COMMENT Time for G-7 to count its oil barrels
By Chris Cook
"How many divisions has the Pope?" was Josef Stalin's reaction when told that
Pope Pius XII opposed his policies.
In a recent 10-day visit to Iran, I made a presentation in relation to a new
financing approach to energy markets based on a simple but radical
partnership-based legal and financial structure or "Enterprise Model". As a
result, I subsequently met many senior officials of the highest rank.
One lesson I drew was that my hosts considered that Iran was not alone in
considering that the current rush by the Group of Seven (G-7) leading
industrialized nations to reconfigure the global financial system - they will
be at the forefront of a summit this
weekend to discuss a way out of the present financial crisis - is based on
wishful thinking at best and total delusion at worst.
The day after my departure, Iran, Qatar and Russia - which possess well over
50% of global natural gas reserves - met to discuss the future of the global
market in gas and the possibility of a "gas OPEC". Most serious commentators
regard this as impracticable for a variety of reasons, most important of which
is the role of infrastructure such as pipelines and LNG liquefaction trains -
and in particular their stupendous costs - which mandate long-term contracts.
While Iran has for some time been in favor of developing a gas equivalent to
the Organization of Petroleum Exporting Countries (OPEC), it appears that the
impetus behind the current series of meetings may well have been from Russia.
Certainly, from where Russia is sitting, the pro-US stance of new French
President Nicolas Sarkozy, combined with a German approach, which could not
exactly be said to be favorable to Russia, has for the first time brought the
EU seriously into question as a destination for gas.
Energy security - like pipelines - has two ends. Geopolitical calculations in
relation to security of supply are - in the case of Russian energy giant
Gazprom - supported by the commercial reality that having a single route to
market is never a good idea. This is particularly so when the route runs
through countries such as the Ukraine, which may be tempted or feel
economically obliged to draw on gas in transit in breach of agreements.
Whatever the facts of the matter, Russia was extremely annoyed at the extremely
negative way in which its dispute with Ukraine has been characterized in the
West, when they have been reliably delivering gas to the EU for some 40 years,
including during the Cold War.
That being so, the idea of energy cooperation between Russia and Iran,
particularly through the routing of Caspian oil and gas through Iran to the
Persian Gulf or elsewhere, appears to be far more than merely a Russian
negotiating tactic.
However, the Gas OPEC meeting in Moscow scheduled for November 18 was postponed
and some observers consider that competition between these and other leading
gas-supplier nations will render further progress impossible; indeed one of the
sticking points has been whether the proposed Gas OPEC should be based in Doha
or Moscow.
A new global market in gas
In my presentation in Tehran, I referred to the possibility of a "Caspian
Master Partnership" approach to the collaborative development of the rich
Caspian energy resources. This was received extremely well, to the extent that
I felt encouraged to submit for consideration an outline of a proposal for a
"next generation" networked global gas market architecture.
This "GasClear" proposal was based on very considerable development work I have
carried out in the past 10 years in the area where markets and the Internet
converge.
The first element of my proposal is for a global "Gas Master Partnership"
whereby an association of gas market producers would combine with an
association of gas market consumers to create a natural gas "Clearing Union"
based on "GasClear" - the generic function of gas market transaction
registration. The cartel of energy market intermediaries which currently
benefits disproportionately from oil market volatility, and which many consider
has an interest in promoting it, would participate in this gas market on terms
set not by themselves, in their own interests, but rather by producer and
consumer "end users".
The key stakeholder of such a master partnership I envisage as a neutral gas
market "custodian" entity - in which nation states are members - which in all
likelihood would be a Swiss entity. The other subscribers to the gas market
master partnership agreement would be the "Association of Associations" gas
market user group of market counter-parties, on the one hand, and a "Gas Market
Service provider" consortium on the other.
Gas unitization
The second element of my proposal is that natural gas should be "unitized",
through the simple device of the creation of "units" (in the Master
Partnership) issued by producers and redeemable in gas. It is then possible for
gas market infrastructure to be financed - or refinanced - in a way that
renders secured debt - which in any case is becoming ever more scarce -
entirely redundant.
Gas producers could, simply by selling undated gas units "forward", obtain
interest-free finance through what is essentially a (sharia compliant) loan
denominated in energy. Investors would be able to invest directly in gas, and
benefit from energy price rises, but with the knowledge that they will always
be able to redeem the units against their own energy consumption or to sell
units to other consumers, if not to investors.
The outcome of such a market would be "energy dollar" units initially based on
natural gas, but capable of being extended to other forms of energy and thereby
of becoming a global means of exchange. Such an energy dollar could come to
replace as a global reserve currency the US dollar, which is currently being
temporarily propped up by the continuing process of massive de-leveraging,
whereby dollars are necessarily required to repay dollar loans.
Clearly the prospect of holding balances of such energy dollars would be
infinitely more attractive to consumers such as China and Japan than the
prospect of accumulating still greater balances of conventional US dollars.
Bretton Woods II
The great producer nations must be looking on in amazement as the G-7 rushes to
press the "reset" button on the deficit-based financial system, thereby wiping
out trillions of dollars worth of the value that producers received in exchange
for their production.
Many months of preparation preceded the first Bretton Woods, and in the limited
time left before the final collapse of the post-Bretton Woods US dollar-based
system it should be possible for producer nations to prepare a coherent and
holistic counter-proposal for the necessary new global settlement - a successor
Bretton Woods II agreement.
The US in particular should be asked to repay its energy debt to the rest of
the world, and to do so by deploying their stupendously wasteful military
industrial complex to the peaceful - and extremely profitable - purpose of
creating and deploying the technology necessary to conserve the precious
non-renewables we still have, and to create new and renewable sources of energy
in the future - that is, a "Green New Deal", largely funded by US creditors,
and with the benefits shared equitably among nations.
In my view, John Maynard Keynes's proposal in 1944 of an "International
Clearing Union" was the correct approach. The key difference in the alternative
networked and decentralized architecture I envisage is that the "value unit"
(Keynes's "Bancor") would not be an inherently worthless "fiat" currency issued
by a global institution.
It would instead be a redeemable "energy dollar" issued by producer nations
within a networked pool of energy production and a global Master Partnership
framework agreement. Moreover, a carbon levy - essentially a mandatory, but
valuable, investment - could then fund direct investment in renewable energy
production (megawatts), and indeed even in energy savings ("negawatts").
Such an International Clearing Union architecture would be in the interests of
nations which focus on the creation of real, rather than paper, wealth, and
could lead to a market framework operating, as Muhammad Yunus of Grameen Bank
puts it, "not for loss" rather than for the profit of purely financial
intermediaries.
So, in conclusion, energy producers generally could be forgiven for asking the
question: "How many barrels has the G-7?"
Chris Cook is a former director of the International Petroleum
Exhange, he is now a strategic market consultant, entrepreneur and commentator.
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