Proposing a Caspian Energy Solution for oil price decline

Proposing a Caspian Energy Solution for oil price decline

By Dalga Khatinoglu

Throughout the oil and gas rich nations, which border the Caspian, there is only one subject on everyone's minds: the collapse of the oil price, and its effects.

We have seen Turkmenistan devalue its currency the manat by 19% reflecting the collapse of the troubled ruble in Russia's hard hit economy. Iran, who is the other major regional oil and gas producer, has ironically been to some extent insulated from current events by sanctions, which have meant that even if Iran could sell oil, they cannot access the proceeds.

Oil prices have plunged from above $107/barrel in June to around $50/barrel at present. The OPEC oil basket price has even faced further decline, dropping from $109/barrel in June to $46.69/barrel on Jan.6 due to a glut in markets and members' deeper discounts.
However, there is a raging debate among Iran's policy makers as to how to address the situation.

Many blame OPEC for the price collapse, and for instance the former Managing Director of an Iranian Drilling Company active in the Caspian Sea region is not alone in his suggestion that Iran should leave OPEC since continued presence serves no purpose.

Another suggested policy approach revealed by a member of the energy committee of the Iranian Parliament is the support by 40 Member of Parliament on reductions in Iranian oil exports by 25 percent during new Iranian year 1394.

The former director general at Iran's Oil Ministry Mahmood Khaghani told Trend Jan. 8 that "these kinds of ideas are doomed to failure because the reasons for the current oil market decline lie outside the control of either OPEC or Iran."

"The oil & gas market expert and commentator, Chris Cook, outlined at a major international conference in late 2011 in Tehran - after the speeches of the Secretary Generals of OPEC and the Gas Exporter's Countries Forum (GECF) - precisely how the oil market had become financially inflated through market participation by US investors.

Although many at the time were skeptical, Cook's prediction the market would inevitably collapse to and through $60/barrel, once this financial support ceased, has now come to pass.

Answering a question about the ways to resolve the energy market crisis, Iran's Oil Ministry's former high ranking official explained, "I have been a proponent of energy swaps as a means of economic exchange for a long time. For instance, during my working career at ministry of petroleum I originated concepts such as the Caspian oil swap - an exchange of oil delivered in the Caspian Sea Port of Neka for oil delivered in the Persian Gulf. Also an exchange of Iranian natural gas for Armenian power (electricity) and so on."

According to Khaghani, "there is a window of opportunity for the creation of generic Caspian energy swaps, which could form the basis of a broader regional market and energy clearing system. This could revolutionize energy financing and funding throughout the region."

Iran and Russia, most affected states

During an interview with Trend Jan. 8, the former director of International Petroleum Exchange Chris Cook agreed with Khaghani's opinion:

"I believe the current oil market collapse, which I predicted, is an opportunity, not a threat. We now see - to use the analogy of a Danish fairy tale - that the Oil Market Emperor has no Clothes. My international policy recommendation to regional producers is to enter a direct dialogue with consumer nations particularly the EU and China, to create new multilateral agreements and pricing arrangements," Cook said.

About the situation in Iran, and Russia, who is even affected more from collapsing oil prices, Cook believes that "their situation is only disastrous by reference to the US dollar, and the combination of the collapse of the price of oil and gas in increasingly strong dollars, combined with problematic access to the dollar banking system. The first recommendation is that Iran and Russia should increase domestic energy prices dramatically to the level which would maintain at (say) $120/barrel oil or its equivalent in natural gas or electricity".

Answering a question about the consequence of rising energy prices, such as a possible uprising of people, revolution and the fall of government, Cook said, "the simple solution is for Iran and Russian to establish 'Energy Treasuries' that would combine the functions of a Central Bank and Oil Ministry Treasury departments - to issue an 'energy dividend' as of right to all citizens of energy swaps or prepay credit instruments".

Why do that?

Again, strategic market consultant Cook says, "Iranians and Russians would then have the choice of continuing the enormously wasteful practices which came from cheap or free fuel, or of investing massively in a new generation of energy efficient energy infrastructure and renewable energy production. Naturally, these energy credits could also be exchanged for value not just inside Iran or Russia, but within a suitable clearing arrangement of mutual acceptance and accounting, throughout the region."

In reply to the question, "what you are suggesting is essentially to base regional exchange upon the value of energy", Cook said, "that is precisely what I am suggesting, and I believe that one or two key policy makers in Iran understand the concepts".

Regarding what the pathway to implementation might be, he explained, "in my view, the Economic Co-operation Organization (ECO) is key. There appears to be an understanding that even though there was and remains competition in relation to upstream oil and gas sales, collaboration in respect of downstream energy such as gas to power generation, and energy transmission infrastructure is essential."

Khaghani who served as the director for energy, minerals and environment at the ECO Secretariat in 1996-2000 agrees with Cook, saying that "in fact, I think that ECO, which currently led by a distinguished Azeri energy expert, is well placed to begin an initiative to explore and urgently develop - for the Caspian region initially - the necessary upstream oil and gas collaboration which the oil and gas swap concepts make possible."

The Economic Cooperation Organization (ECO), is an intergovernmental regional organization established in 1985, currently is composed of Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzistan, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan and has a total combined population of 400 million.

When asking Cook if he is in fact proposing a simple market solution, Cook said, "Indeed I am, but not quite markets as we know them. I like to say that we cannot solve 21st century problems with 20th century solutions. The irony is that my research has established that the agreements and instruments we have identified and are recommending actually pre-date existing markets by hundreds, if not thousands of years".

Edited by CN

Dalga Khatinoglu is an expert on Iran's energy sector, head of Trend Agency's Iran news service

Follow him on @dalgakhatinoglu

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