Exploding Myths, Part V
- Reducing their headcount by 1,400 people.
- Drawing down their North American operational shale capacity by 50%.
- Reallocating this North American spending to global initiatives.
- Recognized a $12 billion writedown in the fourth quarter, mostly attributable to North American operations. Unknown what the amount of the total of this asset write down was in terms of accounts receivable.
The CEO Mr. Olivier Le Peuch then stated the following.
As the year progresses, the effect of slowing North America production growth is likely to cause tightness in the market and further stimulate international operators to step up their investments in the second half of the year and beyond,” Mr. Le Peuch said.
I read this as goodbye for good. Any downside in North America productive capacity will be Schlumberger's gain in the international markets. I also see this as part of an overall movement from denial to anger which is the second of five levels of grief. With the destruction of cash which has been a feature, not a bug, of the current downturn. Producer management of their field services has been abysmal. Systemic default of “unsecured creditors” is all the rage in oil and gas. I suspect that this was one of the motivating factors in Schlumberger $10 billion fourth quarter loss and their exiting the continent. We have noted elsewhere that these defaults will precipitate the need for producers to pay cash up front in the future. No matter who they are. Making what we are experiencing now a much longer and more protracted decline. If producers have to generate the necessary capital in advance, with no assistance from investors or bankers, it will be a few additional years before they generate the necessary funds and be able to pay in advance. Service industry participants will ask for cash up front and producers will say “they can pay in 30 days.” At which point the service industry will say “see you in 30 days.” When you have fundamentally betrayed the people that depend upon you, you’ve changed the rules of engagement. I guess the producer could threaten to take their business to Schlumberger instead, at which point the service industry will say, “see you in 30 days, if you have that cash.” The Preliminary Specifications decentralized production models price maker strategy takes the cash that producers have buried in the ground and spit polished on their well built balance sheets in property, plant and equipment. And begins to pass those costs on to the consumer of the oil and gas commodities. Oil and gas is a capital intensive industry indicating that the majority of the cost of the commodity will be capital. In today’s competitive capital markets no industry can compete by storing cash in the ground for decades. Only People, Ideas & Objects Preliminary Specification enables the return of the invested cash in a timely fashion (30 months) to begin rebuilding the oil and gas producers. We’ve been discussing this major difference of our system for over a decade now, and you would think that if the producers were able to make the necessary changes to achieve this on their own, they would have done so. But they can’t do it, won’t do it and will obviously never try. Bureaucrats are terribly conflicted as the Preliminary Specification disintermediates them from the industry.
I see strong parallels in what is happening today with the market that I compete in, that being oil and gas ERP software. There was a dynamic, interested investor marketplace for systems in the early 1990’s. The ability to raise capital was relatively easy. But producers believed that ERP systems stole from their drilling budget and worked to ensure they paid nothing for the ERP product and only its service contract. As a result, today it is all but impossible to raise capital for oil and gas ERP systems, as it has been since late 1996. I don’t say this from any experience. I say it from the point of view that I would not take anyone’s capital as I would have no ability or capacity in which to accurately predict if I could ever return a single dime to any one of those investors. This is not just the ERP providers. The same shenanigans have been conducted by these producers on all of their suppliers. They don’t recognize other people’s Intellectual Property, they won’t work with anyone unless they are of a size and pedigree, an example of two ways producers dictate terms. The point that I’m making is the oil and gas industry will have to conduct itself with much less sophisticated financial capabilities, that being cash. Having abused their absolute power in these markets over the past number of decades will demand a different basis of dealing in the future. Which will include a lack of investors when the cash is sitting in the ground, and a lack of willing investors stepping into the oil and gas service industry.
As our White Paper noted, the method of dealing with overproduction by the producers was to muddle through and do nothing. As evidenced by the past ten years of inaction its clear to see they’re fully committed to this strategy. Although I do not believe that we will see a decline in oil and gas deliverability in North America. We have a new risk that is inherent in the shale era. The rapid decline rates of shale is something that we’ve never experienced before. Will it now get ahead of the producers ability to continually increase their production? Will the loss of the capacities and capabilities we’re experiencing in the service industry today be too much for producers to stop the erosion of their productive capacity?
You do reap what you sow. The only systems development or plan being offered to solve the industry issues is the Preliminary Specification. And we are of the opinion the damage that has been experienced by the industry by its bureaucracy is in excess of what anyone can fix. We are therefore pursuing creative destruction and our Initial Coin Offering. Nonetheless no one would offer anything without payment upfront before any development work would be done. Payment in full I would add. I see this same treatment being applied to the oil and gas industry by all of its suppliers. And it will be applied consistently to each and every producer, no one will be immune. The only business risk that will be entertained by anyone providing any service to the oil and gas industry has now fully shifted to the oil and gas producers themselves.
In related news Cenovus has announced that they’ll be carbon neutral in a few decades. Such leadership! It’s clear these producers are unable to focus on their business agenda or prioritize. And that is the myth we explode today, that all is not well. Cenovus announcements are not expressions of naivety, they are distractions and cover stories for the avoidance of any responsibility. It’s not that they feel any guilt about the state of affairs, it's that they want to appear oblivious. We’ve heard nothing but sunshine and rainbows from these producers, no action and their time has run out.
We’ll break now to continue this discussion again tomorrow in Part VI.
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 American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. 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 Telegram @piobiz or Twitter @piobiz anyone can contact me at 403-200-2302 or email here.