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

We see in this desperate market situation where inventories continue to build, demand remains constrained and prices are woefully inadequate. Yet producers are moving their production back onto the market by reversing the properties that have been choked back and restarting production that was shut-in. At $25 why? There has to be some method of industry wide enforcement of production discipline. The probability of government mandates is a non-starter everywhere except for Alberta. And in Alberta they’ve only proven why they don’t work. Too much cheating with work arounds and overall dissatisfaction. OPEC proved that quotas are difficult if at all possible to impose so what is there to instill a method of production discipline in the North American producers? The only fair and reasonable method is the Preliminary Specifications decentralized production model’s price maker strategy that allocates production based on the determination of the property's profitability. If the property is producing profitably based on a standardized accounting then it produces. Otherwise it is shut-in for those accounting months in which it can be worked over to bring it back to profitable production, or commodity prices rise. 

The production reported by our sample of producers is very interesting. Canadian producers reduced production in the first quarter of 2020 by 23,295 boe / day over 12/31/2019. And reduced it by 473,852 boe / day over the first quarter of 2019. Pipeline constraints and the Alberta government production mandates being primarily responsible for the difference. Our sample of U.S. based producers increased their production in the first quarter of 2020 by 220,182 boe / day over 12/31/2019 and increased their production over the first quarter of 2019 by 895,425 / day boe. Combined the increase in the first quarter's production over the end of last year is 196,787 boe / day to a total of 10,353,426 boe / day for our sample.

Producer bureaucrats will tell you what the cost of shutting-in a well is... They know the cost of everything and the value of nothing. Yet do not seem to understand the concept of profitability and why you should not produce unprofitably for decades at a time. To take someone's money and spend it in what some people might call a business is a very simple thing to do. Some even believe that this act is what you call “business.” To earn a profit, to truly understand what a profit is differentiates those from the pretenders who only spend money as their business model. We have nothing but pretenders in oil and gas with no one knowing or understanding how or why they should be earning a profit. They have no concept to the degree of difficulty it takes to earn them and most importantly the difference. Bureaucrats can tell us the cost to shut-in a well, but fail to understand what the cost of selling oil at $25 is.

As a result of the “coronavirus” we’ve learned that you can shut a well in remotely with an iPhone, and you can turn it back on with the same iPhone! We were told by these producers any number of fairy tales about “how the formation would fold over on itself” and other garbage excuses so that they didn’t have to get up off the couch and do something. Now we find that shutting in wells doesn’t do any damage and the formation pressure builds while shut-in, causing an initial higher rate of production once it’s resumed. What is it that motivates producer bureaucrats to say these chronic, dishonest attributes of their business. We’ve seen these fairy tales pushed out over the decades which are subsequently proven untrue. Is it that they resist the logic of the Preliminary Specification and its effect on their job security. Or, is it they don’t understand what it is they’re talking about. Either way, once again, this proves that the industry would operate just fine, and in fact much better, without these people in command and control. The devastation that is oil and gas is the result of their inaction. If the reason for inaction is People, Ideas & Objects it clearly reflects the effectiveness of the threat that we pose to these bureaucrats is real and of great concern to them. That they would lie consistently to deny our commentary and the arguments we’ve made in the Preliminary Specification but to let things get this far out of hand is ridiculous. If it is not us then what has caused this? Well of course it’s the coronavirus. But let's note the effect the virus has had on the decades long depressed natural gas price. 

The accounting month is a concept that is also not understood by these producers. Shutting-in production in the middle of the month to only pick it back up in the middle of next month shows the incapacity of them to understand anything outside of their “cost control” business model. When prices go negative shut-in production, when prices turn positive, return production. The accounting month is how the industry, scratch that, is how the world turns. Everything is based on an accounting month. If you sign a contract it’s for a series of accounting months, usually. Therefore the costs that would be incurred during a three week period that a well was shut-in, that straddles two calendar months, would incur the full cost structure of those two accounting months. So much for cost control. When a well needs to be shut-in it has to be shut-in for the entire accounting month to avoid its operating costs in the current environment and the operating and overhead costs in the Preliminary Specification. And when will this cost control business model begin to consider the fact that when a property is unprofitable, that unprofitability is a real and very high cost that the producer is incurring? Not just on the shut-in property, but all their properties. At least $5 trillion since 1986.

And it’s not just the producers is it. The revenue of the producers sustains the oil and gas industry, service industry and general economy that supports the producers. As far as the producer bureaucrats are concerned these others are the leeches off of their good fortune. Yet it’ll be the reason they’ll be unable to conduct any type of business in the very near future. There never has been any understanding or consideration that the revenues that are earned by the producer are for the benefit of the entire economic system in which producers depend upon. It’s the bureaucrats' money and “go get your own” is the attitude and general operating premise. What the producers are going to find is that these people who made the industry operate have indeed gone on their search for the money you suggested that they find. It is also these bureaucrats' expectation that as soon as the investors see the wisdom of their inaction. They will return to make investments in producers that will make everything work as it did before, without any action on the bureaucrats behalf. The service industry will be recapitalized and the general economy will be restored instantly to its former glory. 

In a world where there have been decades of 0% interest rate policies producers are declaring bankruptcy. That is a testament to the spending disease in oil and gas. Where capital was always considered to have cost nothing, now that access to capital has ceased, losses have been hidden for four decades from those who should have known, to the point where the only source of cash was the commodities themselves. As a primary industry these revenues could be diverted for the bureaucrats own best interests and to hell with the rest of the economy. Overproduction, or unprofitable production, became all the rage as the revenues were considered “my money” and everyone else would be fed the crumbs to keep the facade moving forward. Now the end of the road is near when former industry stars and darlings are on the verge of bankruptcy and others are signing forbearance agreements to keep the banks from foreclosing for another month. The banks will end up with the assets very soon and they’ll certainly be better able to manage them than what’s been done. This will leave the bureaucrats with an exit strategy of slipping out the back door never to be seen in oil and gas again. Telling the people in their future industry “they tried to fix it but it was just too big of an issue.” 

A producer can have everything operating as a fine oiled machine but still have the same outcome as the other 99% who have been deliberately destroying things by overproducing. It’s necessary to have the industry reading from the same hymn sheet and adhering to it. Otherwise that one incremental, marginal barrel of oil destroys the price for everyone will always be produced. Bureaucrats need to ask themselves if this a short, mid or long term issue? And is this narrative that it's the coronavirus that’s causing them their difficulties the appropriate scapegoat to be pursuing at this point? Has the demand destruction from the virus even been quantified in the long term? I have stated that producers have until August 31, 2020 to have funded and commenced the developments of the Preliminary Specification. If they do they’ll be able to struggle for the next few years but continue. If they don’t they’ll quickly lose control of the logistical and operational control of the industry in a way that will seem to have a permanence to it. Commentary like “we can’t do that anymore because they’ve shut that facility down” or “they can’t take our production anymore because their customers aren’t paying” etc, etc will become commonplace. Which then creates the ping pong effect of having the same thing happening here and there in an uncontrolled and unstoppable series of mini-disasters. Then when it’s beyond the ability to bring it back, the oil price will rise and who will have a vested interest in wanting to get involved? No one, because no one made any money. That’s when the price hits $600 / barrel and still no one trusts the industry to do the right thing because nothing has changed. It's still the same people who ran it into the ground. They’ve never seemed to desire to grab hold of the industry and make it work. It’s always just muddling through and doing nothing. What’s happening today and how it's not really an issue. How the industry has always been able to recover from its difficulties. La de da. There is no plan to deal with the mid to long term. No strategy on how to put together a valuable industry for all concerned. It's just get what you can, while you can. You reap what you sow and the farmland that once sustained everyone looks more like an overgrown forest. 

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

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

Many of our sample producers have now reported their first quarter 2020 financial statements. People, Ideas & Objects have always pursued the development of the Preliminary Specification on the basis that oil and gas was headed for an existential crisis of their own making. The coronavirus has only accelerated the end of the beginning of the crisis for them. As we indicated last Friday, the airbags from that long anticipated impact have now been deployed and the follow-on consequences will soon begin to ripple through the industry. We have suggested the industry has until August 31, 2020 to fund and commence the development of the Preliminary Specification as the remedial effort necessary to mitigate their rapid, uncontrolled and disorganized decline in industry capabilities and capacities. In reading these first quarter 2020 financial statements it is evident that the confidence of the bureaucratic management of the producers continues in its resilient, delusional fashion. I attribute this to the uncaring nature of how the industry has been managed these past four decades and the fact that bureaucrats are still able to reap some bounty, at least until August 31, 2020. For further clarification of this bounty review Chesapeake today.

Most of the producers have received distinct expressions of a lack of confidence from the market. Firms such as Ovintiv are as confident as they were when their shares were almost one hundred times what they are today. When the market thinks you're now worth 1.1% of your former self this confidence is misguided. You are the walking dead. Even the large integrated firms have exceeded the 50% loss of value threshold of their former valuations. Which to me is the critical vote of non-confidence that the management should realize that they’re in serious jeopardy. Reading these integrated firms reports reflect that some companies such as Shell and Exxon are responding in kind. When Steve Jobs returned to Apple he quickly made a deal with the devil in selling $100 million shares to Microsoft. A betrayal the Apple faithful claimed. He responded by stating publicly the firm had 90 days left to turn itself around and put together a viable choice for the marketplace. Apple is the only company that I am aware of, ever to have come back from this assessment of a lack of confidence, or of being deemed terminal by the marketplace. There was no such delusion evident in Apple’s new management and changes were made quickly to affect the firm's trajectory and solve their critical issues. I would suggest we recall that overproduction collapsed and fundamentally destroyed the natural gas pricing in North America in 2010. The same began in oil in 2014, OPEC mitigated the destruction of the oil price for over three years and have capitulated that role due to their frustration with the North American producers' chronic and deluded overconfidence and overproduction. What has been done about either of those two situations? These financial statements clearly reflect the decades of abuse producers have been subject to, and the past decade of neglect and inaction to remedy the ongoing destruction. There is no value in oil and gas and that is reflected in these first quarter 2020 financial statements. 

The analysis of these first quarter reports reveals some interesting trends that I find disconcerting and provide more evidence to support some of the claims made by People, Ideas & Objects and support the Preliminary Specifications implementation. The most critical claim was our April 20, 2020 blog post “Corruption 101.” First of course is the losses that have been reported. Mostly as a result of the forced impairments due to the application of the ceiling test. Producers have consistently desired to “build their balance sheets” a.k.a. spending like drunken sailors, and used the ceiling test as their limit as to what they could achieve. People, Ideas & Objects believe this is a misinterpretation of what a capital intensive industry is, and producers should seek to pass the costs of their capital on to the consumer as quickly as possible. The costs of oil and gas exploration and production are predominantly capital however producer bureaucrats cherish their capital costs on the balance sheet as collector items. This is not a competitive posture and is leading to the demise of this current generation of producer firms. 

The second issue is the cash flow. People, Ideas & Objects have always asserted that overstatement of assets has the immediate effect of overstating profits. More or less a given. Which led to the culture of the industry's current destruction. We have stated the current accounting overstates producers cash flow by diverting many of the operations, intangibles and overhead costs that should have been classified as overhead or operations to capital. This has the effect of increasing cash flow by not recognizing these costs in operations in the current reporting period and deferring them to depletion which is not part of the calculation of “cash flow from operations.” Overstating this value has had the effect of overstating the valuation of the firm which is indeed the standard method of valuing the industry. Six times annualized cash flow has been the basis of the market capitalization for oil and gas over the past four decades. It would never, therefore, provide any impetus or motivation to any one of these producers to want to game or boost the cash flow number in any way, would it? I believe in the first quarter of 2020 the effect of this distortion is very evident and clear for all to see. At this point with all but four producers of our sample having reported, we have a loss of $24.329 billion. (Note 2016 losses were $30.229 billion for the entire year.) Revenues have been hit but nothing like what they’ll be in the second quarter of 2020. But in almost all cases cash flow increased in the first quarter of 2020 within our sample. Two exceptions were Suncor and Cenovus who share the burden of being predominantly heavy oil producers? Yes, that is a very interesting question. An even more capital intensive operation than conventional or shale oil and gas? The other exception was Occidental which could be a result of a number of different factors and certainly no one from outside could discern what would be the cause in the next two years. Hedging has taken place and some firms did reap some rewards, however prices in general were in steep decline over January at $51.01, February at $45.26 and March at $20.01 EOM prices. How then did cash flow hold up? 

Our argument is that property, plant and equipment is more or less a slush fund that captures everything that is spent by the producer. Then it is left there for decades to accumulate as what we call the unrecognized capital costs of past production. G&A, interest and we feel a better classification of what are operations and what are intangible assets and capital would provide a better understanding of, and clarity as to how the cash flow was generated and where it was derived from. Today the number is too opaque when the capital nature of the industry and the methods used by the producer bureaucrats are as we’ve documented here. If these have been the means in which the market has determined the value of what a producer is worth, then why has there been such ambiguity? That the cash flow numbers have held up in this environment is disconcerting to me as it reminds me of the reason that Bernie Madoff was eventually discovered to be running a ponzi scheme. During the 2008 financial crisis, with everything collapsing around the world, Bernie was still able to report his historically consistent and undiminished mutual funds value and quarterly performance. But here is maybe the better question. How come we’ve heard nothing from the CFO’s in the industry over the past year? It’s almost like they're as invisible as the CEO’s! And of course all under the watchful eyes of the accounting firms who charge hundreds of dollars per hour for a recent university graduate and call them “experts.” Surely no one could ever get anything past them.

So there we have it. We have argued the specious nature of the industry's accounting throughout our writings these past decades. Would an oil and gas industry have lost its way if it had the precise accounting that measured the real performance of the producers? Why have the ERP systems vendors been so abused as we’ve documented in our White Paper? And why has no major ERP vendor provided a solution to the industry's needs? These are questions that are valid in light of the self-serving bureaucracy that has prospered at evidently everyone else's expense and the opaque nature of their activities, as they’ve reported. I guess the point of it all was to make sure the cash flow numbers were historically consistent and undiminished from the prior quarter.

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 587-735-2302 in Calgary or 713-965-6720 in Houston or email here.

Attention Spans of Mosquitos

It was looking like we might have turned a corner, I was optimistic. Producers began to break records last Friday when they had sustained their sense of urgency for the situation that they created, and then on Wednesday May 6, 2020 it happened. In this WorldOil article entitled “Oil at $30 may be enough to revive shale activity, say drillers” where it notes that both Diamondback Energy Inc. and Parsley Energy Inc. are looking to return to full production. The record therefore stands at 16 days for producers to focus consistently on the issue of overproduction. We should congratulate them on their new 16 day record and remember not to be fooled again. On April 30, 2020 I tweeted the following reply to the CEO of Cenovus.

Alex Pourbaix, Cenovus President & Chief Executive Officer. “When global economic conditions improve, we’ll be ready” is this courageous leadership or today’s version of Monty Python’s Black Knight?

The world oil price collapsed into negative territory on April 20, 2020 and ten days later they’re passively waiting for when things get better. Six days from that producers contemplate putting their production back onto the market. Note too that May 6, 2020 is fourteen days to the expiration of the June contract which could very well see another negative pricing event. Leading to the hair on fire desperate actions we’ve seen where producers beg governments to bail them out.

In terms of producers People, Ideas & Objects have been concerned about this characteristic of theirs throughout our work. We need to have our budget funded in full or this listless wandering will look to cut the costs of our developments when the price of oil increases by $2, or would that be down $2? We’ll never successfully complete our task if we are subject to this inconsistent, passive lunacy. We would also never be able to deliver the type of software that is necessary if we have to cajole these producers every sixteen days with new incentives to keep the project operating. Nothing effective would get done, and what would get done would be useless, incomplete and a waste of financial resources. 

To suggest that producers have lost the script would be our point of view. They have not been operating in the oil and gas business for the past four decades as far as we’re concerned. What it is that they do is involve themselves in spending. The average person on the street believes they’ve created miracles by increasing production in the past decade as much as they have. It is impressive. It needs to be remembered that the average person on the street maintains no understanding or involvement in the oil and gas business. From the point of view of the business it has been a comprehensive failure and is by far the most destructive and damaged industry that’s ever existed. Those that have invested with their own money in order to build the industry have left in disgust at the performance of the producers. It is however the person on the street that the producer bureaucrat listens to in order to stroke their egos as opposed to their past shareholders and investors. That is why producer bureaucrats have no access to capital and are withering away as organizations. Let me restate that, they've destroyed all the value in the industry and have no access to capital in which to incinerate. 

This laid back “muddle through” existence is the defined strategy of the producer bureaucrats. It is inherent in the culture of the business and is incapable of dealing with any issue. “All issues will resolve themselves in time” they claim. The natural gas business experienced their comprehensive decline in prices during 2010 and have not come back in any form since. These prices have consistently fallen into negative territory and no remedial action has been taken by anyone anywhere. What was initially just a North American pricing issue has now become global as the consistent overproduction by North American producers never stopped, ever. Natural gas was always one side of the business and the other side of the business, oil, was healthy enough to carry the producer. So the bureaucrats declared. Now with the commodity prices of both oil and gas fundamentally destroyed there will need to be a plan in place in which these prices can be rehabilitated before the industry could ever recover. The only discussion of this is done here by People, Ideas & Objects, as we have discussed and proposed our solutions to these problems. Nowhere in the industry do you hear or see anything resembling concern, discussion or action to resolve these existential issues. Other than the sixteen days where “the government had to step in to save the industry,” nothing has been done. 

I refuse to believe that anyone facing the resolution of these issues would have to work under these unstable circumstances. This would be untenable and is destined to be the failure of this or any project with our scope and scale. On April 30, 2020 I wrote in this blog that the industry had until August 31, 2020 in order to prepare itself to begin the development of the Preliminary Specification. It is People, Ideas & Objects solution or failure as industry’s two and only choices. Instead what we see is the laid back, passive expectation that the future will be filled once again with wine and roses as long as the producers do absolutely nothing. The culturally ingrained hope that optimism will show the way. And any actions that were done to limit overproduction have now satisfied the market with $23.39 oil. That being a positive price, those actions are now redundant, unnecessary and therefore to be reversed. This is not a business and has not been a business for the past four decades. It is a fool's paradise where you can believe whatever future you desire. All you have to do is shut out the real world and “keep the government on speed dial, they’ll come around, trust me.” 

The crude analogy of the car hitting the brick wall began on April 20, 2020; the airbags were deployed in the manner of negative oil prices. But that was then and it’s a different day with a different future as far as these producer bureaucrats are concerned. They’re unable to see what lies ahead of them, what the follow-on consequences of their high speed impact with reality will ultimately cause them. Bureaucrats are not action heroes and they don’t play ones on TV. Theirs is a corrupt enterprise where the lining of their pockets continues and the quicker they forget about what’s going on around them, the faster everyone else will too. Explain to me how I’m wrong, or even slightly incorrect in that assertion.

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.

Work From Anywhere (WFA)

The Preliminary Specification provides a distinct opportunity for oil and gas to leverage the new and valuable trend of working remotely. As with change, people always surprise me and find new and innovative ways to overcome the obstacles and bring about real lasting change, but more importantly value. The working from home or WFH trend will be a hard one for the “old” business culture to obstruct. Now that people are WFH on a wholesale basis expect to see many new and innovative applications and approaches begin to be developed around this new way of working. 

How prevalent and serious is this trend? I think it is well established in the minds of the business elite and entrepreneurs already. Shell commented in their quarterly report about this trend, stating that they think this may be a major effect to the oil and gas business in the short and mid-term. Suggesting it could materially reduce oil demand as a result of less traffic. Less traffic will be the environmental nirvana that drives some of the trend. Airlines are looking at this as the existential threat to their business, Boing et al as well. What if they were relegated to the leisure travel industry as their primary source of revenue. Warren Buffett in his virtual Annual General Meeting is quoted as saying. 

The supply and demand for office space may change significantly, 

The supply and demand for office space may change significantly,” Mr. Buffett said. “A lot of people have learned that they can work at home, or that there’s other methods of conducting their business than they might have thought from what they were doing a couple of years ago. When change happens in the world, you adjust to it.

It’s just a question of which sweatsuit I wear.

It’s not just office space either. Highly rated restaurants in New York city are seriously contemplating the closing of their eating areas permanently. Having take-out and delivery only. We’ve all known of the possibility of the trend becoming the way we worked all through our lives. That this would someday be the manner in which people worked. What I think we’re finding now is that there is nothing stopping us from doing so. 

There are two key points in the Preliminary Specification I want to point out. First is that it was built conceptually as a Work From Anywhere (WFA) oil and gas ERP system. Secondly, it strips the dynamic, innovative, accountable and profitable oil and gas producer down to its distinct competitive advantages of its land and asset base, and science and engineering capabilities. The removal of the administrative and accounting resources from the producer to service providers enables producers to reduce their office square footage down to what would be needed in order to attain and maintain those competitive capabilities. And I am unaware but there may be opportunities for having those resources operate in a WFA configuration as well. The Preliminary Specification does facilitate those interactions. 

The user community members service provider organizations will be a reallocation of the administrative and accounting resources of the producer firms. Established by the user community members they will manage one process of the People, Ideas & Objects Preliminary Specification on behalf of the entire industry. Charging each Joint Operating Committee a small fee, which may be just a few cents, for their processing during that production month. Where they will do this WFA comes with just one caveat that it is not done in the producers office space. Whether they rent their own office space downtown or elsewhere, work remotely with only meeting rooms for their staff or use WeWork to work occasionally or whatever they discern is appropriate for their needs. The source of these service providers competitive advantages are comprehensive and significant. These include specialization and the division of labor, quality, automation, innovation, leadership and integration just to name the highlights. These shared and shareable resources replace the unshared and unshareable resources that each producer has purpose built to meet the same requirements as all the other producers. The service providers will have it within the domain of their operations to achieve 100% utilization rates. Whereas the producers' current configurations may be able to reach 40% rates today due to the high levels of specialization of the industry and heavy regulatory requirements distributed over a relatively small administrative and accounting staff. This increase in resource utilization is what will be attained in the short-term. In the mid to long term the service providers will have the software development capabilities of People, Ideas & Objects and their user community member / service provider owner that can affect any change of their process as they need in order to expand on their specialization and increase the division of labor necessary to further expand the throughput of the industry with the same costs. 

I also think there could be some innovative ideas in how the capabilities and capacities of the producers' competitive advantages are configured during the development of the Preliminary Specification. The key organizational structure of the Preliminary Specification is the Joint Operating Committee. The legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the North American industry and each producer. People, Ideas & Objects believe the current organizational structure of the producers was driven by the introduction of computers in the 1960’s. When they were introduced the question was what would they be used for? Accounting was the natural first choice, then tax, royalty and other regulatory requirements. The organization then grew out of meeting the accounting and regulatory requirements of the corporate organization and the Joint Operating Committee, from an administrative and accounting point of view, has been lost and forgotten. This should not be considered the case today when we have new and better ways of working, a need for new software and a handful of issues that are addressed specifically by the Preliminary Specification. 

It was December 2013 when we published the Preliminary Specification which includes the Marketplace Interface which includes elements of a WFA capability. The Marketplace Interface was controversial when first introduced and may be redundant at this point, replaced by newer technologies that the user community can implement. What we were attempting to do with the Marketplace Interface was to have the collaborative interactions between participants supported by the capabilities of the ERP system. For example if a producer was to see a new and innovative product that was of interest to them they could begin the process of testing it from with the Marketplace Interface by way of a drop down menu and invoke the ERP system in some way, for example prepare a purchase order etc. This capability would need to be maintained in whatever the user community chose to do in this collaborative WFA area. 

WFA will be a definitive trend in oil and gas. There will be no ability to stop it by the producer bureaucrats or anyone else. Other industries will embrace the trend as a dynamic tool that is a benefit for their staff but also their bottom line. This is contrary to the absolute control that is exercised in the producer firms today. Although layoffs are the bureaucrats most competitive trend at this time, that will change and the need to source many of the people who have been betrayed by their bureaucratic and inadequate management will require extensive coaxing for those people to return. Having a competitive WFA benefit will therefore be mandatory if the producers expect to function in the western hemisphere. 

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.

No More Excuses, Let's Get Down to Business

The state of affairs in oil and gas is... Who cares, we all agree there’s serious issues that need to be addressed. Industry has begun shutting in production which is the first lesson learned in a long list of lesson’s they’ll need to learn in a hurry. Whether the shut-in production is for one accounting month or for the next decade, the oil or gas is still going to be there. The shale reservoirs have produced a new dynamic in the industry that needs to be recognized and accommodated. Otherwise we see the direction things will be headed if we don’t make the much needed changes. 

If the past week provided us with an incremental $7 per boe increase over the prior weeks production. And the U.S. production went from 12.8 mm boe / day to 10.9 mm boe / day, a 1.9 mm boe / day decrease, how did that affect the revenues of the industry? That was an increase of $529.2 million for the week, and $27.5 billion for the year. The loss of 1.9 mm boe / day at approximately $12 / barrel dropped revenues by $159.6 million for the week and $8.3 billion for the year. For a net revenue increase of $369 million for the week and $19.2 billion for the year. This is the result of the price maker characteristics of the oil and gas commodities. Small changes to the volumetric output have significant impacts on their prices. I would quietly assert at this point that out of the $19.2 incremental gain the budget for the Preliminary Specification could be paid in full with over $10 billion remaining. The point however, is that these increases are not enough to solve the industry's problems and more is needed. People, Ideas & Objects value proposition of the Preliminary Specification is $25.7 to $45.7 trillion dollars over the next 30 years. Does anyone doubt that value proposition now?

For whatever reason this has been a difficult lesson for the bureaucrats to comprehend. The Preliminary Specifications decentralized production models price maker strategy replaces today’s methods with a proactive method of removing all the North American based unprofitable production from the market before it begins to dilute the price of commodities on all production around the world. Another key lesson is that profitable production is the only production that should ever be produced. As People, Ideas & Objects have suggested there are a variety of reasons for the accounting and the accounting systems are so poor in oil and gas. One of the reason’s is that actual overhead is capitalized to property, plant and equipment to the tune of 85%, and each property uses overhead allowances that woefully account for the costs of overhead at a property. No producer is making out like a bandit on the basis of their overhead allowances. With the Preliminary Specification we will be creating service providers that will be charging each Joint Operating Committee the fees for their administrative and accounting services on only the producing properties. These direct charges to the property will eliminate the overhead allowances in use throughout North America. That way we’ll be able to see an actual accounting of the cost of administering a property and know better what the total cost of the property is and where it’s profitability begins and ends. Overhead is in the range of $10 - $15 / boe in North America and the scope of these costs is not represented in the current accounting. Additionally the depletion of each individual property, or Joint Operating Committee, will need to be calculated instead of only on a global corporate basis which is done today. That way the cost of capital, in a capital intensive business, will finally be able to be retired in the appropriate manner based on the actual performance of the individual property. And these capital costs can then move from the producers' bloated balance sheets, where they provide absolutely no value to anyone, to the consumer so that the producer can recover their previously invested cash. 

Another lesson to be learned is the determination of what profitability is. This graph from @SoberLook provides us with an understanding of how the industry sees the determination of profitability and when a well would be shut-in. There is a misunderstanding of what break even means and under the Preliminary Specification the determination of when a well would be shut-in is at the properties break even point. A point where all costs including capital are covered by the current price. When one producer produces below the breakeven point as represented by the graph, all producers suffer from lower prices as a result of this overproduction in the marketplace. When all producers continue to produce all of their production during the past four decades below the breakeven point you have a wholesale hollowing out of all of the value of the industry. An accurate accounting of the costs of the property which will include the actual overhead incurred during production and the actual depletion that the property must recognize, until these capital costs are retired, are necessary to determine the appropriate breakeven point and ensure that the prices realized are effectively passing all of the costs on to the consumers and no longer on to the investors. Which is effectively what has been done by loading up the balance sheets with what we call the “unrecognized capital costs of past production.” 

The next lesson is the one that is going to be learned here fairly quickly. It also coincides with the new industry terminology of “curtailment.” Curtailment means to shut-in or slow down. Choking back production will certainly satisfy the need to remove production from the markets. However it will only make matters worse for the individual producers. With the Preliminary Specifications price maker strategy we turn all of the producers costs to variable costs. We do this by taking the producers fixed administrative and accounting capabilities and make them the industries variable administrative and accounting capabilities. We do this through our software and most specifically through the creation of our user communities service providers. These overhead costs will then be variable based on production, if a property is shut-in none of its costs of royalties, operations or overhead will be incurred on a property. Therefore if during the accounting month there is no production there will be no costs incurred at the property for royalties or operations and none of the service providers will have received any information through our task and transfer network that would cause them to conduct any task or to bill anything to that Joint Operating Committee. Creating a null operation, no profit but also no loss. Saving the reserves for a time in which they can be produced profitably, ensuring that the property does not have to carry the incremental costs of additional losses if it continues to produce unprofitably and removing the marginal production from the market. Unlike with the method we’ve developed in the Preliminary Specification for turning overhead costs variable based on production, the producers overhead costs today have not dropped as a result of the shut-ins that are occurring. They are fixed overheads and if they are only curtailing production the operating costs will also continue to be incurred. These holdover costs will skew the producers costs of production on a per barrel basis and reflect their performance has deteriorated. A difficult lesson that we are about to learn the hard way. 

Some might argue now that the first lesson that has been learned, the incremental $369 million for the week and $19.2 billion for the year is more than adequate to make up for any of the overhead and operations costs that remain and shall we say orphaned. The point is not to generate revenues at any cost, consideration has to be given to the overall costs to the consumer and that producers ensure they need to do everything to keep the consumer costs under control. Cost control is part of a business, it's just not all of the business. Until producers are able to make all of their costs variable, based on production as the Preliminary Specification does. They will continue to struggle with these difficulties in the oil and gas business. With overhead by our calculations totalling in the range of $10 to $15 / boe we can see that this issue should be prevalent in the minds of the producers. The question therefore needs to be asked, what will now be considered the new normal?

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.

How I See the Next Four Months, Part III

With the overhang of oil inventories being increased well beyond anything they’ve been before, prices will remain under pressure until those inventories are drawn back down to normal levels. Elevated inventory levels and these low prices will be the new normal for oil. Historically North America natural gas storage and prices followed this same formula. It was the fundamental collapse of the natural gas prices that have been with us for more than a decade now. Could it possibly be that bureaucratic bungling is responsible for the disaster that is oil and gas? It was then that bureaucrats said they still had oil, and both sides of the business had never been down at the same time. I guess that meant they could go about destroying oil in the same way. Their persistence and refusal to do anything is remarkable isn’t it. This is more or less what happened in natural gas in the shadow of the financial crisis. Nonetheless the speed at which the oil business is being destroyed in North America is accelerated by the coronavirus’ related loss of demand. Making what would have happened in the next few years, real this quarter. The constraints of time are the enemy now. There’s not enough time in which to do anything. However the reason that we have to build the Preliminary Specification was noted in our White Paper. The most powerful economy will always be the largest consumer of energy. Oil and gas will always dominate the various sources of our energy supply.

Now that the financial destruction is complete, capacities and capabilities within the oil and gas producers themselves, but also and most concerning is the service industries, will be the next losses that will mount at an accelerated pace. Commodity price declines were shrugged off by the bureaucrats, price and volume declines appear to have done little to spur any action, but the decline in capacities and capabilities will be the most damaging. The erosion of what is possible has already been lost due to the loss of the financial resources and capabilities. The physical loss of people, equipment, talent and skills will lead to an erosion of the physical assets and permanent production declines. Rebuilding the infrastructure of the industry back to where it was, or where it should be will be a mundane, tedious task for all concerned. Rolling the logs back up the hill is never fun, but first we have to stop the logs from rolling down much further. No one is going to step in front of them when they’re traveling at this velocity. And of course this rebuilding will all have to be done with cash that is paid upfront by the producers as they’ve acquired the credibility of their now well established history. The refurbishment of, and expansion of the infrastructure that would be necessary to meet the continent's lofty goal of energy independence may or may not be possible now. An industry based on bureaucratic “muddling through” just doesn’t seem to fit the bill here. The bureaucrats level of self inflicted damage makes it necessary to choose new leadership to rebuild the industry. 

The lack of integrity regarding what has been said and how things were developing is now becoming a far greater concern than bureaucrats were thinking at the time they mouthed their long list of excuses. Who would have thought! Many of the shares of the producers are already reflecting low single digit percentages of their former glory. There’s nothing here for investors now. It’s all going to go to the banks. The service industry will be looking to get paid and someone will have to tell them that there’ll be nothing for them in terms of the money the producers owe them. There’s nothing in it for anyone, it’s a “sunk cost” and therefore will not see any new investment under this administration. Then again the future may not be in the hands of North American producers. We have stated throughout this blog and the Preliminary Specification that it’s not enough to own the oil and gas asset anymore. It’s also necessary to have access to the software that makes the oil and gas asset profitable. Profitability is unquestionably the issue in North American oil and gas. Does anyone doubt that profitability is necessary and a basic need for everyone’s better health and welfare in oil and gas. 

The greatest risk at this point is the precipitous decline in capacities and capabilities may be severe which could easily be remedied by paying $600 / barrel to foreign sources of oil. At 23,200 man hours of mechanical effort contained within each barrel of oil that would still be the deal of the century. That is $0.025 per man hour. Or we could be forced, under a number of different scenarios, to go without. Which would be a tough legacy for the bureaucrats to live with, I would think. Indeed what these bureaucrats claim and are willing to blame is OPEC+ who are working against american producers to put them out of business. If they knew that then why are they following their script? The bureaucrats have four months, lets see what they can do.

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.

How I See the Next Four Months, Part II

Four months is not a lot of time. August 31, 2020 is what we’re talking about specifically. Probably around the time the general economies begin their optimal operation once again. A time where oil and gas will have progressed further down the road of destruction that our good friends the bureaucrats have chosen for us. It’s also a period of time in which they have the opportunity to correct the situation and move to a higher performance trajectory. Reconfigure the industry in a way to be profitable everywhere and always. To be truthful it doesn’t seem that anyone is believing the stories that are being told by producers anymore. There is an understanding that oil and gas was in difficulty prior to the coronavirus and blaming these issues on the lockdown doesn’t pass muster. It appears to me that the gig is up. No one left to blame and no more excuses are selling. Who then is responsible for all this damage? 

As I mentioned in Monday’s post the people who are in oil and gas are really dismayed by the producers inability to deal with the situation they’ve put themselves in. Waiting until the storage and refineries stop taking product is not the time in which you begin to deal with the overproduction that you’ve been involved in for the past four decades. Recall our classification of overproduction is the economic classification that states it’s the unprofitable production. This type of overproduction would only happen in an industry for a sustained period of time if there were some serious flaws in the underlying makeup of the industry. The bureaucratic mismanagement has become the culture of the industry where there is no knowledge or understanding of why or how it’s wrong by the majority of the people who work there. The bureaucrats are fully aware of the cash machine they have at their disposal, for their personal use and have used and abused it with little regard for anything else. They too may not have known why or how things were happening the way they were but that didn’t stop them from indulging in what they could get. 

We are on a very steep trajectory downwards to a place that no business or industry has ever been before. The financial statements of the producers have been fraudulent and do not represent the real picture. These producers are wholly inadequate in terms of resurrecting themselves and putting anything together for the future. To determine the real prospects of these firms take 65% of property, plant and equipment and recognize it as depletion in the current quarter. Then I believe that pro-forma adjustment will accurately represent the state of affairs. These are seriously damaged organizations. Far beyond those that will respond to any kind of triage. We have a very serious problem with large productive capacity (overproduction), constrained demand and prices painting a very bleak future. It’s bad enough having low prices now the dilemma is low prices and low volume which will evaporate everything at a rapid scale. This current environment is on top of the diminished financial capabilities that are so far extended that all of the equity in the industry has been destroyed. And up to half of the bank's investments will be providing their industry with a real “haircut” that will send those that are risk averse back to the stone age in terms of appetite for oil and gas. And let's not forget the service industry. The one that is far more damaged than oil and gas. An industry that was used and abused for so long it too will need to be rebuilt from the ground up and funded for the next decade or two with cash, upfront, from the producers themselves. Who else is going to get involved? And who else is going to get involved with any of the producers as long as these bureaucrats, who may be both naive and criminal, are in place. Speaking of restructuring, reorganizations, bankruptcy and chapter 11’s they just don’t address the scope and scale of these issues. There are long term structural complications that have to be addressed within the industry by those who were not party to its demise. 

The sooner we all realize that there is no one at fault other than those that are sitting at the top of these organizations. That the scale of the problem is well beyond what any industry has ever faced or realized before. (Specious accounting has its insidious ways.) And it is this industry itself that has to do the hard work over the next few decades of rebuilding itself and proving over many years, and this many years may be a full decade, that it will be worthy of the trust of those outside the business. Only then will things return to normal for oil and gas producers in North America. Setting our expectations at this level and with this understanding of what we need to be doing, starting with the development of the Preliminary Specification, is the only way we’ll move forward. These chronic excuses, scapegoating and refusing to accept there is a problem or that they’re responsible has to end today if we’re going to move forward. Secondly the funding for the Preliminary Specification has to be in hand as soon as possible and prior to the August 31, 2020 time period. Or the steepness of our downward trajectory will turn further and much sharper downward, towards the rapid loss of our North American production profile in oil and gas. Capacities and capabilities in both the service industry and oil and gas have both been damaged and will be difficult to rebuild as they are. If we go beyond August 31, 2020, North America will become energy dependent to an extent that it has never been before. 

Note that none of this dark scenario affects our good friends the bureaucrats. They’re fine and they thank you for asking. What they may turn to is the need for their action and in doing so balk at People, Ideas & Objects budget. I would argue that now is not the time to discuss it, and I am not going to revise the budget, if I do have to revise it, they will like it even less. I’m sure they’ll be able to find one of themselves who’ll be able to solve this issue with $5 in funding. I’m satisfied that the budget that we published in the first quarter of 2014 adequately addresses the issue as I’ve framed it. I’m also satisfied that we fully understand the issue throughout the time we’ve been working on this solution. Pressure needs to be asserted on these bureaucrats. The most effective route is those within the industry who have a vested interest in turning things around, who’ve determined that they too are unsatisfied with the current outcome can all participate in moving this initiative forward. 

This can be done by showing these bureaucrats they have been responsible for this. That they now have the opportunity to make good on the careers they had in oil and gas by doing the one productive thing in their life. Fund the budget of the Preliminary Specification, and then step aside. That doing so will provide them with the knowledge that they did something positive and they did what was needed to set things right. What I think and what I believe are different than most people. I seem to be about five years ahead. There has been a process however that began when the investors stopped their participation that more and more people have begun to see the light of what is and what has happened here. Oil and gas bureaucrats are well known in their community, if my thinking that they were both naive and criminal with no redeeming qualities becomes the common thinking in five years then they’ll have a problem when that becomes what people are commonly thinking. It would therefore be in their best “personal” interest to ensure that the industry is turned around and that there is no reason for people to think that about them. That is the window of opportunity that is in front of these bureaucrats prior to August 31, 2020. After that, I can’t see anything other than this window of opportunity closing. If we go down that road beyond September 1, 2020, there won’t be much question about any of this, or of them, will there. 

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. 

How I See the Next Four Months, Part I

Storage facilities were filling at a rapid rate prior to the coronavirus lockdown and we would have been at the point where we are today some time down the road. This has been the trend in oil, as it has been in natural gas for the past decade. Natural gas being a continental price, overproduction took less time and effort for it to destroy the price through chronic overproduction by North American producers. Oil being a global commodity market, and with shale only beginning in earnest after the collapse of natural gas, it took longer for the chronic overproduction to destroy those prices. Therefore at some future point in time we would have been in this situation with the unchanging ways of the producer bureaucrats. We see even today the trend of doing nothing, finding a new scapegoat in blaming the coronavirus and now begging for governments to step in and save them. 

Currently the WTI 12 month average Futures contract is priced at $26.97. The 2021 WTI Futures is at $31.79. These are woefully inadequate prices for the producers to be able to sustain their operations. They are also based on today’s information. What we don’t know is if there will be a resurgence of the coronavirus in the fall or not. A note about the 1918 Spanish Flu pandemic was its first iteration was very mild. Only when it resumed after six months did it take on the lethal form it’s famous for. And what about OPEC+. The current production cuts are in consideration of the decline in demand. When the stay-at-home orders are lifted will this cooperation cease and the surplus production expand on the 2 million boe / day surplus supply that was in the market when the OPEC+ agreement fell apart? 

Natural gas futures for Henry Hub 12 - month average are $2.48 and the 2021 Henry Hub futures are $2.71. Which would be fairly good prices if this were the early 1980’s. Clearly none of these oil or gas prices will be able to carry the freight for any prolonged period of time. With the financial situation of the oil and gas producers today, what options will they have? They have no working capital which by the first quarter of 2020 we should see a serious decline of these resources everywhere. Producers financial statements will begin to be published this week and will include the March 2020 month when the global decline in demand became quite evident. Oil and gas property sales are not viable as the prices are well below what they used to be. Will these be the new market prices? Investors and bankers don’t really have any sympathy for the producers. The field service industry has advanced too much credit to the producers as it is and are in more difficult financial positions than the producers are. Governments are unwilling in Canada, and possibly unable (Democrat opposition) to provide any direct assistance to the industry. Treasury Secretary Steve Mnuchin has stated there will be no bailouts and any money producers do receive will be in the form of a loan that will only damage their financial position further, though it may be able to temporarily provide some working capital. 

What these reflect to me is that the financial situation that was present at the end of 2019 has depreciated substantially in the first quarter of 2020 and will have taken a nosedive in the second quarter. How quickly the general economy returns to normal is an unknown. What we do know is that the deterioration in everyone’s personal financial picture has been substantial too. The need for everyone to recalibrate their lives based on these new financial realities will take some time. 

What we saw last week was a continuation of the “muddle along” and “do nothing” permanent vacation policy of the bureaucrats. Doing something about the chronic overproduction was their choice all the way back to December 2013 when People, Ideas & Objects published the Preliminary Specification. Nothing happened and nothing will happen as long as these bureaucrats sit upon their throne. Only when deliveries at refineries and storage facilities couldn’t take anymore oil did these bureaucrats begin to shut-in anything. And this wasn’t any action taken by the producers, it was refineries and storage operators that ceased taking product. And what producers may have shut-in were the stripper wells which we believe to be their most profitable. But no one knows. If this hasn’t disappointed and frustrated everyone that was hoping for a resurgence in the industry, for investment, career or other purposes, those hopes are dashed now. The credibility in the industry is gone. With these non-actions of the producers and these results of the coronavirus on full display, the inability to respond, the blaming of others and pleading for help showing their desperate and pathetic nature, who would be interested in helping or getting involved with these poor souls now? Notice that oil prices only went negative in North America, the source of the industry's global issues.

The dynamic nature of the entrepreneurial Texas economy has been overwhelmed by bureaucratic victimology. That is to say the heads of these producer companies are of this character. I’ve been an advocate of purging them for a long time now, their self-interest, do-nothing, bullying of others is over and they have much to account for. To obtain a consensus of that would be easy. The difficulty is these people are very entrenched and aren’t going anywhere. They are and will be the walking dead, carcases of little to no value, other than to drain what value others have. 

So where do we go from here. The Preliminary Specification is about rebuilding the industry on a brick by brick and stick by stick basis. Our IEO has been shelved due to its inability to respond in the current time frame. The source of our budget is unknown at this point, however, I’m at a loss to see much of an alternative to the Preliminary Specification. I’ve been working to stop this from happening and clearly identified this risk occurring. Our solution, the Preliminary Specification resolves these difficulties in the market today, as they were designed specifically to do exactly that. What we should all be thankful for is the fact that we are suffering from chronic overproduction and not a lack of supply. This buys us the time necessary to make these changes in the industry, if we begin reasonably quickly. The capacity and capabilities of the industry, and most particularly the service industry are going to need to be maintained and to some extent rebuilt, how much damage occurs will be dependent on how quickly we can source the Preliminary Specifications budget and deliver our solution, or the revised industry configuration. Our timelines to do so, as they stand today, are very tight and there is not a lot of flex in our schedule on this basis. It assumes we get moving right away. Which I think becomes imperative if we want to avoid too large of a deprecation in North America’s energy production profile. 

What the ultimate source of our budget will be is unknown to me and I have difficulty conceiving the possibility at this point. But I don’t think the industry can continue down this road without choosing an alternative direction. Expecting the do-nothings to change will be well beyond these time frames. They don’t even see the issue. They probably have many more people they could blame before they get to the real source of the issue. It’s clear to me the culture of the industry doesn’t understand, doesn’t care to understand and won’t do anything to try and understand. We’ll be living in caves by the time they do something. They’re fine and they thank you for asking. This should be obvious from this past Thursday when senior Canadian producers accused Enbridge of being a “monopoly.” This may have been a ruse to show that they are dumb as rocks so that they’re not discovered to be culpable as I accused them in my last Monday’s blog post. Or, they could really be this dumb about business that they don’t understand. Either way it shows that they should not be the ones sitting on top of these firms with such an infantile understanding of business. 

The next four months will be critical for oil and gas. What will it do? What it can do is proceed with the Preliminary Specifications funding and start counting the days where the bureaucrats are sent on their way. Instead, what we’ll probably end up doing is just continue on with their governing principle that “we’ve been here before, and we’ll muddle through.” It’s not People, Ideas & Objects choice. In terms of action we’re ready to do what needs to be done to make the industry profitable everywhere and always. That hasn’t proven enough for the rarified air of these bureaucrats, and here we stand with oil and gas financially destroyed, politically desperate and very embarrassing, operationally the capacities and capabilities in steep decline and as of this past week they’ve now brought the WTI Futures Contract into their den of destruction. But maybe I’m being too negative. Or, maybe I do understand the issue.

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.

Overhead Remains Unchanged

The inability to listen to any market indication will go down as a hallmark of these producer bureaucrats. They haven’t listened to the oil or gas commodity prices since 1986. Haven’t listened to People, Ideas & Objects since December 2013 when we detailed a solution to today’s issues. And they didn’t even listen to their investors issues prior to 2016, forcing them to leave as their only recourse. Always thinking that the producer's brilliance would soon be seen by others and investors would begin lining up just like they used to. Well now they know better, if you don’t take care of business, and just use it as a personal ATM, bad things will happen. Today I want to talk about overhead. And why that now becomes the producers largest problem, next to negative oil prices that is. 

One of the motivating forces that started this adventure of mine was the 1986 oil price collapse. Kind of feels like history repeating itself doesn’t it. Prices eventually fell to $10, which are not that bad in comparison to today’s market. All that happened as a result was producers began a decades long stint of crying and whining about how things were going and saying “oh, whoa is me.” All they had to do was stop producing 10 to 15% and the problem was solved, I thought. And then I realized that they couldn’t. They weren’t organizationally configured to do that. Just as today’s configuration has not changed since then. One of the key differences between the way that producers are managed today and the Preliminary Specifications decentralized production models price maker strategy is the way that overhead is managed. 

What we do in the Preliminary Specification is that we convert the producers fixed overhead costs into the industries variable overhead costs. With each producer currently building accounting and administrative capabilities and capacities within their own four walls, these exact same capabilities are being replicated in each and every producer. These capabilities are not shared or shareable between any of the producers in their current configuration. The Preliminary Specification reorganizes these administrative and accounting resources that are hopefully not seen as a distinct competitive advantage of any of the producers. This reorganization involves taking these resources from the producer firms and allocating them into the service providers, a sub-industry that we are creating from our user community. There, the service providers will each be managing one process where the entire industry and its entire property base in North America is their client base. The service providers otherwise simple process management will be complex and sophisticated through the volume of data that they process. Each service provider will then charge each individual Joint Operating Committee the fee for processing the property. If a property should happen to be shut-in for that production month, then there would be no information passed through People, Ideas & Objects task and transfer network and no work, no processing and no billing would be rendered to that Joint Operating Committee by any of the service providers. Making all the administrative and accounting overhead costs, along with all of the other costs of the producers, variable, based on production. 

Today the producers entire staff of administrative and accounting resources show up each day at 8:00 and leave at 5:00. Expecting to be paid and occupying office space etc for the entire month. Overhead is therefore fixed and constant from month to month. If the producer is forced, for some reason, to shut-in production their overhead remains x dollars just as every other month. However, with the Preliminary Specification, if the producer shuts-in 10% of their production during a production month, their overhead costs will have reduced by 10%. If the service providers were active in today’s oil and gas industry they’re workload would be reduced by the amount of the shut-in production, something they know is a risk in their business, something that they’ll be able to plan and budget for. 

Producers will therefore be able to move up and down their production profile and remain profitable at any level of production. If one month they’re at 350,000 boe then they’ll be as proportionately profitable as they were last month at 500,000 boe. All the producers costs are variable based on production under the Preliminary Specification. 

With shale providing untold volumes of oil and natural gas reserves. In the current business model of the producers all of these reserves are in a race against each other to be produced as soon as possible. Leading to a continuation of the disaster that is today in both oil and natural gas, which would happen under any scenario, coronavirus or not, as there is no production discipline. And I would suggest if we leave things the way they are, we would experience these same market dynamics over and over again during the next thirty years. The production discipline that is invoked by the Preliminary Specification is that only profitable production is produced anywhere and always. Profitability is the only method of production discipline that is fair and reasonable, and therefore able to be adhered to. There are distinct advantages for doing so. The producer's corporate profits are maximized when none of their unprofitable properties are produced, therefore there is no dilution of the earnings from their profitable properties. The reserves that weren’t produced are saved for a time when they can be produced profitably. Those reserves will no longer have to carry the additional costs of the cumulative losses they would have otherwise incurred if they kept producing. And the commodity markets have the marginal production removed from the market ensuring they find their marginal price. 

As we indicated in Monday’s post, these bureaucrats are responsible for their culpable, corrupt behavior. Without the accounting or the systems that are able to provide the performance based reporting no one in the industry knows what the total overhead incurred is. Up to 85% of each producer's overhead is conveniently capitalized. Just think of all those head office cities with their towers of people and try to imagine how overhead allegedly remains immaterial to this industry. In terms of performance there have only been 5 good years in the industry since 1986. That’s the past 34 years, or 29 “bad years,” and some of those, like 2020, seem to me to be really bad years. This past decade has to be considered the worst decade of the industry's history. The current oil and gas industry is facing an existential crisis which is also the largest issue they’ve ever faced. I’m not talking about the coronavirus that started in March 2020. More the natural gas business that fell flat on its face in 2010, much as oil is today, with the investors leaving in 2016. Yet we have a complacent and happy bureaucracy that has done nothing and will do nothing until they’ve stuffed the continent full of oil and gas to the brim. But they're fine, and they once again thank you for asking. Only the anomaly of negative $38.96 oil prices have produced a yawn from these types. Other than that, what action has been taken? Shut-in production, those are being forced on the producers by the refineries and storage facilities that are full! Not until the absolute last moment was anything done. Brilliant!

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.

Corruption 101

I’m setting this post in place for future reference. I've had many people since I published the White Paper "Profitable, North American Energy Independence -- Through the Commercialization of Shale" who are stuck in their ways, debating the issue with me and I am finding these conversations very frustrating. Some have done me the courtesy of reading the White Paper, others have not. Yet the overall cultural inertia of the industry is overwhelming the good sense and judgement of these people. I’ve spent a decade researching and formulating a comprehensive business model that deals with the issues and unique characteristics of the oil and gas industry. A business model that works and has the need of each element of its model operating in consideration of all the other elements in the model. What people are hearing is one small element of the model and are able to, with one half second of thought and with no understanding of the integration of the Preliminary Specification criticize a specific element of it without the benefit of understanding the interactions and dependencies of the whole model, and therefore conclude the entire Preliminary Specification would therefore never work. What I’m hearing is that “we’ve always been here before and it’s always turned around. Markets will rebalance and producers will recover.” More and more of these conversations show the obstinance and incoherent nature of the industry's culture coming through. This is, and has not been a business for many decades. The industry's culture is derivative of criminal naivety and the damage done as a result has eliminated all of the value, goodwill and future possibilities. The existing structure of the organizations that are the producers, their sycophantic head office suppliers who are just as bought into the culture feign not to understand the issues that they’ve created. I’m tired of being laughed at by these people for the things I’m saying when they refuse to admit the basic facts of the destruction they’ve caused. Basic facts such as no investors, no bankers the secondary follow on destruction of the service industry and general economy has occurred through their actions. Today bureaucrats seek cover from governments as the “coronavirus is destroying their business.” Just the latest in a convenient stream of excuses. Realize that people have had enough.

This post therefore rips the bandage off the wound and exposes the damage for all to see. It takes the current situation and relates it in the stark terms that it needs to be understood by these bureaucrats. Throughout our White Paper we note that bureaucrats just don’t listen to anyone or anything. It is over. The investors, bankers and others are gone forever in the current configuration of producers. The service industry will only take cash upfront in a refurbished industry. Bankers are now skipping the bankruptcy proceedings. Circumventing it by foreclosing on the producer and seizing the assets. That way they’ll be better able to manage the assets than has been the case. The people who have been running the show up until now have no credibility with anyone whatsoever. That is why there is no support coming to the aid of the industry. The manner in which the industry has been operated for the past number of decades has been purely for the self interested bureaucrats. We have consistently identified them and held them as being the ones that are solely responsible for all the damage and destruction. And they conducted this purposefully to line their own pockets. Their method was to employ high levels of “capital discipline” with respect to the money taken from investors. However, any cash flow from those investments was to be used in whatever struck their fancy. There are no other people who are responsible for anything. The only way to fix the industry, the only way we’ll find the financial resources is that we find it within ourselves to recognize these facts and begin the humble act of rebuilding the industry in an appropriate manner.

No one conducts a criminal enterprise at the level that has been conducted here and just resumes operation after all of the destruction. There will be a wholesale accounting and those that are responsible for this will be identified and held accountable. Whether they knew or not. By not recognizing the appropriate timing of capital costs in the cost of the product that was sold it inflated assets, profits and cash flow. Where the mantra was “build balance sheets” in a capital intensive industry, it should have been the objective to pass those capital costs on to the consumers as soon as possible. The assets listed on the balance sheet of the producers today are nothing more than the unrecognized capital cost of past production. Financial statements of all producers are materially misstated throughout the industry. Materially is a wholly inadequate word for the purposes here. They are incoherent facsimiles of each other producers' financial statements. Indiscernible as to the performance of the organization in comparison to any of its competitors. They are fudge, designed to be fudge, supported by second class ERP systems from the 1980’s that have been placed on starvation diets so that the accounting would be as opaque as possible. This should now be obvious to all.

Maybe the resources were not provided to the ERP systems providers deliberately to assist in not having the accounting exposed as the ponzi scheme that it was and is. People might ask if this was a deliberate scam or was it a mistake. Read what we said in this section of our White Paper about the history of ERP systems providers on page 18 and determine for yourselves. Why is it that no major ERP vendor provides any oil and gas solution to the industry? If I was running a scam of this magnitude I sure wouldn’t want Oracle to be providing me with my accounting system.

In our White Paper we note on pages 9 and 73, the assertion is made that the accounting conducted over the past four decades was and is a deliberate ponzi scheme perpetrated by the oil and gas producers on the investors and bankers and for the benefit of the bureaucrats. There is no other way to describe it. This is more than anything an accounting issue, as it was with Bernie Madoff, who claimed his innocence, don't you know. Which has led to the naive culture of the industry, as everyone who is in the business today started after 1980, more or less. In business, officers and directors are held accountable and responsible for the actions that they take. If they were conducting a ponzi scheme and were unaware of it, tell it to the judge, I’m sure they’ll be sympathetic. Claiming that they were unaware and did not know is not a defence and will be the reason that they’re hit twice as hard when the day their punishment is levied. And please remember, prisons are filled with innocent people.

And of course the moral and ethical standards of the producers is beyond reproach, we’ll hear. That this alleged corruption claim I’m making is nothing more than the continuation of a long litany of accusations by yours truly. (Of which all have been validated.) Then read the section on page 20 of our White Paper. There it documents that producer bureaucrats have been notorious abusers of individuals and companies Intellectual Property. Stealing from one company to upgrade the capabilities of another company so that price competition is fostered in the marketplaces that they use. Or how they attempted to abuse People, Ideas & Objects Intellectual Property on five different occasions. Contrast this IP abuse, the financial statement facade and the odd inability of producers to use any major software vendors ERP system to the heroic stand these bureaucrats make regarding our decentralized production models price maker strategy. What they assert is its collusion and they would never touch it in a million years. “They are good corporate citizens!” No, they’ve been scamming pretty much everyone and their franchise is challenged mostly by the Preliminary Specifications price maker strategy and therefore have to have a strong argument to fight back with. The fact is for a producer to make an independent business decision to produce or not, based on profitability, determined from actual, factual accounting information is a wise business practice. One that is employed in every other industry, and therefore not collusion. But somehow inconsistent with the purposes of oil and gas? Why would that be?

Isn’t it odd today that the claim that production will be shut-in on the stripper wells and therefore that production will be lost? The profitable assets, unknown to anyone, are the ones that the engineers are not interested in. These so-called stripper wells that produce very low daily volumes, the ones that “can’t be shut-in.” have been producing for decades. They therefore have retired the amount of capital costs incurred, particularly when their wells were drilled and completed for less than $100 thousand. How then would they be unprofitable? Why do the producers look at these as the unprofitable properties? A) they don’t know because their accounting and systems are useless. B) they’re only interested in the “pristine assets” as the CEO of Chevron recently eloquently stated. Remember the first principle of oil and gas is that it’s not a business, it's a criminal operation. 

Ever notice how, as I’ve documented here many times before the boogeyman is always lurking behind every corner. Anytime something negative turns up the bureaucratic finger pointing and excuses are started for a fresh scapegoat to keep the “facade” going. None of the producers ever have anything to do with anything negative, inaction is their claim to fame. They have a thousand reasons as to why my arguments are not valid. If I point out how they’re wrong, they’ll come up with a new one. No one seems to be the wiser of their talking points developments. Watch how this issue will be topical in about a month. 

I’m sure those that were giggling before are now ROFLOL. Fine, let them. But before they make a comment I suggest they pick up a business book and read about some of the companies that didn’t survive the same type of corruption that has been going on here. Start with WorldCom, move to Enron and most certainly take into account the activities of Bernie Madoff. I’m sure for many of the industry bureaucrats these books have been followed religiously in terms of what to do. They've been running a scam and now the scam has been discovered. The administration that caused this, and their cohorts, will not be the ones who are put back in power to run the industry again. This will go down as one of the biggest frauds perpetrated in the western world. 

I’m not going to bother engaging or entertaining them anymore. I’ll just refer to this post and let them read my position here. I’ve got a lot of cleaning up to do. And when they do find that there is a group that agrees with me, on all aspects of the Preliminary Specification and People, Ideas & Objects budget does get funded, don’t call on me, I’ll be busy having the last laugh. I’m not the one who caused this, I’m not the one that needs to be held accountable, I’m not the one that needs to be arguing the point, I’m the one that’s been trying to get it fixed, I’m solving the problem and the bureaucrats have been the ones feeding at the trough at everyone else's expense. 

What People, Ideas & Objects have in the Preliminary Specification is an Oracle based ERP system that standardizes the accounting across the industry, increases the quality of the accounting across the industry, structures the industry to foster innovation, focuses the industry and producers on profitability everywhere and always, and maybe best of all disintermediates the bureaucracy. A business model which has been summarily rejected by these bureaucrats since its publication in December 2013? Yes that’s a question. Based on what we know today everyone better understands the motivations our very good friends the bureaucrats had in conducting themselves in this compromised, self-serving and corrupt way. 

I am open to discussing any aspect of the issues in the industry and our proposed solution. I am however no longer falling for the engagement by those who do not have clean hands, naive or not, on bits and pieces they may find of particular interest or amusement. If you’re interested in discussing anything along the lines of this topic I am here, just be prepared, study what the proposed solution is and have the requisite courtesy of doing so. 

The excuse machine is very effective about getting the appropriate song sheet distributed before everyone starts singing from it, doesn’t it? What we do know is that nothing is ever done about anything. Natural gas was destroyed in 2010. Investors left, except for Warren Buffet, in 2016. Nothing is ever done, it’s always someone else's fault and there’s a convenient excuse for that. Who’s accountable for that and why did this happen?

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.