Accounting in Oil and Gas

I’m in receipt of an interesting document that provides relevant information to those who may need to better understand the state of affairs in oil and gas accounting. The document is from P2 Energy Solutions who provide ERP software products to oil and gas companies. One of their cornerstone products is Qbyte which was what IBM sold them when they decided to get out of the business. They have 1600 clients using their various products. And as I’ve stated in our White Paper, “Profitable, North American Energy Independence -- Through the Commercialization of Shale” they’ve persevered on a starvation diet as do all business related software providers have had to do. Producers don’t pay for accounting systems or accounting when there are wells to drill. Besides the value of the company, and everything that is needed to be known is in the reserve report. Accountants are there to pay the bills. P2 does a good job of showing how accounting and systems are conducted in four different ranks of the oil and gas industry. The four categories are Initial, Reactive, Managed and Optimized. The only thing that I think P2 didn’t get right in their descriptions was the amount of “hair on fire” panic and rush that usually accompanies this accounting. 

P2 has done an excellent job of capturing this information in an unbiased manner. They’ve done the industry a favor by ripping the bandage off of this gaping wound to show that the lack of resources dedicated to systems, automation and process management has left accounting for oil and gas in the dark ages. It is no wonder that these producers are unaware of the consequences of their actions. They’re not paying attention to accounting and accounting is unable to fulfill their obligation of providing timely and accurate information about the business beyond the basics. Their business model of “just drill more wells” is providing everyone with the spectacular failure we’re experiencing by not listening to investors when they say they’re dissatisfied, not listening to commodity markets when their prices state clearly they’re oversupplied and not listening to accounting beyond getting them to “pay the bills.” I hope the bureaucrats, those that we identify as the C-Suite and their direct charges, are adequately humiliated.

In our White Paper we noted two characteristics of the oil and gas industry that I want to restate here. The first point implies the culture regarding the capitalization of every cost in sight. Or as producers like to say “building balance sheets.” It has created a culture that has destroyed the capabilities of both accounting and administration. To cater only to the drilling of wells as that is the business as well as the business model. We noted regarding this culture, the consequences of what has developed;

Which is, as far as they’re concerned, the extent of the use and purpose of accounting in oil and gas. This cultural division has grown over the past four decades where accountants ability to assert the business issues does not exist. The release of reserves value through further drilling is the business and the only business as far as the culture of the industry is concerned. The nuance of recording and reporting the accurate timing and recognition of capital costs of exploration and production are not a topic of discussion when “everyone” is following the SEC’s regulated requirements and are “building their balance sheets” faster than “we” are. What we do know is over reported profits begets overinvestment, and overinvestment begets overproduction. Especially when no production discipline exists. p. 10

… a result of the SEC implementing its Full Cost and Ceiling Test regulations for capital assets. These regulations have extinguished the producers initiative to act. If everything producers spend becomes an asset which increases the value of the firm, if everything they produce is almost pure profit, they’re disincentivized to see the situation as anything but wildly successful. “What could be wrong?” Planning, strategy and active management have been ineffective in this environment and as such grew to be unnecessary, therefore not undertaken and atrophied. How else could you describe the past ten years in the natural gas business in which nothing has been done. If the business should ever have difficulties, as it has always done before, “it will work itself out.” p. 14

 

The second point I want to make is that accounting and administrative capabilities should not be a distinct competitive advantage of any producer. Each producer building their own capabilities that are not shared or shareable in their current configuration do not provide any value. They are also fixed in terms of their cost behavior. By implementing the Preliminary Specification we are moving them to the service providers where they become variable based on production. It is also noted that the ability to make any changes to these capabilities in terms of performance or configuration is constrained not only by the current software, but also by the inability to expand the specialization and division of labor of the staff within these departments. Our service providers list as one of their key competitive advantages specialization and the division of labor. This with the defined software capabilities of PI&O provides the capacity and capability for industry to expand the performance of administration and accounting well beyond what they are capable of in today’s configuration. 

Did I ever mention the value proposition that People, Ideas & Objects (PI&O) our user community and their service providers generate for the oil and gas industry? Let me repeat it once more. Over the next 25 to 30 years we provide from $25.7 to $45.7 trillion in incremental value to the North American oil and gas industry. I think that today’s environment provides an understanding of how that value comes about. Producer bureaucrats don’t have a clue what’s going on. Yes, it is that bad. They’ve destroyed the business fundamentally and they have no one left to blame. If you read the P2 document the way I did, the cupboards are bare and producers have nowhere to turn to gain an understanding of where the value or the value destruction is. 

I mention the Preliminary Specification in order to contrast the situation once our solution is operational in the oil and gas industry. What we do is reallocate the administrative and accounting resources from the producers themselves and have them work for individual service providers who work on behalf of the entire industry as their clients. Providing an individual process management that they charge their fee to each of the Joint Operating Committees. The Preliminary Specification then produces full detailed financial statements for each Joint Operating Committee, which includes the actual detailed overhead charged from the service providers, and depletion for that property. This reorganization turns the producers fixed overhead costs into the industry's variable overhead costs. Variable based on production. If the property shows a profit then it will continue to produce. If it is unprofitable it will be shut-in and join the producers inventory of shut-in properties where it can be worked on to improve its performance and return to profitable operations. Then it will no longer dilute the earnings of the profitable properties. Save those reserves for a time when they can be produced profitably. Will not add the incremental losses to the reserves that will need to be recovered in the future. And most importantly today, remove the marginal and unprofitable production from the commodity markets.

We mentioned the other day another advantage of this change in the configuration of accounting and administration which is the standardization of accounting across the industry. This standardized accounting will also be objective, unbiased accounting that will be provided to each and every producer. If a producer receives a financial report that states the property is unprofitable they’ll know that’s on the same basis and criteria that every other property was evaluated and subjected to. That there was no undue influence in the determination of profitability. This standardization would apply to Exxon as it would to the start up that began operations last week. People, Ideas & Objects being a cloud computing provider, it will be available to any and all producers equally. The service providers are billing based on the activities at the property. A working interest owner may or may not be known to each of the service providers. The amount of data they’ll have will be limited to what is necessary for them to process their work. Who the working interest owner is will not necessarily be known to many, and therefore be of little concern to any of the service providers. Establishing a blind objectivity that all producers can rely on to ensure that their performance is being evaluated consistently. 

Therefore in terms of accounting, process management and automation provided by the Preliminary Specification and service providers. It will be a state-of-the-art, dynamic change oriented capability to meet the demands of a dynamic, innovative, accountable and profitable oil and gas producer and industry. There won’t be any difference in the processes that are managed for any of the producers when it comes to the size and sophistication of the producer. It will be standard. The start-up will not need to hire any accounting or administrative staff in order to conduct their accounting, it will all be provided from the existing service providers that service the entire industry. As in the past, their disproportionate startup administrative and accounting costs will not have to be carried for the first decade of their life as they’ll just be paying for the necessary, actual, variable costs of processing their accounting. Gone will be the days when they had to carry that disproportionate load in terms of their overhead costs. 

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Interactions With PI&O, Part I

As I’ve noted before, all of the people who are involved in the greater oil and gas economy will see the industry from different perspectives through their use and operation of their specific version of the Preliminary Specifications software. The industry we’re rebuilding will be where people are assured of the steady economic performance that would be a result of producer profitability, everywhere and always. No more boom / bust cycles. Secondly, an industry in which the investors would see profitability as the driving force and primary objective for all concerned. This industry has now learned a costly lesson regarding why profits are needed everywhere and always. The investors hold the tools necessary to keep management performance profitable for all concerned. Once investors see that oil and gas has a plan and strategy to be profitable again they will look to immediately position themselves to earn those profits as soon as the producers have funded and initiated the Preliminary Specification. And lastly understanding that OPEC+ are tired of ceding market share to shale producers that also destroy oil prices, but not OPEC+ profitability, how assured would they be if they saw North American producers were beginning the work to rebuild their businesses based on producing their products profitably everywhere and always? Would they then cease their price war if the Preliminary Specification was adopted and funded by North American producers? What would the world look like without North American based bureaucrats constantly searching for and accusing every scapegoat they can find?

In this new series, “Interactions With PI&O” we’ll be discussing the manner in which people will be interacting with People, Ideas & Objects (PI&O), the software that we produce and the services that are provide through our affiliated user community and their service provider organizations. Today I want to discuss the user community and what software they’ll be using to determine the needs and wants of the producers. They’ll have the most comprehensive view of the industry as they’ll not be isolated to just one producer, but the entire industry and all of its associated industries such as the service industry, the greater oil and gas economy, and all of our software users, which will include anyone in need of accounting and administration for oil and gas. 

We will be introducing significant change to the oil and gas industry and that change is going to be managed by our user community and implemented through their service provider organizations. As a result, their first tool to enable this, and to communicate these changes broadly, will be our operation of a current version of the Preliminary Specification based on the most recent software development build as a demonstration of the ERP system. This would be of great advantage to make our changes communicated, understood and appreciated throughout the larger oil and gas community. Therefore we will begin, almost immediately upon the commencement of software developments, to have a facility where people can go to see and use the latest development build of our software. I would expect at this time the builds would be in the order of weekly however it is difficult to determine at this time. Therefore the iterations of the developments and their changes would be evident for everyone in industry to see as they were developing through the builds. This in turn would assist our user community when their producers, or others, ask for certain features and functionalities that were being developed on top of any prior innovations etc. Both increasing the quality of, the speed, and the understanding of the PI&O software throughout the industry and greater oil and gas economy. Removing the unknowns prior to implementation and having the industry up to speed when we’ve implemented the software and go live. 

This facility's existence has never been discussed publicly before. It’s costs however are priced into our budget. It is very expensive due to the Oracle Licenses which include Cloud ERP, and all the necessary applications that are defined and necessary to support PI&O’s Preliminary Specification. During initial development, supporting producers will be provided with access to the one designated individual, our one point of contact, within their organization to view and interact with the facility. This will be the individual leading the implementation of the PI&O system within the producer firm. It will be their responsibility to present demo’s of the application in YouTube videos or classroom presentations in order to inform the producer staff, capture feedback and forward that onto the appropriate user community member (UCM). 

UCM’s will have access to this facility at all times. That way they’ll be up to speed on the changes that the entire user community has made, be able to solicit feedback from the producer contacts and ensure that all is accurate. Sample data will be prepared by PI&O and will emulate the processes of an active producer. We would appreciate donations of data from the industry when that time comes. The UCM’s will have this facility throughout the years of development both in the initial development phase prior to commercialization, and it is expected that they would have access to a similar facility once the application becomes commercially available. Producers of course will be using the applications live. UCM’s will not have access to the producers systems or data and therefore will need to emulate the producers systems with test data, via the weekly builds, which will be necessary for them to understand the application in its various use cases throughout the industry post implementation. 

As we’ll note in this series, “Interactions With PI&O,” will show the different perspectives on the system are fundamentally different depending on your area of responsibility. The service provider systems will be slimmed down single processes with very limited data. The need however to emulate each of the service providers perspectives will be a requirement for the UCM as well, as they’ll need to see what it is the producers systems look like for each of the service industry representative and anyone else who’s using the software. 

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Everyone Sees it Now

Covid-19 is providing a better understanding for everyone about the difficulties that I’ve had in dealing with the North American oil and gas producers. For many decades oil and gas prices have not provided for profitable operations, but I guess a producers' right to produce unprofitably overcomes all logic. As I’ve said 5 out of the last 35 years have been good years. Investors left due to their poor financial performance many years ago. Why hasn’t there been any response or action to either these depressed commodities prices or to their investors exit? What is the argument that is put forward by these bureaucrats that they can defy logic and gravity for so long, and continue to do so in the face of such dire financial circumstances? Are they unaware, or just deceived by their own accounting that shows profitability continuing despite any outside negative or positive influence. I have been trying to sell the industry on the ability to generate real profitability everywhere and always. All that I’ve experienced is a knock-down, drag-out brawl of world class fighters who have no interest in change or profits. My only conclusion is producers “play the long game” don’t you know, and a decade or two is just a minute in real time.

The history of this past decade is horrendous! Natural gas began to decline during the financial crisis and these prices continued to erode due to overproduction in the North American marketplace. A marketplace constrained due to the inability to offload the product to other continents. Natural gas prices remained high in Japan and Europe which launched substantial investments in export LNG facilities. These in addition to mostly Australia's LNG capabilities have now eroded world wide natural gas prices to the point where they don’t even cover the shipping costs to move LNG anywhere. The abundance of North American shale gas has saturated the global markets and its storage facilities. 

Oil and gas bureaucrats knew intuitively then that oil was where it was at, and that is where they went with their shale technologies. Moving U.S. production from 5 mm bbls / day to 13 mm bbls today. By 2014 oil prices began their precipitous decline, and in 2016 OPEC+ stepped in to begin the removal of surplus oil production from the market. As a result they were successful in rehabilitating the price from $29 to $74.15 in June 2018. Reducing their production over three and one half years for a total of one billion barrels that were taken off the market. Or as much as the global commercial oil storage market. Not to be deterred we’ve now seen oil prices as low as the teens. With the prodding of President Trump, OPEC+ wants to initiate a new agreement with the caveat that North America join in, and there is no way in the world North American producers will ever participate in anything that will save their souls. They’re on a suicide mission and they aren’t hiding that fact from anyone now. 

Shutting in production across the globe is generally considered the appropriate resolution to the oversupply issues. Lets restate that, the bleedingly obvious solution. Yet People, Ideas & Objects Preliminary Specification, our user community and service providers which are designed to enable producers to reduce supply by removing the unprofitable production from North America is alleged to be “collusion.” Bureaucrats will never understand the business of the oil and gas business, or make any attempt to even try. Death becomes them. 

Lately we’ve heard these producers state that shale formations are more amenable to shutting in than other formations such as those in the Middle East and Eastern Europe. One of the lies the bureaucrats have been involved in telling is that “they can’t shut-in because the formation will be damaged.” The damage coming about as a result of “the formation collapsing on itself.” If ever there was any indication that these bureaucrats were only doing what they do in order to line their pockets it’s this statement. This is 100% bunk. Proven by the fact that Saudi Arabia pledged to increase their production from 9 mm bbls / day to 12 mm bbls / day within the next few months. Sounds like they experienced significant damage by shutting-in all that production these past few years doesn’t it! The shale formations are fraced multiple times on a lateral that extends many miles. These fracs are caused by upto 60 mm bbls of water being injected to crush the rock so that the oil and gas can accumulate into the fraced areas. Usually sand is injected in the void in order to ensure that the porosity of the void remains high and production continues. By shutting-in a well doesn’t damage the formation. Certainly injecting 60 mm bbls of water would potentially do more damage, I would think. 

The writing is clearly on the wall for all to see the antics of these bureaucrats. In this time of enforced isolation I’ve never felt less alone. The attitude in the marketplace is clearly consistent with the logic that is contained within the Preliminary Specification. It is what businesses do, it is business logic. You don’t produce unprofitably and you don’t do it for four decades. What is and has been going on has now been noticed by everyone, it is obvious and miraculous to most that producers are applying such unreasonable arguments. I have always said the damage and destruction that has been caused at the hands of these bureaucrats has been catastrophic and unheard of anywhere and at any time before. Bureaucrats believing their own specious financial statements, that they are viable and strong, is a result of the corrupt accounting that has gone on for four decades. This has covered over and masked the great drainage of wealth and value out of the industry by their hands. We certainly don’t need these bureaucrats now that the industry is worthless. What’s more these bureaucrats feign not to understand, even today. They are redundant and what’s more they are an impediment to any resolution. The Preliminary Specification is a solution that they were aware of since 2003, its full specification on how to be profitable since 2013. Which proves they had every opportunity to do something and chose instead to line their pockets. People, Ideas & Objects have a plan and a strategy to do better. With the Preliminary Specification, our user community and their service provider organizations. We can rebuild the industry faster, without compromise or continuing with this corrupt and failed system. And have the dynamic, innovative, accountable and profitable oil and gas industry and producers that we need and know we need for the dynamic future we know will be the most difficult. 

I am pleased to have prepared the solution to what can only be described as the largest oil and gas issue, ever. It has been a long battle and this day was inevitable. This day being that I think we may have turned the corner. Milton Friedman said it best and we quoted him with the following quotation in our White Paper.

Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

What I Mean by "Overproduction"

What has become clear to me is that there’s some confusion about how I’m using the term “overproduction.” What qualifies as overproduction and how it’s measured. In our White Paper we note that the economic principle is summarized as “overreported profits attract overinvestment which creates overproduction.” This is also defined in educalingo.com as:

In economics, overproduction, oversupply or excess of supply refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment. The demand side equivalent is underconsumption; some consider supply and demand two sides to the same coin – excess supply is only relative to a given demand, and insufficient demand is only relative to a given supply – and thus consider overproduction and underconsumption equivalent. Overproduction is often attributed as due to previous overinvestment – creation of excess productive capacity, which must then either lie idle, which is unprofitable, or produce an excess supply.

Simply overproduction is unprofitable production. We know the price of both oil and gas have been fundamentally destroyed by oversupply. We know that producers' cash and working capital balances reflect their chronic unprofitableness. I guess the question therefore would be has anyone seen any underemployment in oil and gas lately? What we have in the last sentence of this definition is the issue that North American producers should be most concerned about. We should all be able to agree that the prices of $61.21 and $2.183 that were realized at the end of 2019 were inadequate to sustain the industry. Producers reported profitability however cash was being consumed. If we assume that the prices necessary for existing North American producers to be profitable is $100 that implies that 145 mm boe / day is more supply than the market would bear at that price. Let's also assume that the price destruction reduces consumption to 110 mm boe / day. A 35 mm boe / day overcapacity that would need to be shut-in, or, in order to attain the North American, profitable everywhere and always price of $100. No one knows what the numbers would be; these are all assumptions for the purpose of showing the example of the situation that the North American producers find themselves in. There is a surplus in this example of 35 mm boe / day that is unproductive, leading to chronic unprofitability across the 145 mm boe / day.

As the quote suggests the “creation of excess productive capacity, which must then either lie idle, which is unprofitable, or produce an excess supply.” This excess 35 mm boe / day supply we are finding, in an environment where the energy prices are price makers, not price takers, is even more unprofitable than the idle capacity. The reason being that it has reduced the price substantially enough that the gross revenues of 145 mm boe / day are lower than the 110 mm boe / day. The issue of idle capacity, or the current North American producers unrecognized capital cost of past production as we call it, is a cost that is not eliminated completely from the market. Although the Preliminary Specification makes all the costs variable, creating a null operation. The capital that was used to generate the surplus capacity has an implied cost that must be accounted for, in this case, by the North American producer. Surplus capacity is one of the highest costs a firm can incur, are horrendous and are the toxic waste that will eat away at any company over time. Although producers claim their costs that were once $60, then $50, and $40 then $30 are mysteriously able to reduce the “historical” aspect of their costs, these costs in fact have not been reduced. The legacy of these unrecognized capital costs of past production will be carried by the existing producers until such time as their production is able to retire these costs. Which based on producers depletion schedules is around 2050. Therefore they’ll be in this depressed economic environment they’re in now until the time they are able to deal with and eliminate the implied capital cost of their surplus capacity. 

However, PI&O looks at those surplus capacity costs differently than the North American producers do today. They are the amount of the discount in energy prices the consumers were provided as a result of the investors in these oil and gas producers paying the capital costs of past consumption. Consumers paid the operating costs and investors generously paid for the capital costs on the consumers behalf. They did this when they fulfilled their role of providing the annual capital infusion, then producers capitalized everything to their big, bold, beautiful balance sheets for eternity. The Preliminary Specifications price maker strategy provides a go forward mechanism for the industry to produce profitably everywhere and always. However it also provides the existing producers a means to exit the dilemma of surplus capacity costs they’ve created for themselves. The unrecognized capital costs of past production that has been incurred to generate their overcapacity might haunt them to the end of their days, or alternatively they could join PI&O et al who’ll provide them with our price maker mechanism necessary to recover those costs, by finally recognizing these capital costs of past production and proceeding as a profitable industry. If not PI&O et al will rebuild the industry brick by brick, and stick by stick without them. 

It is in our White Paper that we identified these unrecognized capital costs of past production as the only residual value remaining in the industry. The amount of these unrecognized capital costs, or the prior consumer discount, can now be passed to the consumer through higher prices in our price maker strategy. Turning big, bold, beautiful balance sheets back into cash. Making up for past producer sins and rehabilitating the financial condition of the current producers. Or, we’ll rebuild the industry brick by brick, and stick by stick from the ground up on the basis of a new competitive cost structure. Mostly through purchasing properties at steep discounts from cash starved and desperate bureaucrats. And in turn defining a substantially lower commodity price that attains profitability for those new producers derived from the Preliminary Specification. Which will permanently preclude the existing producers from ever recovering their previously unrecognized capital costs of prior production. Either way producers will be looking at removing those costs, they can do so early and deal with their surplus capacity difficulties with PI&O et al, or they can continue to cling to the few remaining drowning victims for a few more decades as they sell off what they built for pennies on the dollar. 

Clearly their situation will not be rectified by any coronavirus stimulus. Their damage is a result of four decades of overinvestment that will resist resuscitation of the industry in any form by the current status quo bureaucracy “muddle through” strategy. There should be no doubt about this and the fact is clear the situation as it stands today is terminal. We can declare it terminal today as it doesn't have any capacity to recover, or we can sit and hope it comes around for the next decade or so. The bureaucrats are down to their last drowning victim in the Federal government and the ability for them to act is constrained by some producers who resist, wisely, government involvement in the industry. Which brings up the question regarding Exxon. With 6.1 million barrels of oil equivalent in daily global production, nothing will happen without them. What the existing North American producers will need to do then is wait until such time as Exxon is out of business too. Again, the rebuilt industry under the Preliminary Specification on a brick by brick and stick by stick basis will be highly cost competitive in terms of their capital costs, in a capital intensive industry, in comparison to existing producers. Therefore this lower capital cost structure will be holding any upside on capital cost recovery for the existing producers due to a continuation of lower oil prices, lower but still profitable to the new producers, and drawing out the pain of the demise of the old producers, that is of course unless they join us.

A quick note to realize the Saudi’s and Russians will not be making much difference to the oil price or to anyone. With the decreased demand in consumption the effect that they were seeking by starting their “price war” has been expanded exponentially. And is far outside of anyone's control. I think the same can be said for any real or tangible assistance to the North American producers from governments. The need is not there as it is in the hospitality, medical and other industries. However producers are now claiming that “our energy independence and national security depend upon it.” The coronavirus stimulus is not designed to rectify the damage that bad management created over the past number of decades. However, from what I’ve seen these past two days, people are beginning to come out of their self-imposed lock-down and exercising their freedom to enjoy life again, at six feet’s distance or more.

My argument is that it’s time to quit thinking about what other drowning victims bureaucrats can cling too, and begin rebuilding the industry brick by brick, and stick by stick by initiating and funding the Preliminary Specification. That way bureaucrats could admit their mistakes leave the industry and say they did something productive to remedy these issues. What I’m suggesting is that bureaucrats just leave. There is little damage that’ll be done if they did leave and only continued damage if they stay. They’ve done enough, we'll take it from here. Before they go just initiate the development of the Preliminary Specification and raise the budget to do so. And then go.

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Links to White Paper and Preliminary Specification

On April 4, 2020 we found that our url shortening service was no longer in service. Hence all the url's to the White Paper and Preliminary Specification throughout this blog no longer function. We have since joined bitly and are using the following. 

For the:

White Paper,    Profitable, North American Energy Independence -- Through the Commercialization of Shale    https://bit.ly/3aIds4VWhitePaper

Preliminary Specification    https://bit.ly/3aOXTsgPreSpec

Preliminary Specification Preamble    bit.ly/2wdjHP0Profit

User Community Vision    https://bit.ly/39OLovvUserComm

User Community How to Join    https://bit.ly/39EN1f7HowToJoin

Service Providers    https://bit.ly/2x2jrCUSerPro

Budget     https://bit.ly/349TZYhBudget

Revenue Model    https://bit.ly/2xQ5EiGRevMod

Initial Exchange Offering    https://bit.ly/2X7jwzSIEO

We apologize for any inconvenience.

A Vision and a Plan to Deal With the Largest Oil and Gas Issue, Ever

The unaccountable nature of our good friends the bureaucrats will continue. There should be no doubt in anyone’s mind that this is the case. Professor Thomas Sowell said “It is easy to be wrong - and to persist in being wrong - when the costs of being wrong are paid by others.” After fighting them since 2003 on these very issues it is obvious that bureaucrats will not change even in the face of negative oil prices on a wholesale basis. It’s not their money that they’ve destroyed. It’s not their livelihoods that they’ve destroyed. And it’s not their careers they’ve destroyed. These bureaucrats do thank you for your expression of concern, but can assure you that they’re fine. Identifying them as I have for these past decades as the culprit of this destruction was easy, they were the ones responsible. Can anyone doubt that now? They had the authority to deal with the issue and institute any remedial action necessary, for decades. As we’ve seen now after more than a decade of excuses and blaming others, there is nowhere for them to hide. We all need to tell them to leave. We don’t want them, they provide no value, and are a drag on the performance of the industry. But before they leave they need to show some remorse and apologize to those they’ve damaged so extensively by instituting and funding the Preliminary Specification. Then when they leave immediately after they can say they did what they could to fix the mess they made. They set in place a plan and strategy to build a future and removed the problem from the industry. This is the only way in which the industry is going to heal itself. If you doubt me, we can wait another year and see what happens then, but I suggest action.

PI&O’s Preliminary Specification, user community and service provider organizations provide a comprehensive vision for the next 30 years. One in which the oil and gas industry is dynamic, innovative, accountable and profitable, everywhere and always. A vision and a plan for 30 years that once adopted, will have people rallying, including investors, to oil and gas. The key here is the investors. They invest in the future earnings and cash flow of what they see the industries plan, strategy and vision can provide them. They will provide the capital for that and be somewhat patient for a year or two for that vision to manifest itself. People are the same. If they see that an industry is vibrant and there are opportunities that are fresh and exciting they’ll want to get involved. And what about OPEC+, if they saw the Preliminary Specification, its user community and service providers being funded and built would they continue with their full production strategy? This is how we begin to rebuild the oil and gas industry brick by brick, and stick by stick. Which is the only opportunity that we have available to us at this time. So much destruction has occurred that any attempt to tinker with what exists today will only fail due to cultural inertia, and would carry a significantly lower probability of success than the Preliminary Specification provides. The Preliminary Specification has been actively promoted here and through our White Paper since December 2013 and July 2019. The cognitive dissonance that these have created in the industry are adequate for our needs to start the development of the user community working on identifying and specifying exactly the details of the systems they want and need. Brick by brick, and stick by stick.

We have claimed throughout the Preliminary Specification and this blog that the issue we resolve is the largest administrative and accounting issue the oil and gas industry has ever faced. Thanks to our good friends the bureaucrats it has now become the largest issue in oil and gas, ever. We should all be pleased to be able to work towards this solution and build the new oil and gas industry, brick by brick, and stick by stick. This time of great upheaval and crisis is our greatest opportunity for the individuals with the knowledge and capability to complete these tasks. Build a stable, financially capable industry that is well managed and robust which provides affordable, abundant but profitable energy for the next three decades. Crisis is the point in time where opportunities are at their greatest. Our user community members, with the roles and responsibilities that we recently detailed, can begin this process. They will be ground zero in terms of where and how this rebuilding process begins. This is why they must be endowed with the resources that PI&O have established in that community. That is the way that it will be done in the highest quality, fastest and most efficient way. Using the capitalist system with thousands of entrepreneurs applying their knowledge and capabilities in new, exciting and innovative ways.

Bureaucrats, here’s your chance to prove to everyone that you didn’t do this deliberately to line your own pockets. That you didn’t do it out of greed and self-interest. Before you leave the stage make the commitment to build the Preliminary Specification, our user community and their service provider organizations and secure the funding for the whole project. That way at least you can say you did your best and your legacy will have at least one positive element in which you can sail into retirement.

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Production Allocation Based on Profitable Production

I thought that I would start with some good news first for once. This is in fact excellent news and something everyone should know and understand. What is the plan and strategy for the energy industry? As it stands with the bureaucrats it appears to clutch onto any other drowning soul. That doesn’t mean that’s what’s going to happen. If the Preliminary Specification, our user community and their service provider organizations were adopted by the industry, its plan and strategy inherent in every aspect of our software and services would be seen by all concerned as positive for the future of oil and gas. Investors would see a dynamic, innovative, accountable and profitable industry being rebuilt from the ground up and look to position themselves immediately to earn their future profits there. People would look to the industry with renewed interest and seek the opportunities that a dynamic, innovative, accountable and profitable oil and gas industry offered. And what about OPEC+. If they saw the industry rebuilding itself in the vision of the Preliminary Specification et al, would they continue to erode their future prosperity? These may not all be available immediately today but will be obvious in the next few years and provide everyone with the opportunity to realize a future career or business in which to base themselves upon. This situation we are in today is a terminal situation for the bureaucrats and we should cheer their final demise as a positive attribute. The quicker we get moving in the direction of rebuilding our future through this plan, vision and strategy the faster we’ll turn this ship around and become what it is the industry should and we all know it can be. 

Now back to today’s dismal facts. What security or direct benefit do our good friends the bureaucracy seek by having the government dictate production allocations? Wouldn’t that just entrench their administration for that much longer and make it that much more difficult to eliminate them? The one thing I’ve learned is that as far as they’re concerned it is all about them. Why else would so many people have lost so much without even a shrug from these bureaucrats? As far as they’re concerned all of this has been a resounding success!

The fact of the matter is that there won’t be anything left of the North American producers by the end of this month. The bureaucrats' destructive ways have led to the ultimate demise of these producers with nothing left for them. If we assume that North American producers are generating revenues of $10 / barrel net, that there is 40 million barrels of oil equivalent production and their out of pocket cash costs are as low as $30 / barrel; we need to account for the payment of 100% of the overhead that is being incurred each month, overhead that I believe is as high as $15 / barrel. Then each day the industry is flushing $800 million down the drain. For 30 days that cost is $24 billion that they don’t have. At the end of 2019 our sample of 20 producers, representing 10 million barrels / day, had $5.4 billion in working capital, which doesn’t include what was consumed in the first two months of 2020. Banks had already begun to refuse access to lines of credit. And the real kicker is that there is still storage available today! Making May, or post virus hibernation, look like...? Or dare I ask what 2025 is shaping up to look like? 

It would seem more people are beginning to join in on my dire predictions about the state of affairs in oil and gas. As I noted above it didn’t have to be like this, we can turn this ship around quickly. The first quote is from oilprice.com author Mitchell McGeorge who lays it out the best I could have ever imagined. 

The world’s oil markets are at a crisis point arguably not seen in its history. 

With global oil demand curtailed by an estimated twenty million barrels per day due to the coronavirus led shutdown in the world’s economy, the oil war would turn an already dire economic outlook for global energy demand into a catastrophe that could change the energy landscape forever. An increasing number of producers are now losing money on production, wells are being shut-in and in certain areas (e.g. Canada) the oil industry may never recover – a generational destruction of personal livelihoods and the end of a reliable source of national wealth and revenue.

Yes, the economic crisis caused by the coronavirus has severely affected the global oil markets but, the actions of the participants in reaction to this crisis have shown an industry in the grips of a mass suicide.

And

As often the case since 2017, the US is looking for others to do the ‘heavy lifting’ when it comes to the supporting of the global energy market. OPEC and OPEC+ have legitimate gripes that their support of the global oil price through production cuts has directly led to continuance the US shale industry’s exponential production growth.

US shale production has grown to such an extent that it has helped the US eclipse both Russia and Saudi Arabia in becoming the world’s largest oil producer. This has been trumpeted by the US President as the US achieving energy independence. 

To the often-made complaints by OPEC and OPEC+, the US has always cited ‘free market’ forces. How ironic now that there are calls by domestic US shale producers for tariffs, duties and even limits on foreign oil to provide an ‘artificial’ oil price floor.

From World Oil the simple, basic and now obvious comment.

The current oil crisis will see the energy industry finally achieve the restructuring it so badly needs

Of course this has already been painful for many in the industry. The market capitalization of our sample of 20 producers at the end of March 2020 sees losses of $234 billion. Extrapolating that across the North American producers it comes in at about $936 billion. To reiterate that is three months losses just for the investors. It’s not as easy to calculate the losses and pain being realized by others who have been so fundamentally betrayed by the mindless, self-interested bureaucrats, but maybe that's the point. When we first published our budget in early 2014 my discussions with bureaucrats reflected they were confused as to why $8 billion was necessary. Today we see what Mitchell McGeorge calls “The world’s oil markets are at a crisis point arguably not seen in its history” which could no doubt be solved by said bureaucrats for $5 in total. It’s just they don’t want to. That it is such a big issue makes me think we’ve priced our solution in the right ballpark. “Cost benefit analysis” is a term in business that I suggest bureaucrats look up and weigh our budgeted costs against the perceived benefits of actions they didn’t take. 

As Mr. McGeorge noted, producers call for tariffs, duties and limits on foreign oil, and I would add the production allocation deemed necessary from the Texas Railroad Commission are the focus of the bureaucrats today. All of these are unnecessary when we consider the business principles of the Preliminary Specifications price maker strategy. By making independent decisions at each property, based on actual, factual accounting information that determines profitability of the property, then deciding to produce or not is not collusion as the excuse-a-minute bureaucrats make it out to be. You would not be colluding with anyone, you would be running a profitable business. It is basic business that is done at every level of every industry. Ford has had the sales leading truck in the F-150 for decades. Yet each year they shut down production to ensure that they don’t overwhelm the inventories at their dealerships and lose the pricing power that they have. Ensuring that the product remains profitable. Only a fool would continue to produce a product that lost money and think they were doing something altruistic. 

Therefore making profitability the basis of production allocation is the only fair and reasonable basis of allocating production. Government mandates don’t work as evidenced by the initial success of the Alberta government's institution of production allocation of oil at the start of January 2019. These production limits are still in place and the province's oil production is receiving prices as low as $6 / barrel. The lowest on the continent as there is no incentive for the producer to uphold the production discipline to keep production off the market. OPEC has had nothing but difficulty in instituting quotas over the past decades. Although it has worked recently, they’ve been ineffective in the global market. The only method of production allocation that will provide the market with production discipline is by using profitability. Then producers can maximize their corporate profits by shutting-in their unprofitable production, working these properties over to bring them back to profitable production, and therefore not diluting their overall corporate profits with the losing properties losses. However, this a feature only of the Preliminary Specification with the user community and service providers in place.

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

User Community Developments, Part XXXIV

I’ve yet to hear a valid argument against People, Ideas & Objects (PI&O’s) assertion that oil or gas should only ever be produced profitably. No one’s been able to provide a reasonable explanation as to why we would ever produce oil and gas unprofitably. These are commodities that are unlike any other in that they’re not replaceable; you can’t grow a new crop next year or melt them down for reuse. What other commodities meet those criteria? Continuing to produce unprofitably, I believe, is the equivalent of robbing future generations of the use of their energy in ways that are wasteful. If the products were produced profitably, then we can assert consumers used them effectively and efficiently and were therefore not wasted. Are we able to say that about the production of hydrocarbons in the past decades?

We have frequently discussed the Preliminary Specifications standardization of accounting and administration that will be undertaken in oil and gas by our user communities service provider organizations. Every property would be subject to the same objective and standard treatment that is applied to any other property in North America. Natural gas is much more costly to account and administer for, due to its byproducts. Some properties are significantly more complex than others. These will be reflected in the unique cost structures of each and every property. In addition the administrative and accounting costs are all variable under the Preliminary Specification. Making all of the costs of the producers variable based on production. Enabling the implementation of our price maker strategy and ensuring the profitability of each and every producing property.

It will be the role and responsibility of our user community to ensure that the accounting and administrative aspects of each property are both timely and accurate. As well as the method of accounting that is applied is both objective and standardized throughout the North American producer base. As a result producers will know that their profitable production is profitable in direct comparison to all other production across the continent. (There will need to be some special consideration for the consistent full production of heavy oil as its scalability is not economic or viable under any circumstance.) It should be noted that included in those profitability calculations will be the actual prices that were received at the property. Any differentials would be applied however there would be no consideration for any hedging. That is a corporate activity that is something the producer may consider continuing if they so desire. It does not affect the criteria of whether or not to produce a property. The property will be the only basis of evaluation in terms of profitability.

In a world of ever increasing costs due to the advancing difficulty in producing each incremental barrel of oil and gas. The need to remain active and proactive on a costing methodology for how the capital is recaptured and its cash reused by the producer is of concern. Conventional oil and gas will be treated differently than what shale would or should be. With its flush production, steep decline curves and costly reworks this will take a more precise accounting than what has taken place to date. Our user community will need to apply their most advanced thinking in terms of what and how the costs of oil and gas exploration and production are realized. As we’ve also mentioned the recognition of capital provides a return of the cash that was previously invested. Providing a ready source of capital for the producer to reinvest for the future. With the capital expenditures that are forecast the need to source adequate levels of capital are necessary. The only source of capital available to the industry is the recycling of their capital costs on a higher frequency than the multi-decade basis they’ve done in this “build a balance sheet” era. Our user community will need to ensure that adequate capital resources are provided to the producers for this purpose.

Bureaucrats have been intoxicated with the cash flow from oil and gas production in the past decades. The industry is a capital intensive industry and therefore the return of capital that was previously invested has always been strong. The deferral of capital recognition for decades has been a result of the levels of cash they’ve been able to generate in these producer organizations. It has taken them significant effort to understand and develop unique and innovative ways in which to divert these funds into their own pockets. The issue that we have today is that with the Preliminary Specification the volume of cash coming into these organizations is going to be an exponential increase from the bureaucrats' days. Luckily we’re disintermediating them and won’t have to concern ourselves with their hands sliding back into the cookie jar. Where did all that value go? Nonetheless the cash that is generated will be substantial and the need to have better control over this will need to be instilled within the industry, producers and larger oil and gas dependent economies. We should build some software like the Financial Marketplace module of the Preliminary Specification that deals with this!

We’ve seen some discussion recently about production quotas with OPEC+ and Texas, and also some discussion about government imposed production allocations. Our White Paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale” discusses these in addition to our price maker strategy. These discussions are consistent with the Alberta government's production allocations that reduced the province's production by 350,000 boe / day since January 1, 2019. These are not the remedies we’re looking for. They are ineffective as they are unable to impose the production discipline that is needed in the marketplace. Producers shut-in the production to meet the quota and then begin to figure out how to get around the quota. In Alberta there are several ways of doing so. None of the production is evaluated as to whether it is profitable or not, and therefore it is all detrimental to the producers bottom line. Currently the Alberta based production is receiving single digit oil prices. Low prices as a result of continued overproduction as the government mandate has done little to solve the problem they were created for. The only method in which the market will institute any production discipline is through the use of profitability as the means in which a producer is evaluated upon. Then they are motivated by the value enhancement of doing so. The increases in value from implementation of the Preliminary Specification includes saving the reserves for a time in which they can be produced profitably, ensuring that the costs of the reserves don’t have to carry the additional burden of the successive losses that would be incurred if the property continued to produced unprofitably, the producer only produces profitable operations and no longer dilutes their earnings with unprofitable operations and the commodity markets have the marginal production removed from the market and hence the prices will find the market price. Our user community will be the critical resource to enhancing the profitability of the energy industry. Our methodology or price maker strategy has been known in oil and gas since at least 2007. If it were able to be implemented within the current configuration of producers, would it not have been done so by now? The fact is producers and the industry are not configured in any way to provide this information or this mechanism, it is impossible for them to do so. Only the Preliminary Specification can.

Global oil inventories are alleged to be at around 750 million barrels as of Monday March 23, 2020. Oil storage capacity is believed to be about 1 billion barrels. If the demand for oil has dropped by 20 million boe / day and overproduction is at 2 million boe / day. The remaining 250 million barrels of storage may be filled in as little as ten days, or the day after April fools. When storage is full will it be the coronavirus or overproduction and oversupply that occupies the minds of the producer bureaucrats? Will President Trump have time to hear the producers concerns then? What we will know is that oil prices will go negative, the differentiated prices are not that far from zero today, single digits and falling. Maybe producers will understand the best form of storage is the reserves themselves. For example, don’t produce unprofitable production. Maybe the North American producers will wake up to the fact that they’ve been unprofitable all these decades. Maybe they’ll realize they’ve been so unprofitable that they’ve consumed value and cash with each barrel produced. They were only viable when someone else was providing consistent cash infusions. Maybe they’ll realize that investors saw this a few years ago and got out. Maybe they’ll realize that OPEC is still making money as the low cost producers, and will continue to do so. Maybe they’ll realize with all the doors slammed in their face, that blaming everyone, cutting everything and everyone the time for a reckoning will be at hand? That having the ability to withhold unprofitable production is not market manipulation as they have always claimed but just plain business sense.

In summary what’s it going to take to make the transition from the current oil and gas industry to the one we’ve described in the Preliminary Specification. First of all there has to be a continental wide destruction of any and all value contained within the oil and gas industry. Check, complete and good job bureaucrats. There is development of the Preliminary Specification with its highly capable, dynamic, innovative, accountable and profit oriented user community and service providers with the software and software development capabilities that facilitate change. Ones with the power, control, Intellectual Property, budget, leadership, people, revenue sources, licensing, distinct and comprehensive competitive advantages, timing and accuracy of the costs of exploration and production, quality of service, objectivity and standardization of administrative and accounting services and lets not forget the responsibility and authority to get it done. This is a new capacity, capability and functionality in the oil and gas industry. It is not available today and needs to be purpose built to deal with today’s issues and tomorrow’s future.

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Yes, of Course...

Everyone can shut-in now, in fact it seems to be all the rage! World Oil published an article on Sunday March 29, 2020 that identifies shale as a type of rock that can have its production shut-in without any damage to the formation whatsoever.

Shale Threshold. “The market is going to be out of balance for quite some time,” Morris said.

Yergin, the confidante of oil ministers and chief executives, sees the threshold for reinvigorating shale between $50 and $60 a barrel. U.S. crude was trading above the $50 level as recently as Feb. 26.

“At $50, we’ll start to see a recovery and a step up in investment, so long as people feel safe about the price floor beneath them,” he said.

It’s funny that Yergin should put it that way. A big part of shale’s resilience lies in its unique geology. Unlike the so-called conventional fields in Saudi Arabia and Russia, North American shale is rock so dense that it doesn’t degrade or collapse on itself if oil production is interrupted. In other parts of the world, disrupting output can do irreversible damage.

That’s why the bulk of Chevron’s $4 billion spending cut will take place in the Permian, CEO Mike Wirth said Tuesday. It’s a rare field where production can be turned off almost instantly without adverse long-term impacts.

With shale, “the assets don’t go away because you haven’t destroyed the field,” said Ken Medlock, senior director of Rice University’s Center for Energy Studies. “We’ll see a thinning of the herd but the assets will still be there.”

Welcome to the shut-in party pal(s). Not to suggest otherwise, but I always believed that a frac job was to “blast” the rock with water and hydraulic pressure, opening a void for the oil or gas to flow to? Their point in this is; that not until you’ve systemically, comprehensively and financially destroyed everything in the oil and gas industry will you begin to shut-in properties. That you could have shut-in production when we completed development of the Preliminary Specification in December 2013, which suggests that unprofitability is the point in which you shut-in a property. A time period in which bureaucrats lied to everyone about, my list is far too long to include everything so I’ll just list my favorite lies here, market rebalancing, capital discipline and we’ll muddle through. I am going to add “doesn’t degrade or collapse” formations to the top of my list right now. Now with all the destruction they’ve caused they’ll admit shut-in production is the way to go. The issue bureaucrats had before, with shutting in production, was that it took effort to do so.

This problem isn’t going to go away I’m afraid. As I discovered decades ago the industry is not configured to function in this way. It uses the high throughput production model. Which sees maximum capacity produced at all times to offset its large overheads. The Preliminary Specification shifts the industry to the decentralized production model which makes all the producers' costs variable. Then any property that is shut-in incurs no costs. Overheads are incurred by the service providers who will not be conducting any work on shut-in production and therefore will not render any billing for their services. Shifting the overhead costs from industry to the service providers enables producers for the first time to be able to control their overhead costs.

Not only do the service providers have a role in this but also the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. The Joint Operating Committee is the industry standard legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. Using it aligns these frameworks with the compliance and governance that is “currently” managed by the bureaucracy.

This shut-in production enables producers to save the reserves for a time in which they can be produced profitably. The reserves will not have to increase their return on investment when it includes the additional losses of the property if it continues to produce unprofitably. Global oil and gas storage facilities will be augmented and better managed by assuming reserves are a natural form of storage. And the commodity markets will find the marginal price when the marginal barrels of oil equivalent are removed from the marketplace. It is this logic I assume that these people now find so compelling.

Therefore here are a handful of useful questions that people may want to ask these newly enlightened bureaucrats.

• Who will be the producers that shut-in their production? Profitability has been determined by PI&O to be the only means in which to allocate production fairly and reasonably. Therefore what we’ll see from the industry is the continuation of their favorite activity. “It's not them, its other producers, we’re profitable.” The blame game.

• Which properties will be shut-in? There is not a producer in the industry that knows within a range of +/- 25% of their revenues what their profitability at any property is. Ask for the detailed reports and focus on the actual overhead charges. There are no actual overhead costs charged to the properties, anywhere on the continent. Most, probably 85% of overhead is capitalized. It must be that properties manage themselves and the overhead supports the bureaucrats? Don’t ask me, I already know the answers, ask the producers these questions, that’s why they're profitable. 

• If PI&O’s Preliminary Specification makes actual overhead variable, what does this renewed interest in shutting-in consider to do with the producers overhead? The key question, and why what they’re doing doesn’t work. Their overhead is 100% fixed. The same at any level of the production profile. Therefore their profits may appear even more specious as a result. But they do have a plan of course, just lay the overhead off. Those people that were just hanging on by their fingertips trying to keep up while doing ten peoples work, might be able to let go soon. And those that are remaining get ready for more work and soon it will be your turn too. Isn’t oil and gas fun!

Just as the producers told the service industry to cut their costs by 25%, they immediately jumped at the opportunity and reduced the volume of their business which was already on its knees due to this bureaucratically induced depression. This too will inspire and motivate the remaining few people left in the producers to redouble their efforts again. As I said on Friday to the bureaucrats, before you go, initiate and fund the Preliminary Specification. That way you can do something positive for once in your lives.

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Epic Dishonesty

The level of dishonesty that is being pushed by the producer bureaucrats at this time of crisis is quite frankly nauseating. After fighting these people for decades about their destruction of value from overproduction and deceptive accounting practices, the inevitable business consequences of doing so are coming home to roost. People, Ideas & Objects (PI&O) has faced a brutal onslaught for over 15 years of absolute garbage from these people for proposing a solution that enables them to remedy these specific issues, and be profitable everywhere and always. Our White Paper “Profitable, North American Energy Independence -- Through the Commercial of Shale” published on 2019’s American Independence Day details this issue and its solution. Why, if as they’re now claiming, shutting in has been the standard operating procedure in industry, as noted in World Oil, has the industry gone to the verge of negative pricing and completed its full destruction? But also, why the abuse of PI&O, and why the arguments against shutting in production all this time? Or in other words if shutting in was standard procedure, why didn’t industry proceed with the development of the Preliminary Specification at any time since its publication in December 2013?

Shutting in production is the only remedy to overproduction and oversupply which PI&O suggest has been ongoing since the late 1970’s in North America. Ours has been resisted by producers for every possible reason under the sun. The costs and risks of shutting in, as noted in oilprice.com, were never mentioned at any time before and are specious, as there are a variety of temporary operational reasons producers shut-in production, such as workovers etc. The internal processes to shut-in on a wholesale basis don’t exist. Operational decision making authority resides with the Joint Operating Committee. One of the reasons that we have moved to make the Joint Operating Committee the key organizational construct in the Preliminary Specification. And the current systems information in oil and gas as to which property is profitable doesn’t exist. However these processes to shut-in production can be developed by the engineers and by developing the Preliminary Specification. Alternatively if they persist in not wanting to do that, then go out of business.

In a World Oil article it was mentioned that the lack of storage would force the producers to shut-in substantial volumes of production. They indicated that at many times in the past shutting in had been conducted for a variety of reasons, most specifically the 1986 OPEC actions to flood the market. I’m having a hard time remembering these actions. What I recall was the phenomenon of producers crying “oh, whoa is me.” Nothing was done then and only when the global oil storage is full, and prices go negative do bureaucrats wake from their slumber. This is a continuation of the dishonesty we’ve seen over the past fourteen years that PI&O have been actively developing the Preliminary Specification and promoting our solution. Does anyone remember the long held belief in “market rebalancing.” Or how about the common call that we’ve been here before and it always gets better. How many times have we heard the other industry standard bearer of “capital discipline.” There’s also the “we’ll muddle through, and do nothing” as the methods that were proposed as “actions” to deal with the declining prices and destruction of value.

I grant them today’s commentary reflects a change in the bureaucrats tone. They’re not blaming anyone and focusing on their own actions that would be necessary to remedy the situation. This to me is amazing, albeit the horses bolted long ago and are nowhere in sight, probably deceased. If it is reasonable now to shut-in production after systemically overproducing for decades and prices are in the single digits, threatening to go negative. Why would it not be reasonable to shut-in production when the property is unprofitable? Bureaucrats should look around and notice the number of groups that are supporting their organizations. No investors, banks, the service industry and all the people they have working for them. They’ve fundamentally betrayed them with their dishonesty and destruction of their money, careers and livelihood. No one is listening to them, and to say things that are not true about our history is annoying the hell out of me.

Dear Bureaucrat, here’s an idea and a short term plan of action to deal with the situation. Bow out, but before you go, initiate and finance the development of the Preliminary Specification so that you can set in place the righting of your wrongs, reverse the destruction you’ve caused and in a way apologize to all the people you’ve betrayed. Then take a hike!

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 Twitter @piobiz anyone can contact me at 403-200-2302 or email here.