Price Maker vs. Price Taker, Part IV

The search for petroleum reserves has finally met with its ultimate conclusion. If you can’t produce them profitably what good are they? Everyone is now running around with trillions of cubic feet of gas and billions of barrels of oil. Conceptually this was beyond anyone's dreams or understanding as little as a decade ago. Each producer is now attempting to cash in on all of those reserves by the end of this week and are finding that things are not as they were expected to be. The business model was simple, acquire petroleum reserves and control costs. What could be simpler? Producers then realized that self-deception was not real when they concluded “those aren’t costs, they’re assets.” Soon, I would guess around 1981, the race to the bottom began. Are we there yet? If not I’d be surprised. The damage that I see is horrific and will take at least a decade of dedicated remedial efforts to rebuild the industry in the vision of the Preliminary Specification, and gain back at least a foundation of value to further leverage. Hard work involving the sacrificing and suffering of those within the industry. The kind of effort that these bureaucrats have shown absolutely no propensity for.

Spendaholics running around spending money, calling them assets and declaring they’re making money will go down as reinforcing a number of previously well understood and hard earned lessons. Spending money, under the guise of cost control is not a business model and is only a small percentage of the business. Excelling on the spending of money is a valuable skill for any industry however it’s about 10% of what a business does, not 100%. Bringing on these other business skills will need to be done in order to rebuild the industry. The first area has to be in the area of the business called revenues. Not to be sarcastic but revenues are production times price. The bureaucrats maniacal focus on increasing production relates they understand the production half of the formula. Prices are driven by the fundamental economic principle of price makers. Demanding that bureaucrats pull their heads out and think about this last half of the revenue formula for at least five minutes. How has the conclusion that oil and gas commodities are price takers provided them with any value over the past 34 years? Does that amount of time qualify as enough to consider other options? What the bureaucrats have done since December 2005, the time I started writing about this issue and researching our solution, to this industry is truly legendary. Describe to me any other industry that has been deliberately destroyed when the product that is produced is so critical to the consumer? None, maybe coal, however that has been displaced by oil and gas. It wasn’t deliberate stupidity.

Producers don’t know which properties are profitable. Yet they claim that Artificial Intelligence will be providing them with breakthrough thinking for the future. This has now been their claim for at least two years, which doesn’t say much about Artificial Intelligence in the hands of bureaucrats. If they don’t have the basic information such as the properties profitability how is it they’ll determine any future from that?

My therapy continues.

It’s remarkable at this time to hear the revised strategies coming from the major integrated producers. Understanding they too have an issue that is affecting their business.  Source @SoberLook

They need to come up with a means to deal with these issues and a vision for the future, just as much as say Chesapeake does. In a nutshell this class of producer is now pursuing the “low carbon footprint” business model if I could summarize their press releases. BP is even going to the extreme to say they’ll be carbon neutral. I guess that means they’ll be destroying everything including their reserves and production profile. These are the leading lost souls that the remainder of the industry bureaucrats find their inspiration. And I wonder how things have become as they are, maybe it's as I mentioned the other day, the fish stinks from the head down.

Back to the solution at hand. The price maker attribute of the organizational change to service providers is even more valuable in ways that have not been described here, and in ways that have not even been discovered, yet. If a property based on this actual detailed accounting is not performing then the producer can shut-in the production for the production month. Doing so will save the reserves for when they can be produced profitably, ensure that the cost of the reserves are not increased by successive losses from continued production, provide the producer with the most profitable means of oil and gas production by not diluting their profitable operations with unprofitable production and removing the marginal production from the commodity markets. This is enabled when a shut-in property doesn’t produce any data that goes through the People, Ideas & Objects task & transfer network which triggers the service providers to complete their work for the month. With no data there will be no work done and no billing to that Joint Operating Committee from any of the service providers, creating a null operation, no profit but also no loss at the property. Providing the most profitable means of oil and gas operations. The service providers may at any time find that they are facing a drop of 15% of their revenues due to the volume of shut-in properties. Which is something they can plan for and budget. Enabling producers for the first time to have the indirect ability to control their overhead costs.

That is certainly what is known and can be taken to the bank. There are a myriad of undiscovered benefits that this reorganization to the Joint Operating Committee brings. Our user community and their service provider organizations, as independent providers of standardized accounting and administrative processes will be able to innovate based on this new perspective of using the Joint Operating Committee. And they’ll have access to the People, Ideas & Objects developers and therefore be able to implement changes and innovations in their process as they and others within the industry who inform them, see them. Enabling the producers to benefit from a new era of accounting and administrative performance. This will be above their enhanced and evolving specialization and division of labor that forms part of People, Ideas & Objects and our user communities unquantified portion of our value proposition of simply doing more with less. Enabling the industry to expand its productive output from the same resource base.

As an example of one of the other things that will change, and will become a given is as follows; in an asset sale the administration and accounting does not change when legal title changes. When the closing date is effective the time is noted on the purchasing producer and everything is then available under their producer ID and not on the sellers ID. No accounting integration necessary. Instant and full implementation of all the historical data, accounting and administration will continue as it was in its standardized manner. Only the owner has changed. Consuming all of $0.005 worth of electricity in the process. Or another benefit the user community might come up with is that the Preliminary Specification is consistent with the major integrateds revised strategies. The decentralized production models price maker strategy provides only profitable production everywhere and always. Which is consistent with the corporate objective of maximizing shareholder value. And reduces the amount of the commodities on the market, essentially helping these producers to achieve their carbon neutral objectives. Who would have thought? There are many benefits such as this that will be revealed through the process of development and subsequent iterations.

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook

Any arguments on that point are now moot, in my opinion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz can contact me at 403-200-2302 or email here.

Price Maker vs. Price Taker, Part III

In today’s environment where democratic socialism hasn’t ever really been tried before, to focus the energies of the oil and gas industry on the corporate objective of maximizing shareholder value is contrary to the prevailing political minority. The best reflection of democratic socialism is reflected eloquently in this following photo.

Some in oil and gas may consider today as evidence of the failure of capitalism. However I would suggest that it reflects the movement from the third industrial revolution to the fourth. The loss and inability to read market prices and act on that information. And a persistent bureaucracy that has no accountability for what they’ve done or the future of the industry. Creative destruction is a phenomenon that has preceded many changes over the past centuries. Yet the corporate objective of maximizing producers shareholder value stands as People, Ideas & Objects, our user community and service providers focus today, and in the future, as much as it did over the past century. Why do we care about the investor so?

We need to take a look around and ask if this oil and gas industry is the one that we want for the future. Are people satisfied with the current environment and see strong opportunities where they can prosper, make a good living, raise a family, take on a mortgage and retire? Maybe throughout that career process they could also become a shareholder themselves. I don’t see anyone’s hand being raised in confirmation of these thoughts. If the producers themselves are not providing their overall objective of maximizing shareholder value then does that mean their investors money is being redistributed to others within the industry? No, clearly not, as it is today none of the profits, value or prosperous nature of the industry is being generated anywhere. If the producer bureaucrats are not fulfilling their corporate objective then they’ve cut off their desire and drive to compete and win. Whatever is good enough will do, or just muddle through, we’ve been here before and we’ll be again.

The fish stinks from the head down is a saying that fits here. When the architects of the business, the decision makers and those that provide the overall vision of where we’re heading as an industry. When the organization is defined and constrained by the software it uses, the business model doesn’t function or build any value but alternatively destroys it. What can anyone, outside of the entrenched bureaucracy that benefits from this depressed environment, do? Nothing. We all know it takes a long time to turn a supertanker around. But that’s not what we’re attempting to do here. Our supertanker is riddled with damage, is sinking and spilling oil everywhere. What are those members and participants in that industry to do when the management of the shipper doesn’t care that they’re losing and destroying so much value? When the only response anyone gets from that shipper is that they’ve seen this before and they’ll muddle through.

The investors do not desire to be part of the destruction, can see the writing on the wall and exited the situation with the ease of a telephone call or click of a mouse. In essence the stock market sending a price signal to bureaucrats, who’ve obviously ignored it. If only all of the problems could be fixed as easily. The banks also have nothing but risks and are stuck with a portfolio of companies that they’re unable to motivate to act. Therefore we see the service industry in oil and gas enter the worst of their downturns. Even Schlumberger’s CEO’s commentary when they moved 50% of their assets out of North America was indicating they weren’t coming back. The general economy that should be thriving in the areas where oil and gas is operational are all in depression era states. The producer bureaucrats just sit and blink at all that is happening and expect that something will happen to make it all better.

We could all do better than having the alleged leaders of this industry sitting around silently blinking and nodding off. What do we have to lose by ignoring them and acting to correct this mess. Would they even be aware? Nothing has changed since the fundamental collapse of natural gas prices in 2009. Other than the collapse of oil, the investors and bankers are getting out as fast as they can. Nothing has been done to remediate the damage other than generate serial excuses that have all proven to be false, or was it that they were lying all along?

During the research of the Preliminary Specification we spent some time evaluating the future organizational makeup of industries. Would they be comprised of decentralized markets or centralized bureaucracies as the current method of organization may continue. Our conclusion was that markets would come back to dominate industries primarily due to the Internet. Adam Smith introduced the concept of the invisible hand of the marketplace as the “unintended social benefits of an individual's self-interested actions.” This was believed to have been replaced by the hierarchies “visible hand” that was prevalent in large corporations. As Professor Richard N. Langlois noted in his hypothesis of “The Vanishing Hand” which he describes in his paper “The Vanishing Hand: the Changing Dynamics of Industrial Capitalism” as.

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3

And therefore the “vanishing hand” which is what we see in some of the industries that have been disintermediated, replacing the “visible hand” of management is now becoming the “vanishing hand” or “invisible hand” of markets once again. This is the strong belief of the Preliminary Specification as seen in the three marketplace modules and our price maker strategy. The ability to respond to market signals, the price of the commodities, does not exist. Bureaucrats determined long ago that they know better than what the markets are telling them. Yet the oil and gas industry has carried on for four decades in an accelerated manner of value destruction. Each year reporting specious profits that are earned from their genius, as they know not which property provided the profits. And selling investors on that genius in an industry that is impossible to discern who are the leaders and who are the laggards.

Just as markets take a premier role in the future of industries. It is understood that markets provide one, and only one thing. The price it's willing to pay the producer. If you can produce profitably at the price offered you produce. If you are unable to, you maximize shareholder value by shutting-in those properties that are not providing profitable operations. Only then will the corporation reach its maximum value for its shareholders and as we’ve noted, all those that are associated with the industry will be prosperous too. As they will be able to know that the industry will always be profitable everywhere and always. That their efforts will be rewarded and provide value to all that use their products. Looking around the greater oil and gas industry today, who is happy with the fact that shareholders are not rewarded for their efforts? Adam Smith wrote about these principles in 1759 and in 1776. Market failure is the sole responsibility of the producer bureaucrats.

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook.

Any arguments on that point are now moot, in my opinion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Price Maker vs. Price Taker, Part II

On Monday we mentioned we’d be discussing the concept of production discipline that the Preliminary Specification brings about. The price maker strategy is valid only when the producers adhere to the simple business principles of ensuring that there is an accurate costing of the oil and gas produced. That unprofitable properties are shut-in within the first month or two of their being determined to be unprofitable based on that accurate and detailed accounting information. And some form of production discipline is instituted across the North American industry and this is enforced reliably, consistently and fairly. People, Ideas & Objects have chosen profitability as it is the only fair and reasonable method of production allocation. Government mandates and OPEC allocations based on reserves are unable to be applied fairly when political influence is asserted. These are the three requirements that make the price maker strategy of our decentralized production model operational in the Preliminary Specification. They are sound in theory, however in practice we have seen throughout the industry, and most particularly the history of OPEC in the 1980’s and 1990’s when they had substantial surplus capacity. The ability to maintain quotas, or some form of production discipline in oil and gas is very difficult. The need for cash creates the issue, it therefore motivates cheating and production discipline is easy to overcome when oil and gas commodities are fungible.

It is in that sense that the Preliminary Specification appears to provide the incentive for cheating when the return of the cash incurred as overhead is returned the subsequent month as one of its primary advantages. This is immediately provided to the oil and gas producer as we noted in Monday’s post. The ability to also extract the previously invested cash for reuse as capital expenditures, to pay dividends or reduce debt is the effective way in which the industry will provide a prosperous and profitable operation throughout its next three decades. However, getting the full value of the oil and gas resources as they’re represented in the reserves in place needs to be achieved in order to fulfill the objective of maximizing shareholder value. Let’s have a look at these three requirements in detail and understand how the production discipline of the Preliminary Specification is implemented.

An accurate costing of the properties oil and gas commodity costs needs to be rethought as the principle of unlimited capital provided by banks and investors was only viable when they were deceived. In the real world deferral of all costs to property, plant and equipment, then to deplete these over decades doesn’t make sense in a commercial environment. The SEC dictates the accounting for the costs of capital will not exceed the value of the reserves of the producer. The producers have interpreted that to mean that the objective of the firm is to raise the value of property, plant and equipment to what the value of their reserves are. Which is ludicrous. The competitive producer will seek to turn over their capital costs in order to recover the cash invested for its reuse. If this extinguishes property, plant and equipment then that is an operation that will be hard to outperform from a competitive point of view. As we noted on Monday the direct charges of overhead to the Joint Operating Committee, as opposed to being capitalized in property, plant and equipment, is an attribute of the Preliminary Specifications decentralized production models price maker strategy. When the actual costs of oil and gas exploration and production are being accounted for then we can begin to account for the properties that are providing benefit to the firm, profitable, and those that are not, losses. Currently in oil and gas the ability to discern which property is actually profitable is about as easy as separating the ingredients of fudge. It cannot be done.

There are regulations for the type of accounting that is undertaken by the oil and gas producers. Regulations that are dictated by not only the SEC but also other regulatory bodies such as royalty, tax… The amount of leeway and interpretation of these regulations within the industry is not a feature of the creativity of the accounting staff, more to do with the quality and experience of the staff that the producer employs. The major integrated producers have policies and procedures that are very sophisticated and are fundamentally different than what a small producer may employ in the process of “getting the quarter out.” Nonetheless all are within the requirements of those regulations. The sophistication is the determining factor. The Preliminary Specifications service providers introduce a new level of standardization of oil and gas accounting. Whether a startup or integrated major the need to meet these regulations is necessary and that will continue. However, when the accounting for recording the butane sales of a property is conducted by the appropriate service provider, that will be calculated in the manner in which our user community, the principle of the service providers organization, and the industry representatives determine they want that process managed. And the management of that process will be the same for all producers and the costs of managing that process will be the same for all concerned. The need for startup producers to have hundreds of thousands of dollars of administrative and accounting staff to conduct their accounting and administration will be reduced to the incidental fees that the service providers charge for the actual work that was completed and necessary. If there were no profitable properties producing, the startup oil and gas producer would not be incurring any of these costs. There are also distinct advantages for all the producers in the industry for a standardized methodology of administrative and accounting overhead costs. Particularly when these costs are shared across the producers who are involved in the Joint Operating Committee. Having a standardized accounting of these costs prepared by three thousand independent service provider organizations working on behalf of the entire industry ensures that no one is being treated unfairly.

The following graph has been used in the White Paper and shows exactly how oil and gas has become the financial armageddon that it currently is. Source @SoberLook

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 graphs 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.

You hear investors demand that producers begin to return more of their invested capital. Investors are always the most efficient communicators. If only producers would listen. If a property does not produce a profit, above the breakeven point in this graph, then it has to be shut-in. Which is the production discipline we’re talking about, which leaves nothing to say about the discipline portion of the claim. If a producer continues to produce properties unprofitably then the only ones they’re fooling are themselves. Their profits are being diluted by these unprofitable properties in two material ways. First these losses are offsetting their profitable property profits and therefore reducing the corporate profits earned. Secondly they are reducing the prices of the commodities by continuing to overproduce unprofitable production which as price makers, has a material effect on the price of the commodities their profitable properties receive.

To stand out as a high performing oil and gas producer -- it’ll be interesting to see if that becomes an overall corporate objective in oil and gas. Producers will need to fulfill their corporate objective to their shareholders. Maximize shareholder value. By maximizing profitability they will also maximize the value of their firms. Pretty simple really. But in that we have the inherent, implied discipline that would rule the North American producers in terms of why they’d adhere to the production discipline in the Preliminary Specification. I don’t expect the current bunch to make this transition, I’m on the record as saying they’re terminal, we are using disintermediation and creative destruction to shorten their usable, miserable lives. The corporate objective of profitability has other benefits that we’ll talk about on Friday, and why everyone, not just shareholders should be interested and motivated by this one simple corporate objective.

Throughout this Price Maker vs. Price Taker series I’ll be recreating the following graph which spells out one thing. Oil and gas commodities are price makers. Source @SoberLook

Any arguments on that point are now moot, in my opinion.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Price Maker vs. Price Taker, Part I

The following graph spells out one thing. Oil and gas commodities are price makers. Source @SoberLook

Any arguments on that point are now moot, in my opinion. The definition of price maker and of price taker are provided at the links by Investopedia. Further analysis of why there are no substitutes for oil and gas, please review our White Paper.

The Preliminary Specifications decentralized production models key feature is its price maker strategy. Shifting the current industry belief that oil and gas commodities are price takers to the appropriate footing of price makers. This graph shows that the more oil production that came onto the market the more value eroded from the industry due to the chronic overproduction and oversupply. Fundamentally destroying the prices of oil and gas, and subsequently the producers themselves. If these commodities were price takers, then in this situation the increased production volumes would have had no effect on the price of the product. Whereas one of the characteristics of price makers sees significant price responses to small increases or decreases in production. The bureaucrats misguided belief that oil and gas are price takers is systemic and unanimous in the industry, and is clearly incorrect. The only method to resolve the situation is the industry wide implementation of the Preliminary Specification in order that our decentralized production models price maker strategy can take effect throughout.

One of the first requirements we do in the implementation of the Preliminary Specification is to move the accounting focus away from the corporate model as we describe it, to the Joint Operating Committee. Then each property can begin to have their own financial statements prepared to find out if it is profitable in the real sense of the word. Accurately measuring the timing of capital costs, royalties, operating costs and actual overhead incurred to ensure that the performance of the property is providing incremental value to the corporations that own them. This requires in addition to changing the recognition of depletion to the property level or Joint Operating Committee for each producer, overhead will need to be charged directly to the individual Joint Operating Committees. These are the two critical changes that are made in the Preliminary Specification in comparison to today’s accounting. First we’ll need to have People, Ideas & Objects software define and support an alternative industry and producer organizational structure. One where the administrative and accounting resources are reallocated from the individual producer firms to the service providers that are established through the Preliminary Specification. Through the reorganization of the industry our user communities service provider organizations will be providing their process management service to the entire industry for the specific process or subprocess they manage. It is in that way that they’ll attain high levels of specialization of that process and the division of labor will be distributed over the approximate 3 thousand service providers that People, Ideas & Objects expects will be needed to cover off the full scope of administration and accounting of the oil and gas industry. Actual overhead of each of the properties will therefore be known based on the actual detailed accounting at each property. Overhead charges which will consist of the billings of each of the service providers who provided their process management to that Joint Operating Committee that month. Producers will no longer allocate direct overhead costs to the corporation with the subsequent capitalization of approximately 85% of those costs to property, plant and equipment. The same will be the case for overhead allowances to the Joint Operating Committee, they will be replaced by the actual direct overhead charged to the individual Joint Operating Committee.

The most immediate direct change as a result of managing overhead costs in this manner will be the benefit to the producers cash management. Ensuring the cash that was incurred to fund each month's overhead, which is up to 20% of revenue throughout the industry, is returned to the producer by way of the oil and gas prices they charge the consumers of their products. Creating a monthly float of cash being cycled each month to pay the firms overhead for the next month. This is the primary reason that cash and working capital continues to escape the producers grasp. Currently their capitalization of overhead policy has the majority of these costs capitalized. These costs are then depleted over the next number of decades providing the return of a small fraction of the cash that was consumed in overhead each month. As we now know this system only worked when there were investors ready and willing to recharge the spending machine each month. Either way it is foolish to manage an enterprise in this manner and the need for change is hypercritical. The inability of bureaucrats however, to absorb the facts contained in the Preliminary Specification have been well documented since it was published in December 2013. Six months before the oil price broke down in similar fashion to the way that natural gas did five years earlier. Note this return of cash will only occur if there is an accurate costing of the oil and gas commodities produced, that producers impose the inherent production discipline we’ll discuss on Wednesday, and therefore only profitable operations are undertaken. In essence invoking the price maker strategy of the decentralized production model within the Preliminary Specification.

The Preliminary Specification, our user community and service providers provide for a dynamic, innovative, accountable and profitable oil and gas industry with the most profitable means of oil and gas operations. Setting the foundation for profitable North American energy independence. People, Ideas & Objects have published a white paper “Profitable, North American Energy Independence -- Through the Commercialization of Shale.” that captures the vision of the Preliminary Specification and our actions. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don’t forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Oil and Gas Pricing

With the Preliminary Specification, our user community and the service provider's operational in the oil and gas industry. Pricing of the commodities of oil and gas will be different than what is currently occurring in today’s marketplace. People, Ideas & Objects provide oil and gas producers with the most profitable means of oil and gas operations. On the issue of pricing we ensure this profitability through two key differences in the way we operate the industry. The first is we enable the producer to use the “price maker” strategy of our decentralized production model. Secondly we include all of the costs of production in the determination of the commodity prices. Capital, royalties, operating and overhead. Not just the royalties and operating costs to calculate the margins as is done today. It is these differences that enable us to make the claim that we provide over $45 trillion (thats correct with a T) in incremental value with our value proposition over the next 25 years. This post will detail how we earn that difference.

There are a number of fundamental changes that occur when the Preliminary Specification is implemented into the industry. The producer firm is organized to focus on their competitive advantages of their earth science and engineering capabilities, and their land and asset base. We do this by stripping out the administrative and accounting resources of the producer firm and establishing service providers who are focused on a single process and use the entire industry as their client base. The service providers are in turn able to focus on their competitive advantages of specialization, the division of labor, automation and making the computers work for us, as opposed to the other way around. This reorganization of the industry opens up many opportunities and enhancements to the way that the producer operates through the Preliminary Specification. The decentralized production model is one area where our value proposition is affected greatly.

With this industry configuration in place, it provides the ability for each property to determine the actual cost of operations. The costs will include the capital, royalty, operations and overhead that is incurred in that property. Overheads are incurred by the Joint Operating Committee, not the producer firm. The overhead is incurred by the service providers who will conduct their services when they receive an activity from the property that starts their work, and subsequently issues their billing. For example, when there is production, the revenue accounting service provider will conduct their process in accordance with the needs of the producer, and then issue their billing to the Joint Operating Committee for revenue accounting services for that property. If the property is shut-in, then none of the service providers are receiving any information from the “task and transfer” network and no work is conducted by any of the service providers. Creating a null operation; no operating costs, royalties or overhead are incurred during times when a property is shut-in. Only the cost of capital is uncovered. This increases the overall profit of the producer as it is assumed that the only reason the property was shut-in was that it was not producing a profit.

If each producer produced only profitable properties in this manner then they would only have properties that were profitable. ;) Their shut-in inventory would provide them with ample opportunities to innovate in an attempt to bring those properties back into production. On an industry wide basis the marginal cost of production would be determined. And the commodities prices would find their equilibrium. In the case of natural gas this would be at least double and maybe triple the price of natural gas in North America. On oil it would have a significant impact as well. This would not only make the producer profitable in the current environment, it would reduce their capital costs of the property by reducing the amount of losses that have to be recovered tomorrow on properties that are losing money today. We have valued this price making capability from our decentralized production model at $5.7 trillion over the next 25 years in our value proposition.

The other critical aspect of our Preliminary Specification that provides the dynamic, innovative and profitable oil and gas producer with our significant value proposition is the manner in which we calculate the costs of the property. It is our assertion that the producers are being misguided by the SEC and accounting firms in their use of full cost and successful efforts. They are essentially bloating the balance sheets of all producers by implementing these accounting policies. Even with these poor prices the producers are able to report profits on operations because they include none of the costs of capital in their calculations. In determining prices we will use a more appropriate means to recognize the cost of capital in the pricing mechanisms used by producers. Then they will be able to capture these values in their price making strategies and recover their costs of capital for their investors.

Just because the industry is reporting accounting profits and stock traders are claiming to have made money, does not mean that oil and gas is a healthy industry. There is a difference between the two of these domains. The business of making money in oil and gas has been fundamentally flawed since the accountants implemented their accounting voodoo many years ago. Never recognizing the full cost of capital in a business is foolish and the investors in the business itself have been made to pay as a result. Until we include a capital allocation, on a reasonable basis, in determining the commodities pricing, this business will not be able to provide an investor with a return on their investment. It is stated that the industry requires $40 trillion in investment in the next 20 years. Where is this money coming from when all you have are accounting profits. With producers sitting on big, fat, bloated balance sheets holding onto capital costs that never see the income statement. Sure I’ll volunteer my capital, let me put my money down, where do I sign up. With the Preliminary Specifications decentralized production model. The capital costs are considered and included in determining the commodity prices. Therefore the capital is being returned to the investors in the long term. The other $40 trillion in our value proposition. Today the bureaucrats say the investments are a sunk cost, and they don't consider sunk costs in their decisions. I suggest we don't consider bureaucrats in ours.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative, profitable and successful means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

It's Time For Change

People, Ideas & Objects is looking forwards to a very active year in 2015. With the decline in the oil prices in the last quarter of 2014. And the further decline in natural gas prices in the month of December, our time has come. The Preliminary Specification decentralized production model deals specifically with the commodity prices and enables the producers to enact “price maker” strategies. Nothing could be more timely. But its not just the decentralized production model that we provide as solutions for the industry. By using the Joint Operating Committee as the key organizational construct of the dynamic, innovative and profitable oil and gas producer. We are able to provide solutions to the current and future issues and opportunities of the producers administrative, accounting and operational domains. That is the real value of the Preliminary Specification, beyond how it resolves today’s problems.

However today’s problems are problematic for all producers. Year end has now begun for the majority of producers based on the oil and gas prices that were in play at the end of the year. Operational losses of material scope will be announced in the next few months. Additional write downs of assets to the commodity prices will also be carried out by the audit firms. This is perceived by many in the industry as being of a non cash item and therefore not of concern. Producers would be wise to remember that this was your investors money and is evidence that it is worth less than what it was when it was given to you. I expect to see a bloodbath.

Its not that there has been any real discussion of the issue of how the industry will deal with low commodity prices. Any strategic or tactical plans, or any discussion at all, appears to be missing from the discussion of lower oil and gas prices. CEO’s and CFO’s seem to have their heads firmly placed in the sand and are unavailable for comment. In consideration of their situation, its not that they can do anything about it. Their business model is completely inflexible in terms of its operating strategy and full production is the only methodology. Their only alternative was to talk to me and adopt the Preliminary Specification with its decentralized production model as an alternative operating model.

That was yesterday. Review of this blog’s calendar feature shows that we began writing this in late 2005. We published the proposal for the Preliminary Research Report which offered to research the idea of using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer in August of 2003. If you look at anyone of the entries in this blog it is regarding how we can build systems for oil and gas based on the Joint Operating Committee. At anytime during this eleven and half years you would have thought this research and discussion would have obtained an audience. I can tell you that it certainly has. And the bureaucracy has engaged me at every opportunity that they could. The highlights were on three occasions where they hired three other groups in attempts to steal the Intellectual Property that makes up either the Preliminary Specification or earlier work. This was, in my opinion, so that they could lay claim to it and shut it down, not to use it for its appropriate purpose of building something constructive.

It has been throughout this past decade that there has been a theme in all of my writing. That is that all economic growth can be attributed to enhanced organization through specialization and the division of labor. Our society today requires software to define and support any enhanced version of specialization and division of labor. People, Ideas & Objects software and our software development capabilities are therefore critical capabilities of the oil and gas industries future growth. Some of these attributes were discovered in the Preliminary Research Report and published in May 2004. The bureaucracy have twisted this to their benefit by never acting to change their systems, therefore their franchise will never be challenged. Understanding that economic benefits were at stake their franchise was more important. This was in addition to the value that was available from the decentralized production model in the last five years from low natural gas prices. The bureaucracy therefore can not be trusted. They have refused to deal with me and therefore have proven unable and unwilling to use these tools to the betterment of society. Now with losses growing in a material way its time for change and I am unwilling to work with them.

Did Steve Jobs need the assistance of the record store managers in the development of iTunes? He offered a clear alternative without the legacy constraints of the past. I don't want to compromise with the bureaucracy on their legacy needs and losing ways. We offer a viable alternative with the Preliminary Specification, our software development capability, our user community and service providers. This is a remove and replace strategy based on the greater force of economic change, creative destruction. The bureaucracy have begun their role in this process, its time the investors find the will to step up and direct the payments be made to us to begin these developments and for us to begin our work.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

What is the Long Term Outlook for Commodity Prices?

Oil and gas commodity prices continue to disappoint those within the industry. What we have currently is a situation where prices are depressed on both sides of the business. Creating difficulties for the North American producers. It has traditionally been the case that either oil or gas have been healthy enough to carry the other side of the business in terms of financial performance. It has been very rare that both sides are suffering at the same time as they are now.

Natural gas prices have declined and found a new pricing structure around 20 to 1 in terms of its valuation to oil. This is as a result of the shale gas production that began in 2008 and has flooded the market with almost 38 bcf / day in current production. That’s just in six years. Producers continue to develop the shale gas fields, and with their prolific production flood the market with new sources of natural gas. We should expect that this increase in shale gas production to continue as there has been no characteristic change in the behavior of the producers.

Oil prices began to decline in the summer as a result of Opec not wishing to continue to be subject to the loss of indirect market share from the U.S. shale oil producers. Saudi Arabia began to identify the U.S. specifically as the issue in terms of their justification for continued over production. If the U.S. shale producers can produce unprofitably at capacity, so can Opec.

So now we have a situation where the U.S. producers will see their fourth quarter financial results showing losses on all of their operations. The response to this situation by the bureaucrats that operate the producers is the classic shrug. Who is going to do anything about it. And they're right, without People, Ideas & Objects, the user community and the service providers the investors in the industry would have to sit and listen to this garbage.

If we advance this oil and gas pricing scenario forward any material amount of time, what happens? On the natural gas pricing side of the business the bureaucrats were granted their prayers with a cold winter in 2013 / 2014 that caused the prices to perk up a bit. However the shale gas producers have been able to reestablish those storage volumes during the 2014 summer season and now are producing more than ever. Assuming we get through the winter with a balanced supply and demand situation what will happen when the storage volumes don’t require the rebuilding that they traditionally need and the market is well supplied? Will the natural gas prices find a new market pricing structure around 35 to 1? What is the long term outcome of the natural gas producers strategy of producing at 100% capacity?

Pushing forward the oil and gas pricing scenario on the oil side sees a similar outcome. Recently the producers were found to be stating that they could continue to produce at much lower prices in the face of stiff Saudi opposition. Such is the need of the bureaucrat to ensure that they are seen as superior. Maybe I should have more respect for our potential customers as opposed to calling them fools and foolish. But they are fools for thinking that they can sit there and taunt the Saudis by saying they can make money at lower prices. The only people you are scaring are your investors. They have seen this behavior before when the natural gas business went under, they don't want to see the oil business go the same direction. The point being that continuing to lose money on production when you are producing at capacity is a fools game.

In both the oil and gas situation the market looks like more of the same to me. And the bureaucrats think that the situation is too difficult to change so they will remain in the position of power for the foreseeable future. Certainly long enough to complete that expansion on the cottage. “So why bother with anything, its not our money, lets just keep the show moving.”

This is why the investors need to read the Preliminary Specification. Become familiar with the user community and the service providers. They should be particularly interested in our value proposition and how we provide the oil and gas producer with the most profitable means of oil and gas operations.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

Challenging Industries Pricing Assumptions

In today’s post I want to take one of the assumptions that industry is operating on and challenge it in terms of whether or not that really is the method that they want to operate the industry. The assumption is that the producers need $6.70 / mmbtu for their natural gas in order for them to be profitable. It is this assumption that we have also used in determining that the decentralized production model would provide the $700+ billion in opportunity costs to the industry. It is the calculation of $6.70 that may be incorrect in that it provides an average across the industry. Where the conventional gas profits, which would be substantial at that price, more than offset the losses in the unconventional areas. This I think is the inappropriate manner in which to operate the industry. Under this scenario, the unconventional gas should remain shut-in until the prices realized in the marketplace are adequate to produce a profit on the unconventional gas production as well.

This change would introduce much higher gas prices and higher opportunity costs for industry than what we have calculated before. Some may feel that People, Ideas & Objects are just looking to accelerate our value proposition by pumping up the value of the industries opportunity costs. The effect of this change could be in the order of three or more dollars in the price of natural gas and a doubling of our opportunity costs. The focus should not be on whether the oil and gas producer is profitable as a whole, it should be on the profitability of each individual property. If the property is producing, that imputes that it’s profitable. And that the producer is only producing profitable properties. Not that the producer is producing a mix of profitable and unprofitable properties, but on a whole is still marginally profitable. That is not the production discipline that we are seeking to instill in the producer firms.

The current high throughput production model rewards the producer with the highest production output that they can attain. That is why there is so much emphasis on the producers boe / day by the investors. The higher the production output the lower the costs of the overhead per barrel of oil. However, that metric no longer applies in the decentralized production model. If your producer firm is capable of 100,000 barrels / day of production. Your overhead per barrel of oil is $x.xx / bbl of oil whether your yield is 20,000 or 80,000 barrels on a given day. The fact that you are profitable at either 20,000 or 80,000 barrels per day is the point that needs to be considered. It is far more important to produce only profitable production as the criteria of concern rather than the overhead per barrel of oil in the high throughput production model. Investors will adjust to this new model and begin to recognize and appreciate the production discipline that profitable producers implement.

Holding properties off of the market will become the common sense thing to do in the oil and gas marketplace. Since there will be no charge for operations, royalties or overhead in the decentralized production model. The shut-in property will record a null operation and will not influence the companies financial performance in the quarterly financials. Whereas by producing the property today has a negative effect or drag on the performance of the firm. The point of this blog post is that in order for the industry to be at full natural gas production will require the industry to realize much higher prices than the $6.70 that is currently assumed by the marketplace. To cover the costs of the unconventional gas production the price may have to breach $10.00.

If we attain $10.00 on all of the gas that is produced in the North American marketplace the opportunity costs as a result of the move to People, Ideas & Objects decentralized production model, moves well into the multi trillion dollar values for the decade 2009 to 2019. Producers have a choice. They can continue to develop the shale gas reserves with no hope of ever making a profit. Or adopt People, Ideas & Objects and earn the profits that the investors demand of the industry. It’s their choice.

The Preliminary Specification and user community provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

So Much For Cold Winters

Natural gas prices have to be disappointing for those who were hoping for an end to the low prices that have been realized for the last number of years. Pricing has continued to erode over the summer as storage volumes have been rebuilt from the very cold winter that we had. We are well over the 2 tcf, or half of our storage capacity with approximately 2 and a half months left of storage build remaining. What is clear is that shale gas production volumes are able to deal with the coldest of winters no matter what the damage our winters make to the storage volumes.

And so it will be that we will see low natural gas prices push producers profits further into the abyss of unprofitability. If producers claim that they need $6.70 to be profitable, sub $4.00 pricing shows the extent of the difficulty. If only there was another way! But there is and we all know it as the Preliminary Specifications decentralized production model. As we pointed out a few months ago. The decline in storage volumes to well under 1 tcf was an opportunity for the producers to establish their control of the natural gas pricing and implement the kind of price maker strategy that the decentralized production model provides. Our very good friends, the bureaucrats, are unable to do this due to the fact that they are leaderless and incapable of change. Therefore they continue to produce at full capacity and this opportunity to become price makers passes without a note or a shrug.

A simple 18% reduction in production would have caused no increase in storage volumes to occur during this past summer. Sending a signal to the marketplace that the producers were not going to accept the prices that were being offered. Then as prices rose, those producers who could have produced profitably at the higher prices would bring their production back on and the price and markets would stabilize. This might have been able to have been achieved in as a little as one or two quarters. However, the only leadership that is being demonstrated by the bureaucracy is their over the top response to People, Ideas & Objects.

The natural gas business has been endowed with an unbelieveable grant of good fortune in terms of the shale gas reserves. The bureaucracy feels that these can be produced at a loss in their uncaring and unthinking manner. As long as they have cash flow they will continue to be in control of the industry. The shuffle of money can continue for the life of these reserves and then we can all look back and ask ourselves what otherwise could have been. Or we can get rid of these bureaucrats and replace them with the People, Ideas & Objects software, the user community, service providers and app marketplace that we are discussing here. All of these people are focused on providing the oil and gas producer with the most profitable means of oil and gas operations. The evidence of these facts are the prayers for a cold winter expressed last year by these bureaucrats, their inability to exercise any changes this summer to change the production profile and enhance prices, and the complete lack of discussion of the natural gas prices as an issue within the industry.

Its a 9 - 5 industry, you go in, pick up a paycheck, some benefits, a pension, loads of paid vacation and really no one asks much about what you did or are doing. Its a bureaucratic machine that drones on without anyone asking or caring about anything other than “me.” The only way in which to change this is to offer an alternative. One in which People, Ideas & Objects is preparing now. One in which the industry will be asked to support financially in January 2017 so that we can proceed with the developments. If you like what you see and are happy with this poor performance then you'll know to do nothing, if your unhappy then you’ll want to contact me and participate in these developments and provide the oil and gas producers with the most profitable means of oil and gas operations.

The Preliminary Specification and user community provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

A Different Tactical Approach

We see in the natural gas storage volumes a rebound forming from last winters significant drawdown. Due to much prayed for cold winter. Natural gas storage volumes were drawn down substantially and were the primary reason for the increases in the natural gas prices. Prices remain higher than they were last year as the storage volumes remain below their five year average. However their trajectory appear to be putting the North American storage volumes on target to breach above their five year averages sometime this summer or fall. A complete reversal of the situation. This is as a result of the enhanced prices that are still being realized, the production that has come on stream as a result of the higher prices and the prolific nature of the shale gas reserves.

I would propose an alternative tactical approach be taken by the oil and gas producers. If the Preliminary Specification and decentralized production model were the business models that were operational in the industry. This drawdown in the natural gas storage facilities would be the opportune time in which the producers could establish control of the natural gas prices and become the price makers that the decentralized production model enables them to be. By removing the unprofitable production from the marketplace at this time the buildup in the natural gas storage would lead to higher prices at a much more rapid pace. Now would be the time to implement the decentralized production model and establish the price maker strategy that the producers would have under the business models available with the Preliminary Specification.

What we have learned however is that bureaucracies don't change. They certainly won’t come within a million miles of People, Ideas & Objects or its Preliminary Specification. We have also documented the accounting and logistical difficulties that the bureaucracy would have in trying to conduct a reduction in G&A costs. And that volunteering for any work is counter to the best interests of the atypical bureaucrat. So instead they will continue to produce at capacity until the natural gas prices collapses some time in August or September and in the mean time practice that deer in the headlights look in the mirror.

Being profitable is for fools anyways. The oil and gas industry has cash flow. The practice is you report the cash coming in and don't say anything about the commitments or the flows going out. And it seems that everyone buys it. The only thing you have to do is be able to stand up during annual report season and have a “plan” that sounds reasonable for the next year. And you're good. Party on till next year. This is how its done in the oil and gas industry. So instead of thinking about a different way to deal with the natural gas storage volumes, forget about it. Thinking hurts don't you know. Just go with the flow and don’t say anything that upsets the show.

And another year of shale gas reserves are wasted in a long procession of wasted shale gas reserves. It is the investors money, and there are a lot of them remember. So we should not worry about it. The inertia that is behind this continuous waste of resources is quite surprising. With $705 billion in opportunity costs for the decade of not using the decentralized production model. You would think that there would be adequate motivation for the bureaucracy to do something about it. But after almost four years of expressing the value of this model, the only interest generated by the bureaucracy is to take the Intellectual Property. And we know that the taking of the IP was not to develop the idea it was only so that it could be proven to be unworkable.

One day we will have put together our user community and presented it to the investors as a viable solution to the issues that we are discussing here today. And the investors can choose which form of administration they want, the bureaucracy or People, Ideas & Objects with its Preliminary Specification, the user community and the service providers that offer a better way to administer the oil and gas industry. And we can be done with these foolish ways of losing money.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.

Plans, Hopes and Prayers

What we have seen in the past few weeks is the absolute failure of the bureaucracies strategy of “hoping and praying for a cold winter.” We all know this has been their key point to building value in the industry for the past two years. And when we had the cold winter it certainly seemed like the need for the Preliminary Specification tanked with the temperature. Why would you need the Preliminary Specification when the natural gas prices had returned to the point where producers could earn a profit? Well you wouldn't necessarily, other than for the many other reasons it provides. But in terms of the decentralized production model the value of that model would be diminished in an environment where higher natural gas prices existed.

In January and February of 2014, all was well as the temperature of the continent was icy cold and forecast to continue. What the bureaucracy didn’t understand is that the prices are also determined by supply and a large part of the supply is from shale gas. And there is no end to the shale gas reserves. Certainly one winter is not going to affect the supply of shale gas reserves in the North American marketplace.

Now prices have reached a point where they were for the last five years on average. That’s surprising! So what has really happened here is that the bureaucracies strategy of hoping and praying for a cold winter is nothing but a pile of you know what. It is, and always was, bubble gum for the masses. They never really had a plan for how they are going to run the industry. They're just hoping and praying for things to get better. They haven't a clue.

I suspect that the natural gas marketplace is going to figure this out pretty soon. And when it does the floor on pricing is going to drop out from under our good friends the bureaucrats and leave them with a price that is truly jaw dropping. That’s what markets do to the unprepared. They punish them. Continued overproduction is a systemic problem that is in the bureaucrats DNA. They can not do anything about it. If they could, would they be hoping and praying for a cold winter?

Expect to see some grand strategy being formulated by the powers that be that will address the business model coming out of central command. Some industry wide initiative that is systems oriented to deal with the problem. And yes it will violate our copyright in some form. But its the only chance they have to baffle the brains of anyone who might still happen to be listening to them.

The fact of the matter is that natural gas prices are destined to stay well below their marginal costs until the industry puts in place a business model that can address the needs of shale gas. The Preliminary Specification with the decentralized production model does that. The other attribute of the model is that it eliminates the bureaucracy in the oil and gas industry. Which at this point is not just a good thing, its a great thing. This past season has shown they don't have a plan for how they'll manage the industry. Its now they don't even have a hope and a prayer.

Winston Churchill once said that you can always count on the Americans to do the right thing. That is after they had exhausted all the other possibilities. Now that they have no plans, hopes or prayers. Maybe they will do the right thing and build the Preliminary Specification.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

One Implication of the Decentralized Production Model

We saw last week Canadian Natural Resources Ltd purchase the conventional assets of Devon Energy Ltd for $2.6 billion. I wonder if CNRL knows something about conventional gas assets that Devon doesn’t. Like what the implications are for implementing the decentralized production model in the oil and gas industry. By doing so, conventional assets become much more valuable as a result. Making this transaction favor CNRL in the long run.

What the decentralized production model does is turn the oil and gas industry into a price maker. This leaves their history as a price taker far behind. And it does it in a way that doesn't require them to collude or break the law in any way. All they have to do is focus on profitable production. If a property doesn’t produce a profit, shut it in and try to innovate ways to bring it back on production profitably.

People, Ideas & Objects decentralized production model works by stripping the innovative producer down to the C class executives, the earth science and engineering resources, land and legal and some support staff. Reallocating the remainder of the firms resources to service providers who are focused on a process or subprocess and are using the entire industry as their client base. The service providers are then able to provide their services based on a heightened level of specialization and division of labor. Providing their services, such as lease rental payments, production, revenue or royalty accounting etc. directly to the Joint Operating Committee that incurs the service. The fee for the administration and accounting services goes directly to the Joint Operating Committee that incurs the service.

As a result when the property is shut-in there are no activities that invoke the various processes for administrative or accounting service providers to incur any of their services. And hence none of their services are charged to the Joint Operating Committee. Therefore during times of shut-in production only the costs of capital are uncovered. There will be no operation, administration or accounting charges to the Joint Operating Committee. And the property will report a null operation. No profits but also no losses. The reserves will be held for a time when they can be produced profitably and the natural gas marketplace has a floor placed on the gas price.

The net result is that the pricing model of the industry is changed to higher values to enable the profitable production. The dynamic that exists in the marketplace today is that there is enough shale gas making up the production profile that it will be more than just the swing production. It will define what the level of profitable production will be, based on shale gas costs.

Therefore the conventional gas costs, which are substantially lower, will not factor in to what the pricing model requires. They will be profitable, highly profitable at all times. This assumes that the conventional gas properties can maintain reasonable production profiles and keep their operational costs low.

The decentralized production model is a business model for the innovative oil and gas producer. It is also a new economic model for the natural gas business. One that is based on the highest cost production. As it is only that high cost production that will come on to the market when a profitable price is received. And since shale is already approximately 40% of the North American production profile. Its costs will be the determining factor to its arrival on the marketplace.

Therefore CNRL’s acquisition of conventional assets at this time may be timely if the decentralized production model becomes the business model that operates within the industry. Maybe they know something that Devon and I don't know, a guy can always dream.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here.