Iran's energy sector at the crossroads
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Transcript of Iran's energy sector at the crossroads
Iran's Energy Sector at the Crossroads
Transition through Gas
Chris Cook
London 15th June 2015
Iran's Energy Sector at the Crossroads
Introduction – Cook's Tour
Looking Back – an oil market review
To the right, the Dollar & to the left, the Euro?
Looking Forward – a Transition though Gas?
Cook's Tour – Personal View
Fraud Investigation to Market Regulation to Market Development
1990/1996 Director, International Petroleum Exchange
1998/2001 “OilClear” - a market-based Dot Com
2000 - Blew whistle on 'micro' oil market manipulation
Cook's Tour – Personal View
June 2001 – contacted Iran Central Bank
May 2004 – Iran Oil Bourse project begins
Since 2004, a Long & Winding Road....and eight visits to one of the finest countries in the world
Some impressions along the way....
Cook's Tour of the Oil Market
1945 Bitter Lake - Saudi/US Energy Security
Energy Security: 1973 Oil Shock – price up 400%
US and Energy Security - 1973
US secretly agreed 400% oil price increase from $3 to $12/bbl with Shah of Iran & hence OPEC
Outcomes:
1/ Petrodollar – US agreed with Saudi Arabia to deposit dollar proceeds in US $ assets
2/ US got oil for T-Bills.....OPEC got blamed for high prices
3/ Alaska, North Sea, US Gulf oil viable & funded at $12bbl
4/ US/UK energy security achieved via stealth carbon tax
The Age of the Middleman
Enter the Exchanges
Volatility led to risk and formation of oil exchanges
First - New York Mercantile Exchange (NYMEX)
Then International Petroleum Exchange (IPE)
NYMEX introduced West Texas Intermediate (WTI) oil contract & IPE introduced Brent (North Sea)
US WTI Crude Oil Price History
Brent Crude Oil Price History
Enter the 'Wall Street Refiners'
In the 1990s investment banks began to take a role as financial intermediaries - “Wall Street Refiners”
They began to create new funds for risk averse 'inflation' hedgers to invest in commodity markets
Passive Investment
Exchange Traded Funds and Index Funds
Quasi-ownership not debt
Passive investors whose aim is to avoid loss rather than make profit – 'inflation hedgers'
Middlemen do not take market risk but keep credit risk & profit from trading on asymmetric information eg HFT
Passive Investment & Inflation Hedging
Speculation - putting capital at risk for transaction profit – active two way (long or short)
Producer Hedging – off-loading commodity risk in exchange for dollar risk – short only
Inflation Hedging - off-loading dollar risk for commodity risk – return OF not return ON capital – long only
Financialisation of Oil
Goldman Sachs Commodity Index fund created 1992
& marketed as 'inflation hedging'
BP & Goldman Sachs joined at the head from 1995
BP effectively controlled Brent benchmark from 2001 when Forties field was added to Brent field
Financialisation of Oil
BP (IOC) locks in oil price through forward Brent sales but refiners tend not to buy forward > 3 months
GSCI 'long-only' medium & long term buyer of Brent
GSCI fund buys & rolls over Brent futures contracts while BP sells & rolls over Brent futures contracts
Financialisation of Oil – Prepay
Introduced by Enron c1999 as ('off-balance sheet') funding invisible to investors & creditors
GSCI lent dollars interest free to BP via J Aron (Goldman Sachs trading arm)
BP lent oil to GSCI via sale & repurchase with J Aron
Financialisation & the Death of Markets
QE and 0% $ interest rates – 'buy anything but dollars'
Correlated bubbles caused by 'inflation hedgers'
Commodity prices lose touch with production, consumption & inventories
Equity prices lose touch with underlying flows of dividends and retained profits
Correlated Commodity Bubbles
Market Cardiac Arrest due to Financialisation
World Oil Markets Move Together
Macro (medium/long term) Market Manipulation
If producers can support prices they will eg tin, copper
Such 'Macro' manipulation can persist for many years
Enron-style 'Prepay' contracts eg Chesapeake Energy
Producers lend oil to passive investors
Passive Investors lend dollars to producers
Macro (medium/long term) Market Manipulation
Investment Banks intermediate producers & investors
Two tier (false) physical market Dark Inventory of oil in custody with economic value prepaid by investors Asymmetric information re inventory is profitable for privileged banks and traders
Oil Market Bubble 1.0
Bubble 1.0
North Sea Benchmark – Brent Complex
Collapse
Collapse
2008 – Peak Credit
Collapse of Lehman Brothers
Collapse of interbank trust – trade credit freezes
QE & 0% interest (ZIRP) to prevent debt deflation
Systemic solvency problem (unsustainable debt)
Credit intermediary banks systemically short of capital
Collapse – July to December 2008
Oil trade credit dries up so oil trade dries up
Oil price collapses from manipulated $147/bbl spike
Saudis cut 1.5m bpd and then in Dec 2008 OPEC announces 2m bpd cut
Makes no difference
Jan 2009 Obama ('Big Money' President) takes office
Market Price Structure
Backwardation
- current (spot) price higher than future price
- no limit to backwardation
- typical of under-supplied market
Contango
- current (spot) price lower than future price
- if contango exceeds cost of storage etc then traders buy now, sell forward & make risk-free 'arbitrage' profit
- typical of over-supplied market
2009 Supercontango
2009 Supercontango – Inflating Bubble 2.0
Supercontango
2009 Supercontango
Supercontango indicative of market oversupply, but rapidly rising price simultaneously indicated market undersupply
Question. Why did prices rise dramatically in an oversupplied market?
Answer. Financial buying was opaquely supporting the oil market price by funding oil inventory
High Prices – Cui Bono?
Producers If a commodity producer can support prices then he will Brent Complex in terminal decline makes support easy
Market support requires Capital: Sovereign reserves or Risk averse ('passive') investment funds
And liquidity Central Bank Quantitative Easing (QE)
Follow the Money: 2009 Saudi Intervention
North Sea Benchmark – Declining Production
Follow the Money – Oil Price & QE
Follow the Money – Oil Price & QE
I forecast $45 to $55oil post QE
But end of QE took a long time!
2015 Oil Price Rebound
Brent & WTI prices hit lows of c$45/barrel by mid January
Within six weeks Brent rose 32% while US WTI rose 8%
Not physical demand by refiners: due to financial demand
Question. Where did liquidity come from? 22nd January European Central Bank announced € QE Oil price and German Bund yields now 92% correlated
Question. Where did investment capital come from?
Answer. Follow the Money
Follow the Money – 2015 Saudi Intervention
US Oil Production
US Energy Security - Outcomes
History does not repeat itself, but it does rhyme High cost shale crude oil was viable/bankable because
oil prices were supported for 5 years above $80/barrel Demand for oil products also fell due to efficiency Renewable energy substituted for carbon fuels
Stone Age did not end because of a shortage of stones US oil swing producer & security of supply. At a price Oil market price effectively capped at $60 to $70/barrel
Bitter Lake to Bitter End?
US energy security through shale oil is the most significant market event since 1945
Saudis appear to have been ejected from the US tent
US is now pivoting to the last remaining significant reserves of undeveloped low cost oil in Iran & Iraq
End of the Petrodollar?
There are signs that Saudis may have begun switching reserves to € assets & access to free € QE liquidity
Petro Euro has long been an ambition of the EU & ECB
Have Saudis switched from Petrodollar to Petro Euro?
Is Oil Market Capped at $60 to $70 per barrel?
IOC 'Oil as a Commodity' transaction model squeezed Irresistible Force of rising E & P costs squeezes NOCs
against Immovable Object of $60/$70 bbl oil price cap
IOC Options Consolidate – defers the inevitable Switch to natural gas eg Shell Compete for last remaining low cost oil in Iran/Iraq
Or - transform to Capital Lite 'Energy as a Service' model
1973 Oil Shock – Price up 400%
Energy Security - Danish Approach
Mandatory overarching operating principle for energy policy
Least carbon fuel cost - for a given output of heat, electricity or power, minimise carbon fuel input
Danes funded investment via high local taxation
Outcomes
Danish GDP has doubled, while energy use has been flat & carbon fuel use has declined
Decentralised production & consumption; local heat networks & renewables – a Natural Grid
NOC Strategic Aims
NOCs aim for:
- stable transparent high prices
- security of demand
- resource sovereignty (ie ownership)
Other Participant Strategic Aims
Consumer
- stable transparent low pricing
- security of supply
IOC (Middleman)
- security of supply & demand
- stability & transparency....up to a point.....
- Booking (ownership) of reserves to satisfy shareholders
Trader (Middleman) - stability & transparency are Death
Bank (Middleman) – asset ownership by borrowers
Problems - Iran and Energy as a Commodity
Existing legacy infrastructure fragmented, fragile & often inefficient (often <20% output efficiency)
Huge carbon fuel waste between well & consumer
Iran competes within OPEC for sales of energy-as-a-commodity
More Problems
Intractable conflict between Iran resource sovereignty & IOC need for reserves on balance sheet
Adversarial relationships with traders & banks
Iran & Consumers both lose from opacity & volatility
Volatility & bank capital shortage makes conventional bank financing & funding increasingly difficult
Energy as a Service
Least Carbon Fuel Cost Principle - minimise carbon fuel system input for given electricity, heat or power output
Market Structure & Instruments Energy Swaps – production sharing supply
agreements – Capital Partnership Energy Credits – risk sharing of energy prepay credit
instruments – Guarantee Society
Energy Swaps
Iran supplies flow of oil or natural gas
Iran agrees proportional shares of product or service output with service providers & consumers
Balance of output is available to investors
Investment may be conventional (eg $/€ bank loans) or unconventional (energy loans of prepay energy credits)
Oil for Product Swap
RefineryRefinery
Investors
Consumers
Service Providers
%Prepay
Oil
NIOC
Products
Gas for Power Swap
Generator (eg CCGT)
Generator (eg CCGT)
Investors
Consumers
Service Providers
%Prepay
Gas
NIGC
Power asService
Prepay Energy Credit
What it is
- promise issued in exchange for value received
- returnable in payment for supply
What it is not
- Debt - no right to demand money
- Derivative – no right to demand delivery
- Equity – no ownership right in respect of sovereign asset
Requires trust between Promissor & Acceptor/Investor
Prepay Energy Credit funding – Energy Loans
Energy Loan – Value Proposition
- consumers may pay in advance & lock in price
- Iran obtains interest free credit & locks in price
- investors obtain return in intrinsic value of energy
- investors may use for consumption or sell to consumers
Requirements
- physical energy market & pricing benchmark
- accounting system
- framework of trust – Guarantee Society agreement
Energy-as-Service – Value Propositions
Iran & Consumers - share cost of supply infrastructure
Service Providers - receive agreed %age of revenues - balance of revenues available to investors
Investors - buy prepay credits & so make energy loans
Consumers – pay for energy delivered using either conventional payment or energy prepay credits
Example - Caspian Energy Grid – KAT Core
Turkmen Gas/ Power Hub
Tried & Tested - Marchwood (UK - 58% efficient CCGT)
Tried & Tested - BritNed and NorNed HVDC Links
BritNed 260km - 600MW NorNed 580km - 600MW
KAT Core - Outcomes
Turkmen NOC exports power to Caspian littoral states
Energy savings fund development of infrastructureTurkmen NOC conserves gas which is then available
for generation or exportAzeri & Kazakh NOCs release production for export
through reduced local carbon fuel requirement Caspian energy market & pricing benchmarkMinimise funding costs: energy loans bear no
compound interestIncrease resilience – Caspian Energy Grid also
capable of carrying regional renewable energy power & load balancing
Energy Security - Transition through Gas
Security of demand for Iran
Supply of oil & gas as a service
Collaboration, stability & transparency adopted as market standard Win/Win behaviour
Shared services, costs & risks via market framework agreement
Energy Security - Transition through Gas
Optimal low carbon financing & funding via Energy Loan direct investment in carbon fuel savings
Payment of subsidies through Energy Dividend of energy credits
Least carbon fuel cost principle minimises CO2 emissions: higher the carbon fuel price, the more $ profit in saving it
Instead of oil priced in $ (or €) and gas indexed against oil, dollars, euros & oil are priced in energy value of gas
Beyond OPEC
OPEC has been dead and on life support for years as a puppet of the Saudis
Global oil market pricing through Brent Complex is completely corrupt with no replacement in sight
Dollar and euro banking systems essentially bankrupt
New multilateral global oil & gas institutions are needed to bring together producers & consumers directly
Non-OPEC NOCs are well placed to share costs of creation of a new oil & gas market platform