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Introducing the PetroTrust

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Presentation made in Tehran 12th October 2008 at the 2nd International Oil Refining Conference

Presentation made in Tehran 12th October 2008 at the 2nd International Oil Refining Conference

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Introducing the PetroTrust Introducing the PetroTrust Presentation Transcript

  • Introducing the PetroTrust A New Approach to Energy Investment Chris Cook – International Oil Refining Conference Teheran 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” £ £ Bank Borrower 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 Interest Bank Borrowers
  • ..from which Interest is paid to Depositors.. Interest Interest Bank Borrowers Depositors
  • ..Default and Operating costs deducted... Interest Interest Costs Bank Borrowers Depositors
  • ..and a profit to Investors normally results Interest Interest Costs Investors Bank Borrowers Depositors
  • So Banks create a Pyramid of Credit, on a base of Equity Bank Credit Bank Equity
  • 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 Bank Equity
  • … and an opaque “shadow banking system” of Investors holding “sliced and diced” risk… Investor Equity Credit Bank Equity
  • 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 Bank Equity
  • 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 Corporation Gross Revenues Unit Investors % % 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”.. Assets Custodian Ownership
  • … Investors put in Financial Capital in money, or “money’s worth”… Assets Investors Ownership Financial Capital Custodian
  • … Managers put in Human Capital of time, expertise and experience.... Assets Investors Managers Ownership Human Capital Financial Capital Custodian
  • … and Users pay for the use of this Capital… Assets Investors Users Payment Managers % % Use Custodian
  • … the result is a “Capital Partnership” Assets Investors Users Managers 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 Custodian Units % of Units % of Units Refinery Investors Oil Suppliers Managers
  • 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 Plant Custodian Units % of Units Units Investors Gas Pool Managers
  • 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 Infrastructure Caspian Nations Managers Custodian Units % of Units Units Investors
  • … .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,