Introducing the PetroTrust A New Approach to Energy Investment  Chris Cook – International Oil Refining Conference Teheran...
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 Fi...
… 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 In...
… .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,
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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

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Introducing the PetroTrust

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

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