oil and gas producer. With that we turn to the next quote from Professor Dosi’s paper.

It is not my purpose to review the whole body of innovation-related literature. Rather I limit my discussion to a selected group of (mostly empirical) contributions and focus on the microeconomic nature of innovation upon techniques of production, product characteristics, and patterns of change of industrial structures. The discussion will aim to identify

• The main characteristics of the innovative process, 

• The factors that are conducive to or hinder the development of new processes of production and new products, and

• The processes that determine the selection of particular innovations and their efforts on industrial structures. 

There are two major set of issues here: first, the characterization, in general, of the innovative process, and, second, the interpretation of the factors that for observed differences in the modes of innovative search and in the rates of innovation between different sectors and firms and over time. 

Oil and gas are well known for their claim to be highly innovative. With the recent developments in shale, the deliverability and reserves of oil and gas in North America have been substantially increased. Is this due to the innovations of the producers? Or is it a result of the developments made by the service industry in the areas of coiled tubing and companies such as Packers Plus? When we look critically at the success in the shale era was it as a result of the service industries perseverance in driving their ideas forward through decades in which the producers refused to consider their “new” technologies. Or was it as a result of the producers determined effort to solve the future shortages of oil and gas commodities? Knowing what I know about the difficulties in having the Preliminary Specification discussed and considered. Knowing what I know of the coil tubing providers begging producers for years to try their products. The difficulties that Packers Plus had. The developments made by the service industry are wholly responsible for the innovations that we’ve seen in oil and gas.

Harsh words that will most certainly put more noses out of joint. The fact is the industry refuses to accept anything from a “small” company. It refuses to accept anything from a company that has a technology that they don’t fully understand. And they refuse to accept the Intellectual Property rights of the service industry representative that provided the product or process. They prefer to call the service industry greedy and lazy when the activity level is high and the only field equipment available is scheduled for two years from now. And they expect that payment to the service industry will be made in 18 months when the producer has a difficult time with their cash flow. This is the true “innovative” environment of the oil and gas producer and as we have stated in the Resource Marketplace, Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification if this behavior is not corrected it will lead to the financial destruction of the industry, on top of all the other reasons, and it will ensure that only the bureaucrats are truly benefiting as a result of oil and gas exploration and production.

There is nothing further from the current oil and gas industry configuration and culture in terms of what is required from an innovation point of view. Based on the research of Professor Giovanni Dosi significant changes will be required. What I have described here is an ad-hoc approach in which producers cherry-pick the value add from the service industry and wash that Intellectual Property amongst the innovators competitors. All diplomacy aside the producers do not have much time in which to make the changes described in the Preliminary Specification. From an innovation point of view, and from the point of view of profitability. They believe they can continue in an industry where their costs are in the range of $150 and receive barely half of that value in sales on a pre-differential basis. The difference is made up by not recognizing the substantial capital costs involved in a capital intensive industry. Storing those capital costs for decades at a time on the balance sheet as property, plant and equipment. And then adding to those capital costs all of the overhead that they feel they can justify as “capital” in order to “build their balance sheet” that much larger. Meanwhile during the entire process the cash only goes out and rests on the balance sheet as property, plant and equipment where it will be recognized and consequently returned to the producer some decade from now. It is a ludicrous way to run an enterprise, and one that has failed spectacularly. It just doesn’t seem to ever be realized by those that are running the show.

Recently President Trump was promoting the oil and gas industry as the largest producer of energy in the world. He also took the OPEC cartel to task with accusations of stealing money from americans as a result of the high oil prices. Throughout the life of the oil and gas industry. It has only been a handful of years where they’ve received the political support of the american administration. This usually being expressed through a quiet, arms length approach. Having President Trump so supportive of the industry is an anomaly and a treasure that the industry needs to better manage than they are today. Should the industry be found to be unprofitable and incapable of supporting its own operations as a result of not charging enough for their products. It may be seen by President Trump and the american people as a fundamental betrayal of the rosy stories and positions that have been promoted in the past decades by these producers. Making it very difficult for any future administration to believe the industry but also to take anything but the safer and more secure confrontational and adversarial positions against the industry that we’re all familiar with. Then again, I am talking about credibility and what do oil and gas bureaucrats know about credibility and integrity?

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.

Sources, Procedures, and Microeconomic Effects of Innovation, Part II

Readers should strap themselves in we’ll be travelling at a much faster pace than we did on our first post of this series. Today we’ll be reviewing two paragraphs of Professor Giovanni Dosi’s paper Sources, Procedures, and Microeconomic Effects of Innovation. Bringing the sum total of our review so far to three paragraphs! The richness of the content of this paper is astounding. It was also very hard work to get through. Which is probably why I went through the entire document a number of times. Each iteration building on the knowledge gained in the previous pass. As with yesterday we have a broad scope of understanding captured in a small number of words.

It is the purpose of this essay to analyze the processes leading from notional technological opportunities to actual innovative efforts and, finally, to changes in the structures and performance of industries. 

Thus, I shall discuss the source of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search and the nature of the incentives driving private agents to commit themselves to innovation. pp 1120 - 1121

I wonder why it is that Professor Dosi raises the point about the “changes in the structure and performance of industries.” Just as the oil and gas industry and producer firm must reorganize themselves to enable profitability they also need to structure themselves to facilitate and enable the innovations in the sciences and technologies that make up the industry. Both profitability and innovation can be achieved through the decentralized production models price maker strategy. Where the service providers are created from the producers current administrative and accounting resources. I think this is intuitive, or it should be. Yet the battle rages between the producers vs. People, Ideas & Objects. Is it truly worth the destruction that is being realized in oil and gas to remain opposed to the changes required in the Preliminary Specification?

It is at this point that we meet the ultimate academic argument between Hayek’s Spontaneous Order, Schumpeter’s Creative Destruction and Giddens Structuration Theory. And we have chosen the best features of each one to fit our arguments throughout the Preliminary Specification. I consider that creative license. The weight of our argument however would go to Giddens Structuration Theory and most specifically to Professor Wanda Orlikowski’s Structuration Model of Technology.

Structurational studies of technology and organizations have been highly influenced by the social studies of technology. Initially arguing for a view of the "duality of technology," Orlikowski went on to argue for a practice-based understanding of the recursive interaction between people and technologies over time. Orlikowski (2000) argues that emergent structures offer a more generative view of technology use, suggesting that users do not so much appropriate technologies as they enact particular technologies-in-practice with them. The ongoing enactment of technologies-in-practice either reproduce existing structural conditions or they produce changes that may lead to structural transformation.

People, Ideas & Objects believes based on our understanding of all of these theories that software defines and supports the organization. It not only enables the “structure and performance of industries” as Dosi suggests, but in the case of oil and gas today, is a constraint on those structures and diminishes the performance of the industry and producer due to the inability to change the software as the industry and producer changes. This is why People, Ideas & Objects offer the user community, our service providers and the software development capabilities that are provided through Oracle developers as the means to not only accommodate the necessary changes but in certain instances to drive the changes to increase the profitable and innovative performances of the producer and industry.

With respect to that third paragraph that we quote from Professor Dosi’s paper. The oil and gas industry is currently configured in such a way that the oil and gas producer does everything for itself other than the field operations. Having a geographically diverse operating theater makes it impractical to maintain their own service industry operations, although some still do. In terms of control, all aspects of the producers operations, governance and administration are under the producers direction. In the 1950’s this was not only possible but probably ideal. There is probably no one from that era to check with regarding the validity of that statement. In the 21st century it is ludicrous to think that a firm can concentrate their entire domain of operations under one roof. It was through the research that we conducted of Professor Richard Langlois that we were able to determine that in the battle between firms and markets, markets would be the preferred choice in the 21st century. In yesterday’s post we mentioned the performance measurement in the Preliminary Specification of Revenue Per Employee. It is through a greater involvement of the market that a profitable and innovative producer will be able to positively increase their Revenue Per Employee trajectory.

The impetus of the Preliminary Specification is for the producer to produce all of their production profitably. Rarely would that involve their entire production profile. To attain the highest level of profitability the producer will seek to produce profitability throughout their production profile in order to maximize their profitability. That requires and demands that the producer innovate on the earth science and engineering capabilities that they’ve developed and deployed on their properties. To expand the sciences of geology and engineering is the frontier where they can expand their organization further with higher production volumes and profitability due to the innovations they deploy. At the same time striking an equally equitable balance between the consumers current consumption of the lowest cost, yet profitable oil and gas production, and the commercial conservation of energy for future generations.

I want to take a moment to comment on my concern for the financial health of the producers. In the second quarter I was surprised at the difficulties being experienced by our sample of 23 producers. I was expecting a very difficult second quarter to be reported and ended up thinking that there is a serious degradation of the financial foundation of the industry undergoing at that time. One based on the fact that, as we’ve stated here many times before, the only source of cash is production and most particularly new production. This was creating what I saw as enormous pressure on producers to increase production at all costs in order to increase their available cash. As we discussed in the second quarter the deterioration of cash and working capital was epic. In the third quarter I think it will have accelerated further as a result of this chronic overproduction creating differentials, particularly in Canada and to a lesser extent in Texas, that are higher than the commodity prices being realized. When over half of your revenue is going to be gone from the late third quarter and better part of the fourth quarter, this industry will have its day of reckoning before this year ends. The only choice is for the hamster to run faster…

People, Ideas & Objects puts forward our Preliminary Specification as the solution to the issues in the industry. It is designed to deal with the problems that are causing the producers so much financial distress. We believe that if the industry would adopt the Preliminary Specification investors and bankers could see a profitable and innovative future that would be of interest to them from an investment point of view. And may be motivated to carry the producers across to the point in time where the decentralized production models price maker strategy enables all production in North America to always be produced profitably.

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.

Sources, Procedures, and Microeconomic Effects of Innovation, Part I

Lately we’ve noted some of the research that we reviewed of Professor Richard Langlois from the University of Connecticut. Research that we conducted during the writing of the Preliminary Specification. He was a rich resource in terms of determining the needs of the dynamic, innovative, accountable and profitable oil and gas producer. In terms of innovation we also had the work of Professor Giovanni Dosi, who at the time of this particular paper was with the University of Sussex and the University of Rome, and provides one of the key documents on the topic of innovation. This paper was published in September 1988 and is entitled “Sources, Procedures, and Microeconomic Effects of Innovation.” If you have access to a resource for the download of papers I highly recommend adding this paper to your library. You can download it here from JSTOR for $10 as well. I will caution my readers that I went through a lot of papers during the research for the Preliminary Specification. This paper generated significant volumes of this blogs text, contribution to the Preliminary Specification and is very rich in content. It is also unquestionably one of the most difficult papers that I’ve had to review in a comprehensive manner. Reading it briefly or skimming it may not be worthwhile as a result. What I think will be worthwhile is that we include a review of Professor Giovanni Dosi and Professor Richard Langlois on this blog to update everyone on some of the basis of innovation and other aspects of the Preliminary Specification that we’ve learned through these two researchers.

The first paragraph of this paper frames the purpose of innovation in oil and gas in a constructive manner. I immediately am flooded with ideas regarding the impact to the industry, the producer firm and supporting service and other industries and sub-industries.

This essay concerns the determinants and effects of innovative activities in contemporary market economies. In the most general terms, private profit seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities, if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations. In turn, the success of some agents in introducing or imitating new products and production processes changes their production costs, their market competitiveness and, ultimately, is part of the evolution of the industries affected by the innovations. p 1120 

The Preliminary Specification was published in its final edited form in December 2013. In it we speak of imitation and the distribution of laggards and leaders within the oil and gas industry. We’ve even created a factor for comparison purposes and to determine the position that a producer would find itself within the industry. This factor is Revenue Per Employee that we generate within the Preliminary Specification. What we found is there is a large disparity between the values of a laggard and a leader in terms of Revenue Per Employee, and how the laggard firm would find it difficult to make the changes necessary to affect an upward trajectory of Revenue Per Employee. It is with this understanding of the Preliminary Specification that I find this first paragraph of the Dosi paper to generate the most thought around the idea of “imitation.”

A lot has happened in the industry since the publication of the Preliminary Specification. Yet nothing has changed other than the addition of the Blockchain Module. I think it will remain as timely throughout its intended 25 year usable life. When we look at imitation in oil and gas we have to ask ourselves what role it’ll take in the future? And although there were laggards present in the industry in 2013, will there be room for them in the future? Will they be able to rely on the capabilities that have been developed by others and “make it up as they go?” To be candid I don’t think so. The reliance on the leaders abilities and capabilities to be innovative and to move the science and technologies of oil and gas forward will be one in the same with that producers production profile. Most particularly I think is the heart of that quotation of Professor Dosi’s that puts into context that the role of laggards will be very difficult.

In the most general terms, private profit seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities, if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

What is it that a laggard will be imitating, or be able to imitate in the future? When the development and deployment of ideas to the various Joint Operating Committees is done through the Research & Capabilities and Knowledge & Learning modules as we recently noted. At a velocity and throughput of an exponential volume. These will be the basis of the producers competitive advantage. The application and development of their distinct competitive advantages in the earth science and engineering capabilities upon their land and asset base. I see this as a far different producer than the one that exists today, as it has become a far different oil and gas industry. I wonder how the dynamic, innovative, accountable and profitable producer will come about? Muddling through as the strategy, and doing nothing as the operating procedure, which are the producers current position which has brought us to this state of financial crisis. Will the producers current strategic and operating position stumble upon this means to develop and deploy its capabilities on its own? Just as they’ll stumble upon the methodology for becoming the profitable firm society needs them to be. I think we should bank on it happening, just based on luck, what about you? As a matter of fact, right now I can see the software for this necessary industry infrastructure being written by itself with no human involvement and no producer cash! It’s a miracle!

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.

Canadian Thanksgiving

No posting today.

Why It's Not Their Fault

We may have identified what the problem in oil and gas in a recent post. The overproduction causing prices to collapse, creating a financial catastrophe, which no one seems to recognize. When we look to see who is responsible for the overproduction we should be able to quickly see that any overproduction would have been brought about by financial losses in the specific producers operations. And there’s the problem, everyone is wildly profitable in oil and gas don’t you know. So the individual producer can prove to the rest of the industry that it’s not their fault that the unprofitable overproduction has occurred. They weren't part of it. The accounting is so messed up that it’s reasonable to say that no one knows anything about anything. The purpose in oil and gas is to “build the balance sheet” a concept that I’m not aware of. Why would someone “build a balance sheet?” Is there some particular skill involved? Does it require imagination, vision and the deployment of real oil and gas related talent in the pursuit of oil and gas exploration and production? We can assume that spending money is a part of “building the balance sheet.” Which imputes that it could be borrowed money or it could be share equity. For it to be share equity it would require that producer to be profitable, check, and / or participate in the stock market on a frequent basis to increase the volume of shares outstanding, check. That’s it, all the numbers on the balance sheet are “building.” I think I have the concept now.

“The one with the most toys in the end wins.” That is the motto of the big spender who’s life is defined by the material possessions they can touch and feel. Why would it not apply to oil and gas too. Especially when clearly it does! Assets are the best thing ever, who wouldn’t want more assets, they make you worth more, a literal paper giant among the other reams of paper. The more assets the better and the only limitation is the amount of the producers reserves times the price of the commodity. Therefore everything can be an asset! The gas in the president’s car, the Post-it-Notes of his executive assistant, both of their phone services and all of their time. Those are definitely assets too! Why not go through the entire company and apply the same thing to everyone and everything. Start in the stationary department. Don’t worry, no one's going to go through and review their operation on that basis. That was completed by all of the producers by the late 1980’s.

From my point of view I would not want to have any assets under the property, plant and equipment account. That may not be possible however, I would strive to have the lowest possible amount I could possibly achieve. From my point of view it isn’t worth having anything in property, plant and equipment and I certainly would never leave it there for the better part of a few decades. These are not assets these are costs. And in this instance for oil and gas, the capital costs of past production. The quicker that I can recognize them and have them flow to the income statement the more efficient I am as a producer overall. It would show that I’m still profitable, assuming I was getting fair market value for my product, and as a result the cash that was used to build those assets was coming back into the organization and was readily available to be used again in future capital expenditures, paying dividends or reducing debt. When everyone is running around building big balance sheets as the purpose of the business, and as the only purpose in the business, things don’t work.

It’s not that it's any one producers fault specifically. It’s that every producer is at fault and there is only the misguided objectives being pursued as a result of a culture that has developed that knows no different and no one dares to stand up to. Makes one think that the purpose of oil and gas is to lose the money of the investors and bankers. Laying people off must be the most fun, I guess. And never paying a service industry representative is just good old sport. The point of it all, as a producer, is you can stand up and say “that it’s not my fault, look at my balance sheet.”

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.

Stickiness and Leakiness

Within the Preliminary Specification we have an interesting dichotomy. On the one hand the capabilities of the producer firm are proprietary to the firm that develops them. Yet they are deployed to the Joint Operating Committee that the producer shares an interest in with many other producers. In today’s marketplace the operator acts on behalf of the members of the Joint Operating Committee. In the Preliminary Specification we have flipped the direction of the flow of knowledge to where the capability is generated in the Research & Capabilities Module and flows to the Knowledge & Learning Module for deployment. The concept of operator has been eliminated in the Preliminary Specification and replaced by the concept of pooling. The purpose of this is critical to the producer and Joint Operating Committee. Professor Richard Langlois provides us with the following.

The question then becomes: why are capabilities sometimes organized within firms, sometimes decentralized in markets, and sometimes coordinated by a myriad contractual and ownership arrangements like joint ventures, franchisees, and networks? Explicitly echoing Hayek, Jensen and Meckling (1992, p.251) who point out that economic organization must solve two different kinds of problems: "the rights assignment problem (determining who should exercise a decision right) and the control or agency problem (how to ensure that self-interested decision agents exercise their rights in a way that contributes to the organizational objective)." There are basically two ways to ensure such a "collocation" of knowledge and decision making: "One is by moving the knowledge to those with the decision rights; the other is by moving the decision rights to those with the knowledge." (Jensen and Meckling 1992 p. 253). p. 9

We have therefore reversed the flow of knowledge or capabilities within the Preliminary Specification by moving the producers capabilities to where the decision rights are held. We have done this as the Joint Operating Committee is the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer and industry. By identifying and supporting the legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks of the Joint Operating Committee and then moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committee we achieve a speed, accountability and profitability in our organizations. The decision rights are held by the Joint Operating Committee within the operational decision making framework. Whereas today having the decision rights moved to the producer firm creates a conflict between these two organizations that is inconsistent, we believe, with performance, accountability and profitability.

We need to recall the situation that oil and gas will be in a short period of time. Where today it takes one idea to generate a dollar, it will take ten ideas to generate a dollar in the not too distant future and one hundred ideas in no time after that. The volume of knowledge is going to have to be managed in a more effective way than it is today. The need to have the right knowledge to the right people at the right time and the right place will become more difficult if there are unnecessary conflicts and obstructions to the flow of that knowledge. On the other hand we are focusing the producer firm on their distinct competitive advantages which are their earth science and engineering capabilities and their land and asset base. The key here should be having these capabilities applied in a timely manner to their land and asset base. For what other purpose would the producer be creating these capabilities. In the Preliminary Research Report we learned an interesting point about the producers proprietary earth science and engineering knowledge, understanding and capabilities. It is here that we note once again from Professor Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

In Brown & Duguid (1998) they make the following observations: “The leakiness of knowledge out of and into organizations, however, presents an interesting contrast to internal stickiness. Knowledge often travels more easily between organizations than it does within them. For while the division of labor erects boundaries within firms, it also produces extended communities that lie across the external boundaries of the firms. Moving knowledge among groups with similar practices and overlapping membership can thus sometimes be relatively easy compared to the difficulty in moving it among heterogeneous groups within the firm. Similar practice in a common field can allow ideas to flow. Indeed, it’s often harder to stop ideas spreading then to spread them.” (p. 102) p. 32

And from a common sense point of view we have this quotation from Winston Churchill “A lie gets halfway around the world before the truth has a chance to put its pants on.” We all know this leakage of knowledge to be inherently true. When someone discovers something that is “news” within the industry, it is generally well known within industry associations for the geologists or engineers as soon as it is known in the firm. It is either imputed through what is known, or the leakiness is as porous as it is. What is a producer firm to do to ensure that the knowledge they have does not leak? I think that the point lies in the meaning of “capabilities”; which is “an aptitude that can be developed” or “knowledge begets capabilities, and capabilities begets action.” Simply it is not possible to stop the leakage. The question therefore becomes, is it best to develop your aptitude by curling up with a text book or to participate in a marketplace. People, Ideas & Objects believes that innovative and profitable producers, instead of hoarding knowledge, will deploy the right knowledge to the right people at the right time through their use of the Research & Capabilities and Knowledge & Learning modules of 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.

Survival of the Fittest

Readers know me to be dedicated to resolving the issues that I see in oil and gas. Issues that are addressed in the Preliminary Specification, which is a codification of my concerns and their resolution since I began this project. These issues have now manifest themselves into what I consider to be the complete financial destruction of the oil and gas industry. There is little monetary value left in the industry and the value represented by the producers on their financial statements are nothing more than fairy tales. Yet as we enter the fourth quarter of 2018 we find the discussion in the industry and in the media reflects that the times have rarely been better. Am I missing something here or do the producers know something that I am fully unaware of.

Looking at the situation today from the point of view of an investor or a bank, what’s in it for them? I’m probably the last person to ask this question as I was concerned at the best of times that the industry was not providing a reasonable accounting of the situation and no one ever made any money. However today I think it’s pretty clear that the financial condition of each and every producer is in desperate, and in most situations critical condition. Well beyond what I would approach as an investor. And as you can imagine I like risk. To critically evaluate any producer you’ll need to allocate 60 to 70% of their property, plant and equipment to depletion as an overall adjustment. That will correct for the accounting anomaly of bloated balance sheets and the unrecognized capital costs of past production that we all know and love in the industry. (Note that doing this at 60% for our sample of 23 producers wipes out Total Share Equity and leaves a deficit of $12.3 billion.) The past hasn’t been so bright after this adjustment has been made. In addition the liquidity in the industry is critical. No one has any cash or working capital. Properties are for sale but no one has the financial resources to complete the purchase of anything. Producers believed they could replenish cash by selling properties but that doesn’t appear to be the case anymore. No one from an equity or a debt point of view is going to touch a firm with a working capital deficiency and a history of monumental losses. It’s the underperforming and failing organization that is represented when those factors are the critical issue. The organization has not made any money and they have no money. Nothing in the world but an endless supply of money will make that pig fly. Why would an investor or bank put more capital into it?

I expect the price of oil to follow along the same trajectory of the natural gas prices. Oil being a far more complex, international market than the continental based natural gas markets. Oil has also been affected by shale, but at a much later date than natural gas was. Nonetheless the propensity to overproduce by producers continues with their deceptive accounting providing them with the belief that they remain profitable and prosperous. Overproduction continues unabated in both commodities since I noted this behavior in 1986. Now with shale the situation is wholly untenable. What is there to stop producers from continually overproducing? We recently learned of the collapse of the natural gas prices in the Permian. The differentials that exist there due to the pipeline constraints are having a material effect on the prices that are received by those producers. Granted the Permian is associated gas however the pipeline constraints also exist on the oil side of the business. It was a decade ago when natural gas prices collapsed. The natural gas futures price for September 2028 is $3.01. Such an exciting business. And in oil the current price is the highest price quoted up to 2027. Clearly nothing is expected to be resolved about the walking dead oil and gas business in the next decade either.

This therefore reflects the complete nature of the failure of the oil and gas industry. No one expects anything is going to happen. Producers are actively drilling more wells and buying land cheered on by a media that is as enamoured with the process of drilling as the producers are. The industry is a financial wasteland where nothing of value exists and nothing is profitable. Survival is attributable to the fact that it’s a capital intensive industry that continues to produce cash flow from those previous investments that allow the lights to stay on and rent to be paid, for now. Yet nowhere does anyone see the problem that there is no problem. There is only a problem if you consider that oil and gas would be classified as a business. And that’s where I’m wrong. It’s a study in how best to drill a well. There never has been any intent for it to be a commercial operation.

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.

Odd's and Ends

As we noted on September 12, 2018 People, Ideas & Objects have restructured ourselves in order to provide a more timely solution to the marketplace. Eliminating several years off of our development timelines in order to save the oil and gas industry the full value of our value proposition for each one of these years saved. We believe with producers currently losing hundreds of billions of dollars per year in incremental revenues, having unnecessary time consumed by us would be inappropriate. Our competitive advantage of providing the most profitable means of oil and gas operations is now conducted on the basis that we will provide our user community as we’ve discussed and the Intellectual Property involved in this project. These are the two aspects of our business that we’re concerned with. In terms of software development we are no longer pursuing the objective of developing a software development capability. We will be contracting to Oracle Corporation all of the software developments that our user community defines. Oracle has the team and other resources necessary to undertake a large software development project such as ours. This change in our competitive structure leads us to a renewed focus on innovation and the constant research that involves. The only technical aspect of People, Ideas & Objects will be the execution of the binary off of our GitLab repository, or what is commonly referred to as operations. Ownership of the software and its code will remain unchanged as it falls under the Intellectual Property component of our offering.

Our budget is unchanged other than the funds that were established for internal software development will now be used for software developments with Oracle. All things considered we feel that the budget accurately reflects the costs necessary to deliver the Preliminary Specification to the marketplace. There have been gains made as a result of enhancements to the technology and processes of software development. And these are offset by the incremental cost of the higher cost of Oracle’s developers. It has always been considered that People, Ideas & Objects would be made available for sale to the oil and gas producers at some point after commercial release. This change to Oracle introduces another opportunity for People, Ideas & Objects to exit the marketplace and would therefore enhance our ability to monetize this asset. Until we realize a method to live forever this will have to be the case.

The other side of this coin is the fact that the onus is now on industry. We cannot do anything without their participation. The funding of all of our budget must come from the producers. Our current assessment of our ability to raise funds through our ICO are projected to be almost five years from now and that is our current best and only alternative. An unacceptable time frame for the oil and gas industry in our opinion. That is too long from now and inconsistent with what I believe the producers timelines will become. We believe the industry will be facing a further extension of the crisis that it finds itself in and will need to act very soon. We are therefore wholly dependent on producers participation for the funding of our budget until then. There are no Knights in shining armour, or technology firms rushing to provide any solutions to the producers. People, Ideas & Objects own the only valid Intellectual Property that deals with the situation at hand. Producers treatment of Oracle and IBM earlier this century seem to be having the lasting effect of keeping them out of oil and gas for the remainder of the 21st century. You reap what you sow, and that means producers are stuck with me.

It’s quiet now from the point of view of the difficulties being faced by producers. It’s also time to begin the process of reporting on the third quarter of 2018’s activities. Nothing significant happened in the third quarter other than the passage of time. Producers will be reporting a continuation of the dismal dull affairs of the past decade in natural gas and last number of years in oil. I don’t know how we went through the quarter without hearing more about the critical cash situation. There were no financings of any material effect anywhere. Cash was hemorrhaging at a rate that would leave most producers unable to function by Christmas and they’re either running as fast as they can and we’re not able to see these tremendous efforts or everyone has given up. Either way it doesn’t seem that anything is happening.

Oil at $70 is a temporary situation as far as People, Ideas & Objects is concerned. It didn’t take a few weeks to get into this mess and it will take more than what has been done, which is nothing, so far to remedy it. Natural gas in the Permian is a real deal these past few weeks. I am surprised that the attitude even today in some parts of the industry is that any overproduction will soon be cleared by the market. Which is absolutely 100% correct and one of the key functions of markets. The question then becomes how do markets clear themselves of any overproduction? The market clearing mechanism of course is price. Which is usually a surprise to those that have believed in markets upto that point. It would seem I’ll be doing the same thing I’ve been doing for the past few years for a few more years. The industry is not resolving or addressing the issues that they’re facing and the problems as I see them are only becoming more difficult for them to resolve. The resolution is the Preliminary Specification, and we’ll be here doing what we have to do to ensure that option is available for the industry to pick it up. Or if we have to wait the full five years for our ICO plans to come to fruition.

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.

Science, Innovation and Capabilities, Part III

Removal of the excess cost attributable to the surplus earth science and engineering capacity that is unused and unusable is similar to the removal of the excess overhead costs that the producer and industry incur. By reorganizing the administrative and accounting resources into service providers the costs to each of the producers in developing their own administrative and accounting capabilities, capabilities that are wholly similar to each and every other producer in the industry, capabilities that are currently unshared and unshareable, just as the earth science and engineering surplus capacity is unused and unusable. These excess costs are major contributors to the current lack of real profitability in the industry and without the Preliminary Specification in place, will be unacceptable costs in which the industry can incur. We have now identified three new classifications of excessive costs being incurred by the producer firms, the third being the burden of providing the full scope and scale of the specialized oil and gas related sciences. With People, Ideas & Objects Preliminary Specification in place the energy consumer will know that they are being provided with the lowest possible energy prices that consider a fair distribution of the value needed for the industry and all of those dependent on it to thrive and profit.

This therefore briefly defines the focus of the producers role of moving the science within the industry forward, innovating based on that science and deploying their capabilities through a defined process of development within the producer firm, and deployment to the producers Joint Operating Committees. It is within the Research & Capabilities module that we learn from McKinsey & Co in their article entitled The 21st Century Organization, what it is that will be required of organizations in the 21st century.

1) Streamlining and simplifying vertical and line management structures by discarding failed matrix and ad hoc approaches and narrowing the scope of the line manager's role to the creation of current earnings.

The process of using People, Ideas & Objects software will achieve these objectives. By aligning all of the Joint Operating Committees seven frameworks and the hierarchies compliance and governance frameworks, and having the financial interests of the producers drive the management of the Joint Operating Committee, we are “narrowing the scope of the line manager’s role to the creation of current earnings.” These are the focus of the Partnership Accounting, Accounting Voucher, Petroleum Lease Marketplace, Resource Marketplace, Financial Marketplace and Performance Evaluation modules.

2) Deploying off-line teams to discover new wealth-creating opportunities while using a dynamic management process to resolve short and long term trade offs.

These are the critical new roles that are being discussed in these “new” modules which include “Research & Capabilities” and “Knowledge & Learning.” Providing valuable insight to their users about the business that is above the day to day noise. Where the long term vision of the organization can be set, executed and realized through these two advanced software modules.

3) Developing knowledge marketplaces, talent marketplaces, and formal networks to stimulate the creation and exchange of intangibles.

Within the Preliminary Specification, if we include the Research & Capabilities and Knowledge & Learning Modules marketplace definitions, we have five marketplace modules. Participation in marketplaces are things that people will be doing more of in terms of their work in the future. Computers can assist, but again are generally very poor at making decisions, bargaining, knowing what to do, etc. The three primary marketplace modules in the Preliminary Specification include the Petroleum Lease, Resource and Financial Marketplaces Modules.

4) Relying on measurements of performance rather than supervision to get the most from self directed professionals.

The Preliminary Specification has the Performance Evaluation Module for the Joint Operating Committee, and the Analytics & Statistics Module to provide these capabilities to the producer firm. Handing the Performance Evaluation module to the team that is running the Joint Operating Committee will enable them to manage the property in the best possible fashion, profitably. They are going to be able to figure out what it is that makes the most sense in terms of value, and begin to generate more of it.

People, Ideas & Objects have presented our value proposition of providing the oil and gas producer with the most profitable means of oil and gas operations. There is more contained within the Preliminary Specification. Innovation is one of our key areas of focus. Adding value on an incremental basis throughout the industry, the producer firm and Joint Operating Committee. These are wholly dependent on the organizational structure of the producer firm and the industry. A role that is purpose built for an ERP solutions provider.

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.

Science, Innovation and Capabilities, Part II

Knowledge that we can source from the Internet and from books is explicit knowledge. Therefore the ability to use this knowledge, to access and verbalize it is easily done. It can be thought of as expressive knowledge or text book knowledge. Tacit knowledge is more difficult since it can’t be captured and communicated to others. It is the knowledge that is acquired through learning by doing etc. Tacit knowledge most importantly is the knowledge about production. From Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

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

Therefore both tacit and explicit knowledge make up the knowledge of the organization, or producer firm in this instance. Now that we’ve defined what knowledge is we can state that capabilities are the skills, knowledge, experience and ideas of the producer organization. And not to diminish the role of direction and command, I would point out the technical infrastructure included in the Preliminary Specification that we call the Military Command & Control Metaphor. The need for this command and control to span multiple organizations is necessary when the Joint Operating Committee becomes the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. We also have the definition of capabilities provided by Professor Carliss Baldwin’s giving us an understanding of why capabilities are important to producers and the industry, and that is “Knowledge begets Capabilities, and Capabilities beget Action.” Starting this discussion of capabilities with a clear definition of what they are. These are some of the definitions that were published in the Research & Capabilities module and are noted here for clarity purposes. Another is from Professor Richard Langlois paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.”

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

Therefore to capture, document and deploy these capabilities of the producer firm to their interests within their Joint Operating Committees. Access and deploy the capabilities of their partners within the Joint Operating Committee and access and deploy those capabilities that are acquired through contract to ensure that the full scope of the earth science and engineering capabilities that are necessary are acquired and deployed efficiently and effectively. This incremental coordination at first seems like a complex and unnecessary process to be undertaken. The need to cover off the full scope of the earth sciences and engineering capabilities needed will be beyond the commercial reach of each and every producer. The convenience of having all of these in-house will soon be, we believe, well beyond the financial capacity of all producers.

Within the Preliminary Specification we speculate that specialization and division of labor are needed in order to expand the sciences from the point they’re at today. Therefore this will require additional skills and therefore resources to be required by producer firms. Currently producers are acquiring all of their capabilities they need to cover off all possible contingencies that are presented by the properties that they operate. These contingencies need to be on hand and are not necessarily highly utilized. Therefore they are creating an overall earth science and engineering surplus capacity of capabilities within the producer firm, and to the greater issue, of the oil and gas industry as a whole, that is unused and unusable. Creating an uncontrollable cost that currently diminishes the profitability of the producer and industry. An additional cost above the demand for the broad scope and scale of earth science and engineering capabilities. Which we believe these two costs when combined will explode in the near future. The Preliminary Specifications Research & Capabilities module and Knowledge & Learning module seek to eliminate the surplus capacity of earth science and engineering capabilities by fully deploying them through specializations within the producer, the Joint Operating Committee and also in markets. Using the capabilities of the industry at much higher rates of utilization and therefore reducing these otherwise high and unnecessary costs as a result of the unused and unusable surplus capacity that is maintained today. And ensuring that the cost burden of maintaining the full breadth of earth science and engineering capabilities do not expand further on each individual producer as a result of a further specialization and division of labor of the sciences.

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.

Science, Innovation, and Capabilities, Part I

We now begin a series on the interactions between the science, innovation and capabilities that exist within the oil and gas industry and the dynamic, innovative, accountable and profitable oil and gas producer. With an overall assumption that the Preliminary Specification is implemented, and therefore all production is produced profitably, which will provide for a prosperous industry and all those associated with it. Whereas today the investors, bankers, employees, service industry representatives, royalty holders and government tax jurisdictions are all having to settle for far less than what is equitable. Which describes the current situation the industry is in, and society needs to begin to question the rationale of producing oil and gas unprofitably and how we’ll be able to justify that to future generations. Today the consumer constantly complains about the cost of energy. Even with the massive discount in the form of the producers unrecognized capital costs of past production the consumers have received over the past decades. The issue therefore becomes how will the producers ensure they’re providing consumers with the lowest cost energy production that is also profitable and equitable to those involved in the industry? The simple answer is science, innovation and capabilities.

The dynamic, innovative, accountable and profitable oil and gas producer will be actively participating in moving the sciences of geology and applied sciences of engineering forward within the oil and gas industry. As we discussed yesterday these are elements of the Preliminary Specification that establish the foundation and organizational structure necessary for innovation to become a focus of the industry and producer firm. As these sciences expand they spin off new innovations that bring about new insights which in turn further develop the sciences. With the depth and breadth of these sciences as they stand today. With the diverse demand of a producers interests in their properties. The ability and capability for each and every oil and gas producer to have developed their organization to the point where they can handle the full scope and scale of these specialized professions within their domain, and to do so commercially, is believed to be slipping away from each and every producer as we speak. The need for each producer to use specialization and the division of labor to cover off all aspects of their organizations needs will incur too heavy of a cost burden on each one of the producers if they attempt to cover off the full scope of an oil and gas producers scientific, innovation and capability needs. Therefore the need to have the capabilities provided by the producer firm in terms of its unique specialization, then acquire the other available earth science and engineering capabilities from their partners within a Joint Operating Committee and then on a contractual basis from a market that doesn’t currently exist, however is created in the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification.

The Research & Capabilities and Knowledge & Learning modules create the market for geological and engineering capabilities that fill what we call the bread and butter tasks of the producer firms. Freeing up much of the basic capabilities of the industry to be provided on a sub-industry basis similar to the service providers are a sub-industry for the administrative and accounting of the industry. This will enable the producer firms to focus on the higher, more technical capabilities that are the critical value add elements of the earth science and engineering capabilities that form the key competitive advantages of their producer firm. This is how the Preliminary Specification has resolved the critical shortage of these resources that are expected in the next decades. Shortages as a result of the anticipated retirement of the braintrust in these professions and the current lack of new recruits choosing oil and gas for their university studies. The demand for greater effort and science is evident in each successive barrel of oil that is produced. How are the current producers dealing with this situation?

We’ve discussed innovation in two blog posts recently, and we can all certainly understand the scientific aspects of the industry. With the interaction between science and innovation being codependent on each other. What are producers capabilities and how are they expanded. In the Preliminary Specification, capabilities are managed in the Research & Capabilities Module for the producer firm and then the deployment of the capability is carried out in the Knowledge & Learning Module to the specific Joint Operating Committees that producer has an interest in. In tomorrow’s post we’ll begin a more detailed discussion of 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.

Professor Richard Langlois on Innovation

I stumbled upon this quotation from Professor Richard Langlois of the University of Connecticut. He was one of the principle sources of primary research that we used in development of the Preliminary Specification. His work focuses on innovation, transaction cost economics, the choice between firms or markets, modularity and capabilities. Aspects of the Preliminary Specification that provide real value for the dynamic, innovative, accountable and profitable oil and gas producers. His quote was made during a recent podcast, is in the area of innovation and captures a need that everyone must adopt for the 21st century.

I was talking about trying to think about how innovation works. That’s what a lot of my work has been, looking at the history of the various, especially high technology industries and thinking about what are the causes of innovation and how does the process of innovation work and I talked about that in this talk today and I talked about how it’s very important when you think about innovation, to realise that innovation doesn’t occur in isolation, that once you change one part of a system, when you innovate in one part of the system, that’s going to have effects that ramify throughout the system and if you can’t adjust the other parts of the system to go along with what you’re changing in your part of the system, then the innovation may not work.

The first two items that come to mind are that innovation is hard which maybe why our good friends the bureaucrats are mute about any aspect of their current business failures. Secondly the role that People, Ideas & Objects user community, service providers, and Oracle as our contracted software developers provide in terms of a dynamic change capability to the producer firm and industry. We noted recently that we’re reorganizing the oil and gas industry by establishing the service providers as a sub-industry and populating these independent organizations with the administrative and accounting resources of the producers. Once we have that structure in place we have the beginnings of what is necessary for innovation. Reading the Preliminary Specification shows the dynamic nature of how the producer and industry will be able to develop the sciences of geology and applied sciences of engineering in terms of the these capabilities for their producer firm. There will never be and could never be any superstar producer firms coming out of an industry that is desolate of any capability or capacity to innovate. In contrast to today, these structures, foundations and capabilities are all dynamically facilitated in the modules of the Preliminary Specification.

Where the producer firm is constrained in today’s marketplace is through concepts such as “operator,” and the collaboration of detailed proprietary technical information. A renewed focus on the producers competitive advantages of their earth science and engineering capabilities, and their land and asset base are what’s required. If they desire to lock themselves in a room with all the textbooks regarding engineering and geology and develop their own capabilities to be deployed only by themselves then they are certainly welcome to do so. It is a commercial marketplace in a free market system. Just as everyone realizes the reliance on a small handful of individuals limited understanding does not an innovative producer make. An innovative producer will only be attained when the industry is providing the resources and capabilities to facilitate innovation in every producer within that industry. Therefore the need to expand the producers earth science and engineering capabilities is the source of greatest value that the producer can attain in terms of maximizing the profitability of their land and asset base. Participation, and that means full, unconstrained participation in the industry to push the sciences forward will be the only way that the producers will be able to move their innovations forward. This can only be done by expanding and exploiting their earth science and engineering capabilities.

What Professor Langlois captures in his quotation is of course that innovation and its necessary mindset is never fixed. However in addition, the deployment of innovations are not as easy as they sound. They may not work or function in the market if there is no supporting cast to provide for the innovation. Working intimately with the service industry is part of the Preliminary Specifications Resource Marketplace and Research & Capabilities Modules for that reason. A key point of the Research & Capabilities and Knowledge & Learning Modules is that innovation is not a free-for-all either. Having the ability to experiment and develop the innovations away from the mainstream operations of the producer are critical until such time as they are proven and as such can then be deployed efficiently and effectively to the larger population of properties. Otherwise you’ll have uncontrolled chaos and nothing happens in terms of the innovations development. All of these are processes that are managed within the Preliminary Specification.

As I’ve mentioned before the process of innovations development and deployment are not happenstance. Currently the service industry develops significant product and service innovations that the producer firms ignore for a decade or more. These timelines will be inadequate for the future consumers of energy. If today’s bureaucrats feel, as we mentioned before, that they’ll stumble upon the appropriate methods of innovation throughout their producer firms and industry, as well as become spontaneously highly profitable in this the third quarter of 2018. Then they’re kidding themselves as much as they’ve been kidding themselves about their profitability these past four decades. In this technically sophisticated environment, with the complexity of the work that needs to be done in this the second most difficult and complex industry. Hoping that the millions of people that work in oil and gas and related industries will suddenly and spontaneously understand what is expected of them is obviously what are friends the bureaucrats are waiting for. I just don’t think I’ve ever seen the sense of hope and change.

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.

The Rain in Spain...

Bureaucrats will be unhappy that I’ve decided to rain on their parade in another area of their business. Just as the method of treating all of their costs as capital assets, this area shows an inability to discern the difference between assets and costs. But it also highlights the inability to assess what a business is and what it’s purpose is. This of course is in the area of asset purchases or the acquisition and divestitures area of the oil and gas industry. In business it’s important to not pay too much for the assets that you acquire. You need to sharpen your pencils and make sure that the asset or business that you’re acquiring is fundamentally sound. In oil and gas they have a number of people with the expertise, education and experience that conduct these evaluations on behalf of the producers. Where I think they go wrong is they go about the exercise in an inappropriate way. I think the best way to describe the process that is carried out consistently through oil and gas is by way of an analogy. If we used their method to purchase a pizza restaurant and then describe why I think their method is fundamentally flawed.

You’re considering the purchase of a pizza restaurant and have been able to determine that the previous owner has over 100,000 pizza boxes and his ovens have a remaining capacity to cook 100,000 pizzas over the next seven years. The prices charged for pizzas are on average $9.99 and the cost of cheese, tomato sauce, dough and pepperoni average $4.15 leaving $5.84 profit per pizza. Therefore if you sold 14,250 pizzas per year, which is the volume of sales in the past three years. Your profit would be $83,220 per year for the next seven years. Therefore you offer the present value of that stream of earnings, based on a 5% discount rate or $481,500 to the previous owner.

This is the extent of the analysis of the acquisitions that are made in oil and gas. What about the rent that has to be paid, what about the salaries of the cooks and waitresses or the lights and cleaning etc. It’s simple, if you’ve been paying attention those are all capitalized and will form part of the asset balances under property, plant and equipment. The fact that the oil and gas producers through the process of making an acquisition are buying a “business” is not understood. What they’re buying is the asset. In our example the pizza oven which is the real value and money maker, and I can’t refute that argument. If they were to look at the financial statements of the pizza restaurant they would find that it doesn’t make money at all but provides a subsistence living for the owner who’s family eats a lot of pizza.

Looking at the financial statements of the producers today and understanding the adjustment that People, Ideas & Objects recommend should be made to property, plant and equipment to account for the unrecognized capital costs of past production. This adjustment at 60% of property, plant and equipment  wipes out all of the shareholders equity of our sample of 23 producers. What oil and gas property would you be interested in as an acquisition? Certainly there are reserves for sale in the industry. My argument is that no one understands that the entire point of the exercise, the exercise being a business, is to earn a profit on those reserves. And we can state unequivocally, based on the financial statements of our sample of 23 producers, that none of the reserves in North America are, have ever or will be profitable under the current management. Therefore why would anyone pay more than nothing for an asset that doesn’t perform?

That an oil and gas property or a pizza oven have a set number of units remaining in its assets useful life is irrelevant to the monetary value of that asset. Can that asset in a business environment provide for a real kind of profitability? This method of evaluating properties has been in effect in the oil and gas industry for decades now. And the amounts that were paid by purchasers were in most cases far in excess of what the book value was on the sellers financial statements. Understanding however that those book value numbers, were as we say here at People, Ideas & Objects bloated beyond all reason, then the amounts that were being paid were far in excess of what the real value of the property was on the basis of its business performance. However, just as with the pizza analogy the ability to capitalize overhead enhances the profitability and increasing the assets book value of the restaurant. So things have been able to be carried on for decades in the case of oil and gas.

As we’ve documented here before and the reason the Preliminary Specification is required in oil and gas is the accounting information that is prepared is unusable. The Statement of Expenditures and Statement of Operations are prepared on each property for the members of the Joint Operating Committee. These statements use estimates of the overhead incurred to operate the property and these are simple statements to communicate monthly billing information to support the working interest partners share. The accounting information that would be needed in the case of determining the value of a property from a business point of view is not available and can’t be created due to the operators overhead being mostly capitalized and not allocated to each property. Therefore no one knows which properties are producing a profit and which ones are losing money. When the quarterly report shows that the whole operation was profitable, in the sense that everything is capitalized and that capitals recognition is deferred for decades, all the bureaucrats get big bonuses.

With the Preliminary Specification detailed accounting reports for each property will be provided to the producers. With our service providers conducting the administrative and accounting process management on behalf of the industry. They will be billing each individual Joint Operating Committee for their fees for the overhead costs they incur. That way each property will be incurring its exact overhead amounts. These accounting reports will be based on the format of financial statements including balance sheet, income statement and statement of changes. That way each property will be known to be profitable or not and form the basis of the independently formed decisions to shut-in the property due to the lack of profitability. Which is not collusion but business.

The only problem that arose is the investors in these business, after decades of abuse, realized the situation was only being kept afloat by their constant involvement. Now that the writing is on the wall, what can be done to rectify the issue. Make a stand as the oil and gas bureaucrats have and insist that their businesses are healthy and prosperous with a bright future. Make the changes needed to implement People, Ideas & Objects Preliminary Specification. Or just use the exit that has been planned for when this day would come and the bureaucrats could seek greener pastures in other industries. The first option looks truly delusional. The second is going to take a lot of work and effort. The third seems to be the optimal strategy for the oil and gas bureaucrat. Besides it’s raining, and it’s always best to get out of the rain.

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.

See No Evil, Speak No Evil, Smell No Evil

People are going to want to cover their nose and mouth, the smell is going to get really bad in here. The third quarter reports of 2018 may be one of the more interesting to be coming out of the oil and gas industry. There is only one week left before the end of the third quarter and who knows maybe, just maybe... For those that don’t subscribe to fairy tales I think we’re beginning to see some serious signs of distress. One of its names is the Canadian producer Strategic Oil and Gas which is just a small producer with $34 million in annual revenue in 2017. It provides us with a window on the choices and options for the oil and gas producer. That choice appears to me to be, and as always it’s a highly conflicted recommendation, to implement People, Ideas & Objects Preliminary Specification. There are a few lessons to be learned by all producers despite the small size of Strategic. The most important lesson to be learned is that tragedy is in the hands of the bureaucrats and it can strike quickly and ferociously.

I mentioned this company in a previous post noting that their second quarter stated they were proceeding with their strategy of pursuing debt and equity offerings to continue with their plans. That was August 16, 2018, and on August 29, 2018 had formed a committee from members of the board of directors to evaluate strategic alternatives. Much has happened since then, particularly to the stock, which has fallen from $0.42 to as low as $0.06. Then on September 10, 2018 they announced a share offering consisting of a private placement of New Convertible Notes. This would provide the company with $4.2 million and the dilution of 25.5 million shares, increasing the company's total issued and outstanding shares to 70.4 million. After all dilution of shareholders is not an issue in oil and gas! This private placement was in lieu of a previous interest payment that is due on similar notes whose owners are subscribed to this private placement in exchange for the cash that is due for that interest payment. The $4.2 million will be used to conduct the review of strategic alternatives. Note this company being owned predominantly by Jim Riddell who is the son of the late Clay Riddell who was the wealthiest Canadian oil man and 15th wealthiest individual in Canada. Issuing stock totaling ⅓ of the company in order to indirectly pay interest. Use the cash from this transaction to find out what to do because, as you’ve announced, you don’t have a clue. This is just a sheer lack of business understanding which I think is now the key and only qualification to be an oil and gas producer. Please note I am not of the belief that the participants in this private placement can be classified as bottom feeders. Usually bottom feeders have a ruthlessness about them and have an exit strategy where they end up with the booty.

The one good thing that Strategic has going for it is that it has property, plant and equipment of $158 million as of June 30, 2018. That is still plenty of assets to strut around town with. All the money ever raised which totaled almost $390 million has been lost with only $11 million in shareholder equity remaining as of the second quarter of 2018. The questionability of the $158 million would be what I would focus on in this company. But everyone who reads this blog would know that by now. The reader of these statements don’t have to look too far to see the anomaly. For the 2015 year they lost $110 million on $32 million in revenues. For 2016 they had a profit of $33.4 million on revenues of $20.5 million. And 2017 they had a loss of $89.5 million on revenues of $35.6 million. Kind of just leaps off the page and shouts at you doesn’t it. $33 million in profit on $20.5 million in revenues. Miracle workers! Or upon further investigation the asset impairments (reversal) saw $58.4 million added to one of their properties. Why would you do this other than to bloat the assets? In the notes to the 2016 financial statements they have an elaborate justification for increasing the assets based on net cash flows, based on futures prices and drilling that is expected to be done in the “future.” To repeat once again accounting is about performance not about determining the value of the company. And certainly never on the basis of what might happen, if, maybe or cross our fingers such and such will occur in the “future.” Strategic is looking into its crystal ball and saying they think their assets may perform on the basis of a net present value if all of these possible scenarios come together. So in summary and to draw an apt analogy what the 2016 impairment reversal means and does is as follows. “Walmart has adjusted their net asset value upward by $1 trillion based on the anticipated increase in the consumer price index.” Whatever happened to historical cost accounting? The answer in oil and gas is that the name of the game is the biggest balance sheet on the block.

Using dubious and specious accounting in oil and gas is not enough. Adding the Post-it-Notes, telephone service and receptionists salary to property plant and equipment is done everywhere. Realizing these costs over the life of the reserves, which in some cases, as in the case of Cenovus, have reached as much as 27 years. “Reversing prior amounts of depletion and impairments is particularly lucrative in terms of bloating the balance sheet and increasing profitability.” There are many more tricks done in the industry and nothing here should surprize anyone based on a thorough reading of this blog. This game has been going on since the time the SEC implemented their ceiling test requirement in 1977. The game has become a science onto itself and is deceiving the people in the industry more than anyone else. It is understandable that after 40 years the culture of the industry makes these efforts what the business has come to be. Which is what oil and gas has become. The focus is on assets, the biggest possible. The rest of the business is irrelevant and could evaporate as far as anyone is concerned. As long as there is growth in the assets then all is well. I am not, as I repeat, surprised with anything whatsoever here. It is what I have fought to rectify for many decades now.

What should be particularly disconcerting though. And what is highly consistent with the way things have developed in other industries that have collapsed. Is that Deloitte & Touche, and its cohort, who conducted the annual audit of Strategic have expressed a non-qualified opinion on Strategic Oil and Gas for 2016 and prior. They did qualify their opinion based on a going concern basis in the 2017 report. Isn’t it always the accountants, the regulators and those that are charged with ensuring the barn gate is closed and locked so that the horses don’t escape. Are then subsequently found to be the ones that were sitting on the fence posts picking their noses when the smell becomes too much to ignore. There should have been qualified opinions being issued throughout the oil and gas industry decades ago. When asset values are determined on any cost being an asset. Where the value of the asset can be massaged and manipulated through crystal balls and sessions with the faith healers or gypsies, but note never by both within the same fiscal year. Where the sky is nowhere the limit. And all of the accountants have signed off on these theatrics. We know those investors who were lined up and made to believe they were investing were really only being sent off to slaughter. Despicable, sickening and no one does anything to correct this for four decades?

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