The document discusses energy security and transitions in the global oil and gas market. It outlines some of the challenges faced by National Oil Companies (NOCs) and proposes alternative models for energy trading. Specifically, it suggests: 1. NOCs could ensure stable supply and demand by providing oil and gas as an energy service rather than a commodity. 2. This could be achieved through "energy swaps" where NOCs agree to supply a percentage of output to consumers and service providers in exchange for investment. 3. Investors could provide funding by purchasing "prepay energy credits" from NOCs, creating an alternative to debt financing. 4. This framework could minimize carbon fuel use and costs while increasing

1. Transition through Gas
NOCs and Energy Security
Chris Cook
London 16th
June 2015

2. Energy Security – Stakeholder Needs
NOCs - stable transparent pricing & security of demand
Consumers - stable transparent pricing & security of supply
IOC's – security of supply & demand: stability &
transparency....up to a point.....
Traders & Banks – stability & transparency are Death

3. Energy Security: 1945 Bitter Lake

4. Energy Security: 1973 Oil Shock – price up 400%

5. Energy Security - US Approach
US secretly agreed $12/bbl with OPEC via Shah of Iran
Outcomes:
1/ Petrodollar – US agreed with Saudi Arabia to deposit
dollar proceeds in US $ assets
2/ US got oil for T-Bills.....OPEC got blamed for high prices
3/ Alaska, North Sea, US Gulf oil viable & funded at $12bbl
4/ US/UK energy security achieved via stealth carbon tax

6. 2008 Oil Price Spike & Crash

7. Supply steady – consumption varied by <3%

8. 2009 Supercontango

9. 2009 Supercontango
Supercontango indicative of market oversupply, but rapidly
rising price simultaneously indicated market undersupply
Question. Why did prices rise rapidly in an extremely
oversupplied market?
Answer. Financial buying was opaquely supporting the oil
market price by funding oil inventory

10. High Prices – Cui Bono?
Producers

If a commodity producer can support prices then he will

Using declining Brent Complex this is easier than ever
Market support requires Capital:

Sovereign reserves or

Risk averse ('passive') investment funds
Market support requires liquidity

Central Bank Quantitative Easing (QE)

11. North Sea Benchmark – Declining Production

12. North Sea Benchmark – Brent Complex

13. Follow the Money – Oil Price & QE
I forecast
$45 to $55
oil post QE
But end of QE
took a long time!

14. Oil Price & QE Again

15. 2015 Oil Price Rebound
Brent & WTI prices hit lows of c$45/barrel by mid January
Within six weeks Brent rose 32% while US WTI rose 8%
Not physical demand by refiners: due to financial demand
Where did liquidity come from?

European Central Bank announced € QE on 22nd
January

Oil price and German Bund yields now 92% correlated
Q. Where did investment capital come from?
A. Follow the Money

16. Follow the Money – Saudi FX Reserves

17. US Oil Production

18. “History does not repeat itself, but it does rhyme”
Support of oil prices above $80/bbl for 5 years &
petrodollar funding for bank loans enabled shale oil
development
Demand for oil products also fell due to efficiency gains
particularly transport
Renewable energy substituted for carbon fuels

19. Stone Age did not end because of a shortage of stones
….and the Oil Age will not end because of a shortage of oil
US is swing producer & has security of oil supply at a price
Oil market price is now effectively capped at $60 to
$70/barrel
So NOCs must now focus on cutting costs and the
cheapest oil of all.....Negabarrels of oil savings

20. Bitter Lake to Bitter End?
US energy security through shale oil is the most significant
market event since 1945
Saudis appear to have been ejected from the US tent
US is now pivoting to the last remaining significant
reserves of undeveloped low cost oil in Iran & Iraq

21. End of the Petrodollar?
There are signs that Saudis may have begun switching
reserves to € assets & access to free € QE liquidity
Petro Euro has long been an ambition of the EU & ECB
Have Saudis switched from Petrodollar to Petro Euro?

22. Is Oil Market Capped at $60 to $70 per barrel?
IOC 'Oil as a Commodity' transaction model squeezed
Irresistible Force of rising E & P costs squeezes NOCs
against Immovable Object of $60/$70 bbl oil price cap
IOC Options
Consolidate – defers the inevitable
Switch to natural gas eg Shell
Compete for last remaining low cost oil in Iran/Iraq
Or - transform to Capital Lite 'Energy as a Service' model

23. Energy Security: 1973 Oil Shock – Price up 400%

24. Energy Security - Danish Approach
Mandatory strategic operating principle for energy policy
Least carbon fuel cost - for a given output of heat,
electricity or power, minimise carbon fuel input
Danes funded investment via high local taxation
Outcomes
Danish GDP has doubled, while energy use has been flat &
carbon fuel use has declined
Decentralised production & consumption; local heat
networks & renewables – a Natural Grid

25. Problems - NOCs and Energy as a Commodity
Existing legacy infrastructure fragmented, fragile &
often inefficient (often <20% output efficiency)
Huge carbon fuel waste between NOCs & consumers
NOCs compete for sales of energy-as-commodity

26. More NOC Problems
Intractable conflict between NOC resource sovereignty
& IOC need for reserves on balance sheet
Adversarial relationships with traders & banks
NOCs & Consumers lose from opacity & volatility
Volatility & bank capital shortage makes conventional
financing & funding increasingly difficult

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

28. Energy Swaps
NOC supplies flow of oil or natural gas to consumers
NOC agrees proportional shares of product or service
output with service providers & consumers
Balance of output is available to investors
Investment may be conventional (eg $ bank loans) or
unconventional (energy loans of prepay energy credits)

29. Oil/Product Swap
RefineryRefinery
Investors
Consumers
Service
Providers
%Prepay
Oil
NOC
Products

30. Gas/Power Swap
Generator
(eg CCGT)
Generator
(eg CCGT)
Investors
Consumers
Service
Providers
%Prepay
Gas
NOC
Power as
Service

31. Prepay Energy Credit
What it is
- promise issued by NOC in exchange for value received
- returnable in payment for NOC supply
What it is not
- Debt - no right to demand money from NOC
- Derivative – no right to demand delivery by NOC
- Equity – no ownership right in respect of NOC asset
Requires trust between NOC and Acceptor/Investor

32. Energy Loans – prepay energy credit funding
Energy Loan Proposition
- consumers pay in advance & lock in price
- NOCs obtain interest free credit & lock in price
- investors obtain energy return
- investors may pay for consumption or sell to consumers
Requirements
- physical energy market & pricing benchmark
- accounting system
- framework of trust – Guarantee Society agreement

33. Energy-as-Service – Value Propositions
NOCs & Consumers - share cost of supply infrastructure
Service Providers - receive agreed %age of revenues -
balance of revenues available to investors
Investors - buy prepay credits & so make energy loans
Consumers – pay for energy delivered using either
conventional payment or energy prepay credits

34. Example - Caspian Energy Grid – KAT Core
Turkmen Gas/
Power Hub

35. Tried & tested - Marchwood (UK) – 58% efficient CCGT

36. Tried & Tested - BritNed and NorNed HVDC Links
BritNed 260km - 600MW NorNed 580km - 600MW

37. KAT Core - Outcomes
Turkmen NOC exports power to Caspian littoral states
Energy savings fund development of infrastructure
Turkmen NOC conserves gas which is then available for
generation or export
Azerbaijan & Kazakhstan NOCs release production for export
through reduced local carbon fuel requirement
Caspian energy market & pricing benchmark
Minimise funding costs: energy loans bear no compound interest
Increased resilience - Grid also capable of carrying regional
renewable energy power & load balancing

38. Energy Security - Transition through Gas
Security of demand for NOCs
Supply of oil & gas as a service
Collaboration, stability & transparency adopted as market
standard Win/Win behaviour
Shared services, costs & risks via market framework
agreement

39. Energy Security - Transition through Gas
Optimal low carbon financing & funding via Energy Loan
direct investment in carbon fuel savings
Least carbon fuel cost principle minimises CO2 emissions:
higher the carbon fuel price, the more $ profit in saving it
Instead of oil priced in $ (or €) and gas indexed against oil,
dollars, euros & oil are priced in energy value of gas

40. Energy Security - Transition through Gas
Optimal low carbon financing & funding via Energy Loan
direct investment in carbon fuel savings
Least carbon fuel cost principle minimises CO2 emissions:
higher the carbon fuel price, the more $ profit in saving it
Instead of oil priced in $ (or €) and gas indexed against oil,
dollars, euros & oil are priced in energy value of gas

41. Beyond OPEC
OPEC has been dead and on life support for years as a
puppet of the Saudis
Global oil market pricing through Brent Complex is
completely corrupt with no replacement in sight
Dollar and euro banking systems essentially bankrupt
New multilateral global oil & gas institutions are needed to
bring together producers & consumers directly
Non-OPEC NOCs well placed to share costs of creation of
a new oil & gas market trading & funding platform