Caspian Energy 3.0 - Transition through Gas

Caspian Oil & Gas 2013

Chris Cook

5th June 2013

21st Century problems cannot be solved with 20th century solutions.........

Introduction - Resilience

Resilience - the enduring power of a body or bodies for transformation, renewal and recovery through the flux of interactions and flow of events

Resource Resilience – Natural Grid

Financial Resilience – Open Capital

Resource Resilience – Natural Grid

Since 1980 Denmark's GDP rose 78%

Energy use has been stable

Carbon fuel use has declined

How did Denmark achieve this?

Resource Resilience - Natural Grid

Least Energy Cost principle

- not 'least Danish Krone cost' (or least $, € or £ cost)

- minimum carbon fuel input for a given output of electricity, heat or power

- investment in renewables, heat, transport, energy efficiency

Emerging Outcomes of Natural Grid policy

- decentralisation

- skills base of knowledge and knowhow: eg Vestas is the biggest global wind turbine manufacturer......in a country of 6m people

- trend to energy security and energy independence

- not forgetting........reduction in carbon use

Funding the Natural Grid

$ trillions required to fund transition to a Natural Grid

$ trillions in carbon fuel use is wasted

Need to drill for oil and gas savings.......

Financial Resilience – Open Capital

Market 2.0 – centralised, intermediated market paradigm

- proprietary finance capital and 'for profit' transactions

- Debt (Banks) and Equity (Joint Stock Company)

- October 2008 – the Market 2.0 paradigm broke

What Market 3.0 will replace it?

Financial Resilience – Open Capital

Market 3.0

- networked, decentralised and dis-intermediated market paradigm

- transition from intermediation to service provision

- Reason? Market risk is distributed to 'end users' & so finance capital is limited to operating costs

Financial Resilience – Open Capital

Two elements: market architecture & market instrument

Capital Partnership - neutral, collaborative framework

Prepay - prepayment for production or use over time

Application to Caspian Energy

Caspian Capital Partnership ('Nondominium')

- neutral framework for Caspian energy co-operation

- Energy Pool of future production, Gas & Power Grids, Gas Hub /Balancing Point benchmark

Caspian Prepay energy financial instrument

- energy clearing union - (mutual guarantee of issue)

- direct 'energy loan' investment by energy investors, especially gas/power consumers

Caspian Capital Partnership (Nondominium)

Stakeholders

- Custodian – Clearing Union of Littoral Nations

- Producers and Consumers – Littoral Nations

- Manager – private sector service providers

- Investor – energy funds & energy users

Custodian(Clearing Union)

%

InvestorEnergy Funds/Users

ManagerService Providers

%

Littoral Nations

Prepay

Nondominium – What it is and is not

Nondominium is neither an Organisation (eg Energy Charter) nor a Trust (eg UK North Sea Master Deed)

It is simply two parallel collaborative agreements

Clearing Union - agreement between stakeholders jointly

- governs & guarantees prepay unit issuance, exchange & return

Capital Partnership – project agreements between stakeholders individually

- governs allocation of flows of production

Nondominium – How it Works

Existing rights held by Clearing Union as joint Custodian

Production shared by nations and service providers in accordance with project-specific 'enterprise agreements' within Capital Partnership framework

Balance of production available to create and issue prepay units to Investors

No nation or stakeholder has dominant rights

Stakeholders have agreed rights of veto

Nondominium – Outcomes

Neutrality

– no sharing of sovereignty as in Condominium

– takes politics out of energy

Equity – ethical sharing of risk and reward

Stability – no stakeholder has an interest in volatility

Resilience – risk is distributed

Complementary – not alternative but addition to existing agreements eg Law of the Sea, Energy Charter

Prepay Instruments

Taxation

Energy Prepay – What it is and is not

Undated credit returnable in payment for energy supplied

Prepay credit is issued & sold by energy producers at discount

Not a futures contract: no right to demand delivery

Energy Prepay – How it Works

$1.00's worth of energy sold for 80c gives absolute return of 25%

Rate of Return - rate over time at which prepay unit returnable to issuer in payment for energy supply

Rate not fixed - depends on existence & amount of flow

No right to supply – accepted in payment for supply

Energy Loans

Prepay - direct investment in future energy production or energy savings

- the earlier the investment, the greater the risk, and the greater the discount

- return in energy: no $ paid for the use of $

Energy Loans – the Value Proposition

Producer

- sells energy forward and locks in price

- interest-free energy loan until credit returned vs supply

Consumer

- prepays for energy and locks in price

Investor

- direct 'inflation hedge' investment in energy

- Consumers buy credits from Investors at best price below physical energy price & return against supply

Generator(Iran)

Gas

InvestorEnergy Funds/Users

ManagerService Providers

% Turkmenistan

Power

Power Partnership

Power Prepay

Refinery(Turkey)

Crude Oil

InvestorEnergy Funds/Users

ManagerService Providers

% Azerbaijan

Fuel Prepay

Fuel Partnership

Fuel

Outcome – Caspian Benchmark

Balancing point pricing hub for gas and power provides spot benchmark price

Energy standard unit for Caspian energy investment

- 1 Mmbtu energy equivalent?

- 10 KwH energy equivalent?

Outcome – energy denominated Carbon currency

Outcome – new energy subsidy Policy

Energy dividend made in energy prepay units

- incentive to save energy

- energy loan investment use

- exchange units for other value

Outcome – Caspian Green Deal

Energy loans

- new renewable infrastructure: Caspian Supergrid; wind, solar, hydro

- energy efficiency: least energy cost heating, cooling, transport, spatial infrastructure

Outcome – the Transition Trade

A Big Trade of the 21st Century

Exchanging

- value of carbon fuel saved (NegaBarrels and NegaTherms)

- value of IP (knowledge) and Know How

21st Century problems cannot be solved with 20th century solutions.........

…....21st century solutions pre-date modern finance