Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world.
Joel A. Barker
People, Ideas & Objects argument is the oil and gas industry in North America has not been profitable for over four decades. Serious accounting issues have overlooked the lack of real profitability and the slow and steady erosion of any and all value out of the industry. This has manifested itself into a culture where the population of oil and gas producers believe they’ve been successful, yet their investors have been withholding support for the past number of years. The development of shale based reservoirs has accelerated the trajectory of their financial decline and we now see today’s cashless producers have no understanding or appreciation of their issues, plans for the commercialization of shale or People, Ideas & Objects proposed solutions. With the degradation of the financial, operational and political frameworks of the industry, capacities and capabilities will follow. Creating serious, additional societal jeopardy with shales inherent rapid decline rates. The question remains unanswered in many people’s minds if shale will ever become economic? A dire situation that we’ve recently called for the full force of creative destruction to be used against the existing producers and industry. We believe in addition to being an accounting issue, it has manifested itself into chronic organizational and cultural issues which can only be remedied through creative destruction and our Preliminary Specifications disintermediation of the vested interests who reap their benefits from inaction.
Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.
- Milton Friedman
The Preliminary Specification is Enterprise Resource Planning (ERP) software which identifies and supports a reorganization of the producer firm and industries resources. Using the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer we're able to shift the compliance and governance frameworks of the producers bureaucracy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee. This alignment brings about a speed, innovativeness, accountability and profitability that we seek in our producer firms. Once People, Ideas & Objects determined the Joint Operating Committee was the organizational construct of the future oil and gas producer, and industry. I set about to conduct the research into what and how the producer and industry would need to look in order to operate when we made these changes. This was difficult research which took over a decade to complete. Subsequently we were able to publish the Preliminary Specification as a viable, workable model for oil and gas in December 2013. It currently consists of 14 modules and approximately 395,000 words which define what is necessary to resolve these issues, realize the present opportunities, and provide the necessary frameworks and organizational structure to deal with those issues and opportunities which arise in the future.
The key structural change made in the Preliminary Specification is the establishment of our user community and their associated service providers. These are a reallocation of the administrative and accounting resources currently employed within the oil and gas producers. By determining that accounting and administration are not competitive advantages of the producer we can offload these tasks to service providers outside of the producer organization. This provides many key opportunities enabling the Preliminary Specification to operate in ways the industry is incapable of doing today. What we do in this process is convert all of the producers costs to variable costs based on production. If a property doesn’t produce a profit due to its low deliverability, high cost or other reasons, it can be shut-in and its financial losses will no longer dilute the profitable operations from other properties. It will incur a null operation, no profit, but no loss either. We have chosen profitability as the only fair and reasonable method of production allocation, a discipline lacking in the industry and most particularly in the shale era. A shut-in property can then be moved to the producers inventory of properties which require the producer's earth science and engineering innovations to return it to profitable operations. These shut-in reserves can therefore be saved for a time in which they can be produced profitably. These reserves will not have to carry and recover the additional financial losses as costs that would otherwise have been incurred if the property continued to produce unprofitably. And the commodity markets will find the marginal cost based on only profitable oil and gas operations being produced in the industry. What we've essentially done is moved the producers fixed cost, accounting and administrative capabilities to be the variable cost, accounting and administrative capabilities of the industry, variable based on production. The production discipline acquired by producers is their corporate profitability is the highest when only profitable operations are produced. A producer which produces unprofitable properties will not appear as profitable or attractive to the investment or banking communities. Hence the intrinsic motivation to maintain production discipline under the Preliminary Specifications business model in contrast to today’s model.
Producers consider this standard business method of production allocation to be collusion and therefore a reason not to act and are unwilling to put the effort into making this industry a viable profitable business. In fact what this is called is the decentralized production model which in the Preliminary Specification replaces what’s in use today and is commonly known as the high throughput production model. It’s not collusion and every other industry manages their inventories in similar fashion to ensure they do not erode what pricing power they do have. If making independent business decisions, based on actual, factual accounting to determine the properties profitability is collusion, then we're in a strange new world indeed. Oil and gas commodities are subject to the principles of price makers. Producers believe they're price takers and therefore any action they take to increase or decrease production has no effect on commodity prices. One look at the recent history of the industry and we can see OPEC+ has successfully removed production on more than one occasion and successfully rehabilitated the oil price. The same can be said for the Alberta government's mandated production cuts which were implemented on January 1, 2019. These production cuts immediately eliminated the differentials that saw producers net pricing as low as $5. It would seem producers believe oil and gas commodities are price takers to ensure there’s no need for them to act. We believe oil and gas commodities are price makers, profitability is the only fair and reasonable method of production allocation and since producers are unwilling to invest in their businesses profitability, by adopting People, Ideas & Objects Preliminary Specification, why would anyone invest in these producers?
People, Ideas & Objects source of our software quality is our user community. Software not based on user input is useless in our opinion. Our user community will consist of approximately 3,000 individuals who will contribute their understanding to the model of the Preliminary Specification. That way we'll know we’re providing the highest possible quality of software to the oil and gas industry. Each of our user community members will be the principal involved in one of approximately 3,000 fully independent service provider organizations. There they’ll be provided with an exclusive license to manage a single process the user community member’s contribution was determined to be a critical component of during our development. Service providers will therefore not be competing on the basis of price. No one else will hold a license for any specific process and without access to our software no one can come in and offer a similar service at a lower price than what the licensed service provider is able to. Service providers compete on a fundamentally different basis which includes their competitive advantages of quality, specialization, the division of labor, automation, computers working for us not the other way around, innovation, leadership and integration to name just a few. These competitive advantages are inconsistent with having their flank constantly abused by repeated price competitors, a favorite method of today’s oil and gas producers. Our service providers will be provided with the exclusive license to ensure they continue to focus and achieve their full competitive advantages. Our user community and service providers are a cornerstone to building our $25.7 to $45.7 trillion value proposition over the next 25 years for the oil and gas producers. Therefore we see no reason why producers would want to continue penny-pinching these costs which have a transformative effect on their organization.
The mechanism in the Preliminary Specification which creates the null operation at a shut-in property is as follows. If the property is shut-in it therefore produces no data that goes into what we call our task and transfer network. If nothing goes through, the service providers will not receive anything in which they will act upon, process or subsequently generate their billing from. Therefore, for example, the cost of calculating and recording the butane sales for the property will be nothing as the service providers will have not done any work that month for the property, no billing is rendered from any of the service providers and therefore the null operation is created, no profit but no loss either because all of the producers costs are variable, based on production. The service providers in turn will have the entire oil and gas industries inventory of properties as their client base. At any time it may be possible that 15% of these properties are shut-in. In this scenario, the service providers will have budgeted and planned for the possibility of this occurrence, then they can accommodate a 15% drop in their revenues. Enabling for the first time the situation where producers overhead costs are variable and indirectly controllable.
By implementing these key industry and producer changes, People, Ideas & Objects claim our value proposition is worth $25.7 to $45.7 trillion to the industry over the next 25 years. This value proposition consists of two components. One is the $5.7 trillion in incremental profits earned as a result of the higher prices our price maker strategy produces by establishing profitability as the only fair and reasonable means of oil and gas production allocation. These are the profits which are necessary to make up for the deficiencies of the past and cover the full costs of oil and gas exploration and production. The second element is the $20 to $40 trillion which is expected to be required for the industry's capital investment in the next 25 years. In the current business model producers would see investors fund these capital costs in order for them to marvel at how large they’ve “built their balance sheets,” the key objective in today’s oil and gas industry. Alternatively the Preliminary Specification sees our price maker strategy passing these capital costs, in a capital intensive industry, to the consumer on a timely basis. Therefore the producer firms would become self funding with cash being invested and returned on a maximum 30 month cycle. A time period we feel is the maximum necessary to compete in today’s capital markets. A marked reduction from some producers current 27 year capital depletion cycles. Today producers store these unrecognized capital costs of past production, and hence the cash that was invested, on their balance sheet as property, plant and equipment and leave them there for a generation.
In addition to recognizing the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. The Preliminary Specification contains three modules which are Marketplace modules. The Petroleum Lease, Resource and Financial Marketplace modules all establish markets in which the oil and gas industry has traditionally operated. Each of the Marketplace modules share the Marketplace Interface which enables producers to interact and conduct the commerce they undertake as a producer. These interactions are fully integrated within the ERP system of the Preliminary Specification allowing producers, service industry and government agencies to buy, sell, trade and assign land, products and services etc. The Joint Operating Committee and markets are what replace the bureaucracy of the corporate empire which exists today. Centralization as a theme in corporate America has waned and decentralized models are enabled through the speed and availability of the Internet. It is the contrast between our decentralized industry as configured in the Preliminary Specification and the producers current structures which frighten the producers bureaucrats with the termination of their command and control, but let's not forget the healthy compensation they receive for losing all of their investors money.
People, Ideas & Objects is more accurate and valid today than when we first proposed the use of the Joint Operating Committee in August 2003. It is far more valid since the final edited version of the Preliminary Specification was published in December 2013. Producers have, are and will continue to fail spectacularly. Their future is the most comprehensively difficult they’ve ever faced. Yet their preparation and approach is to continue to “muddle along and do nothing.” Essentially what they’ve done for the past four decades. A time in which they learned, through specious accounting, they “made bags of money without even trying.” When in reality the value was slowly seeping out of the industry in what is an elaborate ponzi scheme. The producers' value as represented in their “big beautiful balance sheets” only goes up each and every year validates their argument that they're “good business people.” It’s just capitalizing all the money they’ve spent and holding it on their balance sheet for decades makes them look that way too.
Producers have left these issues manifest themselves for too long. The damage done to the producers and the industry overall is comprehensive and tragic. This is represented today in the extremely low and negative working capital balances held by producers. Their future doesn’t exist primarily due to their incapacity to deal with these problems and the lack of any planning to do so. Today, control of the financial, operational and political frameworks of the industry are slipping from their grasp. Acceleration of the downward trajectory on these three fronts is making for a bleak future. Oil prices are clearly unable to provide the profitable operations their financial statements claim, hence the continued erosion of cash and working capital. OPEC+ and natural gas futures are no further along the process of remediating the commodity markets than they were five and ten years ago. Second, the investors are unimpressed with the continued refusal to listen to them, the commodity markets or People, Ideas & Objects. The obstinance of the producers to refuse any message has become more of an issue then the issues themselves. Working capital shortfalls will not be replenished by banks or investors, it's their indication of a failed enterprise. And third, the capabilities of the industry, and the good faith they once had is deteriorating as the industry, service industry, tertiary industries and general economy begin to realize their futures are better served elsewhere.
The title of this paper is “Profitable North American Energy Independence Through the Commercialization of Shale.” Our decentralized production model’s price maker strategy resolves this issue in its entirety across the North American continent by establishing profitability as the only fair and reasonable means of production allocation. The Preliminary Specification is a comprehensive solution to the administrative and accounting needs of the industry and producer firms. There are many attributes included in our product. Too many to mention here in this abstract, however we provide a summary entitled Our Solution within this paper. Key among them is the configuration necessary to set the industry and producers on an innovative footing to ensure the market is always supplied with ample supplies of oil and gas commodities at affordable prices. These are the actions we’re taking. Our plan is simple, to raise our budget through the only viable method of producer involvement, to implement the Preliminary Specification across North America as the method in which we rebuild the industry. Therefore establishing profitability in oil and gas everywhere and always. Then by using specialization and the division of labor that is defined in the Preliminary Specification, enable the industry to increase its productive output from the same resources. Then, and only then, can we begin to approach the objective of energy independence as a profitable and prosperous industry. The bureaucrats within today’s producer firms plan to “muddle through,” and although they’ve increased deliverability on the continent, it is unprofitable and therefore unsustainable. A fool's promise. Oil and gas investors, upon reading our White Paper should ask themselves if our plan provides them with the opportunity to invest in the dynamic, innovative, accountable and profitable oil and gas producers and industry once again.
Profits. The industry has been chronically unprofitable for the past four decades. Although producers have reported profitability throughout this period. These profits have been overstated due to the Securities and Exchange Commission making a late 1970s change to the manner in which capital assets are reported by oil and gas producers. The Full Cost and related Ceiling Test requirements provide producers with the opportunity to defer recognition of the capital cost of exploration and production, in a capital intensive industry, for decades. These SEC requirements define the outer limit of what is acceptable for a producer to carry as property, plant and equipment, however the culture in the industry has developed where each producer attains this outer limit each and every year. We believe it would be the most competitive posture for a producer to recognize their capital costs in an accelerated manner in order to recapture the previously invested cash and reuse it repeatedly. This assumes they’re charging adequate prices for their commodities and therefore generating real profits. Until recently and by necessity producers have used the capital markets to reload their drilling budgets on an annual basis.
This places this issue within the classification of an accounting issue. Due to the nature of software today, and particularly ERP software, which defines and supports the organizatons, software must be built to rectify these issues before the organizations will be capable of making any permanent, lasting changes. Culturally oil and gas is an engineering and geological science based industry. Individuals from these disciplines are the principles in these producer organizations. As a result, it is my belief that the expectation of these producer principles is for the accountants to pay the bills. Which is, as far as they’re concerned, the extent of the use and purpose of accounting in oil and gas. This cultural division has grown over the past four decades where accountants ability to assert the business issues does not exist. The release of reserves value through further drilling is the business and the only business as far as the culture of the industry is concerned. The nuance of recording and reporting the accurate timing and recognition of capital costs of exploration and production are not a topic of discussion when “everyone” is following the SEC’s regulated requirements and are “building their balance sheets” faster than “we” are. What we do know is over reported profits begets over investment, and over investment begets overproduction. Especially when no production discipline exists.
When I began with the development of what is now the Preliminary Specification in August 2003. There was a large gap between myself and the industry in terms of how I saw the value represented in the industry. Times were good, investors were happy, cash was flowing. Yet the difficulty in generating value, having and needing to go to the capital markets each year betrayed the good times otherwise being experienced. Money seemed to go in but never came out. There were systemic difficulties being experienced where commodity prices would need to have their “markets rebalanced.” These were mitigated by the culturally ingrained hope that optimism would show the way. In the last ten years these cultural distortions have taken on obscene personalities, wholly inconsistent with value generation and profitability.
What I saw in 2003 may be considered common knowledge in the industry today. Knowledge of the fact there’s an issue, unknown to its origins, with everyone in the industry generating their own unique opinion based on “it’s a difficult industry which most people don’t understand.” Although today they see there is a problem there is no consensus as to “what” the issue is, no solution offered or discussed and more importantly, there is no cultural motivation to deal with it. They’ll muddle through. What I see today is the breadth of this gap is at least as large as it was in 2003. I see an industry which has passed at least a decade beyond the need for triage to maintain its existence. An industry whose value has been left to atrophy over the past four decades to the point where it’s worthless and demands significant cash just to operate. A capital intensive industry whose cash flow has been diverted to sustain the self-serving and conflicted bureaucratic administrations so that they themselves would prosper and survive through chronic inaction. Today producer bureaucrats believe they have a minor itch which they’ll “muddle through” and “do nothing” about. These being the global, systemic strategy and operating model of North American producers. Where they’ll continue to report profits, even today, due to the lack of recognition of appropriate amounts of capital, and maintain cash balances which will see them through the difficulties, in their opinions. What they don’t realize is that those cash balances have already been spent and the current liabilities at many producers swamp the current assets establishing the critically low and negative working capital we see throughout the industry.
This chronically low and negative working capital is a dangerous development. All sources of cash have been exhausted and producers are turning to the field services and others through accounts payable to finance their activities. I find this a particularly vile aspect of the current bureaucrats who’ve allowed the decline in these industries to happen. The service industry and others are now having to suffer from the producers' misdeeds with their own working capital evaporating and flashing warning signals regarding the producers poor management and desperate business situation. What we’ve seen during the good times, those being 5 out of the past 34 years, when the producers were willing to belittle the service industry as lazy and greedy for asking what the market would bear for their products and services. After such past criticism of the service industry they now have the audacity to expect that it will be the service industry that is going to step up and finance their operations by extending the producers credit?
Nonetheless, producers don’t listen. Markets including commodity markets inform their participants of one and only one thing, their price. If a producer can produce profitably at the market price the producer should produce. Otherwise they should shut-in their production. What does the bureaucrats' claim of “market rebalancing” mean? When we proposed our solution in August 2003 no action was taken other than to shoot the messenger. The presentation of our solution provided them with plenty of time for them to have acted otherwise. However, we believe the actions they took against us prove they fully understood what remedial actions were necessary. If we were part of the lunatic fringe, why the negative attention? Our solution just happens to be contrary to the bureaucrats interests and personal financial health. We are disintermediating the oil and gas industry. In terms of listening it has been more than three years in which their investors have withheld support to the producers. Yet producers continue to insist they’ll win their investors over with their inaction. Ignoring markets for pricing information has occurred since at least 1986. Ignoring the solution proposed in the Preliminary Specification since August 2003. And ignoring their investors distaste for what they see occurring in the industry, for at least the past three and one half years.
The state of industry affairs on an objective basis is terminal. The velocity of the producer's demise is accelerating. The follow on consequences of producer inaction to the secondary, tertiary and general economy are tragic. The profitability being reported today is as specious as it has been these past four decades. Revenues as a percentage of property, plant and equipment have eroded so substantially and become so unbalanced they’ll never be rectified. Therefore cashflow will continue to erode. My argument here being these alleged investments in property, plant and equipment are not generating any value. The abundant cash producers claim to have, and their media cohorts continue to promote, are specious as well. If producers were able to liquidate their receivables and inventories, in combination with their cash balances they would find that on average 93% of those resources have already been spent and listed as current liabilities on their big, bold, beautiful balance sheets. Working capital in named producers are negative including Apache, Encana, Chesapeake, Pioneer, Canadian Natural, Suncor and Anadarko which are just some of the 23 firms we follow and analyze. Exxon has negative $9.2 billion working capital.
The only residual value remaining in the industry is the amounts recorded in property, plant and equipment on the producers balance sheets. Although through the normal course liquidation of these firms this value may be lost. These values represent a number of obscure points in terms of value. The first is they represent the amount of the unrecognized capital costs of past production. They’re the amount of the investors subsidy provided to the consumers through their support by paying for the capital costs of their consumers consumption. Although these are not general assessments of what value an industry holds. They’re the only value which I see available. These capital costs can finally be realized when using the Preliminary Specifications decentralized production models price maker strategy. By using these unrecognized capital costs of past production in our pricing calculations of future commodities costs, they can be recovered in the form of cash from the consumers by way of higher prices. Producers believe what is needed to resolve the industry issues is for the investors to “back the truck up to the loading dock” and fill the producer full with cash again. Would investors return if there was a credible plan for the industry to establish itself on profitability? A plan such as the vision of the Preliminary Specification? There is otherwise no source of cash large enough to fix the industries issues, other than the consumer. Our solution sees these capital costs of property, plant and equipment finally being realized and their prior cash investments recovered in order to dividend it to the investor, pay down debts and fund the massive capital requirements of the future. This was the only hope for this otherwise optimistic industry. The producer bureaucrats have refused to listen. Therefore history repeats itself when we learn of the previously acquired knowledge of “maximum pain is required before a turnaround.” I just wonder what is “maximum pain” and why we have to go there?
As night follows day the financial destruction within the oil and gas producers will lead to diminished operational capacities and capabilities. The policy of producers has been to “rebalance markets” which is the deliberate elimination of productive capacity in the industry to eliminate the overproduction. It was always exercised in a period of time when shale was a small percentage of our deliverability. Shale gas is now 75% of the United States production. Oil based on shale formations is headed in that direction as well. With the diminished financial and operational capacities and capabilities will these lead to accelerated declines in the overall deliverability of North America? With the resources of the industry being scattered to the wind, where people are tired of the boom / bust cycle of the only industry that still operates in that manner. How difficult will the remedy for this be?
People, Ideas & Objects plan sees us employ the full force of creative destruction to profitably rebuild the industry in the profitable vision of the Preliminary Specification. Secondly, expand the throughput capabilities of the industry to address the higher volumes needed for profitable energy independence. And then build the profitable, sustainable energy independence needed for our society to prosper. It will be the most powerful economy which will be the largest consumer of energy. Oil and gas will always be a significant contributor to our overall energy supply.
People, Ideas & Objects plan contrasts with the oil and gas producers plan simply through its existence. The lack of a plan, or to “muddle through” is a feature, not a bug of the North American producer. Active management of the industry at any point, and in any form, is inconsistent with the industry's culture developed over the past four decades as a result of the SEC implementing its Full Cost and Ceiling Test regulations for capital assets. These regulations have extinguished the producers initiative to act. If everything producers spend becomes an asset which increases the value of the firm, if everything they produce is almost pure profit, they’re disincentivized to see the situation as anything but wildly successful. “What could be wrong?” Planning, strategy and active management have been ineffective in this environment and as such grew to be unnecessary, therefore not undertaken and atrophied. How else could you describe the past ten years in the natural gas business in which nothing has been done. If the business should ever have difficulties, as it has always done before, “it will work itself out.” People, Ideas & Objects have been in the oil and gas market promoting elements of the Preliminary Specification since 2003. The full specification since 2013 and nothing was done by the producers other than to abuse us and attempt to circumvent our Intellectual Property on five separate occasions. The threat we present to the bureaucracy through disintermediation has been the only issue of concern to our very good friends, the producer bureaucrats.
What we have now, upon critical review, are obscene financial statements being produced by all of the oil and gas producers. Disproportionately large property, plant and equipment accounts are contrasted by minimal to negative working capital. Shareholders equity which has in many cases retained and current losses rapidly eating away at the value investors pledged to the producers over the course of decades of annual shareholder issuances. Revenues which pale in comparison to the capitalization of the firm, yet produce fantastical profits due to the lack of any substantial recognition of the capital costs of exploration and production in a capital intensive industry. Profitability was not the religion of the industry. Profitability was irrelevant, or we were told the thousands of times when we claimed we provided oil and gas producers with the most profitable means of oil and gas operations. “Who cares” we were told. Today profitability is such an issue in oil and gas, investors and bankers have left as a result of the lack of it, the cash continues to erode from the industry, the service industry and the broader economies are now tragically suffering as a result of a depression era downturn in oil and gas.
Profitability is the purpose behind the Preliminary Specification. Addressing the issue of producing unprofitable production all the time, and everywhere has been resolved by People, Ideas & Objects. Ours is a trillion dollar value proposition. Yet no movement from the producers. If they can’t be motivated by incremental value and real profitability in their organizations, based on their investment in the Preliminary Specification, why would investors and bankers be motivated to return and invest now that they understand the producers culture and history as just described. How is it then the credibility of oil and gas producer bureaucrats regarding profitability will come about? The answer is the producers can’t, won’t and will not ever change. The cultural differences are too significant for them to bridge. The damage they’ve incurred to date is too substantial for them to recover from. Rebuilding in the style of creative destruction will be faster, more effective, more productive and most importantly of all, more profitable. The acquisition of credibility regarding profitability by the existing producers has passed. They could have proceeded with the Preliminary Specification at any point in the past decade. They didn’t, I can’t help them now. They’re too far gone for me or anyone to rehabilitate, if we attempted to implement the Preliminary Specification I think it might end up being, as a result of the damage that’s been realized, a failure. And then what?
Therefore this is our plan, we are seeking funds from the producers to build the Preliminary Specification. Review of the “History of ERP Systems and Integration in Oil and Gas” section below will show the reasons why this is the only opportunity open to us. When funded, we can then begin the development and integration of the technologies within whatever configuration the industry may be in. Key among these is our price maker strategy to ensure all production is profitable everywhere and always. And the structures to support innovation throughout oil and gas and the associated sub-industries are put into place. Innovation which ensures the consumers are provided with the lowest cost for their energy needs. Profitability has been an issue we’ve argued for decades here at People, Ideas & Objects. It is in our DNA, the Preliminary Specification, and makes up our old time religion. As one can see with the tone of this white paper, the history between us and the producer bureaucrats, the uncompromising manner in our approach, we will not compromise on these fundamental profitable and innovative needs of the industry. Those within the oil and gas industry should now be able to look around and see clearly why profitability is so critically necessary, everywhere and always. The damage is comprehensive and the expectation that investors will return to make everything all right again is only evidence producers have learned nothing and maybe never will. Expecting investors to clean up the bureaucrats mess is frightening on two fronts. There isn’t enough investor cash anywhere to even begin solving the industries problems, the consumer is the only source of cash large enough. And when the investors are expected by everyone in oil and gas to make a difference today, Producers scare the living daylights out of the investors with such over the top, unreasonable requests.
Once we’ve established the capability for all production to be profitable everywhere and always, our plan will begin the process of increasing specialization and expanding the division of labor. This will be necessary in order to achieve a greater throughput from the same resource base. If we're to expand our productive capacity by another 8 million boepd to be truly energy independent, we'll need to either expand the technical engineering and geological resources or figure out a way in which to work more efficiently. We have issues with the supply of earth scientists and engineers, and with the downturn pushing the capabilities of each producer beyond what is sustainable in the long term, this issue needs to be addressed before we can expand our deliverability. Specialization and the division of labor are the toolset in which the industry can achieve these objectives. Software, and more particular ERP software, defines and supports the organizations and therefore the enhanced specialization and division of labor. Once the profitability and throughput potential are addressed then the industry can set upon the objective of energy independence on the continent. Shale makes this a viable and worthwhile objective, however the manner in which it's being done today provides benefit for no one other than the bureaucrats running the producer firms. Energy independence without profitability everywhere and always is unsustainable. Are we just punching above our weight with our enhanced deliverability today? What effect will this industry's financial crisis have on our continental deliverability? With the tragic state of affairs throughout the oil and gas economy we see clearly that today is inadequate for everyone's purposes. In addition to the increased throughput, which is required, there is a substantial amount of work needed on new infrastructure and repairs to existing infrastructure. These costs are not going to be undertaken by investors who are duped by specious accounting. They’ve learned the lessons regarding oil and gas accountings fraudulent nature and therefore these investments need to be undertaken on a different basis, People, Ideas & Objects have nominated the consumer, the only source of cash large enough to satisfy these needs. These costs will have to be borne by the consumer who pays the full cost, capital, operating, overhead and royalty of each boe they consume. It is the only way producers can cycle their capital investments through their organization on a reasonable 30 month basis and provide them with the cash necessary to reinvest and achieve the continent's energy independence.
This is People, Ideas & Objects plan, one which we feel deals with the realities of a critical industry, necessary to ensure our way of life in our advanced economy. What we do know as a result of the (in)action of the past decade is that the producer bureaucrats aren’t interested. They don’t have a plan and if history teaches us anything, when the situation becomes untenable that’s when management finds greener pastures in other industries. We’re not aware of any of these plans, it's just history tells us of these events that have happened before. People, Ideas & Objects have this plan which provides the needs of everyone concerned. Even the consumers long term energy supply. Would our plan now provide the motivation for oil and gas investors to return to the industry and participate in our Initial Exchange Offering as defined below?
Producers have a strong legacy in their dealings with ERP software vendors. A history which extends back to the early 1990s. In order to provide an ERP software solution to the oil and gas marketplace. People, Ideas & Objects needed to evaluate the strength and weakness of our competitors, the structure of competition for ERP software in the industry and how we were going to earn a living. The oil and gas producers approach to ERP systems is best summarized as they’re expensive and therefore take away from drilling more wells. Accounting is not a necessity when the reserves report from the independent reservoir engineers tells producers what the company's reserves are worth. Therefore they limit the spending on ERP systems and use a variety of methods in order to obtain the lowest cost ERP implementation. Strategies such as realizing the ERP vendor has a small handful of producers in which to sell their offering into the industry each year. Therefore they could be motivated to make the sale if they were made to realize as a producer, they were evaluating several different options. That these options vendors were providing better financial incentives then the vendor they were talking to and unless they contributed more, they would be eliminated from consideration. You’d be surprised how effective this strategy has been. Most if not all of the intermediates and larger producers have had their software acquired at $0.00 cost and only pay the implementation and service contract as costs. This has led to a devastated landscape in the oil and gas ERP market space, with few opportunities for the producers to choose from. ERP software investors soon began to realize they were the “mark” and quickly made their exit in the late 1990s. Never to be seen again. This left only SAP, IBM and Oracle with any basis in which to compete.
Due to some sophisticated marketing, SAP had managed to gain a large market share of the more senior producers. Their offering, in my opinion, was too static and incapable of capturing the essence of an oil and gas producer. Workarounds for such basic elements as partners and partnerships needed to be made. SAP was conceived on the basis of a manufacturing enterprise. Where a manufacturer such as Ford has to organize their production lines through tier 1 and tier 2 suppliers, just-in-time. This is inappropriate for oil and gas. Oracle entered the market looking to develop new solutions for oil and gas in February 1997. I remember the day very well for some reason. And IBM purchased PriceWaterhouseCoopers Qbyte application which had the largest installed base of oil and gas customers at the time. Operating on a 1980s application framework. SAP was uninterested in ever making an application for oil and gas. They sell one for oil and gas however it is considered to be difficult and inappropriate for the industry. They have much bigger fish to fry in the global market. Oracle left the industry in frustration as a result of being unable to source willing producers to fund the development of next generation ERP software. Seeing the lack of commitment and the small marketplace of producers in which to sell too, Oracle left the oil and gas ERP space around 2000. IBM with their industry leading application Qbyte understood better than anyone about the need to redevelop its application. They too attempted to source the financial resources from the producers in order to undertake those developments. In frustration IBM left the market space in 2005 as a result of the inability to source any support from industry for its redevelopment.
Since then there have been some minor attempts at providing the industry with new products, however I am unaware of anything being successfully prepared. The industry operates on either 1980s technology or inappropriate SAP interpretations of oil and gas. I understand that in 2018 Quorum Software, who have applications in this market space, were hired by a, or a number of, producer(s) to build a new system. This was well on its way with staff working on the development, when I assume, the price of oil dropped more than 2% one day and the project was cancelled by the producer(s). This is the issue which People, Ideas & Objects have to concern ourselves with. Producers have never been able to apply themselves in any direction for a sustained period. Hence they have no successful implementation of any ERP software. We can not have the financial funding of this development suspended before its completion. It could never be restarted on any basis. And, we need to have the funds in hand to ensure that we do not become “blind sleepwalking agents of whomever will feed us.” Cornelius Castoriadis, The Imaginary Institute of Society.
People, Ideas & Objects approach considers all of these aspects of the oil and gas ERP market. We have enjoyed being in this market in one form or another since 1991. Another area which concerns us is the methodology that is used throughout oil and gas which sees Intellectual Property (IP) managed by the producers as if its community property. We have addressed this issue specifically in the Resource Marketplace module as the ability to build an innovative oil and gas industry will depend on the respect of everyone and anyone's IP by all. We have seen firms hired for their unique capabilities and IP, then their competitors are brought in to help them develop the same capabilities and IP to ensure there is adequate price competition fostered within the industry. The 1990s was very much like this in all industries. I remember them more as the wild west in terms of IP. Those days are gone. The management of my IP has been done in a way which producers are fully aware of the consequences of any violation. Which brings us to one of the strong beliefs that we have regarding why the Preliminary Specification was never funded by the producers. This would have violated their policies on how to deal with vendors IP claims and they would feel they’d be opening a Pandora's box in terms of the cost implications of any and all vendors making claims based on their internally developed and costly IP. Which is true, however, at the same time producers don’t have a robust, innovative or profitable industry as a result of the methods they use today do they? They are the IP dinosaurs of the 21st century and the sooner they forget this regrettable past the better off they’ll be.
We have captured these concerns of ours in our Revenue Model, our user community vision and in other areas within People, Ideas & Objects and the Preliminary Specification. They say once bitten, twice shy, which would be how I see this situation. We do not expect existing producers to survive in their current financial, political and operational state of accelerated decline. We are building the new oil and gas industry based on the vision of the Preliminary Specification, funded by the producers, and based on our user communities contributions. This is how we’ll be providing the most profitable means of oil and gas operations.
There is no consideration of an oil and gas future without discussion of the Information Technologies which are available in the marketplace today. The maturation of these over the past five years, from an ERP systems point of view, have been spectacular. What can be done in terms of what is available today is far beyond what has been implemented in oil and gas to date. My personal assessment of the systems which are in use by the oil and gas industry is they’ve failed the oil and gas producers. In a world where software defines and supports the organization, when those oil and gas organizations and the industry as a whole have failed, and have failed to adjust to the issues causing systemic failure, then that has to be assessed as a resounding software failure as well. There are many reasons for the failure of the software vendors. Key among them is the financial abuse they’ve experienced at the hands of the oil and gas producers, their alleged clients. The software vendors' products have therefore atrophied and their skills have degraded to the point where they're unable to appropriately service the industry and we have today's oil and gas industry failure. The key point to note is that producers did not sacrifice any money on providing better management or information of their business, in order to drill the maximum number of wells possible, build big beautiful balance sheets and report specious profits.
The result of this history has demanded People, Ideas & Objects take a different approach to our funding. We seek to raise the funds we need to complete our developments in advance of our software development commencing. This is in order to ensure we do not become “blind sleepwalking agents of whomever will feed us.” Professor Jurgen Habermas. We must proceed to our completion without interruption and without undue influence from groups who seek to compromise with the bureaucratic ways of the past. Creative destruction is at hand and we need to ensure the configuration of the oil and gas industry is true to the vision of the Preliminary Specification as its model with our user community filling in the details. Compromising the users' needs to meet the current needs of the capital markets, our shareholders or the bureaucrats in today’s producer firms will be unacceptable a decade from now. Our approach to the oil and gas marketplace is fundamentally different than that which has been provided to the producers by our competitors in the past. We have configured People, Ideas & Objects organization as an Intellectual Property, Research and User Community based provider. These are our distinct competitive advantages. We believe, fundamentally, there is only one business in the very near future. The software business. Just as the record store is now the iTunes app all industries will be operated in a similar, disintermediated manner. Such that it’s not enough to own the oil and gas asset anymore, but you’ll need to have access to the software which makes the oil and gas asset profitable. We see our competitors have not provided this, and the producers are systemically failing due to unprofitable operations.
Software is the app which users see. Software is derived from Intellectual Property, therefore all industries will be based on a software’s Intellectual Property. This has been our strategy from the beginning. In the 1990s Intellectual Property was more of the wild west, where if you saw something you used it. Now it has to be respected and as a result the implications in business are dramatic and those with the Intellectual Property have many opportunities they did not have before. In terms of the impact on the people who work in oil and gas the same can be stated. Intellectual Property will be the basis of their employability and value in the marketplace. Education being the base of their Intellectual Property they’ll begin with the development of their unique skills from there. What’s different today is they’ll have access to some form of contractual Intellectual Property which enables them to generate their value. Without it, they may otherwise be unemployable. The three forms of Intellectual Property they may have in terms of their employment is the development of their own specific capabilities based on the Intellectual Property they’ve developed. Secondly they may acquire the rights to Intellectual Property on the basis of a license in a commercial relationship. This is the nature of our user community members and their service provider operations in the overall People, Ideas & Objects community. Or lastly they will work for a firm who has the Intellectual Property itself or have acquired it as a result of a license. Such as the people who work for the service providers. Today’s producer bureaucrats are displeased with this element of our offering and are unaware of the world in which we now exist. It is their archaic system of centralized command and control which will be unable to compete in the future and have none of the requisite capabilities (software) in which to do so.
When it comes to capabilities People, Ideas & Objects have configured our offering on a different basis than our competition. We are a change based software development capability for the oil and gas industry. Our user community is endowed with the exclusive rights to change the Intellectual Property which makes up the Preliminary Specification and its derivative works. Therefore the oil and gas industry, producer and each and every person in the industry will know who to contact in order to make a change in the software of the system. Who do they call to have changes made in their systems today? Our developers only listen to our user community members for the information they need to develop the software. Providing our user community with the power and control of the oil and gas industries accounting, administrative and business model leadership and implementation. This allows us to make the changes to the system as required in order to avoid any and all issues which arise and realize the opportunities in a timely fashion. Industry will no longer be provided with static software configurations that hold the industry in a money losing business model chronically and absolutely. Undoubtedly at some point the Preliminary Specification would create its own similar issues to the difficulties being experienced in oil and gas today. With this change based software, the user community and service provider offering the means in which to avoid another subsequent software driven catastrophe is inherent in our offering.
As I noted earlier in this paper People, Ideas & Objects are seeking to rebuild the industry with the funds from our Initial Exchange Offering. Rebuilding as a result of the devastation occurring in the industry today. We are concerned that if we were to build the Preliminary Specification for the market today, with the producers support, the ability for us to remedy their situation has passed as a result of their chronic inaction. The industries damage being too severe to overcome and therefore the Preliminary Specification failing as well. Producers' inaction is a characteristic of their culture, another characteristic has been to sit back and wait for the solution to come through their door in a complete package without their effort or money in its development. Producers will have finally obtained what they’ve always wanted. No new ERP developments being undertaken on their behalf and therefore the bureaucracy will be unchallenged in their management over their producer firms. To suggest that producers would now undertake to do something to resolve these issues limits them to the solutions provided by our competitors. Those which define and support the failing industry today. I am unaware of any new ERP systems initiatives on the horizon, and possibly the only one who is aware of the time and effort necessary to come up with a new conceptual model for an ERP system capable of solving the industry's problems. Considering People, Ideas & Objects are an Intellectual Property, User Community and Research firm, any use of our IP by the producers in any form is unacceptable.
Investors are concerned that shale reservoirs have created a shift in the dynamics of the oil and gas producers. Asking if shale will ever become commercial under the current business model used by these producers? Noting “shale reserves are a rapidly depleting asset.” Which accurately captures the entire scope of the problem. They can now see the profitability of the producers in the past have been overreported. The cash that fueled the industry was never internally generated. And without investors supporting the producers with annual cash infusions, the industry is not viable. Even though their working capital balances are at critically low and negative levels.
Producers refuse to listen to anything outside their bubble.
● After a greater than three year investor strike the producers continue to feign not to hear them. Investors are now asking producers to adopt some form of production discipline to limit production, World Oil.
● Markets provide only one thing, information in the form of price. If you can produce a profit at that price then produce. Producers have overproduced into the commodity markets for twenty nine out of the past thirty four years, despite prices screaming for them to do otherwise.
● Refusal to listen to their investors is consistent with the treatment People, Ideas & Objects has experienced over the past number of years since we introduced the Preliminary Specification as our solution to the industry's difficulties.
There is a long litany of excuses that were used to assuage investors concerns. Excuses such as “waiting for a cold winter,” “markets to rebalance,” “capital discipline,” “reducing costs through innovations,” “we’re profitable,” “Artificial Intelligence and the cloud,” “capital discipline” again, to its “OPEC’s fault,” “have to ensure alternatives don’t become viable,” “natural gas is a by-product,” “it’s the pipeline companies fault,” the “governments fault” these last two somewhat exclusively in Canada. We find that “market rebalancing” is a particularly vile excuse as it has no basis in fact, and is only the willful destruction of the industries production profile to meet demand. It is People, Ideas & Objects belief that through a fundamental accounting change that occurred in the late 1970s. When the SEC regulated producers to change to Full Cost accounting and its associated ceiling test. A methodology determining what the capital assets recorded in property, plant and equipment will be. This enabled producers to record “assets” that equaled, with some adjustments, the total of their reserves times the current commodity prices as the upper limit of their property, plant and equipment account. If these assets value exceeded their reserves “value” then they would be subject to the dreaded ceiling test write down to correct any asset overvaluation. What was quickly discovered in the high interest rate environment of the 1980s was that interest was a key attribute of the asset value and therefore interest expenses would be capitalized. Someone then asked about overhead with the resulting policies in which today we see approximately 85% of all overhead in the industry capitalized to property, plant and equipment. Slowly the culture of the industry became a spending frenzy fuelled by what came to be each producer's annual share offering. This culture has grown over these past four decades to know no difference in terms of what and how the industry generates or destroys value. The belief is that drilling wells releases oil and gas reserves which are tremendously valuable. Until People, Ideas & Objects began arguing that “real” profitability was necessary, the industry did not care whatsoever about profits, it was about cash flow, not profits, and we were bellitted for our belief in profits. We believe oil and gas reserves are of little to no value if they can’t be produced profitably and profitably considering an appropriate accounting of all of the exploration and production costs, including capital, in a capital intensive industry.
Why are these such issues today? The culture of the oil and gas industry is an issue due to the belief that value is generated through drilling which is not backed by the financial performance of these businesses. And when I say the financial performance I limit performance to just include cash. The industry became a massive call on investor funds each and every year. There never was, or is, any understanding their “business” should be self supporting. It was necessary for them to “build the business” and this was represented by “building the balance sheet” which is the unanimous calling of the producers even today. Spending is the only capability and is the decided competitive advantage of the North American oil and gas producer. As proof you can “look at all of those reserves.” The problem the producers don’t see is producers can’t and have never produced any “real” profits from the reserves. The value invested in the industry is sitting in the ground, as invested cash, with those reserves as represented by the bloated balance sheets of property, plant and equipment. Reporting only the operating and royalties as costs which is all the costs that are left after the majority of costs are capitalized, making producers look spectacularly profitable. The fact is everyone believed those bloated assets, profits and cash flows. The profits were not just over reported as a result of not recognizing much of the capital cost of oil and gas exploration and production. Producers only deplete the property, plant and equipment account on the basis of taking all of the capital costs that have ever been spent. Allocating these costs to the entire reserves base, and only recognizing the capital costs apportioned to the reserves produced that year. Leaving the majority of their capital costs on the balance sheet for decades at a time.
It’s interesting to go back and review the financial statements of the producers and find those periods in which they claimed they were highly innovative and claimed substantial cost reductions in their production. This was a period in which their total recorded depletion, year over year, was declining while their production increased. Indicating they were recognizing less capital cost per barrel produced. Secondly the service industry was subject to steep declines in their capacity utilization and the fact that producers were only willing to pay half of what the service industry representative needed. Reducing the producers costs of their drilling operations in the future. Not so innovative. The service industries representatives choice was to take the business or put their equipment into long term storage. Producers who claimed their production costs were declining while commodity prices declined, costs that were once $60, then were $40 and are now $24, were able to miraculously and retroactively reduce their production costs by reinventing the “historical” aspect of historical accounting. Such is the innovativeness of the oil and gas producers.
What we’ve had over these four decades was a reportedly massively profitable industry based on the chronic spending of investors' money. Spending being the only competitive advantage present in the industry. The amounts of recorded capital in property, plant and equipment are not assets, as represented in the specious financial statements of the producers, and rubber stamped by the public accountants who should have known better and done something. They were, and are, the unrecognized capital costs of past production. And quantify the amount of the discount provided to the energy consumer since none of these capital costs of exploration and production have been recognized. Financial statements in oil and gas “emulate the value of the firm,” I am told, they’re not what they should be, measures of performance. We believe any and all producers should therefore be subject to a pro-forma accounting adjustment to consider the reality of the current situation by moving at least 65% of property, plant and equipment to depletion. What we then find is all of shareholders equity is eliminated in the industry and the majority of the banks interests have been expended and lost too. Oil and gas is a capital intensive industry implying that the majority of its production costs are capital in nature. Just because the SEC defines the outer limit of what a producer's property, plant and equipment account can be, that does not mean each and every producer reaches the limit each and every year. The most competitive producer would strive to recognize all of their costs as quickly as they could and hold the smallest balance of property, plant and equipment. This would return the previously invested cash, assuming they charged adequate prices for their products in order to recapture their prior investments, and reflect a competitive financial performance that would differentiate them in the oil and gas, and capital markets. Can anyone today tell one producer's financial statements from another? Which one’s the hero and which one’s the zero?
When investors are told profits are as healthy as they’re reported in the industry over these past four decades. They rush in with their money in order to capture some of those profits. More investors lead to over investment in the industry which leads to the chronic, systemic overproduction we’ve seen. This chronic overproduction issue has existed in oil and gas since 1986 when OPEC first dropped the price of oil. $10 was their price and all the North American producers had to do was to pull back production 15% in order to rectify the price decline. What producers did was nothing. Except bring about the beginnings of their second cultural phenomenon in the industry. Looking under each and every rock for the responsible scapegoat and crying “oh whoa is me” in the process. In seeing this behaviour, it became clear to me the configuration and structure of both the producers and industry could not reduce production. They’re not configured for that. It would only leave large portions of overhead uncovered and profitability would suffer severely, albeit unnecessarily. I therefore set out in 1991 to build the software necessary to enable the industry to deal with chronic overproduction which was occurring as a result of the chronic over investment created by the specious accounting and financial statements of the producers. The Preliminary Specification provides the oil and gas producers with the most profitable means of oil and gas operations. Everywhere and always. We believe this chronic overproduction situation has created 29 poorly performing years out of the last 34. With shale reservoirs it will be terminal to the financial, operational and political health of the industry. During the most recent decades when producers were barring the door so no more investors could get in. I would ask them about their financial statements and their lack of any recognition of their costs of capital. The answer was always the same, “those are sunk costs and no one considers those.” I would then ask them the following question, so they’d gladly take more investors' money and then spit in their face by telling them last year's investment is now considered a sunk cost? I would comment as they would walk away in dismay at my questions, you do reap what you sow.
Without real profitability. Without anyone searching for value outside of the reserves being discovered. Without any half decent reporting being undertaken anywhere. The value built in the oil and gas industry in prior decades, and the investment dollars put in, have been frittered and wasted while the bureaucrats whistled past the graveyard. The industry is now worthless as it demands substantial capital investment in order just to operate. The cash crisis created as a result of investor and banker withdrawal is slowly progressing towards its final demise. If we consider People, Ideas & Objects pro forma adjustment of 65% of the property, plant and equipment account to depletion once again. An additional consequence is the debt held by these producers is leveraged to the moon. Subsequent to the investors withdrawal, the cash consumption continued, lines of credit were drawn, more cash was consumed, properties were sold for half of their recorded value, working capital is now diminishing at a remarkable rate with nowhere left to turn. The only source of new cash is... more drilling. This has taken three years to become a serious problem for the producers and throughout the industry without any discussion anywhere outside of People, Ideas & Objects. We see no discussion of the underlying reasons for cash being consumed by these organizations. When they never retire their capital costs. When most of the overhead and interest are capitalized. There is no short term float where the cash spent on overhead and interest are expended and then recovered in the subsequent 60 - 90 days by costing them into the price of the commodities. These overhead and finance costs that are capitalized, in addition to the drilling, completion and equipping costs are draining the producers cash resources each and every month because they’re not included in the producers commodity prices charged to consumers, but left to build each month as the unrecognized capital costs of past production, or property, plant and equipment account for decades, while producers hustle to find new cash, or new investors, each month to pay the staff, rent and keep the lights on. Which is a reflection of how poorly these businesses are operated. Simple cash management would have shown this to be unsustainable at least 20 years ago. But they were so profitable don’t you know. In the normal course of their operations they required outside funding to reload the spending machine. The cash drainage continues and no reloading has or will be undertaken. Terminal, in my opinion.
I’ve stumbled upon a graph that I’d never seen before. It was sourced from Lev Borodovsky who publishes the DailyShotWSJ.com, and can be reached on Twitter @SoberLook. As far as I can tell it has most of its input from the bureaucrats who operate today’s oil and gas producers. I can state this due to its representation of their view of the world. A world view that is skewed culturally as a result of four decades of specious accounting that People, Ideas & Objects document in our white paper “Profitable, Energy Independence in North America -- Through the Commercialization of Shale.” When I first saw this chart it confused me until I could figure out that it was representing the status quo perception of costs and how to handle the management of them in oil and gas. Looking at this from the perception of the producer bureaucrats.
Their total costs of each barrel of oil produced in the various shale formations is in the range of $48 to $54. The operating and royalty cost of each barrel varies between $28 and $37. I would point out the $18 to $23 in capital costs are based on an allocation of all of the capital costs across the entire reserves of the property. In our white paper we’ve argued that this allocation is unreasonable in a capital market where the demands for the performance of capital are far greater than what can be achieved when a producer is cycling their cash through their investments in a manner that retrieves their cash over several decades or more. As an alternative, People, Ideas & Objects recommend in our Preliminary Specification that the producer retire all of their capital costs within the first 30 months of the properties life to provide for the reuse of the previously invested cash. Providing them with the means to meet the demands of their future capital costs, shareholder dividends and bank debt repayments, and better match the rapid decline rates experienced in shale. This can only be done if the producer is selling their commodities at a price that is above their break even point which considers an appropriate accounting of the costs of operations and capital. Note this graph reflects that Well Break Even and Shut-in prices denote that at any point, and as long as the commodity price covered the operating costs, the property would continue to produce regardless of the impact on capital costs. If a dollar of capital costs was being returned, or one dollar above the shut-in price, that would enable the production of the property to continue. Only at the point in time where the commodity price dropped below the operating costs would the producer allegedly shut-in their production. This is a fundamental misinterpretation of the term break even, it is the reason the industry is in the difficulty that it’s in and why the producers have continued to lose money for the past four decades. Break even is not what is being interpreted here. What in fact the producer is assuming is that as long as there is cash flow above the operating costs then they’re making money and will continue to produce. What they’re stating is acceptable is they may not be breaking even, but they’re generating cash flow.
What People, Ideas & Objects provide in our Preliminary Specification, if we could assume the accuracy of this graph's numbers, is the point at which the property would be shut-in would be at the breakeven point and below. The reason for this being the production discipline gained through knowing that producing any property unprofitably only dilutes the producers corporate profits. Producing below the breakeven point is the point where unprofitability begins. Producing below the breakeven point for one producer, in an industry who’s commodities are price makers, will have the effect where the price of the commodities will be dropped below the breakeven price for all producers. When all producers continue to produce below the breakeven price for four decades you have an exhaustion of the value from the industry on an annual and wholesale basis. Times were only “good” when investors were willing.
People in other industries operate with the appropriate level of production discipline. Producing only above the breakeven point. They are considered businesses and do not have the luxury of new investors at the ready. They don’t immediately shut-in what is unprofitable when the conditions in the next month or two are going to change positively. That is unnecessary. All industries will wait a month or two to see if conditions change before they’re forced to shut-in production. If conditions don’t turn around then it’s time to make the changes to ensure that losses don’t pile up and, in this case, the commodity markets are permanently damaged (from 6 to 1 to 20 to 1) such as natural gas has been and oil is well on its way to becoming. The same situation would occur with an upswing in conditions, a producer would wait to ensure that the revised situation held before moving too quickly to return to production.
One of the consequences of using break even analysis such as we’ve done here reflects the Keystone Cops mentality that is on constant display in the industry. Today the entire industry is focused on shale as the only aspect of interest anywhere. Conventional just doesn’t excite anyone. Before it was heavy oil sands projects, Steam Assisted Gravity Drainage, before that there were half a dozen trends which saw the producer bureaucrats scurrying in an animated fashion to reconfigure themselves for that new “future of the industry.” Remember oil and gas is not a business. Using break even analysis today would reflect that the most profitable place to be would be in conventional oil and gas properties where the capital costs have been captured and returned, the breakeven costs are therefore very low and hence continue to be profitable at these prices. Returning even more cash to the producer. Yet the Keystone Cops have done everything to divest, cannibalize and let these “assets” atrophy in order to position themselves by investing all of their cash flow in shale. Ghawar in Saudi Arabia being discovered in 1948 and therefore conventional, North American producers behavior would have abandoned it because it's not shale.
What we do know is that no producer at any time in the past four decades has shut-in any oil or gas due to its lack of economic performance. Here is the very difficult aspect of the behavior which is conducted in oil and gas today. Not only do they continue to produce systemically, everywhere and always below the breakeven point. They’ve attempted to deceive everyone by allocating their capital costs to each and every molecule of oil and gas held in reserve no matter how long it will take for that molecule to be produced. Will it be this year, this decade or this century in the case of shale reserves of natural gas? Therefore deceiving everyone with the misguided belief that their breakeven costs are $50 when they’re really $150. Causing the erosion of value and wealth to accelerate even faster.
Now the tough part begins. Long term debt across the industry is slowly becoming due and the bankers are generally satisfied at this point to roll some of the debt over. Even to the poorest performers. As time passes with producers offering no plans, no strategy other than “muddle along and do nothing” becoming more obvious as to its unanimous adoption throughout the industry. With all of the opportunities producers had to invest in People, Ideas & Objects Preliminary Specification to enhance their profitability. When the producers won’t invest in their own business to enhance their profitability, why would anyone else? The bankers will become spooked and with the lack of action and diminishing cash, will bankers begin to want to see even more cash? How long before this becomes material to the banking sector and rolling the debt over can’t continue? Then what? People, Ideas & Objects believe working capital is to become hypercritical in 2019. Any requests to replenish working capital by producers will naturally have the investors and bankers running permanently the other way. Viable businesses don’t seek to replenish working capital. It is the end of the road and all of the damage done to the service industries, tertiary industries and society in general has been tragic and wholly unnecessary. The producers' bureaucrats have much to account for. My question for them today is, how much time do they think their investors patience will last? Will OPEC+ continue to reduce their production and continue to release their market share to the North American, high cost producers? And that’s not really all of your working capital is it?
When the business has reportedly been profitable each and every year. When the value generated by the drilling of wells is reflected on larger balance sheets each and every quarter. There is no critical review of what is wrong in the industry. The only thing that’s needed is to dilute the shareholders once again and raise this year's capital budget from a new crop of investors. Rinse, repeat. “Pipeline companies make money from producers, drilling rig operators make money from us, everything is good.” Conducting this type of business operation bloated the balance sheets of all of the producers beyond obscenity. Producers generate such small revenue streams in comparison to property, plant and equipment and this factor continues to diminish over time. Chronic overproduction will continue to affect revenues negatively, and with reduced revenues on a relative basis, cash flow will soon follow revenues lead and diminish too. It is a downward trajectory which is easily mitigated by... more drilling.
The magic elixir is the new pipelines that will be built to deliver products to new markets. In Canada getting pipelines approved seemed to have been achieved and oil will begin shipping in 2022. In the Permian there are many pipelines that will be coming online in the next 18 months for both oil and natural gas. The lack of takeaway capacity has severely depressed many regional markets with these markets creating their own differentiated regional prices. Therefore it is expected that once these pipelines are in place all will be well. Or will it? I hate to rain on anyone’s parade but the producers are limited in their time horizons to much shorter periods than the commissioning of these pipelines. I believe that once the price pressures that are being experienced in these regions are released to the larger market, the additional overproduction there will only lead to lower global oil and continental natural gas pricing.
Producers have violated the implied understanding they’ve had with everyone involved with the oil and gas industry and associated industries. By employing “cost control” as the only element of a basic business model they’ve allowed the business to fall apart. A business which everyone, the service industry and overall general economy, conceded to the bureaucrats at the producer firms to conduct in everyone’s best interest. They were the ones with the money from investors and the money from oil and gas sales. The implied understanding was the producers were going to run things and everyone else would be taken care of. And when their business model fails as comprehensively as the producer bureaucrats have allowed it to happen, and people within these industries are watching their businesses, careers and lives fall apart after committing to the producers their loyalty and dedication in exchange for this implied understanding. They now see they’ve been comprehensively betrayed. Now it needs to be asked, why is it we’re continuing to show any deference to these bureaucrats? What credibility do they maintain and why are we listening to them when they're the cause of so much difficulty? Many are now calling it a crisis. I’ve been saying as much for the past decade. Milton Friedman stated,
Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.
The Preliminary Specifications assumption is that the industries interpretation that oil and gas commodities are subject to price taker characteristics is incorrect. This is evidenced recently through the actions of OPEC+ with their removal of less than 2% of the oil from the market on two separate occasions which has brought about at least a 32% increase in the global price of oil. There’s the example of the Alberta government's mandated production cuts that removed regional differentials on heavy oil that were in excess of 80% of the global price. This small production cut, less than 10% of the overall productive deliverability of the province, had a dramatic effect where the differentials were eliminated within one month of the announcement. These are markets that reflect the characteristics of price makers, not price takers. To state that “markets will rebalance” or to continue to produce and increase production in a market of declining prices and profitability is not a business. It is foolish, irresponsible and reflects an uncaring attitude that is prevalent in today’s oil and gas producers. The Preliminary Specification is structured to implement the decentralized production model’s price maker strategy to rectify this behavior, establish profitability as the only fair and reasonable method of production allocation, and produce only profitable production everywhere and always.
With the inherent value contained within each barrel of oil. With the supply possibly limited to the next half dozen generations. Why would we ever produce any oil or gas that was unprofitable? What would be the purpose of doing so? Would we not just be robbing future generations of the resources they’ll need to expand their quality of life? On the one hand the costs of oil and gas exploration and production continue to escalate with each barrel of oil produced. This is due to the increased difficulty and science necessary to extract the resource. Therefore a more accurate accounting is necessary than what has been provided to the industry in the past decades. People, Ideas & Objects provides a more accurate accounting of the costs of exploration and production as part of the Preliminary Specification, our user community and their service provider operations. When only profitable production is produced it is implied that we're accurately capturing the timing and accuracy of all costs and passing them on to the consumer. Profits and innovation will be used to ensure an abundant, affordable supply is provided for the long term. Conversely, consumers paying the full cost of their energy will ensure that they’ll choose the most efficient and effective use of the resource.
Producers and the industry need to begin to assert their point of view in the environmental discussion. Yes, there could be environmental consequences of the consumers use of hydrocarbons. Nonetheless the consumers can’t live without hydrocarbons and their need for them in the future is far greater than what it is today. Wind and solar as a replacement are as big a myth as the myths regarding the environment. We’ve discussed this more clearly in this White Paper in the section entitled “An Inconvenient Set of Facts.” Producers drill wells. They leave everything else in the business to others. Pipelines are regulated companies which install pipelines. They are the focus of the environmentalists who receive financial and verbal support from the producers. Which seems to have become their sole role in the pipeline development process. Can anyone point to any individual or producer that championed more pipelines, where has the leadership from industry been? The environmentalists actively demonstrate, obstruct, legislate and litigate the process to the point where it’s difficult for pipeline companies to get pipelines put in place. This as far as the producers in the oil and gas industry are concerned is the government's or the pipeline companies fault. What producers have done is hand their financially, logistical and politically complex and difficult bureaucratic process over to a regulated bureaucracy in the pipeline companies, to seek approval from the ultimate bureaucracy, the government. Producers leadership and management of the pipeline process is complete once they’ve done their good corporate citizens role of writing checks to Greenpeace. When problems do arise and the producers find financial difficulties such as today, the reason their revenues are not fully realized is the government or pipeline companies fault. The fact none of the upside in their revenues was realized is none of the producers fault or responsibility. They’ve always found a scapegoat. Having to deal with differentials which reduce their revenues is other people's fault. Which leads one to question how much of their existing revenue streams are not their fault or responsibility either?
Instead, what producers need to be doing is to begin informing consumers of the choices they have to make. Accept the environmentalists are right and start hiking to the outback. Or, understand that each barrel of oil equivalent has the mechanical leverage of 23,200 man hours of labor. I ran the calculation which states the daily output of 147.25 mm barrels of oil equivalent production is therefore equivalent to the daily output of 86.5 times the world's 7.7 billion population. If consumers want to rely on alternative means of energy then there will be a wholesale downward swing in industrial capacity compared to what oil and gas provides today. Without oil and gas there is probably 97.5% overpopulation and the quality of life for the 2.5% would be prehistoric. So let's keep scaring the kids because they’re today’s thought leaders in society, we know it’s not the producers. But that’s the point of the exercise isn’t it. If the producers accept the children's concern for the planet then they’re absolved of the responsibility to ensure oil and gas is provided for the future. If they find they’re unable to provide for the future energy demand they’ll be able to point to the children and say “we thought they were serious and there was no reason not to believe the children.”
What is generally known and understood for the past number of decades is the knowledge and skills necessary to make a pencil isn’t and can’t be contained within one individual. Whether this is the case or not is unknown, which in a way implies the statement's validity. People, Ideas & Objects budget involves 5,000 man years of effort for the development of the Preliminary Specification based on our user communities definition and participation. These developments will be made on top of the commitments and investment made by Oracle to develop their generic accounting and ERP systems which form the base of the Preliminary Specification. The number we're recruiting for our user community members is approximately 3,000 individuals. A recruiting process and project priority we undertook subsequent to the publication of the Preliminary Specification in December 2013. A number which we need in order to develop a full understanding of the industry and how it operates. These people will be well versed in their knowledge and specialization of how the industry operates. Their contributions will need to be reviewed and confirmed in a collaborative environment by other users. The end product of our software will need to be tested within the industry to ensure its process management and functions are as they’re designed to be and consistent with the industry requirements. These attributes need to be done carefully and thoughtfully. We are not recreating the failing systems which identify and constrain the industry today. We are designing, developing and delivering software that supports the business model in the Preliminary Specification and the way in which work needs to be conducted within the industry. It will be a creative, collaborative and innovative process which our users will use to solve the issues they’ll face during the development process, and to discover the solutions to meet their needs. It will be our user community members as the principal in a service provider organization which will manage a process they’re most familiar with and contributed to during development. Although the process may be simple and easy to use, the scope and scale of the data which will include the entire population of the industries producers will demand our user community and their service provider organizations to comprehend these new data related implications within their process design. This is where their competitive advantages of quality, specialization and the division of labor, automation, innovation, integration and leadership will begin. Once our software and their services are operational they will constantly iterate their functions and processes through their access to our software developers via their organizations principals membership in our user community, and their hands on understanding of what works and what doesn’t in the process they manage.
When we consider the number of organizations which will be permanently working on the development and betterment of the software and services contained within this sub-industry, as I choose to call it, we will find its diversity, scope and scale is designed to match the difficulties of the tasks we're approaching. We are not taking our responsibilities lightly. However at the same time we're not conducting rocket science. We have assessed that oil and gas, both the industry and producers are failing. We feel the difficulties experienced by our competitors has limited their opportunities to address these oil and gas industry issues. The producers' starvation diet they imposed on our competitors has caused this. The technologies which are employed in the industry, their level of integration and innovation in terms of their implementation are steeped in the software vendors legacies of the 1980s. The recent maturation of the Information Technologies have substantially reduced our technical risk in the past five to ten years. These Information Technologies that we’re using in the development of the Preliminary Specification, our budget and our approach will be able to successfully achieve these tasks. Our focus and priority for the past six years has been the development of our user community. Without user community based software developments, we’re wasting everyone’s time. With this in mind we set out to develop a user community vision which would provide us with the software quality which we demand, the producers and industry need and the user community itself would know the structure and configuration would provide them what is necessary to achieve what is expected of them. The key element of the user community vision involves the Intellectual Property (IP) contained within our weblog, our wiki for the Preliminary Specification and elsewhere. It is the implementation and management of this IP which makes up the means to achieve what it is that we seek to do.
All of this IP resides in my hands personally. I have licensed People, Ideas & Objects to develop this IP commercially. They will subsequently license each of the user community members with a license which will provide them with the power and control of the IP’s development. Only user community members will be authorized in this process to make changes to the IP which will be derivative of the Preliminary Specification. Our budget pays the user community members for their contributions to this effort. The budgeted rate is $345 U.S. / hour. This is highly skilled, complex work which requires substantial education and experience. Therefore all of these derivative user community based works are being purchased by me where they’re subsequently licensed to each of the user community members. Each user community will have free and unencumbered access to any and all aspects of the IP to do what is necessary. There will be no trolls established demanding cross licensing of their contributions etc. etc. Subsequent to development and implementation the user community member will be provided with a monopoly license for an individual process to manage in their service provider organization they’ll create. This will provide them with the rights necessary to run the processes binary exclusively and provide the necessary tacit knowledge associated with the process and related services to the producers. Our developers will be licensed and compensated in a similar fashion to the user community to ensure the availability of the IP is not constrained by anyone on our development team. Our software developers will not be authorized or licensed to receive any input whatsoever into these software developments from any person, place or thing other than the user community. Anyone seeking to have their concerns handled within the software and services provided by this sub-industry will have no alternative other than the user community to provide them with what it is they need.
There will be one point of contact for everyone. Those within the user community are authorized and licensed to make changes to the software. They are the principles in the organizations which they’ll establish as service providers to deliver the process software and services. Generally if a user within the industry, a producer, a service industry representative or anyone within the greater oil and gas community would be able to seek the specific individual within the user community which has the power, authority and control over the software, process and services necessary to solve their issues. Who within the producer firm today does someone see about a change? People, Ideas & Objects et al are change based software providers. We only make money based on the changes the producer community needs and wants. We are not constrained, as our competitors are, by code and customers. Which for them as time passes making changes to the code become progressively more difficult, which doesn’t generate revenues, while increased numbers of customers disable the ability to increase the scope and scale of the software when no one will fund it. We have retired this business model for oil and gas.
What we therefore have is an empowered user community which is able to effectively exercise their competitive advantages. These include quality, specialization, the division of labor, automation, innovation, application of Artificial Intelligence, Leadership in the administrative, accounting and business models development, integration and many more. A user community which will ensure the producers, industry, and all those which depend upon it to be dynamic, innovative, accountable and profitable everywhere and always.
We’ve discussed in this white paper the critical role that our user community and their s ervice provider organizations have in developing, defining and implementing People, Ideas & Objects Preliminary Specifications and most specifically the decentralized production models price maker strategy establishing profitability as the only fair and reasonable means of production allocation. They are the means in which we convert all of the producers administrative and accounting costs to a variable, industry based capability, based on production. This is in contrast to the current fixed accounting and administrative costs incurred within each of the producers firms. These overhead costs and capabilities are currently unshared and unshareable, yet replicated within each producer firm. Contributing to the lack of real profitability in the industry.
By making these costs variable, based on production, we're enabling producers to be profitable everywhere, all the time through implementation of our price maker strategy. And profitable from a cost reduction point of view since we’ll have one industry based administrative and accounting capability shared across the producer population. The service providers enable a number of other attributes which we’ll be discussing as part of our solution in this section. These include how People, Ideas & Objects, our user community and service providers provide the dynamic, innovative, accountable and profitable oil and gas producer with both explicit and tacit knowledge of administration and accounting in our service offering. And the independent nature of this offering. We learned many things within the Preliminary Specification which are necessary for the dynamic, innovative, accountable and profitable oil and gas producers. Capabilities and capacities in the earth science and engineering disciplines are what the producer should be focused on in order to increase their competitive advantage. Capabilities are as simply defined by Professor Carliss Baldwin as “Knowledge begets capabilities, and capabilities begets action.” Or Professor Richard Langlois in his book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy” defined the producers role as...
Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. P. 27
Professor Langlois later went on to define capabilities as the “knowledge, skills and experience” of the firm. We would add ideas to this list as well. The question therefore is asked, what is knowledge? Knowledge consists of two distinct types, explicit and tacit knowledge. Contained within the People, Ideas & Objects software will be the explicit knowledge of how and what an oil and gas producer needs in which to operate profitably. And absolutely none of the tacit knowledge. Tacit knowledge can’t be captured in any form. It is knowledge that is “learned by doing” and defined well in this businessdictionary.com definition.
Unwritten, unspoken, and hidden vast storehouse of knowledge held by practically every normal human being, based on his or her emotions, experiences, insights, intuition, observations and internalized information. Tacit knowledge is integral to the entirety of a person's consciousness, is acquired largely through association with other people, and requires joint or shared activities to be imparted from one to another. Like the submerged part of an iceberg it constitutes the bulk of what one knows, and forms the underlying framework that makes explicit knowledge possible. Concept of tacit knowledge was introduced by the Hungarian philosopher-chemist Michael Polanyi (1891-1976) in his 1966 book 'The Tacit Dimension.' Also called informal knowledge.
In Professor Richard Langlois’ paper entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.” He defines tacit knowledge as.
Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. P. 359
It is one thing to provide the industry with a quality solution from the point of view of explicit knowledge. The need to have the tacit knowledge implemented in conjunction with the systems and procedures which People, Ideas & Objects user community and developers are defining is necessary to ensure a successful implementation. The service providers are People, Ideas & Objects implementation of tacit knowledge. They will be the ones providing People, Ideas & Objects software, their services and process management to the industry. Producers will therefore be able to rely on the service providers industry based, variable, accounting and administrative capabilities to be completed in a timely and accurate manner. The latest industry systems buzzword is Microsoft Azure and Artificial Intelligence to resolve the oil and gas industries issues. We believe these are the incorrect directions for the industry to travel. They are technology looking for a problem to solve. People, Ideas & Objects are using the business approach to solve the business issues being realized in oil and gas. Using technology to solve the business issues we’ve identified is the most effective means in which to resolve them. What we're seeking to do is to establish a strong foundation for the industry in which they can build from. Today, most producers have not organized their data or accounting to the level necessary to determine the monthly profitability of any specific property. Many will argue this point with me. To which I would ask what was the actual overhead incurred at any specific property? Not one producer in the industry is aware of what the actual administrative and accounting costs to manage a property are in the industry. Giving people the latest phones, Artificial Intelligence or Cloud Computing is misdirection and a misunderstanding of the issues. Activity designed to distract, instead of action to resolve.
Service providers are independent and are not concerned if it's Exxon or a startup who is the owner of the property they’re billing for their services. Understanding the service providers will be limited to just the few data elements necessary for them to manage the process they’re responsible for, it is doubtful they’ll know which client it is they’re charging when they issue their billing to a Joint Operating Committee. Their concern is the efficient and effective management of the process in which they’re exclusively responsible for. If a producer does have an issue with their service they’ll know who to contact, the user community member heading up the service provider. The user community member will have the power, control and the tools necessary to deal with the issues and opportunities the industry or producer may have as a result of any changes or defects in the software, service or process the service provider manages. The user community members are the sole point of contact for the industry to discuss the process’ management, and are the only people our software developers listen to. As we’ve always said in today’s current software environment, who do you go to see when your current software solution is not as it should be?
Consolidation within the oil and gas industry is a symptom of creative destruction. Startup oil and gas producers have been extinct for many years now. Another symptom. We see Anadarko throwing in the towel and many of their fellow intermediates believing, hoping, and anticipating, they may be the next intermediate to be poached. Shell, BP, Exxon and Chevron will survive because it’s what they do. That doesn’t make them efficient. If Exxon undertook the development of an ERP system to provide the industry with applications would Shell, BP or Chevron be interested? Of course not. And the same would go for any other producer. It is the independence of this sub-industry People, Ideas & Objects are creating and their independent approach to the technical aspects of the accounting and administration of oil and gas which makes it usable by each and every producer no matter what their size or configuration. Startup producers, Shell and Chevron won’t care if Exxon uses the Preliminary Specification and will have, as a result of their production profile, paid the majority of the software development costs. They’re only concern will be to ensure everyone pays the same fee for the same service. The independent nature of our “sub-industry” is an attribute for all of the producers.
People, Ideas & Objects competitive advantage and value proposition is that we provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations. Setting the foundation for the industry to obtain the objective of profitable energy independence on the North American continent. It’s not enough to own the oil and gas assets in the 21st century. It’s necessary to have access to the software and services which make the oil and gas assets profitable. We do this by providing the Preliminary Specification, an oil and gas ERP software solution which supports a business model that defines the following characteristics.
Throughout the Preliminary Specification we've used specialization and the division of labor to create new organizational structures for producers, and an industry configuration that provides producers with the opportunity to change the direction of their performance trajectory. We have stripped down the producer firm to the C suite executives, the earth science and engineering resources, some land and legal support. The remaining administrative and accounting resources are reallocated to service providers which are affiliated with People, Ideas & Objects and provide the accounting and administrative services in combination with our software across the entire oil and gas industry as their client base. Focusing on one process, or part of one process, the service provider specializes in the processing of that information. Billing the individual Joint Operating Committees for the services that they render. This industry and producer configuration enables the producer firms to focus on their key competitive advantages of their earth science and engineering capabilities, their land and asset base. Whereas the service providers will be able to focus on their competitive advantages of their accounting or administrative skills, automation, specialization and the division of labor, problem solving, issue identification, leadership, creativity, collaboration, research, ideas, thinking, design, innovation, negotiation, compromise and planning to name just the highlights.
This revised industry configuration, in addition to recognizing and supporting the Joint Operating Committee as the key organizational structure of the dynamic, innovative, accountable and profitable oil and gas producer provides us with an opportunity to do many things differently. The most significant, at this time, is the implementation of the decentralized production model with its price maker strategy which establishes profitability as the only fair and reasonable means of production allocation. Since all of the operational, and most of the overhead costs, will be shifted from the producer to the Joint Operating Committee we'll be producing detailed, complete financial statements for each property. It is in this transition to the Joint Operating Committee that all of the producers' costs become variable based on production. If the property is unprofitable then it can be shut-in and incur what we call a null operation, no profit but no loss either, and at which time the reserves will be saved for a time when the can be produced profitably, those reserves will not have to carry the incremental monthly losses as additional costs to be recovered in the future, the producer maximizes their profitability as their unprofitable properties will no longer be diluting their corporate profits and the commodity markets will find the marginal costs when the unprofitable production is removed from the commodity marketplace. Markets provide one thing and only one thing. That is the price of the oil and gas commodities in this case. If natural gas or oil prices are too low to make a profit then the logical, business and sensible thing to do is to not produce until such time as the price provides for profitable operations. That is how the producer will operate with the Preliminary Specifications decentralized production models price maker strategy. “This is collusion and the wrong approach” according to today’s producers who choose to produce, largely unprofitably, at 100% of their production profile everywhere and always. They do not accept this basic business understanding of how to run an organization. If making independent business decisions based on detailed, actual, factual accounting that determines profitability is collusion then I suggest they hire Robert Mueller. We have based our understanding that oil and natural gas are price makers not price takers. Losing the once abundant investors money has become a right, a privilege and an honor for the producers bureaucrats and they will justify their operations with whatever logic, or illogic they can muster. Please review the Preamble, the Resource Marketplace module or Partnership Accounting module of the Preliminary Specification for further information on our price maker strategy.
This lighter, leaner configuration of an oil and gas producer provides for greater flexibility in terms of the operations that are undertaken. Specialization and the division of labor are the two primary sources of every increase in our standard of living and organizational performance. These two tools have stagnated in the past twenty years as a result of the role that software is now taking in society and our organizations. Software has the effect of cementing the organization permanently to the software configuration and no organizational changes can be made without the corresponding change in the software being made first. As a result of this we're experiencing no increased performance trajectory as a result of the lack of any specialization or division of labor. Other economic concepts such as creative destruction and spontaneous order have been stifled as the ability to act outside of the defined software methodology is impossible. Therefore it is proposed by People, Ideas & Objects, and adopted within our Revenue Model, that we're change based software developers. We are compensated for the changes that are made in the software based on the desired changes of our user community who are empowered through our user community vision. It is in this way that the oil and gas industry acquires a software development capability which will enable the Preliminary Specification to accommodate any changes, approach any issues and opportunities as they arise and will not disable the dynamic nature of the industry for many decades again.
As I indicate in the appendix of this white paper, the issue we're resolving comes down to essentially Bad Accounting which has influenced the culture of the industry since the late 1970s when the SEC prescribed its full cost methodology for capital assets. The action that most producers now publicly promote is that they’re “building their balance sheets.” I am not familiar with this “business” concept and am unaware if you build a balance sheet with cement or wood, if it needs a basement or you can build it all above ground. It is “building balance sheets” and “balancing markets,” I would guess on the head of a pin, that are two of the many “business” concepts that do not exist anywhere else in the business world! “Building balance sheets” has morphed from a foolish idea, which no one in their right mind would adopt, to a culture of spending as the key competitive advantage (a.k.a. capital discipline) that oil and gas has become. Any attempt to differentiate the financial statements of any existing producers to determine which one is the superstar and which is run by the village idiot is something that I can not discern the difference. If all producers do is spend investors money that will be replenished again next year because investors can’t tell if you’re doing a good job either, all of this spending is capitalized as an asset in property, plant and equipment and depleted over the course of several decades. Any revenue earned as a result of this spending orgy will naturally be profitable as all the costs of the producers are capitalized. Yes, even the Post-it-Notes of the receptionist, their time and the phone service they use. Big balance sheets with big earnings. Leading to investors thinking they're making big profits only to find that commodity prices are somehow collapsing as a result of chronic overproduction from overinvestment by investors fooled by specious accounting.
On the other hand we have the concerns of the consumer and their need to ensure that they’re being provided with the lowest costs of oil and gas. This should not be as a result of the investors subsidy that has occurred over the past four decades. The gross amount of this consumer subsidy is the aggregate amount of property, plant and equipment that exists on all of the producers balance sheets today. We believe these amounts are best described as the unrecognized capital costs of past production. They are unrecognized capital costs and not assets. Consumers have paid for the operating costs and the investors have paid for the capital costs of all past production. The industry as a whole is now worthless as a result, as it consumes large volumes of cash in order to have it operate and function. Speaking of cash, since the investor strike three years ago the producers only source of cash is new production. They’ve extended accounts payable to 18 months and have done everything they could in an attempt to increase production. Now in addition to having little to no working capital they're experiencing severe cash issues as the business does not return adequate performance without annual shareholder infusions. The producers current approach to their situation is to wait out the disgruntled shareholders until they learn to see the value the producers have generated. Also known as the producers “muddle along and do nothing” strategy.
In order to obtain the value consumers are entitled to. Producers will need to adopt an innovative footing. We’ve learned that an innovative footing is not a happenstance occurrence and is well within the domain of what management can implement within their organizations. If their software supports innovation which is what the Preliminary Specification was designed for and provides. People, Ideas & Objects believe it should be incumbent upon the current producers to adopt a policy that no production is produced unprofitably. How is it that we'll justify the consumption of unprofitable oil and gas production to the future users of this resource? Our price maker strategy provides this production discipline that is lacking in the industry today. Producers will want to maximize their profitability and therefore only produce profitable properties and stop diluting their earnings by producing unprofitable properties. It is this method in which the Preliminary Specification has provided the much needed production discipline on a go forward basis.
We are hopeful that none of the producers are pursuing competitive advantages of being the most efficient and effective administrative and accounting providers in the industry. The Preliminary Specification leaves that to the service providers and the producers would be hard pressed to compete with the structural advantages which we’ve built into those organizations. Earth science and engineering capabilities, their land and asset base are the only competitive advantages the producers need to concern themselves with. Throughout the Preliminary Specification we have included enhancements to the producers capacities and capabilities in terms of these competitive advantages. We have provided solutions to many of the issues that are plaguing every part of the business. Using specialization and the division of labor to resolve the looming shortage of geologists and engineers due to the current downturn affecting the intake of new graduates and pending retirements, the increasing demands of these resources in each incremental barrel of oil and gas produced, and the expansion of the underlying science demanding a scope and scale of internal operation which we believe will soon outstrip every producers commercial capacity to develop.
It is the price maker strategy of the Preliminary Specification that makes up the core of our value proposition. One which we’ve calculated in the range of $25.7 to $45.7 trillion over the next 25 years. Such is the state of affairs in the industry and the capacity to deal with these issues has been proven to be non-existent due to the conflict of interest raised between our solution and the current producer bureaucrats. The Preliminary Specification, like so many other applications in today’s business world, is disintermediating these bureaucrats and they're clinging to their last possible days before they can no longer justify remaining, even to themselves. Leaving the industry in desperate condition. We believe the prices for oil and gas commodities need to be in excess of 250% of what are being realized in the marketplace today in order to be truly profitable. Profitable on the basis of a reasonable accounting of capital, operations and overhead. It is a capital intensive industry and the capacity to avoid the recognition of the industry's capital costs by these bureaucrats will ultimately end in some fashion. My point in all of this is you can argue the validity of our value proposition, what is the producers existing plan to deal with their difficulties, after 10 years in natural gas and 5 years in oil I am unfamiliar with any plan. In addition to the price maker strategy building value for our value proposition, we have not valued monetarily the fact that the principles of specialization and the division of labor have provided incremental value in all industries since Adam Smith’s publication of the Wealth of Nations in 1776. These principles are used throughout the Preliminary Specification to aid in the performance trajectory of the producer and industry, and there are many more unquantified areas in which value is generated in comparison to the status quo.
It is on the basis of our value proposition, the scope and scale of the Preliminary Specification, its integrated and comprehensive nature that shifts the focus to the Joint Operating Committee that demands this approach, and the value that this Intellectual Property generates for the industry that we’ve submitted our budget to be raised by our Initial Exchange Offering. Included in our budget is the compensation payable to myself which includes the two different forms. With 97.5 share ownership and 100% of the Intellectual Property, most of these costs will be my compensation. Which I’ve determined is a reasonable assessment based on what the Preliminary Specification delivers in terms of value to the industry. We do not believe the producers will do anything as they’ve displayed no initiative or desire other than to fill their own personal pockets full of cash. We have therefore determined, due to the advanced decline in the oil and gas industry, we're unable to assist those producers in reclaiming their future prosperity. We have always believed fundamentally in creative destruction and knew that was the method which we would have to use. We are therefore setting out to rebuild the oil and gas industry in the vision of the Preliminary Specification, complete with our user community and their service provider organizations.
People, Ideas & Objects Preliminary Specification is a twelve module ERP system specifically designed for the issues and opportunities that exist in today’s oil and gas marketplace. Built upon the Oracle ERP Cloud, it is a comprehensive offering that sees structural changes in the producer firms as well as the industry itself. The key organizational construct of the Preliminary Specification is the Joint Operating Committee. When we move the compliance and governance frameworks of the hierarchy into alignment with the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee we achieve a speed, accountability and profitability within our producer firms. It is our competitive advantage that we provide the dynamic, innovative, accountable and profitable oil and gas producer with the most profitable means of oil and gas operations.
It is necessary that we place the North American oil and gas industry on a profitable footing in order that we can then begin the process of making North America energy independent. Continuing to expand North America’s production profile without setting a foundation of “real” profitability, without the support of the investors and bankers, will be a temporary and politically dangerous road to travel. Only an industry where all oil and gas that is produced profitably is sustainable for the mid to long term. Occasionally hitting the high watermark will not be satisfactory. We believe that the past four decades have seen the industry's profitability overstated due to the SEC rulings in the late 1970s. This ruling regarding the method in which capital assets are recorded by oil and gas producers has now distorted the culture of the industry away from commercial operations, to an industry who’s competitive advantage is spending money, where the objective is to “build balance sheets,” mostly by spending money and capitalizing almost everything for decades at a time. Leaving the producers overall dismal revenues responsible for large reported profits due to the fact that few costs are attached to those revenues. This has been the case for most of the history of each of the producers. Now with bloated balance sheets, well beyond their revenue structures, we're seeing a transition taking place where the previously unrecognized capital costs of past production need to be recognized at a greater pace. Compensating for the lack of recognition in the past. Leaving the producers to account for the excessive profitability that they reported in their earlier lives to be offset with today’s more mature assets creating large losses.
Shale has made a fundamental difference to the oil and gas industry. It is an endowment of untold riches that will be what is necessary to ensure energy independence in North America. Shale has been with us for a decade and a half in natural gas and less in oil. What we can say unequivocally about this time is that shale has not obtained commercial operations. Shale appears to be unable to. It has been a financial disaster that has laid waste to any and all value that had been built within the industry. There is an insidious side to the over reporting of profits that is, or should be, known in most businesses. Profits attract investments. The higher the profits the greater investments it will attract. Investors have been attracted to the industry for many decades and the producers themselves participated in annual shareholder issuances to “build their balance sheets.” This over investment has led to an unconstrained, chronic and systemic overproduction that has been with the industry since the mid 1980s. This overproduction continues today and has become uncontrolled. Investors have starved the producers of capital for at least three years creating a severe cash and working capital shortage. To the point where producers are only able to look to new production as their only source of new cash. We are in a true death spiral that will not stop until such time as the Preliminary Specification is implemented and the decentralized production models price maker strategy ensures that all production is produced profitably everywhere and always by establishing profitability as the only fair and reasonable means of production allocation. The Preliminary Specification demands change. After all, as you’ll see, we're not talking about minor changes to the floor plan for accounting. We are exercising wholesale changes to the oil and gas industry by adopting the Preliminary Specification, and fully utilizing the Joint Operating Committee. Change that is as significant as that which is represented by the changes in energy prices, the global energy demand structure and shale reserves.
It was during August of 2003 when I determined the Joint Operating Committee was the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. In May 2004 I published our Preliminary Research Report (2004) that verified that innovation was a quantifiable and replicable process. I then undertook the research necessary to determine what a producer and industry would need to look like and how it would function if the Joint Operating Committee was used to structure innovation in oil and gas. In December 2013 the final version of the Preliminary Specification was published and we've continued to build the organization necessary to provide for this solution. Noting that our user community is the primary focus of People, Ideas & Objects. Review of the 2.8 million words that have been published in our weblog will provide you with an understanding of our research. The 200,000 words contained within the Preliminary Specification provides a viable, workable business model for the oil and gas industry. What was relevant in the Preliminary Specification in 2013 are now the critical issues within the oil and gas industry. These are existential issues that have eroded the financial foundation of the producers to the point where cash and working capital are disappearing and creating a desperate need to act. Our solution is not what the bureaucrats suggest is necessary. Though it is true we're disintermediating them from the scene. Their issue now is that the only solution that exists in the market is the Preliminary Specification and many others haven’t even been conceived of yet. Indicating that it’ll be at least 2035 before any other possibilities are where People, Ideas & Objects Preliminary Specification is today.
Keep in mind while reviewing the Preliminary Specification that it is People, Ideas & Objects claim that we provide the oil and gas producer, as our competitive advantage, the most profitable means of oil and gas operations. And we do this in the following six fundamental ways.
1) Our Value Proposition
The Preliminary Specification provides the most profitable means of oil and gas operations. We have quantified the value of the difference between our system and the status quo at $25.7 to $45.7 trillion over the next 25 years. These are as a result of the ability of producers to avoid any losses on operations by knowing precisely which properties are losing money and which ones are profitable. Something quite remarkably they're unable to determine today. Then they’ll be able to shut-in any losing properties leading to the dynamic that is discussed below in item 3.
2) 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 and gas producer is a stripped down version of itself that has the C class executives, earth science and engineering resources, land, legal, and support staff. And that’s it. The rest of the administrative and accounting resources of the producers are reallocated and provided by service providers. And each of these service providers are focused on one process, or one element of a process using the industry as its client base. So for example there would be one lease rental payment processor that handles all of the industries lease rental payments. Where the cost of the lease rental payment, and the billing for the lease 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 industry's variable, based on production, 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 lease payment processor would be a small percentage of what is incurred by the industry today. By focusing on the most efficient way to process lease rental payments, and only lease rental 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 lease rental payment process, and most particularly the administrative and accounting processes of the oil and gas industry subject to this type of analysis, complete with a software development capability as proposed 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 critical capabilities for the oil and gas industry performance and future growth.
3) Capability to Remove the Marginal Production and Become Price Makers
With the high costs associated with exploration and production, and particularly shale, it’s no surprise that producers are incurring 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 and 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've employed the “decentralized production” model. As we mentioned in the second point above, 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 then there is no charge incurred for the overhead item by any of the individual service providers as they’ve 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 accurate, detailed accounting and attain their highest level of corporate profitability by not having their unprofitable properties diluting their profitable ones. They can save those 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 need to be recovered in the future. And finally, by keeping that unprofitable production off the market those commodities will find their true marginal costs.
If producers across the industry follow this process then oil and gas prices would not have the significant declines that we’ve experienced in the last number of years. If the downswing in oil and 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. People, Ideas & Objects believe we have a responsibility to use oil and gas resources effectively, and that implies that we at least produce them profitably from an appropriate accounting basis. 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 based on actual, factual accounting that determines profitability is effective management, 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.
4) Innovation for Profits
As the fourth element of our competitive advantage of providing the innovative oil and gas producer with the most profitable means of oil and 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 and 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 and gas producer. From Professor Giovanni Dosi, 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.
With an inventory of oil and gas assets that are non producing. The dynamic, innovative, accountable and profitable oil and gas producer will have readily available properties to focus their innovations on.
5) Lower Costs of Exploration & Development
The oil and 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 moment 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. 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 “good times.”
It is through the Preliminary Specification that the producers begin to respect, sponsor and support the ideas generated by the service industry. Oil and 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 and gas industry has a dynamic, innovative, accountable and profitable service industry supporting the oil and gas industry then the profitability of the oil and gas producer will be enhanced, further contrasting People, Ideas & Objects business models to what the current bureaucracies may be using today.
6) Earth Science and Engineering Resources
The Preliminary Specification recognizes and supports the dynamic, innovative, accountable and profitable oil and 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 fourth and fifth point above, investments in innovation are undertaken with the express intent to return a profit. Innovation on the sciences of oil and gas are part of the producers 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 of each bureaucracy. In addition we've used specialization to reorganize certain skills within these professions to service providers who can specialize in 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.
A quick note about software
All of these components of our competitive advantage require the software known as the Preliminary Specification to be built and operational. As we’ve learned in the Preliminary Research Report (2004), software defines and supports the organization. What we learned at that time was the producers response to that knowledge was they would not change their software, and hence, there would not be a threat to the manner in which they managed the oil and gas producers. This has been the policy of the producers since that time and they’ve been able to ensure that they’ve been handsomely compensated at the expense of everyone else in society. We believe the current bureaucracies within the producers are only riding out the last few minutes of their prosperity before they exit. That would be consistent with the history of organizations going back to the 1930’s. Without the software to run the industry and producer firms profitably, as described in the Preliminary Specification, it will not happen. We have declared the economic concept of spontaneous order null and void as a result of the role that software occupies organizations in the 21st century. In order to change the organization you must change the software first. Otherwise any attempted changes will only see the organization regress back to the way that the existing software manages the organization. This provides further support for the defined software development capabilities that People, Ideas & Objects are offering with our user community who hold the power and control necessary to make changes to the software and services used in oil and gas. Without these oil and gas will remain stagnant.
Hosting of the People, Ideas & Objects Preliminary Specification applications and modules, and Oracle modules, will be via cloud computing architectures. This provides a more cost effective solution to the industry's needs as the budget requirement for hardware and support will be on an as used basis. We will have the resources and capabilities to meet the producers demands of our software during month-end closing etc. In addition throughout this sub-industry that we’re creating between the Information Technology firms and the producers. We will be using Google’s Apps for your Domain based applications and collaborative environment. These enable us to be far more flexible and productive in the tasks that we need to undertake.
These are a summary of the six aspects of our competitive offering for the oil and gas industry. They are structured to provide the producer and industry with a profitable operating base in which to approach the 21st century. However, what we know is that by using the Joint Operating Committee, the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. We enable our software to approach and undertake the administrative, accounting and operational issues that the industry faces today and for the future.
What we have in using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. Is the interactions of many producers and suppliers who are involved in the day to day commercial and strategic concerns of a Joint Operating Committee. What we need to concern ourselves within 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.
Throughout the Preliminary Specification we discuss one of the premier issues of the oil and gas industry. That being the demand of the earth science and engineering effort is increasing with each barrel produced. This is best represented in the steep escalation of exploration and production costs involved in oil and gas. At the same time the critical earth science and engineering resources are somewhat fixed and are 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 depression we're in is stalling the careers of recent university graduates, the expected production profile of the North American continent and the problem becomes of critical concern.
There are few short term solutions to the short fall in geologists and engineers over the next twenty years. It takes the better part of that time to train them to operate in the industry. What we do know are several “things” that are being applied in the People, Ideas & Objects Preliminary Specification. Key to a number of concepts application, are what we call the Industrial Command & Control. Which is a method developed in the Security & Access Control module of imposing command and control over any and all Joint Operating Committees, working groups, producer firms or organizations the producer may need to add structure to.
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 and gas industry. In today’s marketplace to approach a heightened level of specialization and division of labor, particularly from a scope and scale point of view, without the use of software to define and support it would be downright foolish.
The pooling concept is the solution to the current desire that each producer firm acquires the earth science and engineering capabilities necessary to deal with all the needs of their “operated” properties. This creates unneeded “just-in-time” capabilities for these scarce scientific resources. When each producer within the industry pursues this same strategy substantial redundancies are built into the industry's capabilities. Redundancies that are left unused and unusable. What is proposed through the People, Ideas & Objects software application modules is that the producers operational strategy avoids and eliminates the “operator” concept and begins pooling technical resources through the partnership represented in the Joint Operating Committee. That way the redundancies that would have been present in the industry can be made available to the producers and used by the producers through an advanced specialization and division of labor. What these concepts require therefore is what the Security & Access Control module is designed to provide. The system must provide the right access to the right person at the right time and the right place with the right authority to the right information. With the Industrial Command & Control there will also be the manner in which the technical, and all the resources that have been pooled from the producers, interact with an appropriate governance and chain of command within a Joint Operating Committee that spans many producers.
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 these products bring. I am proud that I maintain the two ugliest websites in our blog and wiki. This is for two reasons the first being, I’ve provided a solution to what I see as the issues to oil and gas without any support from the producers. On the contrary it has been a protracted and ugly fight since August of 2003. If the best ideas are being expressed on the ugliest websites I hope the bureaucrats are adequately humiliated. Secondly these sites are both hosted by Google. Which provides me with a technical infrastructure that is more or less impenetrable from a security point of view. Our websites are not generally allowed past the producers firewalls but they’re not subject to any denial of service attacks or malicious behavior. As far as I’m aware we have a 100% up time record. By using Oracle and Google in the configuration for the sub-industry and the delivery of our products we gain the same kind of advantages from a security and access control point of view.
What we set out to accomplish in the Resource Marketplace module is captured in this quotation from one of the primary sources of our research. Professor Richard N. Langlois and Professor Giovanni Dosi were both extensive resources 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're 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 labour 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 and 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 and 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. Therefore the 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 the accounting system of an ERP system are all part of the 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're 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 virtual 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 will accommodate the needs of Exxonmobil and their $257.8 billion annual operating costs down to the single entrepreneur starting out in the oil and gas business. To preclude any group, profession, organization, or person from the Resource Marketplace would limit the value available to the industry. To call this just a Human Resource Marketplace would be incorrect because it would limit the participants in the market. 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. This should include Schlumberger and anyone directly or indirectly employed in the energy industry. Therefore acquiring as Professor Langlois suggest’s “the elements of organization, knowledge, experience and skills.”
It is the use of the Joint Operating Committee and the “Marketplace Interface” by the Resource Marketplace that provides the value to the innovative oil and 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 that is 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
The division of labor and specialization play a large role in the Resource Marketplace as well. By outsourcing many of the administrative functions from the producer firm to specialized service providers who provide the People, Ideas & Objects software and process management to the producer firms. The producer firm is able to focus on those core competitive advantages of their land and asset base, and their earth science and engineering capabilities. Having the land, accounting, production and other administrative functions sourced through the Resource Marketplace by specialized service providers.
With this change in the administrative function of the producer firms we're able to transition from the “high throughput production” model to the “decentralized production” model where production and overhead costs more accurately match revenues. As a result we're able to initiate pricing related production decisions that better manage the producers oil and gas reserves, ensuring profitability everywhere and always. What this means is that with the service providers focused on their process, such as production accounting, they will be engaged by the Joint Operating Committee not the producer. When the decision is made to temporarily suspend production, the associated costs of production accounting and other accounting, administrative and overhead costs will not be incurred. Moving from a reliance on the producers fixed administrative and accounting capabilities to the industries variable administrative and accounting capabilities. The Preliminary Specification turns all of the producers cost variable, based on production. Please see the Preamble for further definition of the decentralized production model. Lastly I would point out the Resource Marketplace module is an active participant, as are the Petroleum Lease Marketplace and Financial Marketplace modules, in the “Marketplace Interface” which will be discussed further in the other Marketplace modules of the Preliminary Specification.
The Petroleum Lease Marketplace is I think the most interesting marketplace module as its objective is to replicate virtually what the physical oil and gas marketplace is. Which of course begins with Petroleum Leases. When we’re replicating the physical oil and gas marketplace, the Petroleum Lease is the source document that is the common denominator of all activity and ownership within the industry. This is one of the critical components of the producers key competitive advantages that include their land and asset base, and their earth science and engineering capabilities. As such it should be considered a producer facing module as its primary role. The Joint Operating Committee will have a use for the Petroleum Lease Marketplace as well, however, their land position may be somewhat static for long periods of time. This is the opposite of the Resource Marketplace module which should be considered more of a Joint Operating Committee facing module where the market's resources are acquired. Any physical oil and gas asset will be attached to some lease, agreement, rights or concession granting the holders the rights and privileges of ownership, lease or rental. These are the things that are contained within a marketplace. They are what are purchased and sold, bargained and traded for, they're the things that people are recruited to provide services for. Generally a marketplace is a dynamic and evolving commercially oriented hub of activity. That is what we're replicating in the Petroleum Lease Marketplace.
When we look at the types of work that are carried out in the Petroleum Lease Marketplace we see a large group of administrators working within different areas of a producer firm. Whether it be the Land or Legal department, Production or Exploration Operations staff or Accounting people; all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the Petroleum Lease Marketplace. The primary concern of the people in these groups is the information and data contained within the module. its accuracy, access, and use by those within their firm, but within the Joint Operating Committees that their firm has interests in. Some of this data will be similar to the data that is held by their firm's partners, and much of this data will have been generated in a cooperative and collaborative manner by those partnerships.
One of the greatest opportunities that we have in developing this system is to address the division of labor and specialization. To take these people’s work and to reorganize it across the industry, so that it is focused on the needs of the producer and Joint Operating Committee and very specialized in terms of the tasks that they conduct. To apply those skills across the entire industry, a geographical region, or some other classification. Which is something that could provide significant increases in oil and gas industry productivity, overall cost savings and value. That is to say that an individual would work at an individual process that is billed to 1,000 Joint Operating Committees that might represent 100 oil and gas producers within a specific region that focuses on Shale and is geographically constrained. Specialization and the division of labor are determined by identifying and filling “gaps.” The natural process of gap filling in today’s business environment is now constrained due to the strict and unchanging structures that are imposed by today’s ERP systems. In order to make changes, to fill gaps, the producers will need the software development capabilities, user community and service providers to make the changes in the software first, then the changes in the organization can follow. These are what People, Ideas & Objects Preliminary Specification provide. The types of documents and the associated processes that are managed within the Petroleum Lease Marketplace are somewhat self-evident. (Recall we're including Land, Legal, Production Admin, Exploration Admin, Accounting and Others in the classifications.) Most of them are created in collaboration with the participants of the Joint Operating Committee and include: Authority for Expenditures (AFE"s), Capital Budgeting (Firm and Joint Operating Committee), Construction Ownership and Operating Agreements, Mail Ballots, Daily Drilling Reports, management of the lease bidding process, Lease Bonus, Lease Rental, Lease Taxes, Areas of Mutual Interest are some of the forms, processes and attributes of the Petroleum Lease Marketplace module. A more detailed specification will be the result of our user communities contribution and commitments.
In Professor Giovanni Dosi’s paper “Sources, Procedures and Microeconomic Effects of Innovation” he notes the following three factors involved in the development of innovation.
Typically 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 in 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.) P. 1121
The innovative oil and gas producer relies on their competitive advantages of their land and asset base, and their earth science and engineering capabilities. The Petroleum Lease Marketplace is the module that provides the producer and Joint Operating Committee with the tools to build and manage their land and asset base. But there’s more, using the “Marketplace Interface” and the service providers that support the innovative producers and Joint Operating Committees. The Petroleum Lease Marketplace provides the producer with the competitive advantages that are necessary to compete in the 21st century.
With many of the world's financial markets continuing to be illiquid and nervous about certain situations. The capital and debt markets have been very negative towards the oil and gas industry with many of the independents being shut out of those markets. The rise of the Asian Joint Venture, particularly in the LNG business, is a direct result of the inability to raise any money in the traditional capital markets. I would expect to see further fall out as the Euro / Brexit situation which seems to be far from resolved, the U.S. is deeply indebted and Canada recently achieved the most indebted citizens in the world. All of these will be demanding a lot of capital with only the quasi-government groups in Asia holding any significant amount of capital to invest.
The primary feature of the Financial Marketplace module is the recognition that there are competing interests and motivations in the industry in attempting to get things done. With different strategies and priorities being deployed by different partners within a Joint Operating Committee, is it any wonder that the financing of a project can ever fall into place. What the Financial Marketplace module proposes is that instead of the property being funded by several individual producer bankers or investors, each taking a working interest share claim against the firm. The Financial Marketplace module would see one bank fund the property in its entirety on behalf of the partners represented in the Joint Operating Committee. Aligning the bank and investment financing of the dynamic, innovative, accountable and profitable oil and gas producers with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, strategic, innovation, compliance and governance frameworks.
Today that may or may not be an objective or opportunity worth considering by the existing producers. However, I think that the freedom of having the attributes of the Financial Marketplace module still reside within the oil and gas market, and possibly even more as a result of the financial crisis of 2008, the destruction of natural gas prices in 2010, the beginning of the destruction of oil prices in 2014 and the oil and gas investors strike that continues since then. The demand for capital in a capital intensive industry will continue to be strong, and its supply will continue to be tight. There has been a serious cash and working capital crisis in the industry over the past three years as a result of the investors withdrawal. Making the situation the producers face untenable and most certain to lead to further wholesale destruction of all involved.
The future requires that we’re able to provide for the market's demands for energy, demanding more capital than ever before. This therefore demands that new capital structures will be necessary to lead to the overall performance of the producer and the Joint Operating Committees they participate in. We need to get our heads around this energy demand situation and start to deal with a solution. Muddling through just seems to be too much of a risk. Therefore creating a physical financial marketplace based on profitability, performance and throughput is necessary in order to realize this future. And profitability today, every day and everywhere throughout the industry during this time. Oil and gas is a mature industry, expectations of “building balance sheets,” whatever that means, and capabilities have to shift to real, tangible and actual profitability. It is estimated that the capital demands for energy over the next 25 years will require investments of $20 to $40 trillion. Based on today’s producers actions and behaviors we can see that their assumption is that the oil and gas investor will continue to provide those resources. This being a continuation of their currently employed business model that capitalizes every possible cost down to the receptionists Post-it-Notes and subsequently recognizes them over several decades. The producers current business model and assumptions of it continuing are unreasonable. What will be needed will be for the producers to turn their capital over on a basis that is competitive with other industries and what the capital markets demand there. That means they’ll need to recognize their capital costs on a very short time horizon in order to recover that previously invested cash as possibly the only source of cash for future capital investments. Having investors endlessly pay every bill while producers achieve no performance compared to what capital markets provide investors elsewhere, is over.
On June 24, 2019 the Wall Street Journal wrote an article highlighting Pioneer Natural Resources. A producer with a strong presence in shale. What they said in that article should concern every oil and gas producer. That the topic of discussion in that article is of no concern as far as any of producers current commentary, behavior or actions, is very troubling. One does not have to travel far to see the extent of the disaster our friends the bureaucrats have created. There is no one else that’s responsible. People, Ideas & Objects have been screaming about these issues since August of 2003, and on our blog since December 2005, yet we have received not one single penny of support from any of the producers in all of that time. Again our focus is on providing the most profitable means of oil and gas operations. Real profitability, not the ponzi scheme profits reported by our good friends. The Preliminary Specification places the bureaucrats in a position where they are disintermediated from the industry. It is this conflict that has driven their behavior, commentary and actions. The quote in the WSJ article is as follows.
Over the past 10 years, 40 of the largest independent oil and gas producers collectively spent roughly $200 billion more than they took in from operations, according to a Wall Street Journal analysis of data from financial-information firm FactSet. During that time, a broad index of U.S. oil-and-gas companies fell roughly 10%, while the S&P 500 index nearly tripled.
What we seek to prove in the Financial Marketplace module, is that through its use we can provide the innovative oil and gas producer and the Joint Operating Committee with the ability to ensure that their capital structures are more efficient than what can be attained in any other system. My criticisms of the management are that the velocity at which the management operates is too slow, its innovativeness is non-existent, profitability has been non-existent for over four decades and cash is only ever incinerated, never returned. In the physical financial marketplace the pace of activity will need to accelerate in order to address these issues and our future. I think we've identified and addressed the associated issues and opportunities with these changes in the Financial Marketplace module of the Preliminary Specification.
A note about the “Marketplace Interface” that is a critical component of the Resource, Petroleum Lease and Financial Marketplace modules. The “Marketplace Interface” is a virtual representation that the user has of each of the marketplace modules. It uses avatars where firms and producers establish a virtual representation of their firm's offerings. This provides a means in which people have to conduct their business virtually as well as through the traditional means. The avatars are supported through the People, Ideas & Objects ERP system that provides them with the ability to conduct any and all operations that they’re able to conduct in any of the Preliminary Specification modules. It is the ultimate collaborative interface. The following video is a demonstration of the technology by the project owners Project Wonderland.
The Partnership Accounting module is a pure “accounting” module from the traditional sense, however, I think there are many attributes and concepts in this module that make it unique and of interest to everyone in the industry. The standard list of output from an accounting system is provided and this is standard fare for any software provider in oil and gas. Our user community will provide the details, data, reporting and process management that they demand from a system. As we see in the Partnership Accounting module the difference in the People, Ideas & Objects software application is substantial in that the Joint Operating Committee is managed as the partnership that it is. Each Joint Operating Committee will be provided with full financial statements, complete with depletion calculations and actual overhead, not estimates, in order to evaluate its performance to ensure that only profitable production is produced everywhere and always. It recognizes that the costs of the property for each of the producers within a Joint Operating Committee are as unique as the strategies that are employed by those producers.
When we talk about the scope of operations that will be managed under the Partnership Accounting module I would say that it includes everything in upstream oil and gas. Simply the cut-off would be the inlet to any refinery. Let me be more specific about that from the point of view of geography and type of operation managed by the People, Ideas & Objects application. If we look at the North American oil and gas infrastructure we see a variety of oil and gas installations designed to serve both producers and consumers of oil and gas. Wells, gathering systems, gas plants, pipelines, storage facilities etc. At each point along these systems there may be additional deliveries of product, or sales of product or products inventoried. What seems to be an obvious and simple business becomes incredibly complex when it's realized that each asset may be owned by a Joint Operating Committee itself and hold product on behalf of the owners of other Joint Operating Committees. This summary glosses over the incredible complexity of this business when the volume of transactions that occur in these businesses make it an important part of the oil and gas operations. Critical to controlling this business is the “Material Balance Report” which is a key part of the Partnership Accounting module of the Preliminary Specification. It is the central document that so much of the subsequent process activity is based upon. It acquires from the source documents the volume, contract or spot price, allocations and other data for the Joint Operating Committee and its integrity can not be questioned. If someone is to be charged for storage of butane for example, or if someone is to be charged a marketing fee for delivery of product to a customer. Or simply if a sale of a raw gas stream is deemed to have occurred at the wellhead. The Material Balance Report captures these transactions and initiates the flow of documents that need to be generated. Once this data is captured the automation of these processes can begin. It is the scope of the Partnership Accounting module that captures all of these data and activities for all of these North American facilities as its purpose. Each Material Balance Report must balance, and each reports inputs and outputs balance to other Material Balance Reports. The key to the Material Balance Report is that it provides a means to ensure that the volumes and prices etc. that are reported are factual. Which is the necessary requirement for much of the subsequent process automation, which includes any amendments.
Reviewing the Partnership Accounting module further will provide an understanding for the reasons why we're taking such a broad scope of operations into considerations. It would be an understatement to state that the Material Balance Report has been poorly served by IT. To approach it from a global perspective that includes production operations, accounting and other areas that depend on this information would be “ideal,” however, the complexity of the business has always been in the way. The budget and engineering of software has never been available to approach the type of problem that this area presents. It exists now with the Preliminary Specification and People, Ideas & Objects. And I think that the Partnership Accounting and Accounting Voucher modules of the Preliminary Specification provides the vision of how this engineering solution solves this problem.
We introduce our “Work Order” in the Partnership Accounting module. The “Work Order” enables producer firms to participate in informal and ad-hoc working groups to conduct studies and research. These informal groups are able to be established and formed without the traditional accounting nightmare that they’ve normally created, that are an impediment to their formation. An innovative oil and gas industry needs to have these studies and research working groups form and develop on an exponential scale in order to expand the overall science of the industry. The “Work Order” is an internal cost control mechanism that producers and Joint Operating Committees can rely on to manage the costs, and recovery of those costs, of the producers internal earth science and engineering resources being charged directly to the Joint Operating Committees. Establishing a second revenue stream for all producers.
We now shift our attention to the Accounting Voucher module. The interactions between the Accounting Voucher and the Partnership Accounting modules of the Preliminary Specification are naturally quite significant. Both being accounting modules, it is natural that they have high levels of integration. The Accounting Voucher is unique in that it brings to the producer the ability to design transactions and the Material Balance Report. These are not innovations that the producer will use to become more innovative but are provided to ensure that the innovative producers processes are actively defined and supported throughout the People, Ideas & Objects application modules. When the business is a science, as it is in oil and gas, it is in the producers interest to remain open and flexible in both its scientific and business approach. The Accounting Voucher and Partnership Accounting modules provide that organizational flexibility. The manner in which these two modules operate is the Accounting Voucher captures the transactions. Partnership Accounting reports on the transactions. Accounting Vouchers remain open for one accounting period and are subject to the same closing process that is familiar and traditional in the accounting world. A Joint Operating Committee will have many Accounting Vouchers each month.
We’ve noted in the summary of the Partnership Accounting module how the Work Order enabled producers to form and participate in working groups. Providing flexibility in participating and accounting for these working groups. This flexibility is what is being sought after in the rest of the producer firm and Joint Operating Committee from both of these accounting modules. Elimination of the bureaucratic inertia that impedes these activities today makes these modules critical to a producers innovation as much as the Research & Capabilities or Knowledge & Learning modules do. The People, Ideas & Objects Accounting Voucher Module will provide the means for the application to “manage the disparate inter-dependencies of modularity theory and Transaction Cost Economics.” That is a summary application of Professor Baldwin's comments and theories. And therefore this Accounting Voucher is one of the key cross roads to all other modules in the People, Ideas & Objects Preliminary Specification. What this means is that it's necessary for people to cease, by way of automation, in just processing and recording transactions and move toward the definition and design of transactions to optimize the business of the producer and Joint Operating Committees performance. Designing transactions is best described in the Preliminary Specification as coordinating the marketplace.
As a result of the pooling concept that is a basic assumption that was developed for People, Ideas & Objects Preliminary Specification. Some of the Accounting Vouchers will be open to charges from multiple producers represented in the Joint Operating Committees that a producer firm is a participant in. The revenue, capital and operations of each of the Joint Operating Committees accounts are open to the direct debit and credit charges of all of the participants in the Joint Operating Committee. The pooling concept has been developed as a replacement to the “operator” designation that currently exists. This is a necessity as a result of the ability for each producer, as a properties designated operator, to have the just-in-time capabilities available for all the properties they operate, demand that they have a surplus capacity, or as we describe them as unused and unusable earth science and engineering capabilities and capacity. The ability to pool these critical resources from participating producers of the Joint Operating Committee enables each producer to use specialization and the division of labor to expand the industries capabilities and throughput capacity and releases these hoarded unused and unusable capabilities. This pooling concept implies that some producers will provide resources to the property in disproportionate amounts to their working interests. Therefore any over or under participation is equalized monthly through the Work Order system that enables these charges to be made. All producers need to contribute the skills, knowledge, experience and ideas that they have in an innovative oil and gas industry. Therefore each of these producers needs to have the ability to charge their earth science and engineering capabilities to the joint account. Opening a secondary revenue stream for all producers, the deployment of their earth science and engineering capabilities to the Joint Operating Committees they participate in and to other producers who may need their specialized capabilities. All charges are subject to the AFE or Work Orders budget requirements and cost control remains the domain of the producers participating in the Joint Operating Committees.
Professor Dosi (1988) states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both?” (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovative inputs.
It is People, Ideas & Objects assertion that the “different incentive structures” and “different opportunities” are facilitated or constrained by the administrative ease in which the producer operates. The same can be stated for the Material Balance Report. If the producer is confident that the deal that was conceived is accurately captured in the Accounting Voucher. And the operation is therefore reporting a substantial, actual profit. Then they know that their innovations are working, their systems are working and the alignment of the legal, financial, operational decision making, cultural, communication, innovation, strategic, compliance and governance frameworks is achieved.
The Research & Capabilities module enables the producer firm to structure a division of labor between those people that will develop the research and innovations within the producer firm (Research & Capabilities), and those that will implement the innovations within the Joint Operating Committees (Knowledge & Learning). This is one of the major processes of innovation that is carried out in the Preliminary Specification. Another major process is that it provides the innovative oil and gas producer with the ability to move the knowledge and capabilities to where the decision rights are held, the Joint Operating Committee. This module is at the core of the innovative oil and gas producer. Identifying and supporting the key elements of “what” and “how” innovation requires. The Research & Capabilities module is the focus of the producers competitive advantages of how they're able to develop and deploy their earth science and engineering capabilities. What we’ve learned about capabilities is that they're the “knowledge, skills, experience and ideas.” And that “knowledge begets capabilities, and capabilities begets action.” There are a variety of interfaces in the Research & Capabilities module that enable and encourage innovation, and develop the capabilities of the producer firm. These capabilities are ultimately captured in the “Dynamic Capabilities Interface” which is the key to both the Research & Capabilities and Knowledge & Learning modules. What the “Dynamic Capabilities Interface” does is capture, document and enable the deployment of the capabilities of the producer firm. These are the knowledge, skills, experience and ideas of the firm. The deployment of these capabilities is by way of their pertinent geological zone, or geographical area, etc. and as a result these capabilities will be populated into the various Joint Operating Committees that meet that criteria in the Knowledge & Learning module. It will be each of the producers within the Joint Operating Committee that will be populating the Knowledge & Learning module in this manner. It is important to note that the information that is documented is the explicit knowledge that has been developed regarding that producer's capabilities and innovations.
The far more valuable tacit knowledge can not be captured by any medium. It is resident in the earth science and engineering resources of the producer firms that are referenced and documented through the explicit knowledge of their Research & Capabilities module. Just as our user community has the ability to capture the explicit knowledge of the oil and gas industry. It is their tacit knowledge of how the industry operates that they design into the People, Ideas & Objects software during development. And while at the same time they’re building their service provider organizations to deliver that software and their services to the producer firms. It is through each of the user communities service provider organizations that the tacit knowledge is deployed in combination with the People, Ideas & Objects software, ensuring that the producer is dynamic, innovative, accountable and profitable at all times and everywhere on the North American continent.
The objective that we're fulfilling in the Research & Capabilities and Knowledge & Learning module is we're moving the knowledge to where the decision rights are held. The Joint Operating Committee is the operational decision making framework of the industry. With the current method of designating one of the producers in the Joint Operating Committee as the operator there is an attempt to move the decision rights of the Joint Operating Committee to where the knowledge resides. In the Preliminary Specification we've eliminated the concept of operator and replaced it with the pooling concept and therefore we're able to align the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance framework of the producer firm. Providing us with a speed, accountability and profitability that is missing and unavailable in the current organizational structures. This therefore will require that we move the knowledge to where the decision rights are held. By doing so we eliminate one point of conflict between the partnership represented in the Joint Operating Committee and the producer formerly designated operator.
The Research & Capabilities module of the Preliminary Specification provides the means in which the producer is able to take their inventory of shut-in wells, which are those wells that have been shut-in as a result of their inability to produce a profit. And determine if there are means within the capabilities of the producers earth science and engineering resources to move the property back into profitable production. It is a testing ground where the focus is on the issues at hand. Where the testing and application of new ideas can be developed and determined if they're successful. Where those successful ideas can be developed fully within the producers earth science and engineering resources capabilities in order to successfully replicate the new methods across the entire producers production profile. Test, prove, develop then deploy. Making mistakes will always occur in an innovative process. The division of labor between the Research & Capabilities and Knowledge & Learning modules ensures that these new procedures are fully proven, documented and deployed successfully. And the producer doesn’t have everyone attempting to be innovative in an environment where things may be learned over and over again at great cost and disruption. It is these processes of innovation that are captured throughout the Preliminary Specification, based on the primary research of those listed in our bibliography, that will ensure that the cost of oil and gas remains cost effective for the consumers.
We now move onto the Joint Operating Committee focused Knowledge & Learning module of the Preliminary Specification. This module shares many similarities to the Research & Capabilities module, and in fact is populated with the capabilities from the “Dynamic Capabilities Interface” as its base of information. Recall that one of the objectives that we’re working to achieve is to move the knowledge to where the decision rights are held, the Joint Operating Committee.
As I noted the Research & Capabilities module organizes each of the producers knowledge based on geologic zones, geographical areas, etc. This is so that the information that is pertinent to each zone can be separated into its own “packaging” within the Knowledge & Learning module. Additional ways in which data may be sorted in the Research & Capabilities module might include geographical location, conventional or unconventional, drilling, completion, etc. Where all the vendors who operate are therefore available within a certain geographical location are referenced only in those regions in the Knowledge & Learning module, etc.
With each Joint Operating Committee being concerned with one or a handful of geologic zones. The focus of the Joint Operating Committee can be limited to just those specific areas and or capabilities. What is particularly different about the Knowledge & Learning module, however, is that the information that is contained within the module is aggregated from multiple producers. Any of the producer participants within that Joint Operating Committee who have pertinent information contained within their Research & Capabilities module will have that data and information for those geologic zones, geographical regions, etc.of that specific Joint Operating Committee populate the Knowledge & Learning module for that property.
With the potential to have multiple companies contributions of research and capabilities about that zone. It is important to have the information organized within the Knowledge & Learning modules in a manner that when the multiple producers data is merged, use of the data is possible. Each capability contains the knowledge, skills, experience and ideas of the people who are part of that producer firm and the service industry representatives. People, Ideas & Objects have developed the football analogy where the decision makers are presented with a list of these capabilities in the "Dynamic Capabilities Interface" and can select and deploy them in much the same fashion as the head coach in a football game.
As we've learned “knowledge begets capability, and capability begets action." Quotes are from Professor Richard Langlois book “The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.”
Indeed, the job of the entrepreneur is precisely to introduce new knowledge. The “Circular Flow of Economic Life” is a state in which knowledge is not changing. Economic growth occurs at the hands of entrepreneurs, who bring into the system knowledge that is qualitatively new – knowledge not contained in the existing economic configuration. P. 27
Here we begin to see the role that people take in the makeup of the oil and gas industry. And to sum it up is to state that it’s everything. One needs to consider the role of computers in these “actions” and that it amounts to not very much. People, Ideas & Objects divides the jobs between what people do well, the thinking, generation of ideas, leadership, collaborating, deciding and learning and leaves the memory and processing to computers.
There has to be a mechanism by which new knowledge enters the system. And that mechanism cannot be rational calculation, for as David Hume (1978, p. 164) long ago observed, “no kind of reasoning can give rise to a new idea.” P. 27
There is much to be done in the oil and gas industry and a lot of it involves blazing new trails. The hard work is what the people will need to be involved in doing. The challenges and opportunities are of historical significance and will require the dedication of a lot of people.
What has been done already has the sharp-edged reality of all things which we have seen and experienced; the new is only a figment of our imagination. Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it. P. 27
The Research & Capabilities and Knowledge & Learning modules work hand in hand to provide the producer firms and Joint Operating Committees with an innovative footing. One that does not replicate errors continuously and learn what was already learned last year, and the year before. Providing a structure that ensures that innovation is the focus and results of the activities that drive not only profitability across the continent, but ensures that costs are managed in a manner that provides consumers with the lowest possible costs of oil and gas exploration and production.
The Performance Evaluation and Analytics & Statistics modules have similar interfaces, the Performance Evaluation is focused on the Joint Operating Committee and the Analytics & Statistics module is focused on the producer firm. Essentially these are user based tools that enable analytical and statistical calculations run against the data and information that are contained within the People, Ideas & Objects ERP systems and other unstructured data. Providing users with the ability to analyze data in new and innovative ways in seeking value for their firm or Joint Operating Committee. They will be used predominantly by the people who are in the oil and gas producers, the Joint Operating Committees and People, Ideas & Objects user communities service providers on a daily basis. Although the service providers will have access to a very small number of data attributes, only those data elements associated with the individual process they manage, they will have the entire industry's population of that data.
The types of data and information that are prepared and presented in these modules is dependent on the individual users and in most instances will be unique, based on their needs and interests, their scope of authority and the type of work they do. When it comes to who will come up with the next great innovation we should expect that it will come from anywhere. Part of the process of innovation is discovery of the problem and we all see the situation from different perspectives. Therefore the point of view and the innovation will depend to a large extent on those different perspectives. Someone working in the trenches may find innovations that affect their work materially, which may not interest others and vice-versa. This process of discovery should be assisted by the types of tools that include the Performance Evaluation and Analytics & Statistics modules. Professor Giovanni Dosi notes.
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. P. 1121
Irrespective of the source of the innovation the fact that it materially affects someone's work should indicate that it should be followed through. These opportunities are hard to discover and we need to be able to evaluate them and assess them based on their impact and their ability to build value. What sometimes appears to be a good idea can sometimes become an area where the firm could be exposed to unnecessary risk or loss. Having access to the historical data available is necessary, however, in the 21st century, it is necessary to have these advanced analytical tools available to analyze that data.
In the Preliminary Research Report, (2004) People Ideas & Objects determined two important findings. One was that the process of innovation can be reduced to a quantifiable and replicable process. Analytical tools are part of that process. The Preliminary Specification sets the industry, producer firms and Joint Operating Committees on this foundation of a dynamic, innovative, accountable and profitable industry. And two, that the Joint Operating Committee is the key organizational framework for innovation in the oil and gas industry. Therefore having analytical tools in the Joint Operating Committee and producer firm are critical.
Within the Preliminary Specification we have identified that many of the data elements within the Joint Operating Committee are public in nature. Production volumes and how wells were drilled are generally released into the market soon after they’re obtained. In terms of proprietary data there is less of an issue with respect to the data contained within the Joint Operating Committee. It is not to suggest that this removes the need to have the highest levels of security on all aspects of this data. Only to identify that the data within these two distinct organizations are fundamentally different. Within the producer itself there are many attributes that are unique and considered the proprietary technologies and understandings that make them what they are. The value discussed within the Preliminary Specification of the treatment of data and access builds significant value for all concerned. Participation is necessary throughout the industry. The issues and opportunities are not resolved here and won’t be resolved until such time as the user community studies and determines the manner in which it is handled. Today’s existing producers, should they survive their own self inflicted destruction, may want to relate their concerns and participate with the user community to ensure that their concerns are considered.
Work in the 21st Century will be different. The tools that people will use will need to be different as well. The Performance Evaluation and Analytics & Statistics modules are the beginning of these new era tools for the way in which people need to work. We frequently speak of specialization and the division of labor in the Preliminary Specification. There is a specialization and division of labor between what the people and computers will be doing and that is reflected here in these two modules. Computers will be responsible for the storage and processing, and people will be responsible for the leadership, problem solving, issue identification, research, thinking, ideas, design, planning, decisions, creating, negotiating, compromising, collaborating, the innovation and the many other things we do well. Much of these things are generated based on the facts that will be determined through the use of the Performance Evaluation and Analytics & Statistics modules.
Compliance & Governance, the module everyone loves to hate. It is my hypothesis that it’s here, at compliance and governance, that everything went wrong. What I mean by that is in the 1960’s when the first computers were being introduced into oil and gas companies. The question was asked what we will do with them. And of course the answer was accounting. Then as they became ever more powerful and more capable they began to add more tasks to their duties and added the natural follow on concerns of tax, royalty and compliance. Soon the culture became focused on those “compliance” requirements of the “firm” and the Joint Operating Committee became something that was used over there. Soon after this engineers and geologists began speaking a different language to the “business” types. Divisions grew and the business of the business was focused on the corporation and its need to file the appropriate paperwork to the appropriate agency in the appropriate time frame on the appropriate colored form.
Anyway, the real business of the business, the Joint Operating Committee somehow survived and if we align its legal, financial, operational decision making, cultural, communication, strategic and innovation frameworks to the compliance and governance frameworks of the hierarchy everyone can start speaking the same language as the engineers and geologists and start to get some real business done. And as People, Ideas & Objects research has shown this would provide the oil and gas producer with greater speed, innovation, accountability and profitability.
Compliance & Governance is the eleventh module in our twelve module Preliminary Specification. The question that should be asked is, how are we going to ensure compliance to all the regulations for all the module specifications that we’ve discussed so far? And I would assert that is why these are user based developments. But seriously, one thing governments seem to be fond of today is regulations on oil and gas companies. With Information Technology enabling various governments to issue technical business rules, technical specifications, XBRL syntax’s and other technological frameworks for these regulations. The ability to write these “frameworks” only seems to have encouraged them to write even more regulations. The larger point is that these frameworks do provide software developers with distinct advantages in enabling the regulations within the software.
The People, Ideas & Objects applications determination of scope will include which regulations it will need to be in compliance. With so many jurisdictions requiring compliance, each transaction may need to be assured to be in compliance with multiple jurisdictions. Add to that the transaction may be generated through a Joint Operating Committee owned by a variety of producers. And those producers may be composed of an international background and the Compliance & Governance module takes on an enhanced importance.
From the point of view of each producer maintaining their own database and applications for all of the compliance frameworks that they need to be concerned with can be a difficult task. The number of people that are needed just to keep a producer's applications up to date is significant. However, People, Ideas & Objects, as one software developer acting on behalf of the industry as a whole, the job of building and maintaining the software that provides for the producers compliance requirements becomes much more specialized, automated and therefore manageable with the service providers. Then again if we were building these applications with the purpose of serving an industry we can access and use the division of labor and specialization to manage these tasks in a way that would significantly lower the costs, however, substantially increase the quality of the producers compliance.
I foresee just the royalty compliance requirements of these applications potentially including many dozens of different jurisdictions. To approach this from a software engineering point of view as a sole producer is not cost effective in the least. To consider these costs are replicated across each producer firm, then we begin to see the costs of compliance escalating to the levels that they are today. There is another way, and that is what is being proposed here in People, Ideas & Objects, along with the many other innovative ways we're proposing to deal with the issues of the oil and gas industry.
Here we have the beginnings of compliance and governance for the innovative oil and gas producer and Joint Operating Committee. What we need to do is to deal with the compliance of an innovative oil and gas producer with the tools of the 21st century. Those include automation, specialization and the division of labor. And in terms of governance, we can begin to provide the producer firm with the appropriate operational governance that is consistent with the demands of innovation. We’ve learned that innovation does not arise from sloppy compliance and governance.
We were able to write our twelfth module into the Preliminary Specification in 2018. It is the first module that is technologically focused. All of the other modules, including the Security & Access Control are focused on the business of the oil and gas industry and producer, as viewed through the Joint Operating Committee. Therefore the Blockchain module provides the blockchain technology to all the other modules of the Preliminary Specification. Included within the Blockchain module itself there is detailed discussion of how each of the other modules is affected by this technology and how I expect it will be implemented. This will be in its initial implementation and it would be expected to become more robust as the years pass. I see blockchain as a must have Information Technology that will need to be the base of the ERP systems that industries will require. I expect and anticipate throughout the development of the Preliminary Specification our user community will be able to define the use of the technology in a more effective and efficient way. This is due to the relatively “new” aspects of the technology and its current rapid developments and adoption.
In terms of understanding this new Information Technology Don Tapscott, who has been a leader in the field of businesses adoption of Information Technology. Has taken a leading role in the understanding and implementation of blockchain technology. He is a co-founder of the Blockchain Research Institute who’s participation includes most of the companies that are involved in business and Information Technology and has robust support from all industries. Here’s an introductory video of Don Tapscott that we used in the Preliminary Specifications Blockchain module.
The key takeaway from this video is the concept of a “shared network state.” Which accurately describes the perspective and point of view that People, Ideas & Objects have created with the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas industry and producer. As a result everything within the industry becomes a shared network state based on the glue that holds it all together, the Preliminary Specification. The producers themselves are stripped down versions of what they are today. Their earth science and engineering capabilities, and land and asset base are highlighted and focused upon as their key competitive advantages. Their working interests in the Joint Operating Committees are supported through the service industry through our three marketplace modules and have a far more involved and appropriate relationship with the producers and Joint Operating Committees. Bringing the service industry in as partners in terms of the development of how the field operations will develop from here. The administrative and accounting resources are reallocated to service providers that are established by the People, Ideas & Objects user community members, who have the power and control over how the Preliminary Specification’s software is developed, and are therefore involved in the day-to-day of the service providers who provide our software and their services to the producers and Joint Operating Committees. Trust, transactions, agreements, vision and direction are understood and implemented throughout this “shared network state” and the industry is therefore able to move forward into what is unquestionably the most difficult future in a dynamic, innovative, accountable and profitable manner.
What we're finding is that the People, Ideas & Objects approach to the oil and gas marketplace is becoming the more common sense approach as each day passes. Our approach being that we provide the software and indirectly the administrative and accounting services to the entire industry with one solution. Our approach was to mitigate the software development costs that are incurred today by each and every producer to conduct the same accounting and administrative tasks as the producer across the street. These costs are being replicated across the industry to develop the same capabilities at each and every producer. Costs and capabilities that are not shared and are unshareable. These software development costs, in addition to the overhead incurred in accounting and administration, are a major detriment to the industry's ability to be profitable and maintain their costs.
The difficulties that the Information Technologies and their infrastructures are presenting are new challenges that each producer has to face. There are now business challenges, that the Preliminary Specification addresses, that are presenting issues where the administrative, accounting and Information Technology costs are escalating further for each and every producer. Don Tapscott calls the “shared network state,” which is appropriate, that a producer as an island unto itself is no longer functional in a world where the future oil and gas industry needs to be. We had always argued that the costs of the Preliminary Specification would be lower than what the industry would incur collectively as individual producers. What we have to undertake from an industry point of view will increase our costs, however the base functionality of our applications would need to be put together and maintained by each and every producer. The push back from industry on our thinking here has been that the scope and scale was to large to be successful. If that were the case, then how do they propose to build the same functionality within their organization with the budgets that a profitable producer can allocate? Administration, accounting and Information Technology may be claimed to be a competitive advantage of a few producers, but it shouldn’t.
Once again we're able to turn to our key Information Technology provider, Oracle Corporation. Their involvement in blockchain at this time is substantial. Providing the Oracle Blockchain Platform and Oracle Blockchain Applications. These are added to the many applications of Oracles that are detailed throughout the Preliminary Specification modules which include the Oracle Database, Java and Oracle Cloud.
As we’ve mentioned elsewhere, in order to have the Preliminary Specification implemented and operational in the marketplace requires that People, Ideas & Objects prepare our organization of over 600 developers into a highly capable team. With all of the other aspects of this initiative we’ve decided in the interest of time that we will be focusing on the Intellectual Property, user community and research aspects of our firm as our key competitive advantages. The software development will be contracted out to Oracle Corporation to circumvent the many number of years that it would take for us to achieve the level of software development capability necessary to undertake this task of developing the Preliminary Specification. Each year the oil and gas industry, associated industries and groups are losing hundreds of billions of dollars due to these issues and difficulties. For us to spend so much time when using Oracle as the logical alternative, is unnecessary and inefficient.
The following represents People, Ideas & Objects White Papers objectives with respect to the overall achievements the oil and gas industry must strive for in the next three decades. These are what we seek to provide the North American producer through the development of the software and services defined in the Preliminary Specification. Enhanced capabilities which enable producers and the industry to undertake a strategic and tactical business approach that provide a dynamic, innovative, accountable and profitable footing. Software is the enabling technology of the 21st century. When organizations are supported and defined by the software which is consistent with the industry and producers objectives, strategy and tactics, then success and profitability will be the outcome. When organizations are not supported or defined by the software that they use they’re limited and constrained in achieving any results which are competitive in the marketplace for capital, labor or the support of the public. People, Ideas & Objects Preliminary Specification is the result of our ten years of research based on what we’ve determined is necessary in order to make the change from using the corporation as the key organizational construct of the producer, to now use the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. It is a fundamental reorganization of the industry and the producer firm in order to deal with the issues prevalent today. Enabling a dynamic, change based organizational capability throughout the producer and industry. Positioning the producer and industry for the challenging and difficult future that we all agree will be the most dramatic and exciting the industry has ever experienced. To ensure profitable energy independence in North America through the commercialization of shale.
To execute the necessary changes to build, implement and operate the Preliminary Specification doesn’t exist in the oil and gas industry. Based on the work that we’ve done in this market we believe it will never exist in the current configuration of producers. This is due to the response we’ve received from the industry in our attempts to market our product. Their response has led us to the conclusion that they can’t, won’t and will not ever change from the status quo. That now, creative destruction is a necessary and valuable tool to eliminate the unproductive and most particularly unprofitable elements of a poorly performing industry. People, Ideas & Objects are therefore now taking an active role in the preparation of what we see as a new oil and gas industry, based on the vision of the Preliminary Specification, where profitable production is achieved throughout the industry, everywhere and always. We believe the nature and characteristics of our energy resources can not be justified to future generations if it is not used in a manner where it was at least produced profitably. We therefore can ensure those future generations, that because it wasn’t produced unprofitably, it wasn’t used wastefully and provided its full value to society. In summary then, we're focused on rebuilding the industry on the vision of the Preliminary Specification. We are unable to provide any value to the current producers as the forces of creative destruction have been put in play through bureaucratic neglect. The time in which they should have acted was many years ago. There is nothing People, Ideas & Objects are able to do for producers in the short term, and we would risk our project failing as a result of the state of the industry if we tried. We’re of the belief that their long term prospects are beyond their grasp as their financial situation is terminal.
The common sense approach of the Preliminary Specification is in dispute by the producer bureaucrats who are challenged by the Information Technologies disintermediation which we represent. They’ve known instinctively we would be the end of their reign of control and power over the commanding heights of the oil and gas industry and are unwilling to give up what has provided them with untold riches at the expense of the shareholders, employees of the producers, the service, secondary, tertiary industries and general economy which have depended upon and supported the oil and gas industry. It is this conflict and the constraint of the ways and means in which they approach the industry which has created the ongoing tragedy playing out over this past decade. Shale has been an exceptional endowment of value across North America. Due to the chronic mismanagement by these bureaucrats the only benefactor of the shale reserves is the energy consumer who realizes a substantial discount on their energy consumption as a result of the specious accounting being used in the industry over the past four decades. (See Bad Accounting in the Appendix.) Outside of this, shale has been an absolute failure from a business point of view. The commercialization of shale is not a topic of concern of the oil and gas bureaucrats, yet is the primary concern of the oil and gas investors who have now withheld their capital from the industry in excess of three years. There are no plans or strategies in place to deal with these difficulties or how to approach the future demands. The financial capabilities of the producers are close to collapsing as a result of the investor and banker strike which began over three years ago.
People, Ideas & Objects have assessed that we're unable to take on the task of saving those who’ve shown no propensity to save themselves, who have traveled down the wrong road for too long for us to retrieve them. Creative destruction is the tool we’re using to exercise the necessary changes in the industry. Therefore we’ve adopted other plans in which we'll prepare the Preliminary Specification and the rebuilding of the oil and gas industry based on providing it with the most profitable means of oil and gas operations. If the current producers bureaucrats won’t invest in their own business by supporting People, Ideas & Objects, focused on profitability, why would any oil and gas investor support such a producer?.
There is a long history of failures in the oil and gas ERP software market. It is a small market with possibly 150 producers able to purchase a system which meets their needs. Producers have used this fact to abuse these vendors by playing one off against the other and gaining the software product for just the service contract. Keeping the ERP vendor on a starvation diet was consistent with their thinking regarding accounting systems interfering with their drilling budgets. People, Ideas & Objects, IBM and Oracle have all used the method of having the producers pay the upfront costs of development. In the late 1990s Oracle left as a result of the frustration of trying to deal with the producers who had no appreciation or budget for the type of solutions needed. IBM owned the market leading application in Qbyte. Their inability to raise any money for new software development, finding the same frustrations, led them to sell out of the oil and gas ERP marketspace in 2005. People, Ideas & Objects are committed to the oil and gas ERP marketspace. We have developed significant and necessary value the producers need within the Preliminary Specification and associated communities. We however have had the same difficulties as IBM and Oracle. We are unable to deal with the producers who are incapable of saving themselves and are therefore working on what will be the systems, the Preliminary Specification, for the regenerated oil and gas producers from the ashes of these producers' creative destruction.
What we do know about oil and gas is it can be percolated down to its two attributes of temperature and pressure. The Information Technologies that are developed and scheduled for deployment in the next two years will have a dramatic effect on the operational control of the industry. 5G and the common discussion around the Internet of Things will become a reality where the ability to remotely monitor and control any and all aspects of the oil and gas operation will begin to become more of a reality than it is today. It will be available for far less cost, be more robust than what is done today and these operations, with the Preliminary Specification, will follow on through to the financial statements of the producer through advanced automation of administrative and accounting processes. To undertake the scope and scale of the issues in oil and gas many producers are converting themselves into software developers. This is an extension of what has gone on for many decades. Each CIO within the producer has a budget which fuels their empire and develops their own unique solution. Cobbling together hundreds of disparate applications in order to provide for their organizations needs, yet they criticise People, Ideas & Objects that we would be unable to undertake the same task with such a large scope and scale for the entire industry. When we compare our budget to the budget in which they’ve cobbled together for their solution, we begin to understand the reasons why each and every producer is and will continue to fail. Aggregating these individual producers' budgets into one ERP solution would have been efficient and effective and far less costly than what is incurred collectively today. What we do know is these producers' current systems development approach has failed consistently at each of these producers, which are now failing as organizations. Our approach is to standardize the administrative and accounting processes within the industry so each individual producer does not have to incur the time, energy and money necessary to develop these non-competitive attributes of their organizations. Each producer building the same unshared and unshareable administrative and accounting capabilities, which includes IT, are consuming large portions of the industry's profitability. Producers IT resources are currently building handsome empires.
So far we’ve talked very little about the technologies. It’s not about any specific technology anymore it’s about the business and how the business and industry is structured in order to be profitable. As many people as there are in the world, without software we wouldn’t be able to function without it. We stand on the shoulders of many giants. And yet, at the same time it is estimated the impact of Information Technologies on the productivity in the economy has been minimal. Which may be the case. However what we know is that for the past few hundred years the only manner in which productivity has expanded is through specialization and the division of labor. These are the principles we’ve used to solve many of the issues in oil and gas. Specifically the service providers are derived from our user community members and focus on one administrative or accounting process and use the entire industry as their client base. Eliminating the need for each producer to build their individual unshared and unshareable administrative and accounting capabilities. Capabilities which are exactly the same as each and every other producer. Our software requires the full stack of Information Technologies that exist in the marketplace today, and will need to be done in innovative ways. Then we’ll begin to see the real productivity gains in terms of the application of Information Technology through higher profitability of the oil and gas industry, lower administrative and accounting costs and better and more timely information.
We note People, Ideas & Objects Intellectual Property consists of the following categories. The research was conducted in determining the Joint Operating Committee as the key organizational construct of the dynamic, innovative, accountable and profitable oil and gas producer. The Preliminary Specification and its derivative works. The work of the user community, how this is acquired is discussed in the user community vision. The software code developed and of course the binaries used within the producer firms, the service providers and elsewhere. Yet you will notice I have not stated we’re a software development firm. We’ve dropped that aspect of our organization as a result of the logistical difficulties and what we feel would be the unnecessary time consumed in the development of a capability which we’ve budgeted for 600 developers. For us to grow from nothing to having all of the developers singing from the same hymn sheet, then mold them into the state of the art team needed for this task would be too long in terms of the timeline industry has. Each year the value proposition of our software and services can be in the high triple digit billions of dollars. We feel it would be inefficient for us and the industry to pursue something which may take upwards of four to ten years to just acquire the software development capability.
It is my personal opinion that no one has the wherewithal to challenge Oracle in terms of the quality of their software offering. What Larry Ellison and his team have done has made all others pale in comparison. It all has to do with the database in my opinion and that is where Oracle most particularly excels. If the data is wrong or the database is unable to conduct the operation correctly it doesn’t matter about much else. Performance of the overall system is another attribute of the database. The demand on these applications at times can be heavy. Oracle is light years ahead of anyone else and to me it appears that no one is even trying to compete anymore. IBM has repackaged their database offering as IBM DB2 and is a cloud offering. It has to be number two in the marketplace with number three being any number of pretenders. Microsoft included. IBM had a large lead as the creator of relational theory and rode that to dominance for many decades. I believe Oracle now has at least a decade on IBM DB2.
We have always configured the Preliminary Specification on the basis of Oracle’s Database, Java, Oracle Fusion Middleware and Oracle Fusion Applications. These have been packaged as cloud offerings which we’re very pleased with. And there are many more peripheral applications provided by Oracle included in the Preliminary Specification. In our initial budget we had the assistance of Oracle Consulting providing their software development services in terms of accelerating our delivery times. We have now dropped the software development aspect of our firm, chosen our distinct competitive advantages and will be handing Oracle the work of the development of the Preliminary Specification and building it from our user communities contribution.
Artificial Intelligence, Machine learning and other pie in the sky dreams of the producers can’t be implemented until they get the base of their systems operational. Flying to the moon in Orville and Wilbur Wright's plane is going to be difficult. Maybe it would be possible but why would you try? Some producers are crediting Artificial Intelligence with building substantial value for their firm. As we’ve seen most producers are reporting profitability, but where’s the cash? The role of IT in the producer firm and industry are far beyond what we’ve seen in the past. Today is a time when a different approach to the future and the long term are necessary. Information Technologies make fundamental changes to the outcome and profitability of industries. Picking up the latest tool and waving it around doesn’t.
These are what People, Ideas & Objects have planned and are doing in the marketplace today. Setting the foundation is the first step in rebuilding the industry. With today’s enhanced deliverability of oil and gas as a result of shale we have been afforded the time necessary to conduct this rebuilding based on the vision of the Preliminary Specification. People, Ideas & Objects plans and structure can be implemented quickly while the demise of the current producers occurs in the background. This is the direction we’re setting, one based on profitability. Everyone in the industry now understands why profitability is such a crucial component of any industry. Without it, you’ll eventually have nothing.
We now begin our review of a paper written by Mark P. Mills, a Senior Fellow at the Manhattan Institute. This paper is entitled “The ‘New Energy Economy:’ An Exercise In Magical Thinking.” (Please see the appendix for more information.)This is a remarkable paper presenting the factual basis in which physics will deny the common thinking there’ll be a natural transition to clean, alternative energy sources. Where these sources of energy would replace the carbon supplies which we rely on today. As a precursor to our review I want to raise a number of points as to why this analysis is critical for the purposes of People, Ideas & Objects Preliminary Specification and the oil and gas industry at large. It is common thinking that “if” the prices of oil and gas commodities breached a certain point, it would initiate the transition to alternatives earlier than would be in the “best interest” of the oil and gas industry. Somewhat implying that they’ll sell oil and gas at a loss to defer this event from happening. I will be quoting from this paper extensively due to the high quality of the work that has been done and the factual basis presented in this document, People, Ideas & Objects are not and have no intentions of ever being in the business of researching within this alternative energy area, and therefore will be invoking the fair use doctrine in terms of copyright. Starting with the introduction of the paper Mills states clearly that the alternative energy transition is a myth.
This “new energy economy” rests on the belief—a centerpiece of the Green New Deal and other similar proposals both here and in Europe—that the technologies of wind and solar power and battery storage are undergoing the kind of disruption experienced in computing and communications, dramatically lowering costs and increasing efficiency. But this core analogy glosses over profound differences, grounded in physics, between systems that produce energy and those that produce information.
In the world of people, cars, planes, and factories, increases in consumption, speed, or carrying capacity cause hardware to expand, not shrink. The energy needed to move a ton of people, heat a ton of steel or silicon, or grow a ton of food is determined by properties of nature whose boundaries are set by-laws of gravity, inertia, friction, mass, and thermodynamics—not clever software.
This paper highlights the physics of energy to illustrate why there is no possibility that the world is undergoing— or can undergo—a near-term transition to a “new energy economy.” P. 4
Movement of people has historically been through the automobile. Therefore the transition to renewable energy will see battery powered cars continue this trend. Which is ludicrous. Battery powered cars is an oxymoronic application of battery power which we’ll look back at, in the very near future, as a distraction. Two ton vehicles being powered by batteries, hurtling down the highway at 60 mph, could only ever make up 5% of the automotive market. The number of required batteries would consume the world’s resources of the ingredients which make up any and all batteries. The average speed that a car travels in the intercities of major cities such as New York is 8 mph. Maybe the application of battery powered vehicles is in bicycles, segways and scooters where consumers could use them to travel at up to speeds of 15 mph for those short range 3 - 4 mile trips that they would have otherwise taken the car. This would be a far more logical progression of the technologies and their application. Particularly when the volume of battery power is constrained. The stumbling block to this progression is the outright banning of these battery powered vehicles in many cities around the world.
Nothing is going to eliminate or reduce the consumption of oil, natural gas or coal for the foreseeable future. Current and future use of these forms of energy are not materially changed as a result of the substantial investment made in alternatives, the constraints faced, the unbelievable volumes of oil and natural gas that are consumed each day, and the endowment which mother nature has provided in the oil and gas resources which we’ve built our economy around. Until you can fully visualize the power derived from 147.25 million barrels of oil equivalent produced each day, you’ll never understand how fruitless it is for the Energizer Bunny to try and compete. The following graph is provided by Mark Mills’ paper “The ‘New Energy Economy:’ An Exercise in Magical Thinking.” P. 7
What is clear is after 50 years minimal benefit will have been gained from the development of these alternative energy sources. Although it appears to be solely at the expense of hydrocarbons, the sample size would be too small to draw any conclusions. At 2% currently, with wind and solar fields producing energy across the continent it’s reasonable for people to ask, “Is that it?” It will require development of some new type of technology that is unknown today to drive the carbon economy into instinction. I’m personally betting on pocket fission reactors. Here we have another graph from Mark Mills’ paper showing what electrical output can be derived from a $1 million investment in shale, wind and solar energy. P. 7
In light of these points, what is the responsibility of the oil and gas industry? Continued verbal support for a myth and fallacy which inevitably will be seen as untrue? Continue to pay the environmental activists their ransom to be good corporate citizens when the purpose of those organizations is to disrupt the producers and confuse society? Let society casually roll down the wasteful and unproductive environmental focus and alternative energy blind bunny trails, only to be caught out when they see their dependence on oil and gas is far more significant than they could have ever imagined. Are the producers bureaucrats pursuing these alternative narratives so they look like good corporate citizens at the expense of doing their job of ensuring adequate energy is profitably and innovatively sourced for the long term? Why haven’t they asserted the industry's narrative regarding the value oil and gas provides society? What has been the purpose for the consumer discount they’ve provided consumers at the expense of their investors over these past four decades? It’s always best to consider these questions in light of the fact that oil and gas in North America is not a business. A business wouldn't do the things that these producers do and without any leaders, it's difficult for them to assert any leadership.
Based on factual data, and the application of known physics Mr. Mills basis for making his conclusions that alternative energies are incapable of meeting our demands are as follows.
Scientists have yet to discover, and entrepreneurs have yet to invent anything as remarkable as hydrocarbons in terms of the combination of low-cost, high-energy density, stability, safety, and portability. In practical terms, this means that spending $1 million on utility-scale wind turbines, or solar panels will each, over 30 years of operation, produce about 50 million kilowatt-hours (kWh)—while an equivalent $1 million spent on a shale rig produces enough natural gas over 30 years to generate over 300 million kWh.
Solar technologies have improved greatly and will continue to become cheaper and more efficient. But the era of 10-fold gains is over. The physics boundary for silicon photovoltaic (PV) cells, the Shockley-Queisser Limit, is a maximum conversion of 34% of photons into electrons; the best commercial PV technology today exceeds 26%.
Wind power technology has also improved greatly, but here, too, no 10-fold gains are left. The physics boundary for a wind turbine, the Betz Limit, is a maximum capture of 60% of kinetic energy in moving air; commercial turbines today exceed 40%.
The annual output of Tesla’s Gigafactory, the world’s largest battery factory, could store three minutes’ worth of annual U.S. electricity demand. It would require 1,000 years of production to make enough batteries for two days’ worth of U.S. electricity demand. Meanwhile, 50–100 pounds of materials are mined, moved, and processed for every pound of battery produced. P. 4
What we know is the volume of oil and gas produced totals 147.25 million boe / day. The mechanical leverage which our society generates from one barrel of oil is the equivalent of 23,200 man hours. Therefore based on the annual production of oil and gas, the total output of oil and gas produces the equivalent man years equal to 86.5 times the +7.7 billion people on the planet. If we expect that batteries, wind and solar are going to provide a worthwhile replacement to the scope and scale which oil and gas provides then that’s fine. If however, the alternatives are unable to provide a replacement then the need to find some other source of alternative energy to fuel our advanced economies and high standards of living. If we should lose the 86.5 times 7.7 billion people which oil and gas is the equivalent of, then we should prepare to live like cavemen and fight it out like we used to. People, Ideas & Objects believes if given these facts the consumer will make the appropriate choice. Potential doom and gloom someday down the road by adopting policies such as the Green New Deal. Or imminent disaster by denying ourselves the way we live today. We believe this is the posture necessary to be taken by the oil and gas producer, what it is they should be stating in order to promote their value to society and their products instead of the unqualified endorsement of “science” that obstructs and confuses their message and their mission. Producers in Canada love to accuse the pipeline companies and the governments of not doing their jobs in securing the pipelines which would ensure their revenue upside was stable. Rereading the sentence once again and the fallacy of the oil and gas CEO comes into clear view. It’s other people’s fault for producers losing out on the upside of their revenues. The only role the producer has in securing any pipelines space is to make the payments to the environmental activists so those people have the financial resources to organize, legislate, litigate and protest the pipelines.
Today’s reality: hydrocarbons—oil, natural gas, and coal—supply 84% of global energy, a share that has decreased only modestly from 87% two decades ago (Figure 1). Over those two decades, total world energy use rose by 50%, an amount equal to adding two entire United States’ worth of demand.4
The small percentage-point decline in the hydrocarbon share of world energy use required over $2 trillion in cumulative global spending on alternatives over that period.5 Popular visuals of fields festooned with wind-mills and rooftops laden with solar cells don’t change the fact that these two energy sources today provide less than 2% of the global energy supply and 3% of the U.S. energy supply.
To completely replace hydrocarbons over the next 20 years, global renewable energy production would have to increase by at least 90-fold.6 For context: it took a half-century for global oil and gas production to expand by 10-fold.7 It is a fantasy to think, costs aside, that any new form of energy infrastructure could now expand nine times more than that in under half the time. P. 6
If the initial goals were more modest—say, to replace hydrocarbons only in the U.S. and only those used in electricity generation—the project would require an industrial effort greater than a World War II–level of mobilization.8 A transition to 100% non-hydrocarbon electricity by 2050 would require a U.S. grid construction program 14-fold bigger than the grid build-out rate that has taken place over the past half-century. Then, to finish the transformation, this Promethean effort would need to be more than doubled to tackle nonelectric sectors, where 70% of U.S. hydrocarbons are consumed. And all that would affect a mere 16% of world energy use, America’s share. P. 7
In Mark Mills paper “The New Energy Economy: An Exercise In Magical Thinking” next section we’ll be discussing the high cost of ensuring energy availability. Within the Preliminary Specification we have determined and implemented through the decentralized production models price maker strategy that the oil and gas commodities are price makers. Not the price takers they’re assumed to be in the industry over the past number of decades. One of the characteristics of a price maker is that there are no substitutes. Which we assert that there is none for oil and gas, and therefore ask. Can you carry nuclear energy in a jerry can, or process chemicals from hydro, lubricate your chassis with solar energy, pave your road with wind energy or power your transpacific shipping fleet with batteries? There is a role for all forms of energy used in today’s energy mix. The limits to solar, wind and battery are real and the myths are based on wishful thinking. It will be a significant and powerful energy source that will be used to substantially reduce our dependence on carbon based energy. Or we’ll need to make some critical decisions on what is more important to us. Life and death decisions. The volume of oil and gas that is consumed today by the global economy is invisible to the consumer. They never see what it is they’re getting or using. The lack of transparency in pipelines, refineries and filling stations makes it look like it could easily be changed by one Tesla charging station. “Then those oil and gas companies will be out of business for good.”
Availability is the single most critical feature of any energy infrastructure, followed by price, followed by the eternal search for decreasing costs without affecting availability. It costs less than $1 a barrel to store oil or natural gas (in oil-energy equivalent terms) for a couple of months.2 0
Storing coal is even cheaper. Thus, unsurprisingly, the U.S., on average, has about one to two months’ worth of national demand in storage for each kind of hydrocarbon at any given time.2 1
Meanwhile, with batteries, it costs roughly $200 to store the energy equivalent to one barrel of oil.2 2
Thus, instead of months, barely two hours of national electricity demand can be stored in the combined total of all the utility-scale batteries on the grid plus all the batteries in the 1 million electric cars that exist today in America.2 3
For wind/solar, the features that dominate cost of availability are inverted, compared with hydrocarbons.While solar arrays and wind turbines do wear out and require maintenance as well, the physics and thus additional costs of that wear-and-tear are less challenging than with combustion turbines. But the complex and comparatively unstable electrochemistry of batteries makes for an inherently more expensive and less efficient way to store energy and ensure its availability. Since hydrocarbons are so easily stored, idle conventional power plants can be dispatched—ramped up and down—to follow cyclical demand for electricity. Wind turbines and solar arrays cannot be dispatched when there’s no wind or sun. As a matter of geophysics, both wind-powered and sunlight-energized machines produce energy, averaged over a year, about 25%–30% of the time, often less.2 4
Conventional power plants, however, have very high “availability,” in the 80%–95% range, and often higher.2 5
A wind/solar grid would need to be sized to meet both peak demand and to have enough extra capacity beyond peak needs in order to produce and store additional electricity when sun and wind are available. This means, on average, that a pure wind/solar system would necessarily have to be about threefold the capacity of a hydrocarbon grid: i.e., one needs to build 3 kW of wind/solar equipment for every 1 kW of combustion equipment eliminated. That directly translates into a threefold cost disadvantage, even if the per-kWH costs were all the same.2 6 p. 8
Facts vs opinions, two sides of the same fence. The Internet has created an environment where opinions are more valuable to their holder than the facts that defy them. We need to overcome this tendency and begin to make rational decisions based on research and facts. Most particularly within the organizations that are providing services that are critical to our economy and our way of life. Producers being driven by the prevailing opinion based on the emotions of optimism and hope have brought us to a situation where the industry is breaking down. This is irresponsible and a capitulation of their duty as producers. Assuming other energy sources will pick up their slack, if necessary, is clearly never going to happen. It’s time to rebuild the industry in the vision of the Preliminary Specification and establish it on the basis of profitability everywhere and always. Then we’ll be able to approach the real possibility of energy independence in North America on a sustainable basis.
In terms of the freight that is carried by 147.25 million barrels of oil equivalent per day. An amount that is opaque to the average energy consumer. Mr. Mills sets out that the amount that might be saved through a dramatic acceleration in the uptake of Electric Vehicles (EV’s) is quite marginal in terms of the total demand for oil products. I would encourage everyone to read Mr. Mills paper The “New Energy Economy:” An Exercise in Magical Thinking. Where he dispels the belief that batteries will have the capacity to eliminate the volumes of oil and gas production. There are many real constraints to the magical thinking behind battery driven automobiles. Constraints such as the resource inputs into the batteries, and their overall usefulness in comparison to the utility of oil and natural gas.
Such a ban is not easy to imagine. Optimists forecast that the number of EVs in the world will rise from today’s nearly 4 million to 400 million in two decades.6 7 A world with 400 million EVs by 2040 would decrease global oil demand by barely 6%. This sounds counterintuitive, but the numbers are straightforward. There are about 1 billion automobiles today, and they use about 30% of the world’s oil.6 8 (Heavy trucks,aviation, petrochemicals, heat, etc. use the rest.) By 2040, there would be an estimated 2 billion cars in the world. Four hundred million EVs would amount to 20% of all the cars on the road—which would thus replace about 6% of petroleum demand. P. 13
In a section entitled Moore’s Law Misapplied Mr. Mills documents how society has distorted the belief that solar, wind and battery technologies are about to undertake significant growth in their performance. Where not only are they going to be much more powerful, but much smaller in size. These performance metrics accurately mapping the type of changes we’ve seen from the development of Information Technologies.
An ant-size engine—which has been built—produces roughly 100,000 times less power than a Prius. An ant-size solar PV array (also feasible) produces a thousand- fold less energy than an ant’s biological muscles. The energy equivalent of the aviation fuel actually used by an aircraft flying to Asia would take $60 million worth of Tesla-type batteries weighing five times more than that aircraft.7 3 p. 13
Finally, when it comes to limits, it is relevant to note that the technologies that unlocked shale oil and gas are still in the early days of engineering development, unlike the older technologies of wind, solar, and batteries. Tenfold gains are still possible in terms of how much energy can be extracted by a rig from shale rock before approaching physics limits.8 3 That fact helps explain why shale oil and gas have added 2,000% more to U.S. energy production over the past decade than have wind and solar combined.8 4 p. 16
What Mr. Mills has documented throughout his paper is a factual analysis of the alternative energies that are available today, and their probability of success in meeting our demands for tomorrow, and most particularly, as a replacement to oil and gas which is our concern. These facts which are based on the physics of what our lifestyles demand, and what oil and gas currently provide, set the bar very high for their replacement. The capabilities of the carbon based economy are difficult to see due to them being buried in pipelines, processed in static appearing refineries and delivered to their automobile tank and home without any visual representation of how much it is that the consumers are using. This contrasts to the somewhat abundant visual representation of wind farms and solar arrays that are dotted across the continental landscape. Why wouldn’t all those wind and solar power sources eliminate oil and gas? Without the appropriate analysis the media has represented the situation as completely possible and probable and somewhat inevitable. The facts however state otherwise.
The inexorable march of technological progress for things that use energy creates the seductive idea that something radically new is also inevitable in ways to produce energy. But sometimes, the old or established technology is the optimal solution and nearly immune to disruption. We still use stone, bricks, and concrete, all of which date to antiquity. We do so because they're optimal, not “old.” So are the wheel, water pipes, electric wires ... the list is long. Hydrocarbons are, so far, optimal ways to power most of what society needs and wants.
More than a decade ago, Google focused its vaunted engineering talent on a project called “RE<C,” seeking to develop renewable energy cheaper than coal. After the project was canceled in 2014, Google’s lead engineers wrote: “Incremental improvements to existing [energy] technologies aren’t enough; we need some-thing truly disruptive. ... We don’t have the answers.”9 7 Those engineers rediscovered the kinds of physics and scale realities highlighted in this paper. Hydrocarbons—oil, natural gas, and coal—are the world’s principal energy resource today and will continue to be so in the foreseeable future. Wind turbines, solar arrays, and batteries, meanwhile, constitute a small source of energy, and physics dictates that they will remain so. Meanwhile, there is simply no possibility that the world is undergoing—or can undergo—a near-term transition to a “new energy economy.” P. 18
A difficult and sobering conclusion which defies what would be termed common knowledge. Oil and gas producers have to ensure that they continue to provide ample supplies of oil and gas to the marketplace. Deferring to the alternative energy, environmental leadership coming from frightened children is unacceptable as reasons why they should somehow cease to provide for the market's demands. Although this is not a risk in any sense today, what follows the loss of the financial, operational and political frameworks of the oil and gas industry is a decline in the capabilities and capacities that were once available. This has not been a risk historically, however, there has not been the dependence on shale reserves that are prevalent today. Shales characteristic rapid decline rates make the North American deliverability somewhat fragile. There is no reason for us to go there, and there is no solution to deal with these issues if we find ourselves in that difficulty. Unlike the financial crisis of 2009 there’s no Fed that can flood the market with quantitative easing of oil and gas supply to overcome any shortfall. I don’t believe it's a risk that we need to take, and certainly not one that we need to explore.
Mark P. Mills, Manhattan Institute, New Energy Economy: “An Exercise In Magical Thinking.”
Mark P. Mills is a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering and Applied Science, where he co-directs an Institute on Manufacturing Science and Innovation. He is also a strategic partner with Cottonwood Venture Partners (an energy-tech venture fund). Previously, Mills co founded Digital Power Capital, a boutique venture fund, and was chairman and CTO of ICx Technologies, helping take it public in 2007. Mills is a regular contributor to Forbes.com and is author of Work in the Age of Robots (2018). He is also coauthor of The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (2005). His articles have been published in the Wall Street Journal, USA Today, and Real Clear. Mills has appeared as a guest on CNN, Fox, NBC, PBS, and The Daily Show with Jon Stewart. In 2016, Mills was named “Energy Writer of the Year” by the American Energy Society.
Earlier, Mills was a technology advisor for Bank of America Securities and coauthor of the Huber-Mills Digital Power Report, a tech investment newsletter. He has testified before Congress and briefed numerous state public-service commissions and legislators. Mills served in the White House Science Office under President Reagan and subsequently provided science and technology policy counsel to numerous private-sector firms, the Department of Energy, and U.S. research laboratories. Early in his career, Mills was an experimental physicist and development engineer at Bell Northern Research (Canada’s Bell Labs) and at the RCA David Sarnoff Research Center on microprocessors, fiber optics, missile guidance, earning several patents for his work. He holds a degree in physics from Queen’s University in Ontario, Canada.
A pdf of the document reviewed in this paper is available here.
https://media4.manhattan-institute.org/sites/default/files/R-0319-MM.pdf
Baldwin, Carliss Y., (2007) "Modularity, Transactions and the Boundaries of Firms: A Synthesis." Working Papers
Dosi, Giovanni, (1988) "Sources, Procedures, and Microeconomic Effects of Innovation." Journal of Economic Literature, Vol. XXVI, pp. 1120 - 1171
Habermas, Jurgen “Theory of Different Knowledge Interests”
Langlois, Richard N., (2004) "Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History." Enterprise and Society 5(3)
Langlois, Richard N., (2003) "The Vanishing Hand: The Changing Dynamics of Industrial Capitalism." Industrial and Corporate Change 12(2)
Langlois, Richard N., and Nicholai J. Foss, (1999) "Capabilities and Governance: The Rebirth of Production in the Theory of Economic Organization." Kyklos 52 (2)
Langlois, Richard N., (1992)"Transaction Cost Economics in Real Time." Industrial and Corporate Change 1
Langlois, Richard N., (2002) "Modularity in Technology, Organization, and Society." Journal of Economic Behavior and Organization, 49(1): 19-37
Langlois, Richard N., (2006) "The Secret Life of Mundane Transaction Costs." Organization Studies, 27(9)
Langlois, Richard N., (2007) "Organizing the Electronic Century." Working Papers
Langlois, Richard N., (2007) "The Dynamics of Industrial Capitalism. Schumpeter, Chandler and the New Economy." Taylor & Francis
Langlois, Richard N., (2009) “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups” Working Papers
Council of Petroleum Accountant Societies https://www.copas.org/
Definition of Tacit knowledge http://www.businessdictionary.com/definition/tacit-knowledge.html
Friedman, Milton, Quotation regarding the ideas lying around are the ones that are used in a crisis. https://www.nobelprize.org/prizes/economic-sciences/1976/friedman/biographical/ https://www.goodreads.com/quotes/110844-only-a-crisis---actual-or-perceived---produces-real
Mills, Mark P., Manhattan Institute, “The ‘New Energy Economy”: An Exercise in Magical Thinking,” March 2019 https://media4.manhattan-institute.org/sites/default/files/R-0319-MM.pdf
Oracle Blockchain Platform https://www.oracle.com/cloud/blockchain/
Oracle Applications Blockchain https://www.oracle.com/applications/blockchain/
SEC Charges Oil and Gas Company and Top Finance Executives with Accounting Fraud, Litigation Release # 24195 July 11, 2018, https://www.sec.gov/litigation/litreleases/2018/lr24195.htm
Tapscott, Don “Understand blockchain in under 7 minutes: Don Tapscott with Lloyds Bank,” A YouTube video on Blockchain, March 22, 2016 https://youtu.be/isuAPyuqS7Y
We the, David, World Oil “Schlumberger, Halliburton took a bit of a hit as shale patch tightens belt” Regarding reduction of production call from investors. May 26, 2019 https://www.worldoil.com/news/2019/5/26/schlumberger-halliburton-suffer-downturn-as-shale-patch-tightens-belt
The Wall Street Journal articles (Behind paywall.)
WSJ articles on Crypto and Initial Exchange Offering’s
https://www.wsj.com/articles/why-stablecoins-stand-out-in-the-cryptocurrency-world-115602184 60?mod=djemfoe
and https://www.wsj.com/articles/crypto-startups-are-raising-money-again-with-a-twist-11559995203 ?mod=djemfoe
WSJ article on Pioneer Natural Resources commentary regarding the performance of oil and gas.
https://www.wsj.com/articles/a-leader-of-americas-fracking-boom-has-second-thoughts-1156138 8670?mod=djemwhatsnews
What we’ve discussed to this point is the disjointed nature of oil and gas accounting. Disjointed from any basis of reality. The only manner in which it has been able to deviate this far from reality is the cultural bias that has overcome the industry. The principles in the industry are engineers and geologists. Accountants have been “wholly incapable” of reigning in any measure of reasonableness in terms of the manner in which the accounting has been conducted. When producers are growing, highly profitable and investors love them, auditors have signed off on the specious accounting that has been conducted, my critique has me relegated to the village idiot stature that I was for the past decades. While the party raged after 2003 I went about my business and did what I thought was needed to be done to avoid what was inevitable. Shale makes it more evident, but the damage would have arrived at some point anyway. Over reported profitability can be conducted in the early, and mid years of an enterprise, however, at some point it will be overwhelmed by the need to correct the anomaly in the accounting by reporting the offset losses. The principle being an enterprise generates x profit within the lifetime of an organization. If producers report 200% of that profit in the first five years, what are they left with? Determining the actual profitability of the organization is a skill and requirement of the accounting and audit professions. If anyone thought I was giving them a pass they should think otherwise. Although CFO’s were “wholly incapable” of making any of the necessary changes, that does not absolve them of their responsibility and authority. It just shows they failed.
Whether over investment occurred in oil and gas is under debate by the producer bureaucrats. The fact of the matter is producers believe they always need more investor money. They would then deny that oil and gas commodities are price makers and therefore if there was any overproduction it would not impact commodity prices. They’ll refuse to be a party to any collusion to rectify the situation as proposed by People, Ideas & Objects in their Preliminary Specifications decentralized production models price maker strategy establishes profitability as the only fair and reasonable means of production allocation. What motivates these bureaucrats is quite simple, inaction. There is a strategy of “muddling along” and “doing nothing.” Which has provided these bureaucrats with handsome compensation for the past four decades. That only five of the past thirty four years were of any value to anyone other than themselves is immaterial in their minds. They have, and will continue to hold onto these myths to allow themselves to appreciate the work that they don’t do.
Overproduction happened in material ways in the natural gas marketplace over a decade ago. Shale reserves were being exposed to the marketplace and the decline in natural gas prices was precipitous. Prices were eventually damaged in a comprehensive fashion where natural gas has since traded anywhere between 15 to 1 and 25 to 1 of oil prices as opposed to its traditional heating value equivalent of 6 to 1. Rereading of the previous paragraph may have the reader question a) how this was allowed to happen, b) what efforts have been taken to rectify the situation, and c) why was nothing done? The answer is, the oil side of the business was healthy enough to carry both sides of the business. Which was true, oil was doing well until December 2014. At which time, shale technologies application to oil fields began the same, dare I say, overproduction on that side of the business. And soon we saw the beginnings of the same shale based phenomenon that was seen earlier in the natural gas side of the business.
The difference between the oil and natural gas markets is that one is global and the other is continental. The collapse of natural gas in North America was almost immediate in retrospect. Natural gas prices in North America collapsed and were substantially lower than anywhere in the world. Then the LNG boom began to export the overproduction of natural gas globally and eventually global natural gas prices fell to where they’re not significantly different from North American prices. Overproduction in oil has a different history. A global commodity that is exportable without extensive facilities. Overproduction took some time before it began to impact the price. However when it did it affected the global prices of oil the world over. Over the past few years we’ve seen efforts by OPEC+ to allocate production quotas amongst its members and Russia to somewhat successfully rehabilitate the global price of oil. Proving the commodity is a price maker through small percentage changes in production having large percentage impacts on price. This is the global situation in oil today. However, the continued overproduction by the North American oil producers have now created their own “regional” oil markets as I call them. Constrained by pipelines, refineries and other physical infrastructure; regions within North America are creating their own oil and natural gas prices due to the dramatic overproduction that producer bureaucrats insist doesn’t exist. Production from areas such as the Permian, Canadian heavy oil, and others far exceed the takeaway capacity in the region and as a result producers face steep differentials on the prices that they receive. Creating what are global prices outside of North America, and unique regional prices on the continent. Once the oil and gas takeaway capacity issues are resolved producers believe these pricing issues will be resolved. People, Ideas & Objects believe the pricing pressures in these regional areas will be released to the large global markets putting more pressure on global prices.
Similar regional prices are being reflected in natural gas. The Marcellus is chronically overproducing with producers receiving about half of the posted price on the New York Mercantile exchange. In the Permian, which produces associated gas, prices fell to the lowest level in the month of April 2019. Prices of -$9.00 were realized. That is producers paid customers $9.00 to take the gas off of their hands. In addition the Permian and other shale basins are collectively flaring 1.6 bcf / day, the equivalent residential consumption of Texas. The point to remember in this diatribe of mine is, that the producers' myths that overproduction doesn’t occur, price takers is the role they occupy and it really is not their fault, they’re profitable! Hence we revisit the previous discussion regarding the policies of how costs are capitalized in oil and gas. Even in the desperate times that we find ourselves today our sample of 23 producers reported profits of $6.13 billion for the first quarter of 2019. Of those producers ten reported losses totalling $1.139 billion. One might assume this was an otherwise healthy industry based on these profits. Which is what the producer bureaucrats would assert. Collectively these 23 producers have property, plant and equipment of $487.3 billion. Working capital of $4.75 billion, annualized cash flow of $60.5 billion and cash used of $3.8 billion. Massive assets as represented in property, plant and equipment with barely enough cash to pay the minimum amount on the credit cards.
The technical economic classifications of price makers and price takers are as follows. From Investopedia.
A price maker is an entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker within monopolistic competition produces goods that are differentiated in some way from its competitors' products. The price maker is also a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.
What substitutes are there for oil and natural gas? Can hydro power lubricate your engine? Will nuclear power provide the chemicals that oil and gas can? What size jerry-can can you use to carry electricity from wind or solar? Clearly there are no substitutes to oil and natural gas. And although in the hands of the bureaucrats oil and gas has not been a profit maximizer, that does not mean that it can’t be, or shouldn’t be. The Preliminary Specifications decentralized production models price maker strategy enables producers to produce only profitable production, everywhere and always, by establishing profitability as the only fair and reasonable means of production allocation. Another characteristic of price makers is that small changes in production volumes lead to large changes in price. We’ve seen this with the actions of OPEC+ and the Alberta government’s implementation of mandatory production cuts. If oil and gas commodities aren’t price makers then they would be price takers as the producers assume. So what are the characteristics of a price taker? Again from Investopedia.
A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.
It would be tempting for me to suggest that the producer bureaucrats make oil and gas appear as if there are no barriers to entry in the industry, however that might be a controversial assertion. The example that could be used here is the bottled water market. If you were to compete in that market what price would you set for the bottled water that you’ve produced? Whatever the market provided because the choice between providers is immaterial to the consumer. Therefore cost control becomes the factor where profitability is earned. This may sound like the oil and gas commodities, but is it? It certainly is how the current producers bureaucrats perceive the business to be. The question that needs to be answered therefore is what would happen if the supply of bottled water were halved? I believe the price would remain the same as there would be alternatives such as the tap, juice or soft drinks that provide the consumer with their needs. What would be the consequence if the supply of oil and gas commodities were halved?
Although I’m sure I’ll be provided with continued disagreement from the producers bureaucrats, People, Ideas & Objects believes we’ve proven that oil and natural gas are price makers. Therefore the solution is to solve overproduction in the North American continent from a global, continental and regional point of view. So that producers are able to attain the prices that are necessary to profitably cover the full capital, operating, royalty and overhead costs of oil and gas exploration and production, based on a reasonable accounting. That there is an argument between myself and the industry on essentially this point, since at least 2003, in this 21st century, with the high cost of shale, with shales inherent rapid production decline rates and with the state of collapse that the industry is in. Is truly surreal to me. If bureaucrats cannot invest in their businesses profitability, why would anyone invest in their business?
What we're therefore discussing is instilling a form of production discipline in all of the producers involved in North American based production. The various forms of production discipline that have been recently implemented are the voluntary production cutbacks in OPEC+, and the mandatory production cuts in Alberta. Neither of these are suitable for the purposes of a long term industry solution. As soon as Alberta’s mandatory production cuts were implemented, companies such as Canadian Natural, who were strong advocates for, and were one of the producers that requested the government implement the policy. Soon became dissatisfied with the allocation that they had to carry in comparison to other producers. This is the issue with mandatory or voluntary cutbacks. They are effective in the short term however discipline can be short lived when cheating and dissatisfaction with the policy creeps in.
People, Ideas & Objects have chosen profitability as the only fair and reasonable determinant to allocate production. If a producer can produce the property profitably, assuming a reasonable accounting, then there is no reason they shouldn’t produce. If it is unprofitable then the motivation to shut-in the property is instilled in the producer to maximize their corporate profits. Having properties that are not profitable continue producing will only dilute their profitable properties and the overall corporate profits will unnecessarily suffer. If the property is unprofitable, and as a result shut-in, then the producer has every motivation to evaluate the property to ensure that all of their earth science and engineering capabilities can be applied to it to return it to profitable production as soon as possible. This is the structure, configuration and organizational template that is inherent in the Preliminary Specification for both the dynamic, innovative, accountable and profitable oil and gas producer and the industry. Producers need to choose what methodology they should implement to solve the overproduction that is in evidence since 1986, wholly attributable to their current business model, and aggravated by shale in today’s environment. We believe that profitability is the only fair and reasonable method for a producer operating in a capitalist society such as North America. And therefore have adopted and implemented that for the Preliminary Specification.
There is an implied variance in the methodology of accounting conducted in the industry. Which is true in the current business model. What if the Preliminary Specifications software, in conjunction with the service providers were providing a standardized accounting methodology across the industry? This is what is possible with the implementation of the Preliminary Specification. Each property would be subject to the same accounting treatment by the wholly independent service providers who have the entire industry as their client base. In almost all instances the data and information they’ll be working with will be limited to the process they have under management. These data volumes will be significantly large, yet limited in their number of variables. To know what an individual properties situation is, or to influence the accounting for one individual producer would be difficult for them to undertake. The service providers accounting processing would be standard and as such the results would be the determination of profitability throughout the industry would be a reliable measure of consistent performance.
If a producer understands that their property is unprofitable and needs to be shut-in they’ll know they’ve received the same accounting treatment as everyone else in the industry. That the profitabilities determination will be standardized at the property level. There will be many instances where some of the participants in the property remain profitable while others are not. This would be a relatively frequent occurrence that would require that the determination of profitability be assessed at the 100% working interest level. Shutting-in properties is not the detrimental action that the producers bureaucrats believe it is today. This should be seen by the producers as an opportunity to enhance the performance of the property, return it to profitable operations and increase their overall corporate profitability. I fail to see how this is considered detrimental to their operations.
We should note this brings about a new dynamic with respect to the age of the producing properties. If the producer has had the properties in excess of the two and one half years that we recommend that they retire their capital costs. Then those older properties will not have to carry any capital costs and as such these properties will be profitable at all times. This brings about the need for a new capital discipline in terms of new projects for the producers. A discipline that asks if the new wells being drilled will be able to achieve profitable production and therefore produce? Creating a higher threshold, we believe, in order to attain project approval. At the same time the acquisition of properties from other producers will not have the associated reserves times current commodity price valuation that they generally do today. The properties acquisition price will need to be on a present value of the future profitability of the property. Therefore we would see much less of the Occidental acquisition of Anadarko for an enterprise value of $69 billion. Assets and an organization that have achieved a total of $695 million in lifetime earnings.
The differences noted here are the valuation of a property based on its financial performance vs. its valuation based on the reserve report. Currently the industry uses the reserve report to provide an understanding of the properties performance. These reports are not based on actual accounting of the producers but on field estimates of the costs to conduct an operation today. This is the way in which producers are able to state that their costs have been innovatively reduced from $60 / bbl to $20 / bbl in a capital intensive industry and are therefore continuing to produce profitably in a declining commodity price environment. Alternatively, they may be the financial accounting numbers that have somehow, and in miraculous fashion, disposed of the “historical” aspect of historical accounting.
It is important to understand why things are happening as they are. The first issue is overhead. In oil and gas there are various Petroleum Accountants Societies for each region on the continent. They are governed by the Council of Petroleum Accountants Societies or COPAS. Their role is to define the accounting procedure that is adopted by each and every Joint Operating Committees agreement for the property. This has been the case since 1961. Within the accounting procedure the amounts of overhead that can be charged to a Joint Operating Committee are regulated and agreed to by each and every producer that operates on the continent. These overhead allowances capture fees for the overhead that the operator would incur as a result of the increased burden they, as operator, need to have in terms of their accounting and administrative capabilities. Therefore the operator would be generating a “revenue” from its working interest partners for their share of the overhead fees charged to the Joint Operating Committee. These “revenues,” for lack of a better word, offset the actual overhead that the producer incurs. These amounts of overhead allowances are woefully inadequate to capture the true cost of accounting and administration in oil and gas. They are necessary to avoid the cost that would be incurred if each overhead item had to be costed to each Joint Operating Committee. A task that would be impossible in the manual systems of 1961 and their derivative ERP systems of today. A task that the Preliminary Specifications decentralized production model undertakes with the service providers.
The negligible amount of offset provided by the COPAS overhead allowances to any operator are reflected in the remaining G&A balances of each producer. It is key to remember that the actual overhead items are charged to the various corporate accounts within the system during the year, and at the end of the year a large percentage of their total are capitalized to property, plant and equipment. No one knows for sure what the overhead costs are in oil and gas. I believe the amounts that are capitalized average 85% across the industry. That’s just based on experience, nothing I can point to. The variance reported by producers of their overhead costs range from 1% to over 16% of revenues in the industry. The best estimate of what the actual overhead and accounting costs are is to get pictures of the downtown core of Calgary, Houston, Dallas and Oklahoma City and assume that most of those buildings and the people in it are involved to some degree. Once you’ve determined what the costs of the people, rent, interest and other overhead costs are. Multiply them by about 25 years as that would be the amount that has been capitalized to property, plant and equipment, and one of the many reasons that cash just drains from the industry.
Due to the fact that overhead at the property level is severely underreported due to the amount of the COPAS overhead allowances. Then we know that the properties will be reporting profitability, if it was able to be determined, that is overstated. In addition corporate profitability is overstated due to the high percentage of overhead that is capitalized to property, plant and equipment to help “build those big, beautiful balance sheets.” The amount of these overstatements is unknown and unknowable. Please review the section entitled “Service Providers” under “Our Solution” for further information on how People, Ideas & Objects will be recording actual overhead incurred at the Joint Operating Committee.
As a result of this methodology of overhead cost accounting what are property a,b, and c doing in terms of performance? Producers present Statements of Expenditures and Statements of Operations which when combined will tell the reader what the performance of the property is in the current month as long as they calculate a reasonable amount for depletion. As we see with the dynamics of these calculations, just for overhead purposes, the profitability of the property could be overstated by as much as 10 - 15% or more just from the recording of overhead allowances vs. actual overhead. Am I overstating the situation or is it worse? No one knows.
The Preliminary Specification will be recording the actual overhead that is attributable for the accounting and administration of each property to that Joint Operating Committee. This will be done through the service providers as they receive their information from the task and transfer network in the Preliminary Specification. If there is propane production, and propane inventories then all of those service providers associated with the follow on processes of production accounting, revenue and royalty accounting and product allocation down to the point of sale will be invoked and manage the process for that property that month. The cost incurred for that month will be what the service provider has deemed as necessary for the capture of the costs and a share of profit of their organization. This cost may be fractions of one cent for some processes. However the service provider may have millions in revenue from the annual processing of all of the industries data for that process. The costs to the Joint Operating Committee for overhead and accounting as a result of the service provider is going to be as accurate as is possible under any possible scenario considering there may be up to one hundred thousand Joint Operating Committees in some producers.
It will be on this basis, and the other changes that we make through the implementation of the Preliminary Specification that the producer will know with a high level of precision where they're earning their profits and not. Where they can apply their innovation and how to optimize their organizations. This is opposed to today where the bureaucrats assume that overproduction of commodities is irrelevant to the “market rebalancing” of the markets!?
People, Ideas & Objects assert that there is a fundamental error in the manner in which capital assets are recorded from the point of view of tangible vs intangible, and capital vs. operations. Currently everything that is done in the industry goes into the one overall objective of “building the balance sheet” by recording it in property, plant and equipment. With drilling involving high cost rigs, steel pipe and cement, coil tubing and fracing operations we feel a breakdown between property, plant and equipment and intangibles if necessary. This goes for equipping costs as well. Although there are many items with serial numbers, items such as casing bowls, these are not retrievable. The effect of this would be to better clarify the vast majority of the costs of the producer as intangible vs. the tangible nature of property, plant and equipment implies.
Secondly, the clarification between what is rightfully in property, plant and equipment, and intangibles vs. ongoing operations. Drilling new wells and conducting the completion and equipping of those are assets for the purposes of this conversation. However, in the shale era these wells require extensive work to maintain their deliverability. Additional laterals may be drilled, fracing further down the original lateral and reworking the prior fracs are all extensive operations to maintain the deliverability. What are these assets or operations? If we’re only lumping more costs on to the existing reserves, to be depleted over the next 20 years then we’ve completed the deception that is the oil and gas industry. However, I believe that this implies that the initial drilling costs should have been depleted in the initial flush production if we’re just adding the additional costs to the reserves. Alternatively, we can stick to the 30 month program that People, Ideas & Objects suggests in which we deplete the original cost of capital, and handle these incremental workover type costs as operations in the month that they are incurred.
The difference between what People, Ideas & Objects believe should be done and what is common practice in the industry is as follows. Oil and gas is a capital intensive operation. Leaving the capital costs on the balance sheets for decades provides no one with any value anywhere outside of mainstreet where CEO’s strut the size of their balance sheets. Retrieving the capital from the prior investment should be the first order of business for the producer. It had become far too easy to sit back and let a few more investors pass through the locked gate to access the cash needed to continue with spending like drunken sailors and no one looking at the business critically. The point in industry is to emulate the value of the company, not to record the performance of the management of those assets. No one was, or is even today, asking if those are assets or are they costs. Producers just continue to harp that they’re building their balance sheet in isolation to any and all other industries on the planet.
Incinerating Cash
I believe it’s clear to see that with everything that is spent on drilling, completion, equipping, overhead and interest expense as property, plant and equipment the cash demands in the industry have been horrendous. Realizing such small amounts of the depletion that should have been realized does not allow much of the cash to be returned from these investments. The assets only build at remarkable rates. The other side of the coin is that these operations are generating revenues that are inadequate to carry what would be the normal or accelerated volume of depletion necessary to correct these difficulties. They would be significantly unprofitable if they did. That’s not the key issue however. These producers are constantly on the lookout for additional financial resources to reload the months spending on the items in the overhead accounts. When these are capitalized as they are they’re not accounted for in the price of the oil and gas commodities, and therefore passed on to the consumer, where the cash would be returned immediately to the producer to be spent in the following month. The next months costs have to be sourced from new money each month as the operation is not truly profitable and the cash is not being returned. Why would an organization do this? Why would an industry do this? Why would they do this for four decades?
Critical analysis of the financial statements of any and all producers in North America show the same attributes. Size being the only differential. Balance sheets heavily dominated by property, plant and equipment, little to no working capital, materially damaged shareholders equity through extensive and successive losses, and what appears on the surface to be a reasonable amount of debt. Our one concern about the debt is the excessive level of unrecognized capital costs of past production are overstating property, plant and equipment and therefore the leverage the producer is actually carrying is far greater than what is represented. The generic financial statements of the industry all fall within these classifications. For the life of me I can never tell who is performing well and who is incinerating money at a faster rate. They’re indistinguishable.
These financial statements are seeking to emulate the value that the producer has achieved. Instead of reporting on the performance of the producer, what we’ve ended up with is best described as indistinguishable fudge. What producers have done is explored the level of capitalization of costs until someone stood up and said enough. That was the SEC when they saw PennWest and their accounting staff capitalizing royalties. PennWest doesn’t exist anymore, they're called Obsidian, and their former accounting people are still being pursued in court by the SEC. Obsidian trades at one third of one percent of those heady PennWest days. The point I would assert is that PennWest was the warning shot across the industry's bow. The SEC’s message was heard throughout the industry and the capitalization of royalties has been adjusted for and I’m certain has ended.
The desire to never recognize the costs of oil and gas exploration and production are easily understood. If producers can report profits, based on SEC guidelines, producers have a built in mechanism where profitability will always be achieved and there will never be any call for change. Party city can go indefinitely and the work that you don’t do won’t be interrupted. The problem is that someone has upset the apple cart and started selling their Preliminary Specification. Unfortunately for the producer bureaucrats, the Internet makes it hard to get rid of people like this.
What we’ve obtained in the financial statements of the producers is highly overstated profitability, assets and cash flow. We have detailed extensively how the overstatement of profits and assets occurs, the difficulty in understanding how cash flow is overstated is a little more complex. If a producer recognizes their capital costs on an accelerated basis to what they would have historically done, the cash flow of that producer would be the same. The capital asset depletion would still not affect the cash that was generated from operations. However, if we were to begin to reclassify many of the field operations, particularly in the shale era, where extensive workovers of existing wells was reported as part of operations then these current operations costs would affect cash flow directly. These costs would be recognized 100% in the current period and reduce cash flow by the amount of the costs. Why would we do this?
It is necessary for the industry to begin thinking about how they’ll recover their capital and operating costs, all of their overhead and interest costs in rapid fashion. Turning these costs back into cash for purposes of reuse is the only method that I see, and is People, Ideas & Objects plan of how they’re ever going to be able to approach their difficult and challenging future. Our bold and audacious recommendation is that they begin running their companies as businesses. Expecting that either investors, bankers or Santa will help fund them continuously is wishful thinking and is never going to happen. Producers have earned a well deserved reputation where they can’t be trusted with others' money. If they're to keep the organizations that they currently manage they’ll need to stand up and make the changes necessary to begin to defend their organization. That means implementing the Preliminary Specification. Recent history shows this is never going to happen so we’ll just let them rest on the couch for the remainder of the time their organizations have left. Cash drainage as a result of the overhead, interest and all of these other costs being capitalized for the next few generations has traditionally caused these costs to be funded from outside investors. I’m glad to be the one to tell them, those days have passed.
By way of two analogies we're able to reflect the oil and gas accounting issues present and in place now for these past four decades. We call these the donut shop analogy, and the second is the pizza shop analogy.
The donut shop analogy sees a new operation opening in the local strip mall. The new owner recently retired from oil and gas and has brought the culture of its industry with him. When the doors are opened business is good and the operation is declared a success based on the financial statements produced. Understanding only some of the territory that could be covered by the donut shop, the owner purchases new donut making capacity which triples the output of the operation. He does this with investors money based on the strength of the financial statements he produced. The new donuts are now made at double the throughput of the previous capacity. Creating somewhat of an issue with surplus donuts. As business continues to expand the owner thinks this is a temporary situation which will remedy itself in time and he should let the “market rebalance” itself. Therefore these surplus donuts are stored in the parking lot. As a result of these changes that he’s made to the operation the owner is very pleased with the performance of the donut shop as a result of the most recent financial statements. Clearly the operation continues to perform and has much more room to expand. Therefore he goes to the financial market once again to raise money to purchase more donut making capacity, and additional parking space to store the surplus donuts while he waits for the “market to rebalance.” Investors make their investments and the operation increases its capacity and begins to produce triple the number of donuts again. Luckily the foresight of the owner to purchase the extra land for extra donut storage.
Soon it’s realized the operation is not generating the cash a successful business would be expected to be producing. The banks are asked to provide some funding to help wait out the period of time while the “market rebalances.” Upon the bankers review they see some anomalies with the donut shops financial statements. All the donuts stored in the parking lots are capitalized as goodwill in building the business. In addition all the utilities and rent are capitalized too, making for a very well capitalized operation. The only costs expensed are the labor, oil and flour to make donuts. Something the owner adamantly disagrees with as he feels they should be capitalized too.
Oil and gas bureaucrats find this analogy insulting, as they should. They feel oil and gas is a different business and the amounts invested and capitalized are supported by the oil and gas reserves discovered. Their understanding of accounting is that it should emulate the value being generated as a result of their activity. The activity of drilling and cementing casing are all intangible costs. They can not be retrieved just as the oil and flour is irretrievable at the donut operation. What they fail to understand is accounting is about performance, not about assigning value to the organization. If it was about assigning value then the donut shop in its current configuration could eventually challenge Apple and Amazon as trillion dollar operations. Eventually they will spend that much just on land. Therefore since the end result of the oil and gas producers accounting emulates approximately the value of the firm, what’s the issue? The issue is there’s no financial performance in terms of the money being invested. It has reported large profits but never earned them. Cash became an issue and the donut shop was closed as a result of being unable to pay its bills. Yes, even though they were building their balance sheets!
We now turn to the second analogy providing evidence that oil and gas financial statements attempt to emulate the valuation of the producer firm, which is supported by the market value of their properties. The other end of the strip mall has a pizza shop which has been in operation for a few years. It has successfully provided the owner with the opportunity to work sixteen hour days and feed his family a steady diet of pizza. Nonetheless for a variety of reasons he feels now is the time to sell the operation and retire. What’s the pizza shop’s value? There are the financial statements, however he does not believe they accurately reflect the market value of the operation. Therefore he lists the property on the following basis. Most of the money he makes is in the sale and delivery of pizzas. Each pizza sold averages $10.00 and $2.00 profit. He has a reserve of over 450,000 pizza boxes in storage. Therefore he lists, receives an offer and accepts the purchasers offer for the property at $4,500,000 which is for this example the average pizza sales price times the number of pizza boxes in reserves. The purchaser is an old friend of the new donut shop owner and is from the oil and gas industry too. He feels he’s made the deal of the century as the previous pizza shop owner never valued the pizza boxes at their full value on the balance sheet! He’s heard walking away from the closing “Can you imagine, he expensed the pizza boxes!” This analogy is just as insulting and the producer bureaucrats have pushed back stating that oil and gas reserves are nothing like the pizza business. Of which I have to concur, the pizza’s are profitable.
We have an example of a sale of an oil and gas producer and the financial statements which had been produced over the past number of decades. It is important to note that People, Ideas & Objects assertion is the attempt of producers to reflect the properties market value in the accounting financial statements. It is not about performance as far as they’re concerned. Building balance sheets is the name of the game, where capitalizing most of the costs and recognizing very few of them is the art and science of oil and gas accounting. Therefore what we see in Anadarko’s financial statements is the net assets total $28 billion. Just $10 billion short of Occidentals offer. In terms of accounting that has to be considered fairly accurate since they’re just about one quarter short of the actual offer! What this clearly represents is that Anadarko has operated on the basis of an attempt to emulate the market value of the assets. However, the equity of the company is only $8.9 billion of which $695 million are its retained earnings. Debt is $31.46 billion. Anadarko’s market cap is $36.84 billion closely emulating Occidental's offer. Therefore at the end of the day Occidental will have paid an enterprise value of $68.3 billion dollars for assets which have produced a cumulative lifetime earnings of $695 million. Whereas these earnings were based on the recognition of very few of the actual capital costs, reflecting the bloating of the balance sheet, cash flow and the bloating of earnings, somewhat of the earnings in this case. What Occidental must have done is take the commodity prices, determined the oil and gas reserves of Anadarko and made their offer on the basis of the present value of this sum. This makes the pizza box analogy valid, the donut shop analogy is seen as valid when Anadarko had $6 billion in cash in the second quarter of 2017 and they now have a working capital deficiency of {$1.32} billion. Occidental paid $68.3 billion for Anadarko’s operation that consumes $3.66 billion in cash or 41% of its shareholders equity each year. Just one of the reasons that oil and gas keeps advertising “investors wanted, just send cash, we’re profitable!”