An outline of Iraq's future financing and funding options in the context of an oil market in transition

1. Iraq at the Crossroads
Chris Cook
London 25th May 2016

2. Iraq at the Crossroads
The Way Back
Euro Road or Silk Road?
The Way Forward

3. Looking Back
1973 Oil
Shock

4. 1973 Oil Shock – price up 400%

5. 1973 to 2001 – Oil as a Commodity

6. Commodity Market Stability & Transparency
Producers require stable, transparent high prices
Consumers require stable, transparent low prices
For Middlemen price stability & transparency = Death

7. Commodity Exchanges
Volatility led to price risk and to oil futures & options
contracts aimed at managing that risk
1983 - New York Mercantile Exchange (NYMEX) -
West Texas Intermediate (WTI) crude oil contract
1988 - International Petroleum Exchange - Brent
(North Sea) crude oil contract

8. Commodity Funds & 'Wall Street Refiners'
Active hedge funds enabled risk friendly speculative
investors to buy & sell commodities for $ profits
Passive funds enabled risk averse investors to buy
commodities to 'hedge inflation' & avoid $ loss
Investment banks served funds & also acted as
market-makers - Wall Street Refiners

9. 2001 - End of an Era: Fall of Enron
From 1992 to 2001 Enron borrowed $8.7bn via debt
contracts disguised as prepay commodity contracts
From 1997 to 2001 over 70% of Enron's reported
operational cash flow was through prepay contracts
Enron traded fraudulently for a decade funded by
Prepay deals opaque to shareholders & creditors
US investment banks instrumental in this deception

10. End of Oil as a Commodity: Fall of Enron
Fall of
Enron

11. Oil as an Asset: 2001/2008 – Bubble & Collapse
Bubble
North Sea producers funded Dark Inventory via Prepay
Benchmark Brent/BFOE crude removed from market &
price bubble gradually inflated spiking to $147/bbl
Collapse
In 2008 crisis oil trade/flow finance dried up, killing
demand & Dark Inventory was dumped on the
market
Price fell from $147/bbl in July to $35/bbl by December

12. Oil as an Asset: 2001/2008 – Bubble & Collapse
Fall of
Enron
Bubble &
Collapse

13. Oil as an Asset: 2009 to 2014 - the Big Long
Enron-style Prepay contracts enable price support
- Producers lend oil to passive investors
- Passive investors lend dollars to producers
If Producers can support/manipulate prices by funding
inventory they will maybe for decades eg tin, copper

14. Oil as an Asset: Oil Price & QE
In 2012 I forecast
$45 to $50 oil
post QE
But end of QE
took a long time!

15. 2009 to 2014: Petrodollars funded US Shale oil

16. 2016 – Oil at a Crossroads
Fall of
Enron
Inflation Big Long

17. Market Now
Market re-balancing takes time
Massive excess inventory – traders are not charities & are
now losing money on cargoes with nowhere to go
Massive tanker congestion

18. Market now – Massive Tanker Congestion

19. My Forecasts
My Forecast in March 2012
I forecast - based on Big Long analysis - that oil would fall
from $110/bbl then to $45 to $50/bbl when QE ended
My Forecast on 25th
May 2016
Without significant coordinated oil production cuts oil price
will collapse within Q3/Q4 2016 to test new lows
If so, what road should Iraq take?

20. EU aims to sell Iraq debt-financed European technology
thereby supporting € banking System with Petro Euros
China aims to build new Iraqi infrastructure in exchange
for oil
Neither road increases Iraqi resilience or leads to
sustainable outcomes
Euro & Silk Roads

21. The Way Forward - Peak Demand
“Stone Age did not end for lack of stones & Oil Age will not
end for lack of oil” - Yamani
Oil price cannot be maintained above c$50/ bbl due to:

Major high cost global reserves: US shale, tar sands

Falling renewable costs eg Dubai solar energy cost
fell from US 6c kWh (Dec 2014) to 3c kWh now

(Note: US 3c/kWh solar electricity out-competes oil
above $23/bbl & natural gas above $4/MMbtu )

The more expensive carbon fuels become then the
more profit there is in saving them - NegaBarrels

22. The Way Forward - Energy as a Service
Irresistible Force of rising E & P costs is squeezing IOCs
against Immovable Object of a capped oil price
IOC Options
- Consolidate – defers the inevitable
- Switch to natural gas eg Shell
- Compete for last remaining low cost oil eg in Iran/Iraq
Or - transform to ('Capital Lite') Energy as a Service

23. The Way Forward - Danish Approach
After 1973 Oil Shock Danes mandated an overarching
operating principle - Least Carbon Fuel Cost
– Minimise carbon fuel use for a given output of
heat/cooling, electricity or power
Danes funded local investment in renewable energy
production (MegaWatts) & energy savings (NegaWatts)
Danish GDP has since doubled; energy use has been flat
while carbon fuel use (& CO2 emissions) fell significantly

24. Energy as a Service – Financing & Funding
Least Carbon Fuel Cost Principle - minimise carbon fuel
system input for given electricity, heat or power output
Market Structure & Instruments

Energy Swap Funding – production sharing supply
agreements – Capital Partnership

Energy Credit Financing – risk sharing of energy
prepay credit instruments – Guarantee Society

25. Energy as a Service - Energy Swaps
Iraq supplies flow of oil in exchange for flow of products
Iraq agrees proportional shares of product or service output
with refiners (service providers)
Iraq may import/use products and/or sell rights to
production using Prepay credit instruments

26. Energy as a Service - Prepay Energy Credit
Definition of energy Prepay credit instrument
- undated promise issued in exchange for value received
- returnable in payment for energy supply
What Prepay 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

27. Energy as a Service – Energy Loans
Energy Loan – Value Proposition
- consumers may pay in advance & lock in price
- Iraq 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

28. Oil for Product Swap
RefineryRefinery
Investors
Consumers
Service
Providers
%Prepay
Oil
INOC
Products

29. Gas for Power Swap
Generator
(eg CCGT)
Generator
(eg CCGT)
Investors
Consumers
Service
Providers
%Prepay
Gas
Gas Supplier
Power as
Service

30. 1778 - the first Smart Energy Trade
Newcomen Atmospheric Engine James Watt's Condensing Boiler

31. Pumping-as-a-Service
Cornish tin mine used more efficient James Watt engine
For as long as the engine was used James Watt received
one third of the coal savings
James Watt incentivised to maintain & improve the engine
Smart Energy Trade - Technology for Carbon Fuel Savings

32. Iraq at the Crossroads
No Way Back – oil as a commodity has been killed by
oil as an asset
Euro Road & Silk Road oil as a commodity markets are
dead ends
Way Forward – Energy as a Service