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Introducing the PetroTrust
A New Approach to Energy Investment
Chris Cook – International Oil Refining ConferenceTeheran
October 2008
We live in Interesting Times…..
….some say, “the end of the financial system as we know it”
If the global system of credit creation is indeed in terminal decline……
….might the solution lie in a new approach to investment?
Iran needs massive investment in energy infrastructure…..
....but the Credit Crunch has made worse the existing problem of US sanctions
The PetroTrust may help Iran in obtaining that investment….
…and the “Trust” approach could allow Iran to lead the creation of a viable alternative….
….to the “Western” model of financial capital.
How did the Banking system go wrong?
A Bank is a Credit Intermediary – or “Middleman”
BankBorrower Depositor
£ £
But it does not lend pre-existing money….
….it creates new money as interest–bearing credit….
….which is then deposited back into the system
Now, if you think about it, a bank’s true economic function….
…is to guarantee that the borrowers’ credit is good…
Interest is charged for the use of the guarantee
Bank
Interest
Borrowers
..from which Interest is paid to Depositors..
Bank
Interest
Borrowers
Depositors
Interest
..Default and Operating costs deducted...
Bank
Interest
Borrowers
Depositors
InterestCosts
..and a profit to Investors normally results
Bank
Interest
Borrowers
Depositors
InterestCosts
InvestorsInvestors
So Banks create a Pyramid of Credit, on a base of Equity
Bank Credit
BankEquity
Demand for Credit has been so high…
….that Banks began to “outsource” their guarantee to rid themselves of risk.
…and thus allow Equity to support more credit creation
Banks outsourced risk totally – through “securitising” debt and sale to investors….
…temporarily – with “Credit Derivatives” (a time-limited guarantee)….
…and partially – using credit insurance from insurers such as AIG
The Result is a bigger Credit Pyramid than Banks alone could sustain…
Investor Equity
Credit
BankEquity
…and an opaque “shadow banking system” of Investors holding “sliced and diced” risk…
Investor Equity
Credit
BankEquity
This extended Pyramid of Credit funded the “Mother of all Bubbles” in US property prices….
…and servicing this credit finally exceeded the financial capacity of the US population.
In August 2007, the Bubble started to deflate and attention turned at last to defaults …
..but by now no-one knew where the Risk lay…
Investor Equity
Credit
BankEquity
Banks started to think, “if this is what our balance sheet looks like…..”
“…what does everyone else’s look like…..?”
The problem is not shortage of money - liquidity – Central Banks can handle that….
…..it is shortage of Equity - a Solvency problem – which Central Banks cannot handle…..
Bank Equity is being eaten away by defaults….
…Investors are licking their wounds…
…and will risk no more of their Equity…
The Result?
Equity
Credit
So, Credit is becoming both scarce and expensive….
…Central Banks are irrelevant….
…and further defaults will destroy yet more Bank Equity…..
….and drain money out of the system in a “deflationary spiral”....
….leading inevitably to a Depression....
So much for the Credit Crunch problem
Clearly the solution cannot lie in creating more credit
So we will take a new approach to “Equity” investment instead.
Conventional Equity consists of shares in a Limited Company or “Corporation”….
Ownership by a Corporation is what makes the “Private Sector” Private
While the Corporation may be conventional, it is not the only enterprise model there is
While all eyes have been on Credit innovation…
…”Asset-based” finance has been developing “under the radar”….
Canadian “Income Trusts” use a Trust law framework to “unitise” gross Corporate
revenues….
Income Trust
Income Trust
CorporationCorporation
GrossRevenues
UnitInvestors
UnitInvestors
%
%
Units
Costs
Dividends?
Units are sold to risk averse investors such as pension funds…
…who consider investment less risky if they access corporate revenues…
….before the management does….
We are also seeing new asset classes such as Exchange Traded Funds (“ETF’s”)….
…“Real Estate Investment Trusts” (“REIT’s”)…
…”Hedge Funds” constituted as “Limited Partnerships”…
…and of course….”Sukuks”
In 2001 the UK introduced the Limited Liability Partnership (“LLP”) – not in fact, a “Partnership”
…but simply an infinitely flexible corporate form – an “Open” Corporate
If productive assets are held by a “Custodian”..
AssetsAssets CustodianCustodianOwnership
…Investors put in Financial Capital in money, or “money’s worth”…
AssetsAssets
Investors
CustodianOwnership
Financial Capital
…Managers put in Human Capital of time, expertise and experience....
AssetsAssets
Investors ManagersManagers
CustodianOwnership
HumanCapital
Financial Capital
…and Users pay for the use of this Capital…
AssetsAssets
Investors
UsersUsers
Payment
ManagersManagers
% %
Custodian
Use
…the result is a “Capital Partnership”
AssetsAssets
Investors
UsersUsers
ManagersManagers
Custodian
A “Capital Partnership” enables new forms of Equity…
(a) Equity Share Units - proportional (%age) ”n’ths” such as billionths.....
…..which may be bought and sold, but never redeemed, because there must always be 100%
(b) Redeemable Units – eg Kilo Watt Hours; rights to occupy 1 hectare of land for a year….
….or barrels of oil and litres of gasoline
Such Units have a value in exchange, but carry no rights to production or income over time…
They hold their value because they are asset-based on value provided by the issuer …
….rather than being deficit-based upon a claim over value issued by a Bank
Let’s have a look at how a Capital Partnership might work as a “PetroTrust”.
Example: imagine that a new refinery is needed in the Caspian region…..
We create a Refinery Trust
Refinery
Investors
Oil Suppliers
Managers
CustodianCustodian
Units % of Units
% of Units
For as long as they supply oil or management services members receive a %age of production
Investors provide development Capital by purchasing redeemable Units
Contractors may invest equipment & materials but must invest their agreed profit margin
Contractors’ costs are covered by selling Units from the “Production Pool” to financial investors
Example: imagine that a gas liquefaction plant is necessary for gas currently being flared
We create a Gas Trust
Liquefaction PlantLiquefaction Plant
Investors
Gas Pool
Managers
Custodian
Units % of Units
Units
Units are redeemable in natural gas or LNG
An “Equity share” of production goes to the Managing member
Contractors receive money, Units or both…
Investors purchase Units of the “Gas Pool” of future production
The PetroTrust ensures that Iranian assets remain in Iranian ownership and control.
…and the financial effect is that Units of production may be sold at a fixed price.…
…..resulting in Sharia’h compliant Interest-free investment.
If prices rise, Investors gain and Iran foregoes part of the profit…
..if prices fall, Iran is protected, but Investors lose – but even so, gain by lower energy costs
The outcome is to raise finance by Unitising future production, simply and flexibly…
…through new forms of “Co-ownership” Equity within a Capital Partnership framework…
…and the Pyramid of Risk is very different….
Management Equity
Investor Units
National Equity
Issues...Legal framework; Regulation; Taxation; Sharia’h Compliance; Market Infrastructure
PetroTrust potential is immense….
Iran already uses cross-border frameworks .eg NICO based in Jersey, operates in Switzerland..
PetroTrust framework allows flexible and simpler new variations of “Buyback” contracts
PetroTrust creates a simple new framework for cross-border collaboration…
eg Iranian Oil Company (UK) Ltd is a signatory to the North Sea MasterDeed framework….
….which is based on Trust, not partnership, law and is costly, complex and cumbersome
But a Caspian Master Partnership….
Assets and InfrastructureAssets and
Infrastructure
Investors
CaspianNations
Managers
Custodian
Units % of Units
Units
….creates a simple new framework for Caspian “Pools” of oil and gas production…
….which may be “Unitised” to enable necessary Caspian investment for all Caspian nations.
The PetroTrust enables a Carbon currency based upon the intrinsic value of energy…
..rather than a market in value-less Units of CO2 emissions, imposed by governments …
….and designed by the same people who brought us the Credit Crunch….
A trader’s metaphor illustrates the fundamental uselessness of a deficit-based carbon currency…
“If you want to keep a cow healthy, you don’t regulate what comes out of it……
“……you regulate what goes in….”
I believe that conditions are now right for a Carbon Currency, and “Clearing Union”
Next Steps
“You don’t know what you’ve got ‘til it’s gone”
And…you don’t know what you haven’t got ‘til you see it….
I recommend that Iran….identifies and removes any domestic obstacles to “Unitisation”
…identifies suitable schemes for “Proof of Concept” Trusts….
….and initiates a global dialogue towards a new global financial settlement – “Bretton Woods II”.
Thank You,