When history is written, then President Trump’s decision on 8th May to abandon the Joint Comprehensive Plan of Action (JCPOA) agreement with Iran may well be seen as a historic turning point.
In fact the origins of President Donald Trump’s aggressive stance against Iran may lie in his ‘Energy Week’ speech on June 29 which saw a historic change in U.S. foreign policy doctrine and language, when the world heard from President Trump for the first time in addition to America First, a new U.S. rhetoric of Energy Dominance.
U.S. Secretary of State Mike Pompeo on Monday, May 21, threatened to place “the strongest sanctions in history” on Iran if its government doesn’t comply with Trump Administration policies. He called for a new nuclear agreement with Iran following Trump’s withdrawal from the 2015 nuclear deal. He said that the Trump administration prefers for it to be a treaty that is ratified by the U.S. Congress.
In response, Iran’s foreign minister criticized the U.S. secretary of state, tweeting that he saw U.S. diplomacy as a “sham” that was “imprisoned by delusions & failed policies.” Minister Zarif wrote: “It repeats the same wrong choices and will thus reap the same ill rewards.”
An Iranian VIP delegation participated at the pre-eminent European annual Flame natural gas conference in Amsterdam last week, during which speakers and delegates from Mediterranean Sea to Iran, Korea to Kazakhstan (Caspian Sea) and the U.S. to Russia discussed gas market and infrastructure development while elsewhere, heads of state and diplomats were meeting to address the JCPOA fallout, called for depoliticizing the energy industry.
Energy dominance & America first
I asked Chris Cook from University College London who participated at the Flame as speaker about the U.S. new policy on Iran. He said: “I first analyzed the U.S. Energy Dominance doctrine announced by Trump on June 29, 2017 in an article published on August 2, 2017 and since then this U.S. strategy has become much clearer.”
He added: “ Firstly, the oil price has been re-inflated from around $45/bbl (Brent) & $42/bbl (WTI) to over $80/bbl & $75/bbl respectively as so-called ‘funds’ crowded in, buying over one million barrels of oil futures contracts of 1,000 barrels each. The outcome for China – who historically overtook the U.S. as the greatest global net buyer – is that they are now paying an additional $30/bbl for 8m barrels per day of imports….this represents an astonishing $250m per day or $7.5bn per month to producers, and this massive cost has recently placed China in a trade deficit for the first time.
Secondly, just weeks after Gary Cohn (the architect of Energy Dominance) and Rex Tillerson left office within a week of each other, a fundamental shift in the foundations of global markets took place, on or around April 18, 2018. At this point unprecedented changes took place in the oil market ‘curve’ (forward pricing structure) while oil and the dollar began to rise together, which is extremely unusual. Meanwhile, the currencies of many emerging and developing nations, including Iran, have fallen dramatically against the U.S. dollar.”
Oil prices and U.S. dollar?
Mr. Cook is correct since while historically, crude oil prices have had an inverse relationship with the U.S. dollar the recent trends has seen crude oil prices increasing as the U.S. dollar rallied along with it. In fact, by looking at the U.S. dollar rate against other currencies and the crude oil prices, it can be seen that the rally in crude oil prices over the last year has mostly coincided with a decline in the U.S. dollar. But, over the last six weeks, oil prices and the U.S. dollar are rallying in the same cycle: this coincidence has only occurred 11 times since 1983 and is drawing the attention of market commentators & analysts such as Mr. Cook.
Mr. Cook says: “In my analysis, this sudden shift is a result of a new direct linkage of the dollar to the oil price through opaque Enron-style tripartite ‘prepay’ funding of U.S. shale oil reserves. If I am correct (and I invite your readers to bear witness to my forecast) then when (not if) oil prices fall the U.S. dollar will fall with it.”
He continues: “In that context, I do not expect major consumer nations such as China and India to continue to accept market prices set by producers indefinitely. China launched a new physically delivered Shanghai crude oil contract on 26th March 2018 and has accumulated over 700m barrels of strategic oil reserves in the last three years. If I were in China’s position as the largest buyer of oil in the market, I would switch my purchases to Shanghai; invite producers and traders to sell priced against the benchmark contract I had created; and in the event that producers refused to sell, simply draw upon my reserves until they capitulate.”
Declaring war on Iran?
By what the U.S. foreign minister declared on 21st May there is no doubt that the U.S. Iran strategy is to weaponise the dollar by using access to the dollar clearing system to coerce compliance by any country with U.S. secondary sanctions. The effect was evident at Flame, as Total announced they could not risk sanctions, and would have to pull out of Iran’s South Pars natural gas Phase 11 project unless they receive a U.S. exemption, which U.S. foreign minister announced on May 21 that will not be granted.
Meanwhile, discussions continue at the EU Central Bank level as to how Iran may access the euro clearing system. But European companies operating internationally, particularly those who operate in the U.S., point out that simply obtaining Euro payments and finance would not resolve their problems in relation to U.S. control of a dollar system on which they largely rely, and access to U.S. markets.
Russian reaction?
Whereas the relationship between Russia and Turkey has long been strategic, Russia’s relationship with Iran has tended to be tactical, due to competition in respect of gas supply where Russia zealously protects its market in Europe. However, the recent evolution of energy markets suggests that this relationship may be changing in important respects from competition to cooperation.
Dr Ali Vakili – who recently retired from Ministry of Petroleum as a senior, highly experienced and influential Iranian energy official – was among the Iranian VIP delegation to Flame and in his first engagement since retiring as Senior Advisor to Petroleum Minister Bijan Zangeneh and Managing Director responsible for fuel efficiency together with his colleague Mahmood Khaghani outlined how Iran’s strategic energy policy has long been to use natural gas to replace petroleum products wherever possible. Statistics show that as Iran’s natural gas production has grown, it has almost entirely been used domestically, with relatively restricted exports to neighboring countries including Turkey, Armenia, and to Iraq.
As documented in the Tehran Times in the past, at a major conference in Ashgabat in December 2014, Mr. Ramazani, former Director at the NIGEC, gave an early insight into Iran’s evolving energy strategy, as he pointed out that it made more economic sense for Turkmenistan to convert gas to power locally and dispatch electricity regionally in a new High Voltage Direct Current (HVDC) Caspian Energy Grid, than to export gas thousands of kilometers into Europe, as envisaged in the U.S. & EU sponsored Southern Corridor initiative which aimed to displace Russian and Iranian gas supply.
Iran has 3.5 million cars fuelled by compressed natural gas (CNG) as well as fleets of buses and commercial vehicles. Iran has also massively increased domestic use of natural gas instead of naphtha as a petrochemical feedstock. The original Iranian rationale for domestic use of gas was national security (oil product import substitution). However, as Mr. Cook suggests: “With oil prices at current levels it now makes commercial sense for CNG vehicles to displace diesel & gasoline fuelled vehicles. In fact this point was driven home at Flame by VW’s Group Head of Strategy, Jasper Kemmeyer in his plenary presentation on VW’s strategic move into what VW call CNG Mobility.”
America first or energy first?
During a joint presentation at the Flame, Mr. Khaghani and Mr. Cook put this question at the Flame workshop. Mr. Khaghani began by outlining how during decades of high level experience in Iran’s Petroleum Ministry he had developed what became known as Iran’s energy diplomacy in the Caspian region.
In particular, he outlined innovative Iranian energy swaps, such as the Caspian Oil Swap of Turkmenistan, Russia, Kazakhstan and the Republic of Azerbaijan’s oil into North Iran for Iranian Oil delivered out of the Persian Gulf. Perhaps his proudest achievements were the supply of gas to Armenia in exchange for power to Iran, and the supply of gas to Nakhchivan which was termed Energy for Peace.
While historically producers of upstream oil and gas compete for sales, Mr. Khaghani and Mr. Cook proposed in respect of downstream heat/cooling, mobility & power that is in the interests of all to cooperate in respect of costs. They brought to the attention of the Flame participants that Western energy infrastructure and commodity markets in oil and gas which are capital intensive are now evolving into smart markets in energy services based on intellectual capital rather than finance capital.
GasCoins?
Three weeks earlier in Moscow at the invitation of Russia’s Deputy Energy Minister for Oil & Gas, H.E. Mr. Kirill Molodtsov, and Mr. Cook outlined how generic swaps of gas flow may be combined with issuance of simple credits (GasCoins) by gas producers as financing instruments returnable in payment for gas supplied.
Following an article published in Tehran Times, the GasCoin concept has attracted a great deal of attention in Iran and Mr. Cook during his presentation at the conference in Moscow fleshed out the concept by explaining how such GasCoin instruments may be practically implemented through a Gas Clearing Union (GasClear). As he explained: “This consists of suitable guarantee (Protection & Indemnity/P&I) agreements for mutual assurance of performance, so that gas producers accept each other’s’ credits, and then account to each other, with administration and risk management by a trusted service provider.”
During a conversation he said: “In this way, a GasCoin, if driven by key gas producers such as Iran and Russia through the Gas Exporting Countries Forum (GECF) could mobilize the next Energy Fintech wave of financial technology, building on the current flood of unsustainable Blockchain/Coin initiatives.”
Mr. Khaghani and Mr. Chris Cook in their joint presentation at the Flame on 15th May 2018 suggested that “such a GasClear system is complementary to the existing energy commodity market and opens the way for payments through issuance, exchange, return and settlement (‘clearing’) of energy credits. The beauty of energy credits is that they are not bound by any national government currency or unit of account e.g. $ or €.”
Mr. Cook says: “The same GasClear platform may then be used by investors and consumers to invest directly in gas supplies and even gas savings. In this system, the role of banks is transformed from capital intensive middlemen who take credit risk, to a new and smart role as a risk service provider & administrator who manages credit risk and performance.”
Gas first and the European Union?
We saw only recently how important the Nordstream 2 gas pipeline route through the Baltic Sea is to Germany and Russia, and that U.S. resistance to it is based purely upon narrow commercial considerations of export of cheap shale gas. Both Russia and Germany are well aware that even at the height of the Cold War, the USSR reliably supplied gas to Germany who equally reliably paid for it, and it is ironic that the well documented breakdowns in supply via Ukraine involve difficult and often opaque relationships between oligarchs, particularly in Ukraine.
It was also interesting to hear from officials of the EU Commission that the politically motivated Energy Union initiative originated by Donald Tusk as President of the European Council to aggregate EU energy market power to better negotiate with Russia is, in their view, completely un-implementable. However, according to Mr. Cook: “The ongoing market trend from commodity transactions to services applies as much to energy markets as to all others. I believe that there exists an opportunity to create complementary networked Energy Tech financial infrastructure – a Eurasian Energy Clearing Union – in which all regional nations may participate.”
So, Iranian VIP delegation and Caspian Energy Grid founders participated at the Flame were offered the opportunity to lead the creation of smart markets in energy – where credit is accounted in the positive value of energy rather than the negative value of debt. This enables a new pathway – through energy economics rather than dollar economics – to a Transition through Gas to a low carbon economy.
In such an energy credit clearing system, Mr. Cook says: “Banks would no longer create credit (because they are not energy producers) but may manage transparent credit creation by producers. This opens the way for the € unit of account to be fixed against an agreed amount of energy and for the Euro to explicitly follow Denmark onto an energy standard (based on provision of energy as a service).”
He suggested: “In terms of institutions, countries like Iran could create a new Energy Treasury, in which representatives of oil and energy ministries participate in overseeing issuance by energy companies, alongside representatives of Iran’s Central Bank, who could not of course issue energy credits, but whose role would be as an independent monetary authority.”
Chris Cook concluded: “The current trend which sees oil and the dollar rise together may be an anomaly and the usual relationship between oil prices and the U.S. dollar exchange rate against other currencies may shortly resume. But, if as I suspect the U.S. has essentially fixed the dollar to oil then we may expect the oil price to fall as and when U.S. dollar falls.”
First published in our partner Tehran Times
