Were Beavis and Butt-Head Elon Musk's Heroes?

 We see in Canadian Prime Minister Justin Trudeau’s response to the Canadian truckers that running away, hiding and not addressing the issues is as effective as covering your eyes, stomping your feet and yelling in kindergarten. Whether it’s politicians, the media or those that actively seek to deceive others through poor or no accountability, this tactic may have been effective at one time prior to its overuse and abuse. We are today witnessing that chickens do come home to roost. It’s a new day and there seems to be new rules coming into play, the benefit of the doubt is no longer being extended, and for those that took that opportunity in the past are no longer being given the time of day. This fourth quarter seems to be a time in which serious questions are being asked of what’s happening in oil and gas and the future of the North American producers. We’ve seen this past decade of oil and gas being more or less a lost decade and the curious are thinking, maybe it’s time to revisit the industry and approach it differently. Let’s look at the natural gas market and determine if events are shaping up to provide for a positive future as would otherwise be hoped for? 

We have three graphs from the February 3, 2022 EIA Natural Gas Weekly Update that describe different aspects of the U.S. natural gas marketplace. The first is natural gas storage volumes showing that natural gas demand remains healthy and the response by producers may have been inadequate to maintain the volume of storage that was traditionally expected. Specifically, on December 31, 2021 storage volumes were 528 BCF higher than the five year minimum and dropped in the course of four weeks to less than half that at 228 BCF above the five year minimum on January 28, 2022. The steepness of this drawdown is significant as it represents a somewhat flat footed response by producers to maintain production volumes. Mid to late March is the time in which storage begins to refill and the amount of storage that may be drawn down during the next 7 - 8 weeks may become an issue. 

Our second graph shows the total number of rigs drilling in the U.S. With this volume of activity, the question needs to be asked if this will provide the turnaround needed to meet the renewed demand and refill the probable depleted storage volumes? The apparent answer at this point is no, it will not.

Our last graph shows what appears to be a break between the response in the producer's activity level and the price of natural gas. Prices are breaking upwards while active rigs are remaining at levels that appear to be too low to have an impact.

What is the cause of this lack of response by producers? Bureaucrats would suggest that the amount of dividends and stock buyback programs are causing them to divert their cash to those causes. This is self-serving and an admission that the bureaucrats have not rehabilitated themselves from their spending addiction. Businesses generate profits that are adequate to meet the needs of the business, which happens to include all aspects of the business, and to compete in the capital markets. It's not an A / B choice, it's C All of the Above. The reason they don’t have the cash resources is due to their flat footedness and refusal to act in terms of reacting to the changing environment of their business over the past 4 decades. Bureaucrats may also claim they haven’t the field capabilities and capacities necessary to conduct the necessary level of activity, the service industry has just not kept up. Which is true, drilling companies were never successful in their diversity initiatives in the restaurant business. The fact of the matter is that while these bureaucrats were enjoying their party they didn’t pay any attention to the business. It has atrophied all of the value and as they have done throughout this protracted period they have blamed, accused and generated viable scapegoats of everyone and everything, other than themselves. The fact that industry doesn’t have the financial wherewithal and it doesn’t have the ability to conduct the field activity is true. These are symptoms of their chronic mismanagement that I’ve documented with the fallout consequences predicted would happen. They’ve had alternatives. 

Would producers be having the difficulties they’re having if they had the appropriate ERP systems? I’m not in any way blaming the current ERP systems providers. They’ve done stellar work in impossible conditions due to the fact that producer bureaucrats have wanted to and starved them financially so that producer accountability was never discovered or discoverable. The fact that investors have pointed out that oil and gas producers must obtain tier 1 ERP systems as a precondition for their return is not a comment towards the ERP providers in the market today. It is the understanding of the dynamic that producer bureaucrats have created where accountability is as impossible to determine as can possibly be achieved. 

There is a wall of common sense and logic that has betrayed the bureaucrats each and every move these past four decades. What should have been done was always circumvented by taking the short term opportunity without any understanding of the consequences it would cause. We have moved from self-inflicted crisis to self-inflicted crisis and back again in a comical act of “building balance sheets” and “putting cash in the ground.” The sad part is that it has gone on for so long that the majority believe it. It is culturally ingrained and the way they do things. They can only laugh at those that don’t follow this prescribed script. What today's graphs show about the natural gas market in North America is that it will soon be influenced by the global natural gas market. European natural gas import prices averaged $28.26 U.S. for the month of January. LNG will continue to have the effect of taking what was a continentally priced commodity and making it a globally priced commodity. 

Even with the endowment of shale North American producers will not be able to respond to the demand for production. Leaving the prospect of much higher prices being realized across this continent. Some may ask if that’s not what People, Ideas & Objects have been suggesting should be what our future should be? Hardly, higher prices are the necessary component of a dynamic, innovative, accountable and profitable industry and for all concerned. Higher prices are also the reallocation of the financial resources towards innovation. With our good friends the bureaucrats nothing of the like will occur. No one will be prospering in the industry as a result of the continued litany of decisions whose consequences were never considered at the time. Our current self-inflicted crisis is this legacy of hedging that has gone on since the April 2020 covid induced oil price crash. These shenanigans have the potential to bring the industry down quickly. 

At some point today EQT will publish their fourth quarter report. They are the largest U.S. natural gas producer and have found themselves in a bit of a dilemma when it comes to their hedging practices. EQT are not part of our sample of producers that we analyze and I am generally unfamiliar with them and their operation. After the third quarter report I only noticed that their hedging losses had dropped their net revenues into negative numbers totalling $775 million for three quarters of 2021. They’ve also recorded a net $4.3 billion current derivatives liability. Indicating this would be coming due before September 30, 2022. I don’t have the requisite understanding of the derivatives market to understand what strategy EQT is employing. It appears to me that they’re seeking to mitigate their downside risk of natural gas prices going below $2.20 and $2.32. The volume of gas under these contracts is considerable at a total of 4.5 TCF of gas over the course of next three and six years.

With respect to the derivative commodity instruments held by the Company, the Company hedged portions of its expected sales of production and portions of its basis exposure covering approximately 2,554 Bcf of natural gas and 5,146 Mbbl of NGLs as of September 30, 2021 and 1,955 Bcf of natural gas and 3,462 Mbbl of NGLs as of December 31, 2020. The open positions at September 30, 2021 and December 31, 2020 had maturities extending through December 2027 and December 2024, respectively.

With these volumes and prices over this period it is clear that EQT assumed that in an unchanging natural gas market they expected to obtain the least viable level of their perceived definition of profitability as acceptable. With the dynamic changes in the prices of natural gas, the upside of their natural gas business will be paid to others. However, royalties are paid on the price realized and at $28 the royalty will cause EQT’s net price to be far lower than the hedged price and that will be before any other capital, operating or overhead costs are recognized. I do not see this as an ideal situation. In addition, working capital of EQT is not what would have been expected of a producer seeking to mitigate its risk. They are the proud owners of negative working capital of $3.9 billion. A large part being the liability to the hedging contract, which brings up this interesting difficulty that the company may be faced with. (Note, EQT current rating by Moodys is speculative at Ba1, which is one step below the defined investment grade Baa3 of the contract.)

Certain of the Company's OTC derivative instrument contracts provide that, if the Company's credit rating assigned by Moody's Investors Service, Inc. (Moody's) or S&P Global Ratings (S&P) is below the agreed-upon credit rating threshold (typically, below investment grade), and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, the counterparty to such contract can require the Company to deposit collateral. Similarly, if such counterparty's credit rating assigned by Moody's or S&P is below the agreed-upon credit rating threshold, and if the associated derivative liability exceeds the agreed-upon dollar threshold for such credit rating, the Company can require the counterparty to deposit collateral with the Company. Such collateral can be up to 100% of the derivative liability.

The question that needs to be asked is in the context of the next self-inflicted crisis. Where do the hedging liabilities fall in terms of the call on the resources of a bankrupt producer? If the derivative liability is invoked, what effect will that have on the company's other debt covenants?

Producer bureaucrats chose to take the least profitable opportunity by locking the firm into the hedging contract. While actively choosing to ignore the opportunity to work hard and build the Preliminary Specification and our user community to rebuild a dynamic, innovative, accountable and profitable oil and gas producer firm. An opportunity that has been available to them since 2012 and at a comparatively minimal cost to the firm, though it would disintermediate the bureaucracy. Therefore who is going to commit to be the first to fund the Preliminary Specification and our user community? And how? People, Ideas & Objects budgetary roadblocks I’ve instituted are the realities of the situation the bureaucrats have created for all participants in the tier 2 and tertiary industries supporting oil and gas. There are no opportunities for any investor returns in oil and gas ERP systems. Therefore this is my dilemma and around and round we go. No one in oil and gas ERP has made any money for investors. How would I suggest that I would? I also need to deal with the fact it is software which banks are violently allergic to. Therefore the bureaucrats have created a situation where they’ll never be held accountable or need to deal with their rolling incompetence. What I see is a lack of concern for the decisions that are made, but then they’ll muddle through. The continued waste of natural resources is tragic in the least. A close read of history will show that once organizations have been destroyed in this manner, and I would suggest that their ability to understand how to make money is their deficiency, they’ll never come into being again as viable, prosperous contributors to the greater good. It’s good to know that Beavis and Butt-Head had at least the oil and gas bureaucrats looking up to them. 

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 TBD 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.

Vision Without Action is Merely a Dream

 Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world. 

Joel A. Barker

With this quote we see the three options where the industry can be directed to. The reality of the situation as far as we know, is that People, Ideas & Objects is the only ERP solution being brought to the market. However, since 2004 when we initially proposed the solution of using the Joint Operating Committee as one of the key organizational constructs of the dynamic, innovative, accountable and profitable oil and gas producers. The issues we identified, most notably the chronic overproduction, has financially decimated the North American producers and associated infrastructure. The interests of the bureaucracy have been exposed as not an accountable, objective, responsive and profitable concern but an unaccountable, unconstrained and self-interested group who’s concern does not extend beyond their own skin. We have extended the initial idea of using the Joint Operating Committee and completed a decade of research into “what and how” the oil and gas industry’s ERP system and business model based on these need to be configured in order to succeed and ensure producers attain profitable production everywhere and always. What we call the Preliminary Specification has solved these issues and offered the benefits of a profitable industry. During this process People, Ideas & Objects incidentally conducted the disintermediation of oil and gas, a process that is and will affect all industries which challenges bureaucracies directly through far more efficient business models. Our budget was published in the first quarter of 2014, and identified clearly the scope and scale of the issues that are now plainly clear for all to see. I think that People, Ideas & Objects can not only claim to have foreseen and understood the issue, in August 2012 we were able to provide a viable solution in an innovative business model but also scoped out the implications of inaction and the scale of the issue. A scope and scale that has unfortunately been validated through bureaucratic inactivity.

We’ve now moved beyond the financial degradation and destruction issues of the producers. The financial rebuilding process will need to be financed through the higher commodity prices, such as the Preliminary Specification provides. However the recognition of these issues is not addressed by industry. The value that was handed down has now been exhausted through bureaucratic neglect. The decades of investor cash that was pumped into producers has followed. After seven years of investor withdrawal we see many events and further implications happening that prove the Preliminary Specifications validity and the destruction by the bureaucrats that was both unnecessary and highly counter productive. These will not be remedied in the short term and not by those who willingly orchestrated this destruction.    The legacy of costs remaining and value that has been extinguished will need to be a deliberate rehabilitation effort. Petroleum reserves are worth nothing if they can’t be produced profitably and profitable in the real sense of the term. The behaviors of the bureaucrats when the dire consequences of their actions became evident did nothing to change their ways. Now, with money on the table from higher commodity prices, and the potential for far greater financial resources in the future, who should we trust to manage that resource? This does nothing to suggest how the far more complex future of oil and gas will be approached. Their model is an uncompromising and culturally constrained method that can’t, won’t and will not ever change.

Once financial degradation has occurred the natural follow on consequence is the degradation of capabilities and capacities of a firm. As has happened in oil and gas, and the service industry. Cash and the inability to source adequate volumes of it, due to the lack of real profitability, and the continued specious accounting that has overhead consuming the bank account each month. The lack of any action by the bureaucrats is the key constraint to any progress. It appears to me that OPEC+ concern for the North American producers' chronic overproduction into the market no longer exists. It appears to me that commodity pricing has become more dependent on the production quota decisions of OPEC+ and its member countries than on the North American producer bureaucrats ability to deceive their investors. And in natural gas the political fortunes of those climate change truthers in Europe are living the consequences of their past decisions. Production may become profitable, even in the real sense, however the deprecation of the industry will hold off energy independence, even in the shale era, for the short to medium term. North American dependence on foreign sources of oil, and the societal implications of that may now be a reality. This being the first of many steps in which societal damage is being experienced as a result of the bureaucratic laziness and sloth identified above. 

The dynamic nature of the bureaucracy is on display most clearly in their response to the funding strike their investors and bankers began in 2015. There is no more significant message that can be sent to management than for their investors to say no. If your investors don’t have faith in you then they’ll keep their money. If you subsequently make no changes to deal with the investors lack of faith and identified issues for what is now seven years, that is very disconcerting. Particularly when the issues from overproduction have been clearly defined since the great depression, the 1986 initial oil price declined due to overproduction, the numerous repeat events of both oil and gas overproduction, the publication of a solution to overproduction in August 2012 and these investors actions starting in 2015. 

This was always the “plan” of the bureaucrats in their muddle through strategy. As part of that strategy which includes “market rebalancing,” whatever that means, capabilities and capacities of the industry would diminish to the point where the bust in the boom / bust cycle would diminish supply to the point where it would match with demand and alleged profitability would return. Where are we in this version of “market rebalancing” and is it now providing a clear and predictable future? Has market rebalancing been achieved and can we assert that it’s nothing more than the willing and deliberate destruction of the value of the industry. 

As I’ve mentioned before I can’t be convinced that all is well when the build back better balance sheets continue to balloon and profitability soars while cash and working capital evaporate. Well it's a “capital intensive industry” they’ll say. To which I say that’s correct, but producers never recognize their capital costs in terms of what the capital markets expects in returns. Capital costs are never realized or passed on to the consumer, only collected and cherished on the CEO’s balance sheet as he struts it proudly down main street. These producer firms are spending machines, not organizations and certainly not the type that could ever be confused with being a commercial operation. It’s about stellar engineering facilities with balance sheet empires that they can prove to anyone that should ever question them. These are empires built on 20 lbs copy paper 8-½” x 11” sheets. And you must never question that.

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 TBD 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.

Trying to Stay Within the Confines of This Galaxy

 Whether oil and gas is in the state that it’s in or not is to be determined by each and everyone of us. We hear in the media today that producers are rolling in cash from higher prices. Yet, hear a comprehensively different tone and discussion at People, Ideas & Objects. If people believe the oil and gas producers are in good condition and their future is bright then they’re correct. There’ll be nothing that I can say or do to convince them otherwise. I’ve been doing this for a while and I don’t like what I see. I’d be willing to accept that I’m wrong yet the producers haven’t convinced me of that yet. The situation has only declined and degraded and is in a state where I think we’re in a lot of difficulty. And not just from an oil and gas point of view but a societal point of view. 

The world is a dangerous place to live not because of the people who are evil but because of the people who don’t do anything about it. 

Albert Einstein 

The scope and scale of what it is that People, Ideas & Objects are undertaking here is comprehensive. That we would aspire to undertake this in the normal course would be unheard of. I don’t believe we’re in an environment where we are anywhere near normal and what is accepted as normal today is unacceptable. There are serious consequences now as a result of what the bureaucrats have authored. Houston can barely make decisions as to which business they’re in. Stay tuned for what they may be saying tomorrow! And yes it is that bad. Outside of People, Ideas & Objects I don’t see anything going on or any concern being raised on any front. The media are promoting the industry as they always have and I don’t see their perspective. I personally felt compelled to do something about this after the 1986 oil price decline when it was obvious that producers just needed to shut-in some production for a while. And yet here we are today. Maybe their objective is to never be accountable or profitable? I’m glad that I’ve done what I’ve done and think this solution is worthy of proceeding. And that would be a natural position for me to take after this much work. However with the state of affairs in oil and gas being what it is today. These are the questions that need to be asked.

If not you, then who? If not now, when? 

Hillel, First - Century Jewish Scholar

Time is now of the essence. Churchill claimed to have saved the Soviet Union in WWII. An assertion that I agree with. The British had moved into North Africa and spanked the Italians back home with quick dispatch. Control of the Suez Canal was the prize everyone was after, and hence control of the Mediterranean. A fixture that was part of the British Empire for many decades. While the Germans were moving into North Africa to take their shot at it. They also moved down into Bulgaria, Hungary, Yugoslavia and Romania. The Albanians and Greeks were dealing with Mussolini as well. The British did move to support the Greeks and attempt to unify Hungary, Yugoslavia with the Greeks in fighting the Germans however they were unable to cooperate with one another. This fighting was unsuccessful for all concerned but the Germans. With the British also losing Crete, almost losing Iraq and Syria. All of this occurred during the March, April and May time period of 1941. On December 18, 1940 Hitler decided that May 15, 1941 would be the launch date of Operation Barbarossa, the Soviet Invasion. However with the protracted distraction the British caused in the Mediterranean this was delayed on March 27, 1941 to June 15, 1941 and subsequently on June 22, 1941 Operation Barbarossa began. What we know of history is that the Germans were stuck in the mud in October and then frozen for the entire winter. Giving the Soviets time to form alliances with the British and Americans and organize themselves to deal with the attack. Although it is probably not a good thing to claim to have saved communism, the alternative of having Hitler with the resources of the Soviet Union would have been pre determinant. 

My point here is that time is wasting and there are consequences of actions and inactions by good people that are having much greater implications than we’re realizing when they subsequently occur. As much as I belittle the bureaucrats it’s obvious to everyone that inaction by them is in their DNA. We can't and should not expect anything from them. They’ll continue to deny us the resources we need to proceed. However that is not a reason to sit and watch this tumble further downwards. There should be no doubt of the need to rebuild the industry in my opinion. It’s too important not to. It will be far easier to rebuild than trying to compromise and deal with the bureaucrats and end up with something that may not work. 

I have defined our user community and their service provider organizations to fall within the domain of the North American oil and gas administration and accounting roles and responsibilities. Our objective is to provide the dynamic, innovative, accountable and profitable oil and gas producers with the most profitable means of oil and gas operations everywhere and always. There is a misunderstanding between myself and areas of the general industry as to what those roles and responsibilities of administration are involved. And these include the operational, exploration, land and traditional areas of administration of the producers that are included in the domain of user community and their service providers. This is a data rich environment and the need to have these captured in an ERP system are paramount. The feeding of multiple systems with the same data is due to the fact that these systems bridge different domains in the bureaucracy and conflict between the bureaucratic empires of the producer is one of the key impediments to the lack of integration in the current systems. These have been implied and well understood with regard to our user community.

Where the general industry misunderstandings arise is in the area of the change in delivery of the software and services of the Preliminary Specification, our user community and their service provider organizations. In delivering a cloud administration and accounting service we’re introducing changes that may not be realized by some. We’re employing what is now commonly referred to as a Software as a Service (SaaS) style of offering to the North American oil and gas industry and the implications of that are broad. The following diagram shows from a systems and services perspective what this consists of and who should address these areas of concern. These areas are what were traditionally considered the Information Technology domain. What People, Ideas & Objects consider to fall under the administrative role in the administration and accounting of our user community and their service provider. From the book “IaaS for Dummies” page 8, John Wiley and Sons.

Therefore let’s look at these areas of concern that fall under the SaaS model of delivery. And give a brief overview of how the specific user community and their service provider organizations will be involved in the development of the Preliminary Specification and then how it is they’ll support the industries producers within this model. Starting from the bottom and working to the top we’ll break down these services. 

Data Center, Networking, Storage and Servers

These form part of the Oracle ERP Cloud offering and are supported by their regions located around the world. We have discussed briefly the method that we’ll be incorporating the Preliminary Specification within the Oracle ERP Cloud offering and will state at this point we are implementing Oracle’s recommended method. We are writing our Java application within the Oracle Fusion code itself into the Oracle Fusion Middleware Server. It will not be a series of separate modules that sit on top of Oracle Cloud ERP which has been the traditional approach. It is in this way that either People, Ideas & Objects or Oracle may update their respective code bases on the currently scheduled quarterly release without impacting one anothers code. Using the full value of Java’s inheritance, polymorphism and most specifically encapsulation. 

These four base elements of a SaaS are determined at definition by the user of the Oracle ERP Cloud offering. Selecting the data center, processor, storage type and all other manner of configurations are available. People, Ideas & Objects are employing a microservices architecture that will map their single administrative or accounting process that the service provider is delivering to industry to the domain of concern to one specific microservice. In the employment of specialization and division of labor we do not expect the service provider to be conducting the accounting involved in an individual process to also be involved in the IT related SaaS roles and responsibilities. These are mutually exclusive capacities and capabilities. There will be other members of our user community with their own service provider organizations that are used to manage elements of the SaaS offering on behalf of the population of service providers.

Virtualization

Within the Oracle ERP Cloud offering there is a registry service for the various images that we will have developed and published and those that Oracle have published. These will be deployed as needed by the service provider that may be configured just for managing the registry or deploying the “month-end” processes, etc. Virtualization is a way of life in the cloud and it is evolving at a remarkable pace with the future configuration and architectures of systems being derivative of these technologies in some form or another. The core of Oracle ERP Cloud, including the modules of the Preliminary Specification, will be run on centralized servers in a more traditional sense where these microservices will access their data and defer their heavy processing to. 

Operating System, Middleware, Runtime, Data and Applications

This software stack will have a myriad of configurations contained within the virtualization registry. Whatever the process needs to operate will remain in the image and the remainder of the operating system, database and others are removed to have a lightweight configuration for the sole purpose of conducting that one process. There will also be the main configuration where Oracle ERP Cloud and People, Ideas & Objects Preliminary Specifications core applications will be operational at all times. Service providers will deploy virtualized images of what they need when they’re needed. Oracle has taken their Linux operating system and most importantly their Database in the automated direction with machine learning technologies. By reviewing the logs of the system it can make changes to the configuration and tune the database as needed without the need for human intervention. The work of Database Administrators no longer need to concern themselves with table size growth as the automated database will drop tables when required, etc. It is here where our service providers and their ownership by the user community will be able to make the impact that I think will be significant. The motivation behind the user community is that they are business people who are building their own business based on serving the producer population with the objective of ensuring the most profitable means of oil and gas operations. They’ll have the motivation, the tools by way of access to the Intellectual Property and our developers, but also exclusive access and attention of the producer firms to determine what is the best method to meet their objective and hence to build their business. 

Therefore what’s the point of bringing all this technological discussion into our business focus? It’s our job to ensure that we’re covering these technical aspects of our offering on behalf of the North American oil and gas industry. We’ve never specifically made this point before and I’ll be including this discussion in the service provider page of the Preliminary Specifications wiki. Our job is comprehensive and multidisciplinary with nothing of the sort ever being attempted before. I don’t believe the industry has a choice as the energy we consume is too critical to our way of life. Just ask the German’s. We’re waking up to this fact all over the world and the North American producers haven’t failed us, they fundamentally and deliberately betrayed us by taking the goods for themselves. Action or inaction is dependent on your point of view, and I have a definitive opinion of what I think needs to be done. I’ll be interested to see how this unfolds and what happens. 

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 TBD 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.

Proof as to Why Overhead is Such an Issue

 Remember the days when Houston rightly claimed to be the global center of the oil and gas industry. That was the industry that was passed down just a few decades ago. These bureaucrats have achieved so much in their pursuit of financial damage and destruction. Now, we’re just a bunch of old guys reminiscing about the good old days. Dare I say… Houston, we have a problem.

The secondary reason that profitability is unattainable in North American oil and gas is the level of overhead incurred by producer firms. Overheads appear reasonable on financial statements due to the significant level of overhead that’s capitalized. It is these capitalization policies that are the primary and indirect reasons there’s a constant drainage of cash from the producer firm. Demanding producers to find new sources of capital to replenish the firm's cash. This drainage of cash has been unaddressed by producer bureaucrats throughout these past decades as they’ve had the willing supply of investors wanting to invest. Investors driven by the specious profits reported when producers focus of the firm was to “build balance sheets” and “put cash in the ground.” Over reported asset values such as these create equal and commensurate over reported profits. Few if any costs outside of operating costs, royalties and the smallest amount of depletion were recognized in the current period. 

Granted I will admit that the overhead issue is symptomatic of the larger issue today and the one that I am indirectly addressing in this post. I’m trying to reconcile the two perspectives between People, Ideas & Objects and the bureaucrats. Why is it that we believe we must make radical changes to the structure of the industry to alleviate the difficulties that plague oil and gas? Capitalized overhead represents the beginning of industry’s decline and is well represented throughout that decline. Taken over the lifetime of this practice, which began in the mid 1980s, the cumulative amount of overhead, in our opinion, is how we assign the material classification. There’s more to it than that however. It became the source and method of how bureaucrats game the system. And then it became the means in which, indirectly, accountability slipped out of the conscious thought of these bureaucrats. Subsequently, the greater destruction is represented in the chronic and escalating erosion of producer value to the point where the costs of oil and gas production are not, and have not been captured and passed to the consumer and recovered in the commodity prices sold. Today efficiencies of the industry are as comprehensively degraded as the value represented in the financial statements are mythical. And what would be the bureaucrats' alternative hypothesis of their performance? The investors gave producers the investment to establish a Lamborghini dealership and now own a “pick-n-pay” junkyard. What future does that provide?

The majority of costs of the producer are being capitalized and depleted over the usable life of the reserves based on the independent reserve reports. Decades would pass before all of these costs would be recognized and substantial incremental investment would be necessary to maintain the reserves. Shale reserves have brought about the era of abundance complete with new cost dynamics. What producers were unconcerned about is that the cash that was consumed and “put in the ground” was not being returned for decades, they had investors. Their financial deception enabled them to continue to the point where the financial performance of the assets, because they were not objectively being evaluated, due to the bloated profitability and balance sheet, and lack of critical financial evaluation, dropped well below what a commercial operation would need to sustain itself. As a result of this long term erosion, eventually the majority of the producer's costs could not be recognized in the prices of the commodities they were selling to the consumer. The consumer was paying for a sliver of depletion, operating costs and royalties with little room for anything else. It is best to consider the capital costs were just being inventoried on the ever growing, built back better balance sheet. Causing cash to be permanently and comprehensively consumed on a monthly basis, where a revolving cash “float” was never established with new cash being replenished from the sale of commodities. Today a cash level that is adequate to cover all of the producer's costs is unattainable in any pricing environment due to the depth of the erosion of the producer's performance. People, Ideas & Objects believe that a capital intensive industry should have their capital intensive costs passed on to consumers in the price of the commodity. This was not done when investors were available to make up for the cash shortfall. 

Overhead’s consequences have therefore been material in nature in the industry. How much is a mystery and there’s no evidence anywhere to support my claims. As a result of these allegations some producers have begun detailing the amount of the overhead they incurred and the amount that was capitalized during the year. I’ve reviewed the numbers of those producers who’ve published them. I’m not of the opinion they fully capture the issue, and are inconsistent with my understanding of the material nature of overhead. Based on our sample of producers, field activities in 2020 dropped to 25% of 2019s. Why did 2020s capital expenditures remain at 60% of 2019’s expenditures for our sample of producers? Conversely, why did increased activity levels in 2021 not have a commensurate increase in the volume of capital expenditures? Is there some fixed cost involved, or are capital expenditures not discretionary? There are too many anomalies and I’ve reviewed too many producers in my career to know better. The deficiency of cash as a result of what I believe to be this overhead issue is systemic across the population of North American producers. Is there some issue above and beyond these consequences of capitalized overhead that’s causing the chronic leakage of cash? And why was the lack of cash so material that investors were called upon annually. And since 2015 when their funding ceased, why has that lack of funding caused producers so much distress? 

The Preliminary Specification turns all of the producer's costs variable based on production. We achieve this outcome by reorganizing the accounting and administrative resources of the producers into our user communities service providers. Each service provider will be focused on one process and will have the entire industry's producer base as their clients. Therefore if the property is profitable and therefore operational then it will be incurring these overheads, such as the recording and calculation of royalties at that specific Joint Operating Committee. Enabling the producer to be able to capture all of their overhead costs in the current period when service providers charge their process fees directly to the Joint Operating Committees. With the preparation of financial statements for each Joint Operating Committee each month, a process which is not done and cannot be done with today's ERP systems and methods of accounting. In the Preliminary Specification if the property remains profitable, these overhead costs are therefore intuitively being captured in the price of the commodity sold. And returned to the producers as cash within the next few months instead of the next few decades. If the property is unprofitable it is shut-in and moved to the producers inventory of innovative projects to return it to profitable operations. While there it will incur no costs, create no profit, but also no loss, a null operation. Producers remain profitable at any level of their production profile. Recognizing the actual costs of the products sold enables these costs to be included in the determination of the Joint Operating Committees profitable operation and therefore recovered from the sale of the commodities. In addition to the overhead, a monthly allocation of the producer's remaining asset balance for that property will be depleted consistent with the capital markets expectations of financial performance. By obscuring and attempting to exclude these costs from recognition has all but destroyed the industry. And what would be the bureaucrats' resolution to their hypothesis as to why their cash began to diminish in the late 1980s. And why was this never resolved outside of their demands on investors?

Cloud computing takes a capital intensive, technically difficult and difficult to support corporate necessity and removes these elements for its customers. Replacing it with an easier to use service available for pennies per hour. It introduces a shared and shareable model of use of these resources where the surplus capacity that customers need to build into their systems for just-in-time purposes and other redundancies are eliminated. Where cloud computing providers are able to specialize and divide the labor in ways that are unique and value generating to the customer. Value that was unavailable and unattainable in the customers previous model of operation. People, Ideas & Objects are adopting this shared and shareable criteria in developing, supporting and implementing the Preliminary Specification in the North American producer market and extending it through our development, user communities and their service provider organizations. Taking the full scope of administration and accounting out of the producer firms and reorganizing them on the basis of a shared and shareable service provider offering. Producers today are replicating, duplicating and consuming vast overheads in order to conduct these capabilities and capacities in-house. There is a just-in-time surplus capacity that is necessary for those times when more is required from the producer's administrative and accounting resources. In today’s workplace and despite even Exxon’s size the scope and scale of specialization and division of labor is limited in its application. By introducing the shared and shareable model with our user communities service provider organizations these capabilities and capacities become variable costs, timely, accurate, standardized, actual, objective and more cost effective than each producer having to maintain these same non-competitive, unshared and unshareable capabilities within each of their domains. It is these costs of these unshared domains in each and every producer that are redundant and the secondary reason for the lack of profitability in oil and gas. People, Ideas & Objects et al will provide the industry with higher levels of throughput from the same resource base due to the use of specialization and division of labor that ensures profitable energy independence is achieved on the continent. 

People, Ideas & Objects, our user community and their service providers with the Preliminary Specification are introducing a complex and comprehensive ERP system on top of the Oracle Cloud ERP offering. By far the most comprehensive ERP system ever used in oil and gas, once built. To introduce this complexity into each and every producer, which includes the start-up producers, that fall within our domain of concern of all North American producers, is something that was considered untenable. However, just as the technical infrastructure provided through cloud computing no longer needs to be purpose built within each producer firm. The combination of our user based developments and the service providers being owned and operated by our user community members. There will be a layer of service oriented accounting and administration resources that are instrumental in the development, implementation, support and transaction processing of these software and services. All of this is available on a variable cost based on usage when profitable production occurs and only if the specific process of that service provider is used. Dare I ask what alternatives are there? Isn’t this type of system the reality of what we’re dealing with in today’s disintermediated business world and particularly with the financial issues in oil and gas? And what exactly are the bureaucrats proposing? (Please note this eliminates the impossible situation where start up and junior producers have to create an excess of $3 million / year in cash flow to cover the base overhead costs of what a public producer requires. And offers those software and services on an as required, variable cost basis. This I believe is the appropriate and value-added use of the Internet.) 

Until 2015 these arguments were summarily dismissed. Investors finally realized they were the mark in the room when shale began to look like an expensive science experiment and a losing proposition. Shales tremendous reserves allowed so much more costs to be absorbed over their usable life. And when depletion takes total “capital” costs divided by proven reserves, the amount of capital costs per barrel were negligible, and therefore profitable under today's methods. And therefore none of these capital costs were being captured in the price sold to the consumer so that producers could always claim profitability in order to “build balance sheets.” The continuous erosion of cash and value has diminished the performance of the industry to the point that the dependence on outside capital sources was absolute and necessary. My estimate was this process began during the very late 1980s. With the 2015 investor withdrawal of outside capital, bureaucrats sought other areas which included abuse of the service industry, enhanced overproduction, and now what we suspect to be the active cannibalization of partner producers cash flow. It is the end of the road for the bureaucrats as even today's prices are woefully inadequate to deal with the cumulative effect of these issues and value degradation they’ve created. Last year bureaucrats even declared that shale was not viable! They drilled it and then figured that out? And just as they’ve chased every other industry trend in the style of the Keystone Kops. It was to run out shale’s back door and onto the riches in clean energy down the alley. There is never any subsequent effort to put in the hard work to make shale or any of the previous trends viable. Even with People, Ideas & Objects pointing out how to do it for them. What is their thinking here, or am I advancing them too much credit in asking?

Chevron’s fourth quarter report states it may lose 3% of its production in 2022. That it will be focused on profitable production. Why are they stating this, are they admitting they never produced profitably before and what’s changed to make them profitable now? Saying something is what oil and gas producers do. Outside of that there’s never any action or follow through. This is their culture and their reputation. There is no persistence or desire to perform. There’s no understanding of the concept and with the culture they’ve created, what changes are they able to make? Where’s the vision and what’s the plan? Outside of higher prices, how? They’ve always found that people believed them, and when it came time to act or perform no one asked them. It’s not that no one remembered. And now we see profitable production is the new trend in the industry so the Keystone Kops are sure to catch that bandit this time. If we remember, and if you can imagine they said the industry wasn’t viable just last year!

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 TBD 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.

An Understanding You Could Rely Upon

 Bureaucrats had traditionally passed on the decision of how they’d allocate their earnings, or in their case cash flow. The three traditional alternatives of a firm were they could spend it on capital investment, pay down debts or dividends. In oil and gas the culture was to spend it all on capital, however it needed to be augmented by the generosity of investors' annual cash injections. “It was a capital intensive industry, don't you know.” No appreciation for the full understanding of that concept and the need to pass that capital on to consumers in the price of the commodity, not to “build balance sheets” or “put cash in the ground.” Nonetheless commercial businesses generate adequate volumes of profit or cash flow necessary for them to do all three of these tasks with the theoretical allocation being one third to each of capital, debt reduction and dividends. And in adequate volumes that would be able to satisfy the demand for the capital costs of the firm without outside assistance. It is here that we see the structural disconnect of today’s North American oil and gas producer and the state of performance degradation when the cash flow is inadequate to fuel even the capital investment demands. It is not a commercial business, it's a spending machine. A business, yes even in a capital intensive industry, would be generating adequate cash flow to pay for its internal needs, reduce its debt and satisfy its shareholders. Oil and gas producers, until recently, proudly bragged they never pay dividends. 

To dilute their shareholders by issuing additional shares each and every year was not an issue to the bureaucrats as I don’t think they understood the negative implications of doing so. The idea is to use your capital structure in ways that leverage your shareholders interest so they’re upside is fully realized. If your outstanding shares are fixed in number the value that is realized in the firm is magnified and evenly distributed to the shareholders who took the risk. To be diluting their upside each and every year disrespects the shareholders that began with the company and held on through the difficult times. Diluting them annually only removes shareholders upside, provides more capital to the bureaucrats who have more to spend and rewards their non-performance by removing the impetus for them to do the hard work of conducting a commercial operation.  

To argue the position that the North American oil and gas producers business approach was not focused on value is reasonable. To argue that overproduction was learned to be highly detrimental as it was in 1929, that the first oil price collapse in 1986 was due to chronic overproduction in North America, that a solution to this and other issues was developed and published in the form of the Preliminary Specification, our user community and their service provider organizations in August 2012 and the investors saw this situation clearly and therefore stopped participating in 2015. Which makes a reasonable argument that nothing more than bureaucratic laziness and sloth is what we have seen to this point in 2022. Producers cash flow remains more than adequate to meet the needs of the producer bureaucrats personal needs and therefore these issues are feigned not to be understood and at the same time considered moot. 

People, Ideas & Objects concern for the investors are evident in everything that we’ve written. We are capitalists and believe it to be the most productive system available in comparison to all others. There is discussion today about stakeholder capitalism and some may consider that we’re oriented to that concept. Our focus on the impact of others in terms of the consequences of the bureaucrats inability to operate a functioning business has had broad implications. I don’t however buy into stakeholder capitalism. If an industry is held to account for the productive value generated by its participants, through appropriate accounting, then a profitable, prosperous and productive economy is the net result. As proof of this concept we only need to look around the North American oil and gas industry to fully comprehend that no one has been winning here. What is needed is clear accountability and profitability which would then be realized everywhere. Another simple fact that doesn’t seem to permeate the minds of those in control. Demand for accountability and profitability fall under the domain of the investors and their abstinence is the strongest message they can send.

Our capitalist system provides organizing constructs of logic, law and frameworks of understanding that are available to guide people in society, including investors. People, Ideas & Objects have adopted these five key organizational constructs in the Preliminary Specification. Today's discussion is from a different perspective which sees the implications of these five constructs working together to enable a structure where all of society gains an understanding of the oil and gas industry operations. This understanding forms the culture of the industry and how it will operate is derivative of these. Defined and supported by the software and services of our offerings. We are not recreating the wheel, that’s what bureaucrats are doing by manually managing the business in their methods. We are securely bolting the wheels to the vehicle. People, Ideas & Objects et al 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.

Joint Operating Committee

Is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the North American oil and gas industry. Moving the compliance and governance frameworks of the hierarchy into alignment with the seven frameworks of the Joint Operating Committee brings about speed, accountability and profitability in the producer firms. This is the source of the foundational concept of the partnership model of oil and gas operations. The legal basis of the Joint Operating Committee that we are suggesting is being undermined in our speculation of active cannibalization currently being undertaken today by bureaucrats in the industry. The need to source cash has been never ending since investors left, losses on hedges are material and we suspect the only source of cash to pay these losses is to divert the partners cash flow. Therefore our speculation suggests that the trust inherent in the partnership model of the industry will irretrievably break down and therefore need to be rebuilt.

Markets and the Price System

The Resource, Financial and Petroleum Lease Marketplace modules are three of the thirteen modules of the Preliminary Specification. They anchor the Preliminary Specification in the three markets that a producer competes in to achieve their objectives. There is also the decentralized production models price maker strategy that ensures producers attain the most profitable means of oil and gas operations, everywhere and always. It is these principles of the capitalist system that have been replaced and circumvented by the hierarchy as a poor facsimile. Leading to their failure. 

Specialization and the Division of Labor

All the value that has been gained in the world since 1776 can be attributed to specialization and division of labor. We are using these principles throughout the Preliminary Specification in order to enhance the productivity of the producer firm and industry. Expanding the industries throughput of capacities and capabilities from the same resource base will be necessary in order to achieve the enduring, profitable North American oil and gas independence necessary. Our user communities service provider organizations are structured around individual processes which they operate on behalf of the entire industry as their client base. Enabling specialization and division of labor's value to be realized through the administrative and accountings enhanced performance. Granted this deny’s the bureaucrats the ability to build empires in these domains. However we believe that overhead is the secondary cause of chronic unprofitability. Each producer builds these duplicate, non competitive attributes to conduct the same functions as all other producers in an unshared and unshareable manner. Our Cloud Administration and Accounting shares these resources on a variable cost basis.

Information Technology

Information Technology applied to the business to increase its value, not for the purpose of having the latest technology. People, Ideas & Objects, our user community and their service providers have implemented IT in ways that are unique, productive and value enhancing. Such as taking the cloud computing paradigm and expanding it to include the administrative and accounting needs of the oil and gas industry. Where any and all producers will be able to have their accounting and administration conducted on a consistent, objective, standardized and variable cost basis through this cloud administration and accounting service. Consistency and standardization are necessary to ensure the accounting criteria that evaluated a property as unprofitable and therefore should be shut-in, received the same consistent, fair and objective basis that all other producers' properties were evaluated under and may have been deemed profitable and continue production. 

Intellectual Property

Two words the bureaucrats love to hate. IP is the basis of how People, Ideas & Objects user community and their service providers, our developers and the producers will access the software and services of our offerings. The glue that holds it all together. It’s also the foundation of why Americans remain dominant in the science and technology fields. Anyone with an idea can take the chance to move it forward for their own benefit. By using the organizational construct of Intellectual Property the Preliminary Specification enables producer firms to advance the scientific basis of oil and gas technology in innovative ways. Working with the service industry to develop their capabilities and capacities in new and innovative ways. Having those with new ideas able to secure them and expand on them as products and services provides the motivation for themselves personally, with the overall benefit of everyone. IP also eliminates the redundant and wasteful duplication of ideas. A strategy currently exploited by bureaucrats to control costs through excess competition; however, a strategy that has done nothing but destroy the motivation for anyone to try something new. 

Locking the development, implementation and deployment of the Preliminary Specifications into these and other minor frameworks provide a solid grounding for the understanding of how everyone in the industry can proceed for the next 25 years. ERP systems define and support the organizations that use them. The bureaucracy is defined and supported through the implementation of their current ERP offerings. Existing oil and gas ERP systems do not recognize any of these frameworks and therefore the only default is to rely on the hierarchy to manually “fill in” the blanks as required. In the 21st century this is unnecessary and unacceptable. It is a defined ask of the investors that their return is premised on the basis of producers use of tier 1 ERP systems such as People, Ideas & Objects use of Oracle Cloud ERP. Making the phone call to Oracle doesn’t qualify to meet the investor demands. Producers will need to have a defined vision of what the system will be, how it will enhance their accountability and ensure their profitability is real, but also established everywhere and always. A commitment in terms of the full financing of the ERP systems development budget. And once the system is implemented and the results of the system are obvious to the investors where the performance and value generation they expect of oil and gas producers exists and can therefore compete in the capital markets. They’ll then commit their financial resources back into the industry. This is why outside of People, Ideas & Objects you don’t hear anything today in the ERP marketplace. Investors have heard abundant talk from bureaucrats and are able to reread their Prospectus’. These words are soothing, however actions that lead to successful outcomes are not what these bureaucrats are known for. 

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 TBD 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.

Ode to the Demise of the Commodity Price Proxy

 Last year I took the opportunity to lay out the difficulties and detail the outright crisis the producer bureaucrats were facing in the near future as a result of their “management.” I know they appreciate the work I do so I thought that I’d update them to accommodate the changes in the market and the status of each of these crises. It’s a difficult job, some say I do it well but the important thing is I enjoy it. Anyway, the “muddle through” and “putting cash in the ground” business model has the feature of cost control as the sole means to provide evidence of bureaucrats' hard work and value being (de)generated in the industry. As we’ve seen. Underlying all of these crises was our documentation of their cost control efforts weren’t as much cost control, as they were cost deferrals. We identified a variety of costs, instead let's call them a mountain of costs that were going to be incremental to the standard costs that producers had come to know and love. Maybe we’ll need the bureaucrats more, they may think. These costs need to be added to the difficulties of the role of the producer of “drilling wells” and I assert that they had a secondary role of paying off the environmental lobbyists from picketing their facilities and head offices. Where do you think all that money comes from to sustain the environmentalists' attacks on the pipeline companies? My point is that the producers were concerned with drilling their precious reserves and expected “others” to do everything else and deliver it to them on a silver platter. While they collected the revenues of a primary industry for distribution amongst their elite group. I’m not suggesting that this is not going to continue to work in the future but it certainly has stopped working now hasn’t it. 

Oil and gas has been around since 1859. With many facilities having been built and substantial oil and gas being discovered and produced since that time. Many of these properties are no longer material or marginal for the initiating producer and their prospects are dim. Abandoning the property is the recommended approach based on the policies of the more senior producers. Producers therefore have been able to sell the property to new producers who generally have been able to create value from them and at the same time the original producers were able to absolve themselves of the reclamation cost obligations. Recently the Alberta government intervened in a proposed sale of Shell’s three sour gas facilities to what was then a start-up oil and gas producer. Stating there was difficulty in seeing how the startup could pay for the reclamation cost obligations. What the Alberta government didn’t understand at the time was there's little they could do when the cleanest of clean energy producers is trying to renounce themselves from their “dirty” oil and gas assets. Pieridae Energy Limited’s acquisition of the facilities was completed in October 2021. Industry wide reclamation costs are the looming, accelerating and unknown amount of new costs that producers are needing to face as the retirement of conventional oil and gas assets accelerate.

The next category of costs that need to be considered are the rebuilding costs of the infrastructure that has been built over the past decades. Much of it is operational beyond its usable life and with either additional investment to bring these facilities up to today’s requirements or to rebuild their replacements. These rebuilding and refurbishing costs will need to be added to the list of new and escalating costs that are incremental to those that were previously realized. 

The question that needs to be asked therefore is: are today's oil and gas infrastructure the infrastructure that we should expect will take the industry to the level of enduring, profitable energy independence? Estimates that the industry will demand $20 - $40 trillion in incremental capital costs in the next 25 years are what are generally agreed upon. These include the categories of capital costs for reclamation, refurbishing and rebuilding in those estimates. In today’s bureaucratic business model it will be the investor that fronts this money to the producer in exchange for the promises of roses and champagne. And let's not forget the paper they’ll receive in the form of “balance sheets.” Banks will want to be getting in on that value generating action too. Alternatively, People, Ideas & Objects, our user community and their service providers propose the Preliminary Specification. Which will cycle the capital costs through the producers on a frequent basis and pass these capital costs, in a capital intensive industry, on to the consumer in the price of the commodities. That way the cash will come back quickly to the producer and the reuse of that capital, cycled through repeatedly on a frequent basis will provide the means to fund these demands. The need for $20 to $40 trillion is unnecessary when $1 trillion turned over 20 to 40 times is just as good. The alternative is investors can sit back with today’s bureaucrats and cherish their paper empire of a well built $40 trillion balance sheet account of property, plant and equipment for a few decades before that cash is ever seen again. I’ve been highlighting this ridiculous business practice for well over a decade and the bureaucrats have done nothing to deal with this, therefore they’re unable to read or don’t like the sarcasm, it could be that it's a difficult concept for them or that it interferes with their personal cash flow. We should ask the investors and bankers. 

We also itemized the major crisis the producers were facing in the looming short to long term. Anyone of these crises would individually have focused the energy of the producer bureaucrats in a concerted effort to resolve their impact. However, that is not the objective of “muddle through,” and its approach continues to ignore these. I’ll highlight them here to see how we’ve done and determine if there are new crises that need to be added.

Crisis # 1

Chronic Overproduction

This is the issue that has caused the producers all the difficulties these past four decades. It is the primary issue that the Preliminary Specification resolves. The second among many issues it resolves is the development of a culture of innovation throughout North American oil and gas producers. One that will work with the speed of the innovation that occurs in the service industry. Recently we noted that overproduction was listed as the third reason for the great depression. Businesses and industries learned not to overproduce and create the difficulties of the great depression again, or what we’ve seen in the chronic liquidation of value in North American oil and gas. The accounting that hides the overproduction via the industry principles of “building balance sheets” and “putting cash in the ground.” It is the misinterpretation of the SEC’s late 1970’s requirement to use full cost accounting that has created this and bureaucrats continue to feign ignorance of the issue, history and facts. In summary, what the SEC states is the producer must not exceed the present value of their independently evaluated petroleum reserves in the assets listed in property, plant and equipment on the balance sheet. Replacing the financial statements purpose of reporting performance to assessing value. Nowhere does it state what the minimum asset balance must be. Tell me of any other business in the world who’s primary objective is to “build their balance sheets?” Simply, overreported asset values create commensurate over reported profits. Excess profitability will attract investors to capture those profits. Excess investment leads to overbuilding of capacities leading to overproduction of the oil and gas commodities. Overproduction is best represented as unprofitable production however this accounting hides the fact that none of the production is or has been profitable. It is designed to “build balance sheets,” not assess performance. 

Crisis # 2

Virus

Implications from Covid are self-evident at this point. Although personally I find the whole situation frustrating. Professionally I don’t think I could have asked for more. 

Crisis # 3

Debt and rising interest rates.

When the asset balances of the producer firm are bloated beyond reason we see two implications that are clearly evident in North American producers. No cash or working capital. A capital structure that is as large as the bloated asset value. Most of the capital structure, due to the losses realized in the past seven years, has eliminated the shareholders interest. Leaving producers with a disproportionate asset value supporting highly leveraged debts. The past two decades of low interest rates have allowed easy access to banks providing excess debt leverage to individuals and businesses of all types. None more so than North American producers based on the independent shale reserve evaluations. What is potentially seen as a global debt crisis may be playing out in the next few years and the immediate implication will be higher interest rates on these unmanageable producer debt loads. 

Crisis # 4 

OPEC+ surplus capacity. 

Suggesting at the time of initially writing this scenario that OPEC+ would once again drop the price. However it now appears that the scale of damage realized in North American oil and gas is far greater than expected. OPEC+ is realizing real value through the higher oil prices when North American producers are locked into hedging contracts that deplete their cash when commodity prices climb. This being one of the many bureaucratic costs of losing the financial, operational and political frameworks of the industry. 

Crisis # 5

Capacities and capabilities.

Once the financial difficulties are realized the natural follow on consequences of what a business experiences are it’s diminished capacity and capabilities. That shale is falling into this class of difficulties is something that I had not considered at the time of initially writing these. Recall the summary declaration by the producers that shale was not commercial and they were hence moving to clean energy. Here again I feel the bureaucrats are 100% wrong. We can easily accuse them of never doing the hard work, and certainly never trying. My focus on raising this before was the financial devastation in the service industry at the hands of these bureaucrats. This would lead to the inability of the service industry to meet the high water marks of what they were able to achieve in prior years. The evidence of this is clear and it is a serious demarcation of what the producers could previously rely on. We noted recently that at today’s 25% level of prior activity levels the service industry is already demanding record prices for their services. The rebuilding of the service industry to its appropriate level will need to be done by the producers themselves and done as a result of their gracious benevolence. The cardinal rule being invoked is, you broke it, you fix it. 

Crisis # 6

Insurance

This is an interesting issue. I thought I had an area of concern that appealed directly to the officers and directors of the oil and gas producers personal pocket books. What we affectionately call bureaucrats. It hasn’t worked out that way and I have to say they dodged what I thought was a bullet headed straight for them. The admission I’m not always right may be surprising to some, however. The point was with the desperate condition of the share values of the producers at the time. Shareholder litigation may begin on the basis of their ignoring the obvious refusal to do anything. Their refusal in light of the warnings emanating from this blog and the exit of their investors. Insurance companies seeing the culpability of the bureaucrats would suspend their coverage if the bureaucrat continued to work at that firm. Triggering an exit from these firms. The past issue is past and did not materialize due to the fact that most of the shares of the producers have rallied as they’re seen as a proxy on the prices of the commodities. 

Sitting in the catbird seat these bureaucrats are reveling in their victory. I suggest their new issue is that shares are high with the potential of decline. I believe there's a risk of this insurance issue coming back into play again. What if the producers are experiencing the financial difficulties that I describe. The concept of the producer share price is a proxy on the price of the commodities implies that it can generate value based on the price increase. If management, who are unresponsive to business realities such as these issues and their investors, yet are willing to hedge their risk so that prior disasters aren’t manifesting again (negative $40 oil) are willing to lock-in what are marginal outcomes which do nothing but sustain bureaucrats in their standard of living, being the lifestyle of the rich and famous. Would this continue to maintain the theory of the commodity price proxy?

Crisis # 7 

Joe Biden. 

Who would have thought sleepy Joe would make Justin Trudeau look lucid and off the recreational drugs. 

Do we see the requisite capacity and capabilities inherent in these producer firms to make the necessary changes to achieve enduring, profitable, energy independence for the long term? Or was the classic management excuse of not all the data was available to them? Will the data be available soon? What excuse is there for this inaction? Particularly when 1929 was almost a century ago and all other industries were able to see and read the causes and implications of overproduction then. I highlighted an article in the Calgary Herald from July 26, 1986 entitled “OPEC minister can see economic destruction.” This article dealt with the 1986 oil price collapse and overproduction of North American producers. That a solution in the form of the Preliminary Specification, our user community and their service provider organizations was prepared in August 2012 that wasn’t to the bureaucrats advantage or liking, but what alternatives have been prepared and what's available now? That is other than the bureaucrats $5.00 solution. Their investors and bankers began exiting the industry in disgust in 2015, actions that are considered the most critical and terminal decisions made towards a firm. Most would agree with the crisis and costs on this list and there would be many more that could be added. If we look at the speed at which the bureaucrats have approached the fact of their investors exit in 2015 and the list of things they’d like to see management undertake. We’ll no doubt see the effectiveness of “muddle through” once again. Yet with all of this, they’ll be trying to figure out where exactly they dug those holes to put the coffee cans full of cash in. 

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 TBD 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.

What If?

 I have always prefaced my arguments about the producers derivative losses and their follow on consequences with the phrase “I believe.” Producers' working capital deterioration in the past two reported quarters is creating difficulties that are becoming unmanageable. In terms of my speculation I reviewed the information that was presented by our sample of 18 producers to see if I can get a better understanding of why the accounts payable and receivable were bloating as they have been. Are producers not paying their bills to ensure they have adequate cash to pay their derivative contract obligations? With minimal field activity, there is no justification to have record balances of accounts payable. The only other material trade accounts payable / receivable are the working interest partners shares of their production interests. I am unable to determine anything other than the need for cash to pay the looming derivative contracts, which are itemized elsewhere, as current liabilities. There were substantial numbers of closings due to consolidations being undertaken in 2021. However I can account for those increases in these accounts. 

Conoco presents the most interesting case in terms of, in my opinion, proving my speculation. First Conoco has not speculated in derivative contracts. Conoco has maintained a healthy amount of cash at $9.8 billion and Working Capital of $9.7 billion as of the third quarter. It is unknown the status of their cash in the fourth quarter as they closed on the acquisition of Shell's Permian assets for around $10 billion. It is unknown as to how they paid for these assets as their capital structure is fully intact and strong. They also had $32.3 billion in revenue and reported profits of $5.4 billion as of the third quarter. The acquisition of Concho was completed on January 15, 2021. My question is, did Conoco who are not constrained financially in any way. Without derivative contracts to concern themselves, find out after the fact what other producers were doing and therefore chose not to volunteer to be the only fool in the industry that was paying their bills to the other producers?

Well how serious could a few derivative contracts be? I’ve labeled it as cannibalization of the industry. Producers have run through every source of cash and value that they could get their hands on. Destroyed that value along with the faith that people had in them, or the capacities and capabilities of those they depend upon, such as the service industry. Cannibalization of their partners is the only source of value now available in the short term. To answer the question however one does not have to remember far back when producers failed to shut-in unprofitable production. Their only source of cash then was revenue, and the demand for that cash was great. Continuing to produce until the refineries told them they could take no more. And the oil prices had fallen to negative $40. Creating the existential crisis we’ve been talking about here at People, Ideas & Objects for the past number of decades. The bureaucratic inability to manage the organization under a viable business model was sending the industry into a negative, downward spiral. With the advancement of shale accelerating that downward trajectory in the past decade. Derivative contracts were the panic response of the producers at the first opportunity to secure some form of solid ground that negative oil prices would not affect them again. Selling production forward at $40 and $50 became bureaucratic nirvana. 

At today’s mid $80 oil prices there is no scenario that is more detrimental to the producer. All is well and the future is bright on the surface. Except these contracts demand a royalty payment averaging 17%, or $14.50. A $45 derivative contract will therefore net the producer $30.50 before any other cost. If we apply the same to the $18.96 Boston natural gas prices we noted yesterday. And the derivative contract is for $2.80. Then the net to the producer would be negative $0.42. I don't think that these are the expectation in the market. Neither are profitable markets and the worst of the derivative contracts in terms of volumes are coming due in 2022. What is the outlook for commodity prices in 2022? OPEC+ are reaping the rewards of the higher prices and the diminishing threat of the North American based producers through these cumulative self inflicted wounds. European natural gas shortages are disrupting the entire LNG market and the repercussions are being realized everywhere except North America. It is only a matter of time until the natural gas supply situation becomes critical, and that may not be this year, but most certainly next year. 

Erosion of the trust in the partnership model of oil and gas operations is the end of the bureaucrats existing business model. The severity of the derivative losses are something to behold. Pioneer for example recorded $2 billion on $7.7 billion in oil and gas revenues in the third quarter. How does this situation end? In the case of Pioneer they say they paid their way out of their derivative commitments. How we’ll soon find out. My argument is that their payment will do nothing to solve the industry wide loss of trust between producers. Pioneer will be able to overcome their mild case of foolhardiness. Its other producers that are thick in the stew that shows no ending. Southwestern is tragic. Oil and gas revenues of $2.6 billion and derivative losses of $2.386 billion. The largest natural gas producer, EQT had combined revenue and derivative losses for a negative revenue of over $700 million. In whatever way, you can always count on your oil and gas producer bureaucrat to generate negative profits, with negative prices and negative revenue, one way or the other. 

It’s just one stumble on to the next with these producers. There are no plans or ideas on how to manage the business for anyone outside the trusted few bureaucrats. “It’s all for us” and they’re only competent in filling their own pockets. Look at the past decade and tell me of any single bureaucrat in industry leadership who's focused on the business. Where is the intelligence, the strategy, honesty and integrity. Where is the value that’s been built in the industry when the management can only go from self created crisis to self created crisis. They didn’t need to “build balance sheets” and “put cash in the ground” to impress anyone. They needed to perform. They betrayed their investors and then their bankers by not doing so. They then abused the service industry by not paying them for a year's field activity for at least 18 months. Financially destroying the service industry, their capacities and capabilities. Today producers have access to 25% of prior service industry capacity available to them and they’re paying record prices for that luxury. Seeking the cash they needed they then pursued production until the prices were no longer providing positive values. But then it wasn’t oil and gas, it was all clean energy for them. Seeing their safety in derivative contracts they panicked into those creating today's difficulties which are causing them to cannibalize one another. All because they can’t address the broken business model that never built value, only spent it. Which shale then set on fire.

This is all old news and stuff that People, Ideas & Objects have discussed before. Well yes that’s true. And here’s the “what if” question. What would happen in an economy such as the one we have, with comparatively high oil and gas prices being realized, if one of these producer’s is forced to declare bankruptcy by one of its creditors? The loss of faith and lack of support these bureaucrats currently enjoy can not go any lower, therefore we don’t need to speculate. What would the consumer and the public at large see, how would they perceive the industry if it began to finally pack it in due to the financial difficulties it has created for itself these past decades? 

Where will the increase in oil and gas production come from? OPEC+ has no interest in providing an excess to the market. The service industry cut their equipment up for scrap metal in order to eat. And good luck finding the other 75% of the people who’ve obviously left that industry. Reflecting the scale of damage being realized there. Will investors and bankers be lining up to help? Will Halliburton and Schlumberger return? If producers could finance an increase in production, they couldn’t buy the capacity and they most certainly couldn’t afford it. If we look at this situation critically on behalf of the bureaucrats their only remaining excuse, who to blame and viable scapegoat they haven't used before is the consumer. If they tried blaming the customers I’m sure they’d get a response. 

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.