Revisions to the Executive Summary Part 2

What’s in a Name?

The naming of this initiative as People, Ideas & Objects is a derivative twist on Professor Paul Romer’s “Endogenous Technical Change” paper that he published in October 1990. (And subsequently earned him the Nobel Prize in Economics in 2018.) A paper that was published in The Journal of Political Economy Vol. 98, No. 5, Part 2: The Problem of Development: A Conference of the Institute for the Study of Free Enterprise Systems Oct. 1990, pp. S71 - S102, and downloadable here.

And best understood through this Reason Magazine article. Accessed January 25, 2003.

Endogenous technical change or new growth theory suggests that economic growth from investments in transportation, communications and financial services was diminishing in its impact. That it was being replaced by a new dynamic in terms of how economic growth was or would be achieved. Summarized in this Reason Magazine article by Professor Romer as people, ideas and things we amended his summary to reflect that we are object based developers to come up with our name.

From the interview in Reason Magazine.

As one of the chief architects of "New Growth Theory," Paul Romer has had a massive and profound impact on modern economic thinking and policymaking. New Growth Theory shows that economic growth doesn't arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress. Along the way, it transforms economics from a "dismal science" that describes a world of scarcity and diminishing returns into a discipline that reveals a path toward constant improvement and unlimited potential. Ideas, in Romer's formulation, really do have consequences. Big ones.

In the Reason article Professor Romer applies his theory to the simple example of standardizing the lid of a small, medium and large coffee cup. Instead of producing, inventorying and handling three different sizes the efficiency of sharing one size is intuitive, inherent and most of all substantial in terms of its cost savings over the long term. Through the Preliminary Specification we have applied this principle in a number of different ways and will be seeing this expand through the use of our user community and their service provider organizations.

Criticism of Professor Romer's theory is that it is unquantifiable. And in a way that is valid if you see the economics profession as a science. Of which I no longer do as a result of the 2008 financial crisis. If it were a science then it would have been forewarned that the difficulties were present and steps taken to remedy it. Only Nouriel Roubini was raising any warning. All the others were too busy checking the dials on the dashboard to have noticed the brick wall they were heading into at high speed.

One example that can be highlighted from our discussion in the Specialization and Division of Labor section above is the massive cost savings oil & gas will realize from the Preliminary Specification. Specifically the reallocation, identification and support of the administrative and accounting resources of the producers to the service provider firms. This value is incremental and is attributable to both specialization and Professor Romers New Growth Theory. Cloud computing introduces a paradigm based on the principle of sharing the large capital costs of building and maintaining a large, fixed capacity, technical infrastructure necessary to meet their customers' needs. And replace it with unlimited capacity that’s available as an all in variable cost based on use. Key to the paradigm is the associated reduction in a firm's demand to have the technical capacity and capabilities for non-competitive attributes such as database, network and operating system specialists with the skills to maintain operations. A relief of not only their customers’ budget but an ability for them to refocus on productive and competitive activities. The two attributes of specialization and division of labor.

It is the sharing of this technical infrastructure that creates incremental value from Cloud Computing. Professor Romers principle theory lies in endogenous growth however the sharing of these costs is what he calls non-rival. From the Journal of Political Economy pp. S73 - S74.

A purely rival good has the property that its use by one firm or person precludes its use by an-other; a purely nonrival good has the property that its use by one firm or person in no way limits its use by another. 

And it is here that People, Ideas & Objects Preliminary Specifications user community service provider organizations implement the feature we are calling oil & gas Cloud Administration & Accounting. The elements of the capabilities and capacities of our user community and permanent ERP software development capability proposed in the reallocation of these resources are shared as a non-rival throughout the North American producer production profile. Alleviating each producer firm from having to maintain the specific skills and attributes necessary to achieve these requirements. Accessing them on a highly specialized and shared basis will provide them with higher quality products and services at lower variable cost based on profitable production.

Security & Access Control

Once we’ve adopted the Joint Operating Committee (JOC) as the key organizational construct of the dynamic, innovative, accountable and profitable oil & gas producer. We're involved in the interactions of many producers and suppliers involved in the day to day commercial and strategic concerns of a Joint Operating Committee. What we need to concern ourselves with in the Security & Access Control module is that the right people have the right access to the right information and data with the right authority at the right time and at the right place. And do so securely, where Compliance & Governance is maintained and there is no unauthorized use of any information in any form.

Throughout the Preliminary Specification we discuss and resolve the many premier issues of the oil & gas industry. One of our concerns here is the demand for the earth science and engineering effort within each barrel of oil equivalent produced has always and will continue to increase. This is best represented in the steep and never ending escalation of exploration and production costs involved in oil & gas. At the same time the critical earth science and engineering resources are somewhat fixed and difficult to expand in the short to medium term. Add to that an anticipated retirement of this brain trust in the next twenty years, the oil & gas related depression we are experiencing which is stalling the careers of recent university graduates, the expected production profile of the North American continent and particularly in terms of providing profitable energy independence, and the problem becomes a critical concern. New means and methods for these resources within the industry to work together will be necessary. People, Ideas & Objects have chosen specialization and the division of labor as that method to resolve it. Demanding a far greater level of collaboration be enabled through the use of the Internet and the available Information Technologies. Enabling interaction within a Joint Operating Committee that spans many producers with the appropriate governance and chain of command for each of those producers and their agents being represented. Introducing substantial new opportunities and risks such as what the Security & Access Control module addresses. 

The concept of specialization and division of labor is well known as a principle of economics that brings about greater amounts of economic productivity from the same volume of resources. Given that the volume of earth science and engineering resources are known for the foreseeable future, specialization and the division of labor will provide us with a tangible means in which to deal with the productivity of the oil & gas industry. In today’s North American oil & gas marketplace, to approach a heightened level of specialization and division of labor from a scope and scale point of view, without the use of software to define and support it would be a failure.

The pooling concept is our solution to the current necessity that each producer firm acquires the earth science and engineering capabilities to deal with all the needs of their operated properties. This creates unneeded “just-in-time” capacities and capabilities for these scarce scientific resources. When each producer pursues this same strategy, substantial surplus capacity is built into their overall capabilities creating industry wide unshared and unshareable resources. Redundancies built within each of the producer firms are otherwise inaccessible and are therefore left unused and unusable. What is proposed through the People, Ideas & Objects Preliminary Specification is that the producer's operational strategy avoids and eliminates the operator concept and begins pooling their technical resources through the partnership represented in each of their Joint Operating Committees. That way the surplus capacity of otherwise unused and unusable technical resources in the industry can be made available to the Joint Operating Committees and employed by the producers through their advanced, organizational specializations and division of labor.

Oracle’s products provide a strong layer of mission critical capabilities in the Security & Access Control module. Although this comes with additional costs, I am certain that no one will argue with the quality and secure knowledge that their products bring. By using Oracle Cloud ERP in the configuration for the delivery of People, Ideas & Objects products we gain advantages from a Security & Access Control point of view. Our user communities service provider organizations will deliver these Oracle product software features and functions in concert with People, Ideas & Objects Preliminary Specification and provide the support and services necessary to ensure the producer's needs are fulfilled. Establishing their role as an industry wide oil & gas Cloud Administration & Accounting software and service offering.

Resource Marketplace

What we set out to accomplish in the Resource Marketplace module is captured in this quotation from one of the primary research sources. Professors Richard N. Langlois and Giovanni Dosi, as were many others, were used extensively for the research that was conducted in the development of the Preliminary Specification. In this quote from Professor Langlois we learn the direction that we are headed.

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labor between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).

To deal effectively with the Resource Marketplace in oil & gas, the producer will need tools to effectively engage with the suppliers and others for the resources they need. The Resource Marketplace Module provides a window on the “Resource Marketplace” for Joint Operating Committees and producers. Anything of value that is contracted between “actors” in the oil & gas, service, service provider, software and user community generated businesses will be found, contracted, managed, transacted and developed through this module. It's simply a virtual representation of these marketplaces. Enhanced with the full capabilities of a tier 1 ERP system in the form of Oracle Cloud ERP. Therefore the transaction processing, negotiation, determination of available resources, determination of transaction costs, contract execution, effective software tools to monitor and verify compliance to the contract with the full support of our Resource Marketplace module and its interfaces to other modules of the Preliminary Specification.

Similar interfaces will be provided for use by the service industries. Transactions have two parties, the efficiencies of the producers would inherently include the efficiencies to the service provider. Since we are an accounting system, then certainly offering similar services to the suppliers would only make sense. It is not just producers in the Resource Marketplace. Key to the efficiencies in the Resource Marketplace are the mitigation of transaction cost friction. Friction on both sides of the transaction, due to the fact that transaction costs in the Resource Marketplace are costs that will ultimately be borne initially by the Joint Operating Committee and eventually by the producer itself.

Contained within this marketplace will be all of the producers and suppliers who will be able to define, create and conduct business in the actual marketplace that exists today. The scope and size of the Resource Marketplace, our user community and their service provider organizations will accommodate the needs of Exxonmobil and their costs down to the single entrepreneur starting out in the oil & gas business. To preclude any group, profession, organization, or person from the Resource Marketplace would limit the value available to the industry. Whatever service, product or solution is provided to the energy industry, from either individuals, those employed by producers or Joint Operating Committees, or companies providing services to the producers which should include Schlumberger and anyone directly or indirectly employed in the energy industry. Therefore acquiring as Professor Langlois suggest “the elements of organization, knowledge, experience and skills” and we include ideas in that list.

It is the use of the Joint Operating Committee and the Resource Marketplace that provides value to the profitable and innovative oil & gas producer. Enabling the service industry to grow thick markets for their products and services. Where a diversity of offerings from new competitors, with new products or innovations on the products provided by existing suppliers. Producers have a role in defining and supporting a dynamic, competitive and healthy service industry. However, before that happens, the need for the software and services that are defined here in the Resource Marketplace has to be built for the producer, the Joint Operating Committee and the service sector to support these markets. From Professor Richard Langlois paper “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

The second hypothesis, which has resonances at least as far back as Gerschenkron’s famous “backwardness” thesis (Gerschenkron 1962), is that the way an economy responds to the problems of coordinating economic development depends not only on its own institutions and capabilities but also on institutions and capabilities elsewhere. It depends not only on an economy’s own history but on the history of other economies as well. The force of this observation is that an economy at the frontier of economic development (however we care to define that) is likely to respond to the coordination problem differently than an economy lagging behind that frontier. Specifically, an economy at the frontier is arguably more likely to rely on decentralized modes of coordination. This is so because uncertainty is greater at the frontier — uncertainty about technology, organizational form, market direction. p. 18

It is here we find the reason for what plagues the North American oil & gas economy. Producers have chosen centralization as their theme to deal with the situation they’ve created. Issues remain unaddressed and solutions to those issues remain limited to People, Ideas & Objects et al. In 2022 similar answers have been successfully implemented in many other industries through the form of disintermediation or decentralized organizational business models and structures facilitated through the use of Information Technologies and most specifically the Internet. Issues in the producer firms have now manifested themselves to the point where their capabilities and capacities through the service industry are highly deprecated. An industry established exclusively to provide producers with the geographical and technical diversity they need to function. To the point where the capital structure of the service industry is non-existent due to the destruction authored by producer firms. At the same time producers are standing on oil & gas production deliverability volumes that haven’t been maintained over the past seven years and may collapse due to their neglect and this incapacity. An uncertain situation best encapsulated as I see it as, oil & gas everywhere, but not a molecule left to burn.

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 & gas industry with the most profitable means of oil & gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. 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. 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Executive Summary Part 1

 People, Ideas & Objects Preliminary Specification has the dual, opposing and conflicting objectives of ensuring profitable oil & gas operations everywhere and always, while at the same time ensuring consumers are provided with abundant, secure, reliable and affordable energy. Today our advanced society mechanically leverages each barrel of oil produced by 10 to 25 thousand man hours of equivalent labor. A value proposition that consumers can not live without. However, we see the responsibility and accountability for these dual roles of profitability and innovation to ensure the consumers are adequately supplied are summarily ignored by the North American based producer firms. Their irresponsibility is now reflected in the financial destruction they’ve caused to their own firms, the industry itself and most importantly the service industry they’re wholly reliant upon as the source of their capabilities and capacities. It is as we state however, the producer bureaucrats are fine and they thank you for asking.

There are five Organizational Constructs that define the overall architecture of how the profitability and innovation is structurally and organizationally defined in our Preliminary Specification and supported through our user community and their service provider organizations. These five include specialization and the division of labor, Intellectual Property, Information Technology, markets and the key Organizational Construct is the Joint Operating Committee. Which is the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the oil & gas industry. By moving the compliance and governance frameworks of the hierarchy into alignment with these seven frameworks of the Joint Operating Committee we achieve a speed, innovativeness, accountability and profitability that is necessary for at least the next twenty five years.

What People, Ideas & Objects can state unequivocally, and would obtain resonance throughout the greater oil & gas economy, is that nothing will exist for the long term without profitable operations. And profitable operations from a real perspective, not the specious claims made by producers over the past four decades and detailed elsewhere throughout the Preliminary Specification. We offer a value proposition that contrasts with the status quo and quantifies our claims as high as $45.7 trillion dollars over the next 25 years of operation of the Preliminary Specification over the base case. This is not a magic elixir as much as it is a measure of the structural incompetence and mismanagement of the officers and directors that have plagued North American producer firms. Theirs has become an industry wide culture of a self-serving, lucrative administration that hasn’t concerned itself with the business of the business.

One aspect of their culture is their fundamental belief that oil & gas are price takers for economic definition purposes. The Preliminary Specification contains our decentralized production models price maker strategy that ensure profitable production is the only production that is produced. The original publication of this document was on August 9, 2012. A period of time that will soon exceed a decade and all that we’ve seen from said bureaucrats is the blank stares from their lofty couch positions. What could have been is a reasonable question when both oil & gas commodities were pushed by producers into negative pricing situations. What could have been if they had listened to their investors' demands for change beginning in 2015. They’ve had the opportunity to make the necessary changes by adopting the Preliminary Specification yet chose to silence and ridicule our solution. They’ve had the demand from their investors, and more importantly, the destruction which we’ve consistently pointed out to them during this decade has been obvious and evident everywhere in the North American producer population, yet not one productive thing was done to deal with it during this decade? 

There are other developments that are evident throughout the global economy that are reflected and instituted in the Preliminary Specification. Specifically disintermediation has been a force that has and will continue to offer all industries business models that compete directly with the inefficiencies of the hierarchical form of organizations. People, Ideas & Objects et al are disintermediating the oil & gas industry. What we have found since the beginning of this dynamic which began with the changes to the music industry. The number of industries that have been disintermediated is comprehensive, which has provided those that have not been with better tools and understandings in which to resist these forces and maintain their hold for longer periods. Leaving the inefficiencies that should have been worked out in the industry to continue and to leave the methods of senior management to survive by cannibalizing prior established value as they’re incapable of building any new value. The loss of serendipity, spontaneity and creative destruction are unintended consequences of society's dependence on software that define and support organizations. People, Ideas & Objects et al are therefore establishing a permanent software development capability to accommodate the changes within the industry in the future and to reinstate these economic principles. 

A feature of our user communities service providers is what we are calling Cloud Administration & Accounting in oil & gas. An extension of the Cloud Computing paradigm that has inherent business value. Eliminating the need for each producer to incur the costs of building and maintaining the unshared and unshareable, non-competitive advantage of their administrative and accounting capabilities. To offer these services as a variable cost, charged directly to the Joint Operating Committee which in turn enables detailed, actual, factual financial statements to be prepared for each property. Therefore if it is profitable it will continue to produce, if not it will be shut-in to incur a null operation, no profit or loss. What People, Ideas & Objects et al will have done is turn all the producers costs variable, based on production.

The Preliminary Specification is a thirteen module ERP (Enterprise Resource Planning) software system designed for the dynamic, innovative, accountable and profitable oil & gas producer. Built within Oracle Cloud ERP’s tier 1 ERP offering, this executive summary will touch on some of the value-added aspects of how the producer firms will profitably be configured to meet and exceed the energy challenges of the next many decades. Keep in mind while reviewing the Preliminary Specification that it is People, Ideas & Objects claim that we provide the oil & gas producer, as our competitive advantage, the most profitable means of oil & gas operations. And we do this in the following fundamental ways.

Specialization and the Division of Labor

If we review the Preliminary Specification there is a defined restructuring of the industry that takes place throughout the modules. The oil & gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, land, legal, and minor support staff. And that’s it. The rest of the administrative and accounting resources of the producers are reallocated and provided by the People, Ideas & Objects user communities service providers. Each of these service providers are focused on one process, or one element of a process using the entire industry as its client base. So for example there may be one royalty payment processor that handles all of the industries royalty payments. Where the cost of the royalty payment, and the billing for the royalty payment service provider is billed directly to the appropriate Joint Operating Committee, not the individual producer. We are moving from the reliance on producers' fixed administrative and accounting capabilities to a reliance on the industries variable administrative and accounting capabilities.

The advantages of moving to a system and methodology such as this is its lower cost and efficiency. The costs associated with the royalty payment processor would be a small percentage of what is incurred collectively by the industry today. By focusing on the most efficient way to process royalty payments, and only royalty payments, the service provider would become specialized and reduce the time and effort in administering these tasks to a small component of the costs incurred today. Around 1776, in Adam Smith’s pin factory, his research yielded a 240 fold increase in productivity from the changes that he made in the process of making pins. Having the royalty payment process, and particularly the administrative and accounting processes of the North American oil & gas industry subject to this type of analysis, complete with the software development capability as defined by People, Ideas & Objects, similar results in productivity would be attained. All economic growth since the late 1700’s can be attributed to enhanced organization through specialization and the division of labor. Society today requires software to define and support any enhanced version of specialization and division of labor. People, Ideas & Objects software and our software development capabilities are therefore critical for the oil & gas industries future performance and growth.

Capability to Remove the Marginal Production and Become Price Makers

The high costs associated with exploration and production, and particularly shale, it’s no surprise that producers are reporting losses on operations. What is surprising is that producers have done nothing to mitigate the chronic and systemic overproduction that has caused the decline in oil & natural gas prices. The reason for this chronic overproduction is the producers have to generate the revenues to cover the overheads they incur in what is called the “high throughput production” model they employ. This model has the overhead costs of the producer firm being incurred whether there is production or not, and as a result, it makes their operation a high cost operation, even at full production. At lower production volumes it skews their earnings and their overhead costs appear out of place.

In the Preliminary Specification we have employed the “decentralized production” model. The service provider charges for their services directly to the Joint Operating Committee the costs of their accounting or administrative service. If the property is shut-in due to low deliverability, high costs or other reason for its lack of profitability then there is no charge incurred for the overhead item by any of the individual service providers as they will have conducted no work on that property, and neither the producer or the Joint Operating Committee are incurring any of the accounting or administrative overhead during times of shut-in production. Therefore the only costs that are not covered during times of shut-in production are the costs of capital. The producer can therefore shut-in unprofitable production based on the accurate, detailed accounting and therefore attain the highest level of corporate profitability by not having their losing properties diluting their profitable ones. Save those petroleum reserves for a time when they can be produced profitably. Those reserves will not have to carry the incremental costs of subsequent monthly losses that would need to be recovered in the future if it continued to produce unprofitably. Cut their oil & gas inventory and storage costs by holding them as reserves. And finally, by keeping that unprofitable production off the market those commodities will find their marginal price.

If producers across the industry follow this process then oil & gas prices would not have the significant declines that we’ve experienced in the last number of decades. If the downswing in oil & natural gas prices were averted by way of a reduction in unprofitable production volumes, the total revenues and profits of the industry would provide for profitable operations everywhere and always. Stabilizing the industry by removing the boom / bust cycle and its destructive force throughout the greater oil & gas economy. People, Ideas & Objects believe we have a responsibility to use oil & gas resources effectively, and that implies that we at least produce them profitably from an appropriate accounting basis. We owe this and the passing of a viable and profitable industry as an obligation to future generations. Producer bureaucrats claim this is collusion and have used that as an excuse to lose effective control of the financial, operational and political frameworks of the industry. They will not listen to the fact that making effective, independent business decisions at the property level, based on actual, factual accounting that determines profitability is not collusion. As a result they have destroyed the industry and are unable to provide an alternative strategy or plan to deal with the issues and opportunities they face, and by unfortunate default, the service industry.

Innovation for Profits

As the fourth element of our competitive advantage of providing the profitable and innovative oil & gas producer with the most profitable means of oil & gas operations. We focus on innovation as the way in which to enhance the profitable nature of the producer and to ensure that the consumer's cost of energy is as low as it can be. Innovation for profit, particularly from the science basis of the business, is the successful perspective for the 21st century oil & gas producer. It is within the DNA of the Preliminary Specification how the processes of innovation are identified and supported that enhance the ability of the innovative and profitable oil & gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

With an inventory of oil & gas assets that are non producing. The dynamic, innovative, accountable and profitable oil & gas producer will have readily available properties to focus their innovations on.

Lower Costs of Exploration & Development

The oil & gas industry needs a dynamic, innovative, accountable and profitable service industry in order for it to be dynamic, innovative, accountable and profitable. In the brief moments that we’ve had “good times” in the industry, producer firms accused the service industry of being greedy and lazy due to the high field costs that were being experienced. Today the service industry has had their activity levels slashed and their accounts receivable extended for up to 18 months by the producers. A situation that puts their organization, unnecessarily, in jeopardy. There is substantial conflict between what is required and what exists. We do not believe this is an appropriate posture for the future of the industry if it is to fulfill its objectives. The Preliminary Specification works to mitigate this conflict by addressing the issue of how the producer firm deals with the generation and management of ideas in the service industry. Currently the producers ignore and abuse the rights and ideas developed by the vendors that they use. And as time has passed, the number of companies that have initiated new products, services and competition have dwindled. Leading to the situation where the producers have a limited number of very large service industry participants who have the pricing power on their side during the alleged one or two “good times” these past decades.

It is through the Preliminary Specification that the producers begin to respect, sponsor and support the ideas generated by the service industry. Oil & gas producers do not compete on the basis of drill bit manufacturing technologies. It is on the basis of the respect by producers of the service industries Intellectual Property that will enable service industry representatives to respond with new and innovative products, services and competition. Through a variety of interfaces in the Resource Marketplace and Research & Capabilities modules the producers are able to participate and lead the creation of new and better products, and services by clearly expressing their needs and allowing the service industry to respond.

When the oil & gas industry has a dynamic, innovative, accountable and profitable service industry supporting the oil & gas industry then the profitability of the oil & gas producer will be enhanced, further contrasting People, Ideas & Objects business model to what the current bureaucracies may be using today.

Earth Science and Engineering Resources

The Preliminary Specification recognizes and supports the dynamic, innovative, accountable and profitable oil & gas producers competitive advantages of their land and asset base, and their earth science and engineering capabilities. It is through the use of innovation, specialization and the division of labor that we leverage the earth science and engineering resources of the producer firm. As with the points above, investments in innovation are undertaken with the express intent to return a profit. Innovation in the sciences of oil & gas are part of the producer's competitive advantages and are therefore the express purpose of the modules within the People, Ideas & Objects Preliminary Specification.

In terms of specialization and the division of labor, the producer firm must approach the issue of the pending limited base of earth science and engineering resources. Pending due to the retirement of the brain trust of the industry, the lack of new hires from the universities, the expected throughput increases in North America and the ever increasing demand of geology and engineering with each incremental barrel produced. People, Ideas & Objects have developed the pooling concept to eliminate the unused and unusable surplus capacity of these resources that are trapped within the silo’s of each bureaucracy. In addition we have used specialization and the division of labor to reorganize certain skills within these professions to service providers who can specialize in the specific skills. It is with the pooling, specialization and division of labor that the demand for engineers and geologists will be more manageable. This organizational structure is identified and supported throughout the Preliminary Specification.

These are a summary of some of the aspects of our competitive offering for the oil & gas industry. They are structured to provide the producer and industry with a profitable and innovative operating base in which to approach the 21st century. 

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 & gas industry with the most profitable means of oil & gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. 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. 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Preamble Part 5

 Innovation for Profits

Another element of our competitive advantage of providing the dynamic, innovative, accountable and profitable oil & gas producer with the most profitable means of oil & gas operations everywhere and always is we focus on innovation as the way in which to enhance the profitable nature of the producer. Innovation for profit, particularly from the scientific basis of the business, is the successful and necessary perspective for the 21st century oil & gas producer. From Professor Giovanni Dosi.

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

People, Ideas & Objects Preliminary Specification has been designed to capture the “what,” “how” and “why” of innovation within the ERP software that we’re developing for use by the innovative producer. Throughout the modules the principles and understanding of innovation were researched and incorporated into this ERP software. Our research included the works of many but most particularly Professor Giovanni Dosi and his key paper “The Sources, Procedures, and Microeconomic Effects of Innovation” (1988). It was there that we learned many of the fundamental aspects of what are necessary for the oil & gas producer to focus on innovation. Recall that it was in our Preliminary Research Report (2004) that we learned that innovation can be reduced to a defined and replicable process. If it's not a replicable process that is defined and supported by the organization then we need to find a reason why oil & gas producers are not innovative, and Apple consistently is. Although we define these processes within the Preliminary Specification which defines and supports the producer organization, Joint Operating Committee and service industry, that does not guarantee that all those that use the software will be innovative as a result. There will be leaders and laggards on these criteria. The ability to evaluate which producer firm has succeeded in exploiting the science and engineering involved in oil & gas most effectively, and commercially can not currently be determined in North American oil & gas. Their financial statements are homogenized facsimiles representing only the size of the producer with undifferentiated and obscure non-performance. 

To highlight a few of Professor Dosi’s key points on innovation, in this next quotation he notes the opportunities, the processes of innovative search, and incentives to investments in innovation.

Thus, I shall discuss the sources of innovation opportunities, the role of markets in allocating resources to the exploration of these opportunities and in determining the rates and directions of technological advances, the characteristics of the processes of innovative search, and the nature of the incentives driving private agents to commit themselves to innovation.

and

The search, development and adoption of new processes and products in market economies are the outcome of the interaction between:

• Capabilities and stimuli generated with each firm and within the industry of which they compete.
• Broader causes external to the individual industries, such as the state of science in different branches, the facilities for the communication of knowledge, the supply of technical capabilities, skills, engineers etc.
• Additional issues include the conditions controlling occupational and geographical mobility and or consumer promptness / resistance to change, market conditions, financial facilities and capabilities and the criteria used to allocate funds. Microeconomic trends in the effects on changes in relative prices of inputs and outputs, including public policy. (regulation, tax codes, patent and trademark laws and public procurement.)

Review of this list shows the opportunity for an innovative framework and footing in oil & gas that can and needs to be built today. Adoption of People, Ideas & Objects perspective of an industry that demands creative destruction be undertaken, where the rebuilding of the industry on a profitable, innovative footing is what we have in hand. It is within the DNA of the Preliminary Specification how these processes of innovation are identified and supported by our software, our user community and service providers which enhance the innovativeness and profitability of the oil & gas producer. To expect the status quo would be capable culturally to make these changes to realize this opportunity has now been proven to be impossible in early 2022. Although producers have claimed to be innovative in the past they’ve also relied on specious arguments such as “building balance sheets” and “putting cash in the ground” as two of their premier developments. People, Ideas & Objects et al through this opportunity we provide have been available since at least August 2012 and there has been no change in the makeup of the North American producer firms. In fact the trajectory of the damage being realized by the greater oil & gas economy began a far steeper downward trend around the same time.  

There are two high level distinct processes of innovation included in the Preliminary Specification that build off the overall innovative foundation being created. The foundation contains many others however it will be the source of many more in the future with a defined ERP software development capability and user community that People, Ideas & Objects are creating. Two of them work together to take control of the innovative processes within the producer organizations. To separate these processes from operations in order to isolate them, prove them, develop them and determine their implementation. Few innovations work on the first attempt. Once the means to implement them is complete then the opportunity to roll them out to the remainder of the relevant parts of the organization for implementation can be undertaken. This reduces the costs of everyone in the organization doing the same experiments over and over, then again, each year, avoiding any organizational knowledge or learning. People, Ideas & Objects et al’s approach ensures that the science and technology is applied, and if further research is necessary, it is undertaken. 

The second currently defined process of innovation involves a more ad-hoc approach that reduces the formality and constraints of the first process. What can clearly be seen as a necessity. From our second most prominent research source, Professor Richard Langlois paper “Innovation Process and Industrial Districts."

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

There is no innovative team in the first process. It is the domain of the industry at large to pursue serendipity and spontaneity throughout oil & gas and the service industry. It is the second process of innovation in the Preliminary Specification where these opportunities arise there is a defined Compliance & Governance of the process and the proper authority is invoked in order to instill the innovations development through the above mentioned process of development or further direction is available within the firm to determine where the conclusion of those experiments have been documented successfully and are ready for implementation or failed previously at which point the argument could be abandoned or built upon the prior failure.

And where will the innovative oil & gas producer focus their innovative energies? It will of course be on their inventory of shut-in properties. It will be there that they have the opportunity to increase their reserves, reduce their costs or increase their deliverability and return the property back to profitable production which is the incentive to innovate for the dynamic, innovative, accountable and profitable oil & gas producer. 

People, Ideas & Objects et al’s Value Proposition

What if ERP software in oil & gas was no longer seen as an overhead cost but as the business opportunity that it is? Which is the perspective that oil & gas producers need to adopt in order to move their organizations to a higher trajectory in terms of performance. There will be no further development of any organization in any industry without the software, and most particularly the ERP software, which defines and supports an organization's capability of changing. Otherwise we will continue to have the paradox that we have in oil & gas where the status quo is satisfied with the status quo and therefore only the status quo will ever be offered at the tragic cost we’ve all realized with much more damage soon to arrive.

People, Ideas & Objects Revenue Model provides for the lowest cost of obtaining an ERP system in the industry. And that is by charging for the costs of software development, plus an element of profit as our fee structure once. Therefore the industry is only paying for the one time costs of ERP software development. A fundamentally more efficient value proposition than any of our competitors. Our user community is implementing the Cloud Administration & Accounting of our software and the services of their service provider organizations. Realizing the remarkable cost savings and associated benefits of the paradigm of cloud computing. Where the substantial fixed costs of building administrative and accounting capabilities and capacities within each and every producer organization is a redundant, unshared, unshareable and costly exercise that we believe is the secondary reason for a lack of profitability in the industry. Turning these non-competitive attributes of the producer firms into the variable overhead costs of People, Ideas & Objects user communities service providers. Turning the administrative and accounting capabilities, capacities and costs in the industry variable, based on profitable production. Therefore overhead of the producer firm and Joint Operating Committees will only be incurred during times of production, which by default, is everywhere and always profitable. The benefit of our Preliminary Specifications decentralized production models price maker strategy.

We can provide this because we’re not focused on the traditional software company concerns of code and customers. As a cloud computing, administration and accounting provider we are oriented and focused on the changing business of a dynamic, innovative, accountable and profitable oil & gas, and associated service industries. This highlights the different motivations of the software developer over the long term. In People, Ideas & Objects instance we generate revenues on the basis of the changes that industry desires and communicates through our user community. Our motivation becomes the constant improvement of the software. In the traditional software vendor’s case they are motivated by their code and customer bases. The larger their code base the more difficult it becomes to change, which coincidentally does not generate revenue. And the larger the customer base the more costly the changes that need to be made to each customer. Coincidentally, these changes to the customer software do not generate any revenues. Hence, their age and size as a firm paradoxically leads to increases in their overhead burden. What you have is a contrast and conflict in the dynamic nature of the software itself in terms of its cost to the industry and the motivation behind the developer. In addition People, Ideas & Objects use of Oracle Cloud Infrastructure and specifically its Cloud ERP offering are based on Java, the first object based ERP system. Therefore People, Ideas & Objects will be the first object based ERP system that is available in the North American oil & gas industry. Providing additional cost benefits over the traditional procedural programming languages.

It’s no longer adequate to just own the oil & gas asset. Without access to the ERP software in the form of the Preliminary Specification there is abundant evidence now that North American oil & gas assets will never be profitable. Regardless of the price of the commodity the bureaucrats have proven not to be working in anyone's interest other than their own. The level of destruction they’ve authored has been unequaled in the history of business. We should note this occurred while our alternative was being offered to mitigate these damages. The faith, trust and goodwill that was built in prior generations has been destroyed and the industry remains in the hands of those who operated in such bad faith? Now that there’s money on the table in the form of higher commodity prices, actions will soon be taken to deal with these individuals and these associated destructive issues. 

Innovation and profitability have been the focus of People, Ideas & Objects since the beginning of this initiative to resolve the issues in oil & gas. Overproduction as a result of the accounting anomalies from the 1970s SEC changes. The producer bureaucrats deliberate misinterpretation of the meaning of those accounting anomalies and the derivative cultural changes in oil & gas that led to such ridiculous notions as “building balance sheets,” “putting cash in the ground” and such. The fault lies with the bureaucrats as we’ve identified since our beginning in August 2003. The CEOs, CFOs, COOs, Directors and other officers are responsible. They have the authority and avoided the accountability for their actions to this day. There are no other viable scapegoats or excuses. 

A brief example of their record to clarify their culpability. Each of these specific events are generally known and can be easily verified. On July 4, 2019 People, Ideas & Objects published our White Paper “Profitable, North American Energy Independence, Through the Commercialization of Shale” to wide distribution. The title covers the point of the topic which is the development and integration of the Preliminary Specification. It was rejected out of hand by producer bureaucrats who had done nothing about their organizations after many years of their investors' demands for action. Within nine months of the producer's rejection of our specific proposal to deal with the issue of shale, they ran the price of oil into the negative $40 range and were forced to shut-in production. A claim they made to refute the Preliminary Specification in 2017 that shutting in production would damage formations, a claim that was knowingly and subsequently proven incorrect. Once oil prices recovered, bureaucrats declared that shale would never be commercial. And in 2021 they announced they were beginning the transition of their organizations in unauthorized and unapproved ways to clean energy. Today we don’t know what business it is that they’re in. This is the quality and style of the leadership that is now responsible for our economies energy supply. A responsibility they’re unwilling to recognize much like their inability to comprehend the need to earn “real” profits these past four decades. Where will we head to next with this bunch?

People, Ideas & Objects, our user community and their service provider organizations have painted a viable and profitable vision of how to rebuild the oil & gas economy in North America from the ashes of what remains. We see the destruction, and much of what will come to be in the next few years and it is not something that people expect. Producer firms are comprehensive failures of tragic proportions. Action is needed to proceed with this initiative, and from whom, when and where our funding is sourced is not within our domain of knowing. We only know the one important criteria necessary in order to make this a success. The funding has to come from the oil & gas industry itself. Otherwise industry won’t respect it, won’t commit to it, and would only look to alternatives as soon as the opportunity arises. Only when they have some skin in the game can we begin to start rebuilding the greater oil & gas economy brick by brick, and stick by stick. 

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 & gas industry with the most profitable means of oil & gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. 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. 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Preamble Part 4

 Lower Costs of Exploration and Development

People, Ideas & Objects et al’s next component of our competitive advantage of providing the oil & gas producer with the most profitable means of oil & gas operation. Is the lower costs associated with field work done for exploration or development. This would also include the field operations on producing properties covered by a workover or AFE.

There have been many past complaints from oil & gas producers about the high costs of field operations. I have written about the accusations made by producers toward the service industry and how the situation has developed and what needs to happen in order to correct these. Everyone would agree that a more productive environment needs to be developed between the service industry and the producers. And I have put the onus on the producers to begin the process of building the capabilities for a more dynamic and innovative service industry. This was and is the position of People, Ideas & Objects at the time of the original publication of the Preliminary Specification in August 2012. Since that time we’ve seen the inverse situation develop where I suggest producer bureaucrats actively sought to destroy the service industry of which they’re mutually dependent upon. If it was done for any other reason I can’t imagine what that would be, as the scope and scale of this damage has been comprehensive. 

• The damage began by scaling back field activity levels to 25% of what they were. 
• Subsequently seeing the nature of service industries survival instinct they were easily exploited by producers by demanding 50% discounts. Field operators subsequently realized 12.5% of prior revenues.
• When capital sources were unavailable to producers they used the service industry to fund their field activities and paid them on an 18 month accounts payable basis. 
• While financially desperate, due to the long term consequences of these producers' activities, the service industry sold equipment such as horsepower and cut up their equipment for scrap metal in order to survive financially. 
• Bureaucrats were fine and they thank you for asking. 

In either era a recognition that the service industry provides producers with the geographical and technical diversity necessary to operate anywhere in North America needs to be realized by producers. As of 2022 destruction of the capacities and capabilities are comprehensive and complete. Additionally, the capital structures of the service industry are non-existent as a result of the treatment they’ve received and therefore producers will need to purposely rebuild the service industry on the basis of their good faith contributions. They broke the industry, they’ll need to rebuild it as no one else will volunteer themselves for this style of expected sacrifice and suicidal capital investment. The belief that if producers had something invested in the service industry then they’d have some respect for it and may think twice about repeating these past actions.

This process can also begin by developing the Preliminary Specification and implementing the changes within it to start the overall industry rebuilding which is a necessity. ERP system providers were subjected to the same treatment the service industry has been in the past five years. However, we were a few decades ahead in terms of the abuse and we can pin the reason for this on ERP softwares consequential increase in higher levels of financial accountability of said bureaucrats' actions. When ERP software defines and supports organizations, today’s oil & gas bureaucrats unaccountable methods are defined and supported in the ERP software they use. Without any activity whatsoever in this ERP market since the exit of Oracle in 2000 and IBM in 2005, the coincidental financial demise of the industry and associated benefit to said bureaucrats is not accidental.

There are a variety of interfaces within the Resource Marketplace and Research & Capabilities modules that provide windows to the service industry. These collaborative interfaces are designed to deal with the one issue that is systemic throughout oil & gas. That issue is the manner in which the producers deal with the ideas of others who have developed them. They ignore them. And they use them without respect to who the rightful owners are. This is counter to the producers own best interests. After decades of this producer activity, what people understand is that the time and effort necessary to develop a new idea is not worth it because the oil & gas industry will only seek to share it with the innovators competitors. Therefore they don’t undertake the time and effort necessary to develop the idea. No new ideas are coming into the service industry at a critical time when the science in oil & gas is becoming paramount. Realize that the innovation in oil & gas is generated through the service industry. Horizontal drilling, coiled tubing and fracing for shale wells with initially Packers Plus packers suffered through the lack of support and respect from producers before they were finally implemented. As much as bureaucrats claim that they’re innovative we need to ask a simple question. Would an innovative industry earn only 5 good years out of the past 36? Or is “muddle through” as they’ve consistently claimed their true strategy?

Adding to this problem is the producers will not hire anyone for field operations that are not of a certain size and scope deemed “capable” of handling the job. So all of the money is going to the larger firms in the service industry, no new competition is being developed and no new ideas to support that new competition. Is it any wonder that the producers complain about the costs associated with field operations? Or in 2022 where the producers deer in the headlights look speaks volumes. The governing rule of the service industry is they broke it, they can fix it. If new investment does come back into the service industry it won’t be in the next decade. The capital structures of these firms have been damaged far worse than what the oil & gas producers have experienced. It will be incumbent upon producers to rebuild this industry, of which they are wholly dependent upon, brick by brick and stick by stick. With their own money on the basis they’re rebuilding the capabilities and capacities they so foolishly and carelessly destroyed. 

In order for People, Ideas & Objects to claim that we provide the most profitable means of oil & gas operations. We need to show that the costs associated with field operations would be lower in an environment where the Preliminary Specification would exist. Having the oil & gas producers respecting the ideas of others in the service industries will be all that is required to make the changes from the current status to a dynamic and innovative service industry. Apart from funding the rebuilding costs which is a separate issue. There are a variety of interfaces and modules that are dedicated to the initiating, sponsoring and supporting of ideas throughout the Preliminary Specification. These are what are necessary for both an innovative oil & gas and service industry. When drilling a well in a shale formation can cost ten to fifteen million dollars the opportunities for innovation are strong. Today no one is motivated to do so because the producers will not respect the owner of the idea. So everyone just picks up their paycheck and carries on. It's a simple matter that the oil & gas industry reaps what it has sown. Professor Giovanni Dosi notes that investments in innovation are for the purpose of profits. That reasoning applies in this instance in that the innovation will reduce the time, effort and costs of field operations by finding a better way in a competitive environment. Dosi notes in “Sources, Procedures and Microeconomic Effects of Innovation.” 

In the most general terms, private profit-seeking agents will plausibly allocate resources to the exploration and development of new products and new techniques of production if they know, or believe in, the existence of some sort of yet unexploited scientific and technical opportunities; if they expect that there will be a market for their new products and processes; and finally, if they expect some economic benefit, net of the incurred costs, deriving from the innovations.

Producers need to create this profitable environment for the service industry. Producers are the primary industry that receive 100% of the proceeds from oil & gas. They need to understand that a share of those proceeds are earned by those in the secondary industries such as the service industry who they are wholly dependent upon. Treating the service industry like leeches and cutting their funding during the bad times doesn’t instill the partnership relationship that provides producers with the 100% of those revenues. Establishing a profitable oil & gas industry everywhere and always would go a long way to help smooth the revenues of the service industry but also the producers themselves. Eliminating the boom / bust mentality that should not exist in a proper 21st century industry. Enabling them to better deal with their staffing and development. Without the service industry sharing in the success of a dynamic, innovative, accountable and profitable oil & gas industry. Neither can or will stand alone successfully in the 21st century. 

Earth Science and Engineering Resources

Our competitive advantages of providing the oil & gas producer with the most profitable means of oil & gas operations everywhere and always, has our focus on the earth science and engineering resources of the producer firm and how these are more efficiently and effectively employed in comparison to what we call the standard corporate business model that’s employed by the bureaucracy today. There are many aspects of this component of our competitive advantage, however, they’re all generating their profitability for the producer firms through innovation, specialization and the division of labor.

In the area of innovation we look to the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification to highlight the processes that are managed there. Focused on the development, documentation and deployment of capacities and capabilities within the producer firm. It is in these modules that the markets availability, sourcing, research and development of those earth science and engineering capabilities are funneled into the Joint Operating Committees for their ultimate deployment. From an innovation standpoint there is also the Work Order that enables these innovative producers to participate and sponsor working groups to research and study various earth science and engineering based projects. Designed to eliminate the bureaucracy and the inherent difficulty in managing the accounting and administrative logistics for the ad hoc nature of these working groups. The Work Order is an interface that enables the user to allocate their overhead and AFE budgets to these studies in a manner that is consistent with the nature of the opportunities.

The specialization and division of labor of the producer firms earth science and engineering resources takes on the difficult issue of the constraint of these resources. Over the next few decades the demand for these resources will outstrip supply due to retirements and the inability to bring on any increase in the numbers of new recruits. There just isn’t that percentage of the population that has the aptitude for geology or petroleum engineering. The need therefore to deal with the resource constraints is a problem that the industry must resolve and the Preliminary Specification has used specialization and the division of labor to do so.

One of oil & gas’ key difficulties is what People, Ideas & Objects et al call the hoarding issue. Each producer is building the capabilities and capacities within their firm to deal with any and all contingencies at any time. This hoarding of earth science and engineering resources, when taken across the industry, builds unused and unusable surplus capacity within each producer firm. With each producer firm attempting to provide all of the capabilities and capacities necessary for their producer firm on a just in time basis, these critical resources are unnecessarily constrained. The solution that’s provided within the Preliminary Specification is what we are calling the Pooling of these technical resources. Each member of the Joint Operating Committee commits the technical resources, based on their unique specialized capability, to the property. Any deficiency is made up from outside technical service providers or other producers who can provide the additional earth science and engineering capabilities for a fee and organized through the Work Order system to charge, bill and pay for these costs.

Which brings up the last aspect of the division of labor and that is as it applies to the bread and butter aspects of geology and engineering work. Much of this work can be turned over to newly formed technical service providers who are organized on the basis of providing a specialized service to the industry. Organized around a process or skill that is common or generic and could be specialized to a high level if the scope and scale could be brought into the picture. Leaving each producer firm able to focus on a specific high level technical specialization which forms the basis of a second revenue stream for the producer and expands the science and technology available for enhanced innovation. 

It is reasonable to assume that industry will turn to specialization and the division of labor to deal with these resource restrictions. However, without the Pooling concept being a critical element of that solution, the scope and scale of the producers domain of earth science and engineering capabilities, because of the demands being generated from enhanced specialization and division of labor in the marketplace, will most certainly create further shortages in these resource bases due to their hoarding issue. Leading to chronic unprofitability due to the enlarged scope and scale of specializations necessary for producers to cover off in order to attain all of their operations capabilities and capacities demands. 

In a few years having each producer conduct all the earth science and engineering necessary for all of their properties will seem like a business model from the dark ages. Decentralized business models are eliminating centralization through efficiencies in every industry. What is being proposed here in the Preliminary Specification is the only reasonable solution to the real issue of the current and looming limited resource base. It is the earth science and engineering capabilities that form a critical part of the innovative oil & gas producers competitive advantage along with their land and asset base. The Preliminary Specification enables the firm's resources to focus on the specialized research and development of “knowledge, skills, experience” and ideas, and the deployment of those in the properties that are held by the firm. This is the appropriate posture for a profitable oil & gas firm, and another component in how People, Ideas & Objects provides the oil & gas producer with the most profitable means of oil & gas operations everywhere and always.

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 & gas industry with the most profitable means of oil & gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. 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. 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.

Revisions to the Preamble Part 3

 Accounting for Capital Costs

Allowing producers to have their balance sheets bloated with capital assets that are never written down. And as a result, their income statements realize only small portions of the real costs of capital incurred in the exploration and production processes leaves the investors waiting for a return of their capital from the industry. Although the bureaucrats may report profits. They really are just the gross margins of the producer firm. The actual overhead and capital costs of the property are never moved to the income statement. The repeatedly stated purpose has been to “build balance sheets” and to “put cash in the ground.” The overhead of the producer is capitalized to the balance sheet and sits there for eternity to pass. The net result of this process is the producers look spectacularly effective in their operations. Their assets continue to grow as long as they spend money from banks and investors. Their profits are high no matter how successful they are from an engineering or geotechnical point of view. However in terms of really producing anything of value, the investors have learned absolutely, oil & gas has been a lost cause since the late 1970s. 

Having high asset values on the balance sheet provides no one with any value. In a capital intensive industry, the oil & gas producer needs to deploy their capital effectively. When every producer capitalizes every dollar spent each year. How do you assess the effectiveness of their capital deployment? According to the bureaucrats you need to look at the firm from the point of view of the capital assets life, or reserve life index, or in this example generally ten years. I feel the horse has bolted from the barn and locking the gate after that decade has passed is useless. Investors need to have a more timely gauge in which to assess the capabilities of the management of the producer firm. I would also suggest that the assets at the ten year mark will probably sit for quite a while longer. Instead of this generic, cultural method, People, Ideas & Objects suggest separating the distinct capital costs incurred to maintain and expand their deliverability. That the total current capital cost in the fiscal year has always contained the costs necessary to both maintain and grow the deliverability of the firm. Or in other words these costs which are easily identified based on their activity should either be capitalized and depleted, or seen to be incurred as operations. As a result the future producers' size of their capital assets account in the form of property, plant and equipment will be much smaller and we suggest depletion would be larger than what is necessary to maintain and grow the deliverability of the producer.

Justification for the different accounting treatment by separating the maintenance and expansion of the production profile in this manner exists in the looming debt crisis that is now threatening. Producers' erosion of their capital structures has limited investment capital remaining after serious losses have occurred. Bank debt is supported predominately by property, plant and equipment account balances as many producers have limited, to negative working capital. Based on their financial statements these producer firms are therefore highly leveraged going into a rising interest rate environment. However, their issue today may be an exaggerated leverage position on the basis of the overcapitalization that we’ve been discussing and the potential that the maintenance capital costs of holding the production profile constant would be better represented in the current period as operations or prior periods depletion. The leverage of these producer firms would therefore be vastly understated based on their current financial statements. Reflecting the real status of their capital structures. The justification for the proposed separation of maintenance and expansion accounting treatment coming about based on the highly concentrated nature of oil & gas being a capital intensive industry. Indicating that the costs passed to the consumer would be predominately capital in nature.

Measurement of a firm's assets and the timing of their movement to the income statement is a key principle of accounting. I think the public accountants and the SEC have caused a distortion in oil & gas accounting from recognizing performance to one in which the objective was to recognize value. Leading to the investment community essentially subsidizing the oil & gas consumer by funding the capital expenditure programs of producers with no expectation of any return on investment. The consumer paid for the royalty and operations. This has to change if the industry is going to approach the needs of society in the next 25 years. Undertaking the $20 - $40 trillion in capital investments that is alleged to be necessary with nothing but disgruntled investors will not be successful. Investors now realize producers are well capitalized in terms of their assets on the balance sheet. But they never made any real money. 

The extraction of value from the oil & gas industry as a result of these accounting methods dictated by the SEC may be difficult to comprehend. It is believed by producers that having big asset values on the balance sheet of their firm is the ideal situation. With People, Ideas & Objects argument being counter to this, these capital costs should be recognized by moving them to the income statement as soon as possible. Which has large implications in terms of the value that is generated in the industry. Currently all of the costs of exploration and production are “stored” on the balance sheets of the producers. These costs have generally never been recognized on a timely basis and since this is a systemic, industry wide, multi-decade issue, this practice has created serious distortions in the oil & gas industry. By moving these costs from the balance sheet to the income statement you will either incur a loss, such as what the industry would have done. Or the commodity prices realized should have been adequate to cover all of the costs of exploration and production, returning the invested capital in the form of cash. Which industry hasn’t done and have therefore been desperately dependent on investor's to cover the annual cash shortfalls incurred from their overproduction of a commodity that follows the economic principle of a price maker and their phenomenal capacity to store capital on their balance sheets.

Initially, without fully recognizing the costs of exploration and production, the oil & gas production appears to be highly profitable. Which attracts more investment leading to more capital costs which then increases the productive capacity of the industry which “appears” to also increase its profitability. In reality none of the investment dollars are being returned to the business in the form of cash when these capital costs are not recognized in a timely manner. Therefore the investors and bankers are once again tasked to make up for the annual cash shortfall of the producers created when the commodity prices are unable to cover the all of the costs of exploration and production in the business. The business is still incurring these costs, however the accounting is reporting that these costs are ballooning assets that hold some mythical value for the producer bureaucrat. When in reality they should be recognized as capital costs being passed to the consumer in a capital intensive industry. 

Doing this for four decades and the hollowing out of all measures of value from the industry will be complete. Producers have been reporting profits when in reality, if all of the costs were considered, oil & gas has been a lost cause, supported by investors for decades. Today’s residual infrastructure does not have the capital structure or financial base, or the performance capabilities, due to its chronic overproduction as a result of the chronic overinvestment systemically collapsing commodity prices. Then, add shale!

Through People, Ideas & Objects our user community and their service providers this accounting will change significantly when we implement the Preliminary Specification. With the decentralized production model enabling the price maker strategy for all oil & gas properties. Producers will be able to shut-in those properties that are unable to produce a profit in a low commodity price environment. During times of high prices they will be able to bring the previously shut-in production back on to meet consumers demand. Or alternatively they will be able to apply their innovations to increase their deliverability or reduce their costs and therefore return the property back to profitable production. The determination of what the costs of that property will include is the capital costs on an accelerated depletion schedule in comparison to what the bureaucrats have implemented. This will bring the costs per barrel much higher and into the territory of what it actually costs for exploration and production in North America. Requiring higher commodity prices for the producers to meet the criteria of profitably producing any property and therefore fulfilling the “swing producer” role in the market.

At some point in every industry this transition has to be made. In the beginning the build out of the industry has to be undertaken by the investment community. Then when the assets of the industry mature, it is time to earn the profits from what has been developed. Oil & gas is a mature industry. The bureaucrats continue to consider that it is other people's money that they need in order to fund their operations and “build balance sheets.” This is inconsistent with reality. Oil & gas is a primary industry that should be providing the investment community with a return on the invested capital from the annual profits earned. Instead the bureaucrats let the assets sit on the balance sheets for eternity and never let these costs flow to the income statement. This subsidizes the consumers of oil & gas by having the investors pay to park the capital costs on the balance sheets in some misguided business objective. Never allowing the capital costs of a capital intensive industry to pass to the consumer in the commodity price realized. The prices of the commodities never adjust to the real costs of the industry where the costs escalate with each incremental barrel of oil equivalent produced. This being the result of the greater difficulty in producing each incremental barrel.

Understanding the significant role and value that oil & gas has in society is not being considered. It is reasonable to ask what right do we have to squander these resources from future generations? We should act responsibly and ensure that we can account for the profitable production of these commodities everywhere and always but also ensure that we pass a viable and prosperous, greater oil & gas economic system on to the next generation. Both of these issues are raised as a result of the bureaucratic mismanagement. Who when asked to account for these actions will lie, which is a strong word so let me restate that. Mouth in harmony bold face lies. When did historical accounting costs ever go down? Only in oil & gas during times of declining commodity prices. Recall those times when producers who were profitable at $70 were suddenly able to be profitable at $55 oil prices, then at $40. Miraculous I know and a feature previously unknown about historical accounting. Bureaucrats have it covered with “recycle costs.” Which are nothing but the cost estimates they receive from what they can beat out of the service industry “if” they should happen to drill a well, or frac a well in the depressed commodity price environment. The discount is printed right there on the drilling firm's letterhead!

Under the changes from People, Ideas & Objects methodology the makeup of a producer's balance sheet will change. From having a dominant position in terms of fixed assets, low and zero cash balances with negative working capital positions. To have high values of liquid investments, positive cash and working capital with much smaller amounts of property, plant and equipment. They will be financially much healthier. They will be able to dividend out large portions of their earnings back to the investment community. Pay down debt. Fund their own capital expenditure programs. And maybe best of all they’ll be more dynamic with the financial flexibility to act in the most profitable manner. All as a result of finally realizing the real cost of oil & gas exploration and production!

It will be the recognition of depletion of the capital expenditures in the 2 1/2 to 3 years that will dictate North America's oil & gas prices. Properties that carry the higher overall costs of exploration and production per barrel, due to their large balances of capital, will be depleting these balances to each barrel of oil equivalent produced. If we are realizing all of the properties capital costs in the first 2 ½ to 3 years of production from the property. Under People, Ideas & Objects price maker strategy it will be these properties that have to meet the criteria of being profitable and determined if they are produced or shut-in first in a low commodity price environment. Those properties that have exhausted their capital cost balances will be able to produce large profits no matter what the oil & gas price is in the marketplace. This brings about a fundamentally different capital discipline when capital is being deployed that must meet this profitability requirement immediately in order to produce. And a new appreciation as to where the value lies in the firm. Instead of where the asset balance is the largest, it will become which properties are the best performers and how to make that the case in each of the other properties of the producer. However, it will generally be the work done from a capital nature of the past three years that dictates what the actual costs of production are. And it will be that higher threshold that the oil & gas prices will have to reach to bring on the past three years production, or the one incremental barrel. In an industry that has the elasticity of supply and demand characteristics that the oil & gas commodities have, (it is a price maker commodity) it will be the higher prices that the industry will need to realize in the People, Ideas & Objects accounting methodology and decentralized production model. Or producers will diminish their corporate profitability with production from unprofitable properties.

The SEC and public accounting firms detail the methods that capital assets are written down today. They define what the limit of reasonableness is in terms of what is Generally Acceptable Accounting Practices. Their position is to define the limit and ensure that the producer firm does not breach the limit of their independently evaluated reserves valuation. However, the bureaucracy has taken this limit as the standard in terms of what “should be” or even as a target of what they should use as the valuation for capital assets. This, I believe, is unreasonable when producers have culturally taken the limit to the extent of the SEC’s allowable at each and every producer firm and done so each and every fiscal year. Bloated balance sheets provide no value to anyone. Many producers have had asset values that exceeded the lifetime possible revenue streams of the organization which invokes the dreaded SEC Ceiling Test. We note it would be the most competitive producer who would have exhausted their property, plant and equipment account, zero being the limit that the SEC demands on the low end. It will be People, Ideas & Objects service providers, the sub-industry that we are creating to replace the producer firms administrative and accounting resource to offer North American producers a Cloud Administration & Accounting software and service. They will use a much more aggressive 2 ½ to 3 year method of realizing the capital assets for the purposes of pricing calculations. If the producers choose to follow that in terms of financial reporting that will be their choice. It is in this way oil & gas prices will reflect the real cost of the commodity. Producers will be able to “make” the necessary prices to recover their costs through our decentralized production model. And the investors can freely invest in the oil & gas producer knowing that the money they invest will be returned to them with the bonus of an annual profit. Assuming they’re able to explore and produce effectively and competitively from an engineering and geotechnical point of view.

Just as earnings and assets are overstated in oil & gas we believe the same is the case for cash flow. Analysis of the capital expenditures of the producer firm sees that not all of the capital expenditures are dedicated to increasing the firm's production profile. The reality of oil & gas is the ever present decline curve, particularly in shale. Should we look more critically at the capital expenditures of a producer and determine which dollars were spent in maintaining the production profile, and those dollars that were spent in expanding the production profile? 

This goes to the heart of the issue of capitalizing everything under the sun. If capital expenditures are to maintain the production profile why would they not be considered operating costs? If they were, they would reduce operating cash flows substantially in the current period and more accurately capture the activities and value that the firm is engaged in. This would immediately revalue the company's market capitalization in today’s environment. These reduced cash flows would better relate to the state of the industry and producers would have to realize increases in revenues from price increases to better evaluate their firm on a cash flow basis. The motivation of the dynamic, innovative, accountable and profitable producer under the Preliminary Specification would therefore be to ensure they were realizing the full value for their petroleum reserves. As opposed to the past four decades which has become a matter of increasing producer value by spending and capitalizing the costs excessively. We need to evaluate the producers on a more equitable means of cash flow and no longer on the basis of these boosted management numbers. In a capital market such as what North American producers compete in, let's see them compete.

As we can see everything in oil & gas accounting has been and is skewed to overvaluation. Assets, cash flow and earnings all are affected by the policies that are in place within the industry. This industry “norm” has enabled producers to believe that they are productive, contributing members of society when in fact they have been a financial disaster. It is only after four decades of this accounting treatment that the evidence of the level of destruction now being experienced is apparent to all. Essentially the value that is contained within the entire industry's infrastructure, that is the entire producing infrastructure in North America, isn’t worth anything as it is a cash flow drain with catastrophic losses. Producers are operationally consuming value. The only measure in which to turn the industry around from this point is to increase the revenues of the producers to record commodity price levels for a sustained period and maintain “real” profitable operations everywhere and always. These revenues would then be able to remediate the destruction that occurred and finance the rebuilding efforts throughout the greater oil & gas economy. Investors and bankers have invested in good faith, now own an industry that is a drain on their resources, and have indeed subsidized the consumer for their energy needs for these past four decades. The amount of this consumer's subsidy is accurately reflected by the balance in the property, plant and equipment account on the producer's balance sheets. The future capital demands of the industry are well beyond what the capital markets are willing to undertake. The only solution is to operate the oil & gas producers as a profitable business from the real perspective such as the Preliminary Specification, our user community and service providers. Bureaucrats have proven they don’t understand business and are unwilling to learn but most importantly unwilling to listen. Opting out of any reasonable continuation of their administration. 

Oil & gas is a capital intensive business. The way it has been run into the ground is the capital was raised, spent and sits for generations on the firm's balance sheet for an eternity. Turning the capital over repeatedly into cash for reinvestment is never considered. It has always been believed that you just raise more money each and every year. Spend that, and then add it to the pile of assets that are depleted over the decades if not centuries which those petroleum reserves remain. Producers have to begin to turn these financial resources over in a much quicker fashion in order to compete within the North American capital markets. By doing the above, recognizing that most of their capital expenditures maintain their production profile, having those capital expenditures recorded as operations will return that capital back into cash within the current fiscal period. That is with the one big qualifier. If the firm is run like a profitable business and not an engineering exercise. It employs the price maker strategy of the Preliminary Specification and realizes the prices that make the producer a truly profitable operation. 

Now that we’ve established our accounting for capital costs methodology is different from the status quo. I want to reiterate the value proposition we have in providing the oil & gas producer with the most profitable means of oil & gas operations everywhere and always. Through the decentralized production model, and the accounting methods we’ve discussed here we’re able to generate $5.7 trillion in additional profits over what the bureaucracy would provide in the next 25 years. By accounting for the capital costs of the industry in the price of the commodity we are reusing the cash resources of the industry to fuel the capital expenditures that will be used by the industry. Providing a return on investment back to the investors. If the expectation is that the industry will be spending $20 to $40 trillion in the next 25 years. People, Ideas & Objects et al are providing, at a minimum, $25.7 to $45.7 trillion more value to the greater oil & gas economy than what the current bureaucracy has traditionally provided.

I’ve mentioned in a prior section of this Preamble that basic cash management was and continues to be an issue in the methods used by producers. What’s happening in the process of capitalizing most of the producers' costs other than operations and royalties is the cash is being consumed in the process. This generates the need to have continual outside financial support where investors and bankers were called upon to reload the bureaucrats spending machine. Money only went out. As the overhead and the excessive capital costs we’ve detailed above are incurred and held as property, plant and equipment for decades, the basic overhead costs of the operation are not covered by what would traditionally be considered in business to be a “cash float.” Paying the costs of high levels of overhead and subsequently large percentages of these are capitalized, drains cash. The amount of depletion over the course of the past four decades of this accounting treatment became the method by which producer bureaucrats were able to “profitably” fit their costs within what they believed to be a price taker commodity. As time has passed (beginning in the early 1990s) the drop in value of the producers capital structure did not generate the financial resources to pay for these monthly overhead costs of office rent, salaries, etc and therefore the cash was never being replenished on a monthly basis from the prices charged to the consumers. If producers were to price all of their overhead costs directly within the commodity price such as what we do under the Preliminary Specifications price maker strategy, these commodity prices will recognize the full cost of exploration and production and therefore be adequate to reestablish that cash float in a time frame no longer than within the quarter. Eliminating producers' overall demand for outside capital on a chronic emergency basis. 

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 & gas industry with the most profitable means of oil & gas operations, everywhere and always. Setting the foundation for profitable North American energy independence, everywhere and always. 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. 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. Please join our community on Twitter @piobiz. Anyone can contact me at 713-965-6720 in Houston or 587-735-2302 in Calgary, or email me here.