Shale and the Era of Abundance
In what is undoubtedly the most studied economic period, the great depression, there are many reasons why it came about. We know about 1) the speculative boom of the roaring 1920s and 2) the 1929 market crash. According to Business Insider the third reason they identified was.
3. Oversupply and overproduction problems
Mass production powered the 1920s consumption boom. But it also led to overproduction on the part of many businesses. Even before the crash, they started having to sell goods at a loss.
A similar crisis was occurring in agriculture. During World War I, farmers had bought more machinery to boost production — a costly move that put them in debt. But, in the post-war economy, they ended up producing far more supply than consumers needed. Land and crop values plummeted.
It all resulted in a drop in prices, both agricultural and industrial, which decimated profits and hurt already over-extended enterprises.
Overproduction has been the case in the North American oil market as far back as 1986, the time of its first price collapse. Since then we’ve seen multiple declines in both commodity prices as a result of overproduction, or as we call it, unprofitable production due to overinvestment. Overinvestment occurred as a result of the specious profits reported by producers. Profits attract investors to invest causing overinvestment and creating overcapacity. Profitability has been inflated by producers misinterpretation of the SEC requirements that property, plant and equipment does not exceed the proven reserves of the producer. Enabling them to capitalize all their costs to “build balance sheets,” and conversely and proportionately over report their profitability. With the development of shale technologies North America has entered an era of oil and gas abundance. When we add the shale abundance to the natural, cultural propensity to overproduce we have a terminal and unending demise of the North American industry. Living off of the cash flows of prior investments is adequate for bureaucratic purposes, however to operate an industry and associated secondary and tertiary industries these cash flows are inadequate. Therefore no one has succeeded in oil and gas other than the bureaucrat and they refuse to change to address the issue of overproduction and transition to the era of abundance.
As a commodity price proxy, producer bureaucrats are reveling in their somewhat recovered share prices. Claims of new found “production discipline” and other spontaneous declarations feign the appearance of control and management. “Muddle through” has been the policy consistency over the past decades and throughout the producer population. All of this is best represented by the declared plans of the producer bureaucrats in terms of at least addressing the issues of their investors since 2015. It’s here we have our answer of how they’ll provide us with a better future outcome. They won’t. Regression to cultural inertia will soon bring about the same forces that brought about the same trends we’re living with today. The fundamental and total collapse of the industry due to a self-inflicted depression. We should note that their policy of “market rebalancing” will need to be dusted off and used again in a few years as the overproduction will no doubt, once again, overwhelm commodity markets. Our description of what “market rebalancing” is designed to do is to willingly destroy the industries capacities and capabilities. The state we find ourselves in today. Although destruction is unquestionably their most successful policy to date, it will be needed again soon due to the unconstrained impact of the characteristics of shale and the era of abundance of energy supply.
Or is this the time in which those responsible for this damage take the opportunity to exit the scene? Today they can claim they left the producer firm when it was in much better condition than it was just 18 months ago, and probably much better than the third quarter of 2022. What better time than now, they’ve survived the zombie apocalypse in the industry and brought the firm back to where it’s just the walking dead. The fact that all the other producers copied their original idea of “building balance sheets” has now created the situation where people can’t tell the difference between they’re brilliant work and that guy down the street. If you compare any producer firm, they’re only relative in terms of their size, their overall configuration and performance is the same across each and every producer. Who’s the hero and who’s the zero is unknown and unknowable. They all have big assets relative to all other aspects of their financial statements. Consistency rules.
Another author I read is Ralph Waldo Emerson who stated in — The Essential Writings of Ralph Waldo Emerson (Modern Library Classics) by Ralph Waldo Emerson, Brooks Atkinson
The other terror that scares us from self-trust is our consistency; a reverence for our past act or word because the eyes of others have no other data for computing our orbit than our past acts, and we are loth to disappoint them. But why should you keep your head over your shoulder? Why drag about this corpse of your memory, lest you contradict some what you have stated in this or that public place? Suppose you should contradict yourself; what then? It seems to be a rule of wisdom never to rely on your memory alone, scarcely even in acts of pure memory, but to bring the past for judgment into the thousand-eyed present, and live ever in a new day. In your metaphysics you have denied personality to the Deity, yet when the devout motions of the soul come, yield to them heart and life, though they should clothe God with shape and color. Leave your theory, as Joseph his coat in the hand of the harlot, and flee.
A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words and to-morrow speak what to-morrow thinks in hard words again, though it contradict everything you said to-day.—‘ Ah, so you shall be sure to be misunderstood.’—Is it so bad then to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood.
I doubt anyone would deny the consistency of the actions of today’s oil and gas bureaucrats. Applied to their discipline and particularly their production discipline we’ll soon find these consistent themes emerging. With today’s ERP systems there is an inability to determine if the Joint Operating Committee is profitable. Producers produce Statements of Operations which have Revenues, Royalties and Operating Costs that include an allowance for overhead. There is no detailed allocation of depletion and the overhead allowance is woefully non-representative. For example, the monthly gross industry overhead allowance always totals $0.00. Therefore when the time comes to determine which property is profitable and which one is unprofitable, there is no possible way in the world today's oil and gas industry is able to determine if a property is profitable. Why would a producer ever produce unprofitable production? The Statements of Operations and Statements of Expenditures were defined in the 1960s. They have not changed since then and are representative of the systems that are in use today. There has been a starvation of investment in the oil and gas ERP space by the bureaucrats as accounting is seen as a detriment to the drilling budget. Accountability is no fun. Today’s systems establish, define and support the firm's hierarchy and are unchanging. Exactly what’s needed in a world where disintermediation is knocking at the door. Consistency rules, absolutely.
Since these points about overhead are refuted by the producer bureaucrats. It would be worthwhile to determine the validity of their claims through a number of questions. What is the total, detailed, actual overhead that was incurred prior to any capitalization by the firm? What was the actual overhead incurred, not an allocation of the prior number, at each of their operated properties? Then ask the producer what is the specific, detailed, actual overhead differential between the administration and accounting for oil and that of natural gas at their properties?
Through the Preliminary Specifications reallocation of the accounting and administrative resources of the producers, into our user communities service provider organizations, People, Ideas & Objects turns all of the producers costs variable, based on production. If the full financial statements we prepare in the Preliminary Specification for each Joint Operating Committee indicates there is a loss at the property, then the producers can shut-in the property and move it to their inventory of innovative works-in-progress. Returning the property to profitable production as soon as possible. This is what businesses have done since learning the lessons from the great depression. If producers removed their unprofitable production from their profitable production it would ensure their corporate profitability is the highest attainable under their production profile. Secondly the producer's petroleum reserves are saved for a time when they can be produced profitably. Unprofitable petroleum reserves will no longer have to incrementally capture and recover additional earnings to recapture those past losses. Keeping the producers operational cost structure lower as the cost of excess production, inventory and storage is eliminated when reserves are instead thought of as inventory and storage. Commodity prices will find the marginal cost when unprofitable production is removed from the market. These marginal prices are in turn provided for all of the producers' profitable production. People, Ideas & Objects provides this opportunity to build the Preliminary Specification and has done so since its publication in August 2012. This publication was met with pushback from bureaucrats who suggested it was collusion. If collusion involves making independent business decisions at each Joint Operating Committee based on its detailed, actual, factual, standard and objective accounting to determine profitability / loss. Then we’re guilty as charged, as are all other industries that have operated profitably since the great depression.
There are broader implications to the production discipline People, Ideas & Objects et al are introducing through the Preliminary Specification. Production discipline imputes a new capital discipline when spending needs, or should be, immediately profitable and remain profitable throughout its usable life. What discipline is involved in the process of building things such as balance sheets, putting cash in the ground? Bringing the oil and gas industry into the context of a commercial enterprise is what the Preliminary Specification does. It takes the status quo method, which is not even the equivalent of the utility business model. Utilities are guaranteed returns. And in turn enforces the producers to be accountable for the activity undertaken everyday they’re in operation. Accountable as an enterprise operating in a commercial and competitive environment. Outside the immediate issue of job security being threatened by disintermediation. Does anyone see why it is that bureaucrats are not interested in adopting the Preliminary Specification, our user community and their service provider organizations? To go through the motions is about 1% of what's necessary to operate a commercial enterprise. Any producer officers or directors capable of fitting that classification?
On the other hand we have no shortage of work to do. Much needs to be done in the next few years. The Preliminary Specification needs to be built. The engineering and geological explicit knowledge needs to be captured as Intellectual Property and developed. New oil and gas firms need to be formed, capitalized and organized. Assets need to be transferred to these new producers in innovative, strategic and tactical ways. In this process we’ll all be helping the current producers to travel faster down their chosen journey to clean energy by disposing of dirty oil. This transition to the Preliminary Specification is something that must be done to deal with the financial difficulties the industry is plagued with from the current administration. This also needs to be done as preparation for the future. And to learn from the experience of this transition as we’ll be faced repeatedly with situations that share this same scope and scale of change in the near future of this business. We’ll therefore be somewhat prepared and experienced in challenges of this nature. Please review our Production Rights to see how everyone can participate in making this new oil and gas industry happen. An industry where it will be less important who you know, but what you know and what you're capable of delivering, what the value proposition is that you’re offering? We know we can, and we know how to make money in this business.
Those interested in joining our user community are People, Ideas & Objects priority and focus. The Preliminary Specification, our user community and their service provider organizations provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. In addition, our software organizes the Intellectual Property of the exploration and production processes owned by the engineers and geologists. Enabling them to monetize their IP for a new oil & gas industry to begin with a means to be dynamic, innovative and performance oriented. Providing a new investment opportunity for those who see a bright future in the industry. A place where their administrative, accounting, exploration and production can be handled for the 21st century. People, Ideas & Objects have joined gettr and can be reached there. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.