A speaking engagement last week at the Caspian Oil & Gas conference in Baku, Azerbaijan was a rather surreal experience.
The taxi-drivers competing for a US$45 fare into Baku city center denied point blank the existence of an airport bus which I could see 200 meters away, and which cheerfully carried me in to Baku city center for 45 cents.
It was much the same when I recoiled from the astronomic cost of a beer in the Baku Hilton and bought a beer a few streets away at a fraction of the cost. Oil wealth lies like a financial smog on
Baku, which the friendly and engaging locals cheerfully do their best to avoid.
An initial surreal feeling grew as I passed the next day through the environmental disaster zone of the old Soviet-era oil fields north of Baku to the extraordinary Jumeirah Beach hotel at Bilgah where the conference was held amid "seven star" glitz.
From real to surreal
He who pays the piper calls the tune, and the tune was clearly called by the two principal conference sponsors, SOCAR (the State Oil Company of Azerbaijan Republic) and BP.
So we were soon hearing realpolitik from a recent UK energy minister, Charles Hendry, who as the newly appointed UK trade envoy to Azerbaijan made clear exactly how important Azerbaijan's oil and gas is to UK Incorporated. We also heard from SOCAR and BP of the colossal real world engineering feats involved in development of existing BP/SOCAR Caspian fields.
But perhaps the most extraordinary aspect of the conference was that two senior Israeli speakers outlined progress with off-shore gas discoveries in the Eastern Mediterranean. While these interesting presentations would have been welcome at the Eastern Mediterranean oil and gas conference sessions I chaired in London recently, their relevance to the Caspian was not clear to me, or to anyone else to whom I spoke.
We also heard from a senior US diplomat that while Azerbaijan was of little or no economic value to the US, the country is nevertheless the apple of Uncle Sam's eye. Clearly there was an elephant in the room I could not see.
The elephant in the room
The decision as to which Western pipeline link - Nabucco West or the Trans-Adriatic Pipeline (TAP) - will carry Caspian gas to Europe from the Turkish gas grid has been imminent for years. But there was general agreement that this time the decision really is going to be made by the end of this June.
What remains unclear is exactly whose gas will fill the pipeline in years to come. So on the one hand, when hearing the earnest speech from a Turkmen representative concerning the availability of Turkmen gas, most of the audience were undoubtedly wondering, as I was, precisely how a Trans-Caspian pipeline accessing Turkmen gas could be built except with unlikely Russian and Iranian consent.
Then on the other hand, what the urbane Iranian representative had to say fell on deaf ears as most of the audience ostentatiously checked their e-mail while knowing full well that the original purpose of Nabucco was to transport Iranian gas.
The elephant in the room - the reality ignored by all - is that any meaningful Caspian oil and gas development will require the participation of Iran.
The head of the Energy Charter organization, Urban Rusniak, made reference in his speech to the need to extend the Energy Charter protocols to cover energy efficiency. There is nothing new about this: it is central to the proposal for an Economic Co-operation Organization (ECO) Energy Accord which I discussed in Tehran with the secretary general of the Economic Co-operation Organization - Azerbaijan's Shamil Askerov - who has a professional and academic background that includes a PhD in the field of energy efficiency.
The route to energy efficiency which I advocate is to adopt the "least energy cost" Danish strategic energy policy which led to Denmark's GDP rising by 78% since 1980 while energy use stabilized and Danish carbon fuel use significantly declined.
As I outlined in my speech in May at the Iranian Petrochemical Forum, and also at last week's Baku conference, the cheapest energy of all is energy saved. So in addition to drilling "upstream" for gas and oil both Iran and Azerbaijan should therefore begin to prospect "downstream" for oil and gas savings and for the creation of resilient and energy efficient Caspian energy infrastructure.
In Scotland, groups of farmers routinely form "Machinery Ring" associations which co-operate in using farm machinery and contractors, and club together to buy fuel and insurance. Having minimized mutual costs, the farmers then compete with each other to sell their agricultural produce at the best price.
Meanwhile in the UK North Sea zone, oil and gas sector participants formed the LOGIC organization to provide a legal framework for transfers of economic interests; mutual assistance; co-operation in helicopter use; and any other services mutually agreed as being necessary.
Prior to the conference, Norway's Statoil and SOCAR announced the take up by Statoil of a license to exploit the proven Zafar-Mashal fields. These are adjacent to the Alborz field, which was hotly disputed between Iran and Azerbaijan almost 12 years ago and which has since remained untapped.
However, the Statoil representative said that progress would be held back for years by the necessity to construct semi-submersible drilling rigs, and before that could even begin in Azerbaijan, this required a construction facility similar to that at Neka, Iran.
This infrastructure could be the basis of Caspian energy co-operation between Azerbaijan and Iran which may begin to break down the long and unfortunate history of mistrust in the Caspian region.
The key is a neutral legal framework for co-operation, and a suitable instrument for the financing of development and the funding of operation of a new generation of Caspian energy infrastructure. The core of my presentations in Tehran and Baku was to outline how this may be achieved through the use of consensual agreements and prepay instruments, which pre-date modern finance
Such co-operation need not initially be in the controversial area of oil and gas, but could commence with gas power generation, transmission and distribution, through the creation of a Caspian power SuperGrid along the lines of the North Sea initiative led by Norway.
Once the uncertainty of Iran's forthcoming presidential election is over, the way is open to a constructive dialogue, between Iran and the P5+1 (the United Nations Security Council five permanent members plus Germany), at present charged with seeking a resolution of the dispute between the West and Iran over the latter's nuclear policy.
Such a new dialogue could be based upon downstream energy co-operation generally in respect of energy infrastructure such as power generation, least energy cost distribution and use, and by way of prototype, upon the development of Caspian energy infrastructure and the sharing of Caspian resources, infrastructure and facilities currently idle.
ECO's experienced and knowledgeable secretary general is well placed to work with Norway as a neutral "trusted third party" with long experience of peace negotiations to begin a transition from the current sterile adversarial dollar diplomacy to a constructive and co-operative energy diplomacy.
Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.
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