TOTAL is the First

TOTAL is the First

Baku, Azerbaijan, July 4


By Mahmood Khaghani for Trend

Total and the National Iranian Oil Company (NIOC) have announced the signature of a 20 year contract for the development and production of 2 billion cubic feet per day (400,000 barrels of oil equivalent per day including condensate) which comprises phase 11 of South Pars (SP11), the world's largest gas field. This gas will supply the Iranian domestic market from and this reprsents the first using the long-awaited Iranian Petroleum Contract (IPC) template.

Total will operate the SP11 project and has taken a 50.1% interest alongside the Chinese state-owned Oil and Gas Company CNPC (30%), and Petropars (19.9%), a wholly owned subsidiary of NIOC.

This is a major agreement for Total, which officially marks our return to Iran to open a new page in the history of our partnership with the country. We are proud and honored to be the first international company to sign an IPC, which offers an attractive commercial framework, following the 2015 international nuclear accord (JCPOA) and to therefore contribute to the development of relations between Europe and Iran.”

UN Support:

This agreement was finalized a few days after the UN Security Council meeting on Thursday 29th June which marked a turning point in Iran's relationship with the global community of nations. At this meeting, the US Ambassador to the United Nations Nikki Haley found herself in an impossible position diplomatically. On the one hand she announced that the US would adhere to the JCPOA deal while on the other hand when she criticised Iran's allegedly "destructive and destabilizing" actions she found herself in an awkward position of practically no support.

Meanwhile, EU Ambassador Joao Vale de Almeida and ambassadors from Russia, China, Britain, France and Germany approved Iran's adherence to the nuclear agreement while U.N. political chief Mr. Feltman told the UN Security Council that Secretary-General Antonio Guterres "is deeply encouraged by the continued commitment by all participants to the agreement," calling it "the embodiment of successful multilateral diplomacy, political will and perseverance."

Even the pro-US United Kingdom's deputy U.N. ambassador, Peter Wilson, is reported as saying that the Iran agreement represents "one of the most important diplomatic achievements in recent memory." and (in a message apparently directed at the U.S.) added that the UK encourages all parties to the agreement — "to uphold their commitments, including ensuring that the Iranian people gain further tangible benefits from sanctions relief."

EU First:

According to news agencies report in their campaign program for the German election, Chancellor Angela Merkel's conservatives no longer describe the US a "friend" but rather as Germany's "most important partner" outside of Europe. Many observers consider this significant change in rhetoric illustrates the cooling of the relationship between Berlin and Washington since President Donald Trump took office in January 2017 after accusing Merkel of "ruining" Germany with her migration policies.

Far more importantly, Trump's has repeatedly criticised Germany's trade surplus with the US and a decision to pull out of the Paris climate accord.

When Germany hosts President Trump and other leaders at a G20 summit in Hamburg later this week the response to what has become known as his 'America First' policy appears to be of "Germany and France as the Motor of Europe" who vow to "reinvigorate the friendship" between Paris and Berlin.

Bearing in mind that these two nations drove the formation of the European Union and essentially set EU policy, a significant new EU First foreign doctrine appears to be developing as a response to President Trump.

Europe returns to Iran :

However, it appears clear that this competitive 'America First' foreign policy doctrine of President Trump is running against a historical global tide now flowing towards economic cooperation. While Germany, France and Italy in particular have all engaged heavily with Iran, they have not until now had the collective political power and will of the European Union behind them.

According to TREND’s regular commentator, Chris Cook the recent election of President Macron in France, reinforced by a powerful majority for Macron's new party in the French Parliament now sees Germany and France respond to Trump in what appears to an EU First direction.

Cook suggests that it was no coincidence that the French company Total announced the day after Macron's excellent parliamentary results the agreement in principle on the long delayed proposed contract in relation to Phase 11 of the South Pars gas field in the Persian Gulf. Total's agreement has been in parallel with other recent agreements by Italy's ENI with NIOC for Kish Island gas field and another on shore upstream project.

A Turning Point:

These new agreements, which the First one concluded on July the 3rd in Tehran using the new Iran Petroleum Contract (IPC) template may come to be regarded a crucial turning point in global energy markets. Total's CEO reported to be satisfied with the new contract and Mr Cook explained that this is because the balance of risk and reward in the new Iran Petroleum Contract (IPC) has been skilfully recalibrated by Iran towards a partnership relationship with contractors.

In Mr Cook's view, by far the most important aspect of the IPC is the form of settlement by which contractors are to be paid for their services and technology. He points out that whatever the US may have agreed in principle in relation to use of the dollar clearing system, they have been quietly subverting in practice. Meanwhile, Mr Cook suggests that Iran is correct to be suspicious of the Euro, which in his opinion has been an unsustainable politically motivated project from the beginning. The Euro's fragility is illustrated by recent Italian bank failures to the extent of some €18billion which now combine with political fractures from UK Brexit to threaten the ECB system.

In Mr Cook's view by far the highest priority of EU foreign policy has been to re-base the Euro currency on Caspian hydrocarbons through making vast Euro bank loans to fund the purchase of over-priced, over-engineered and unnecessarily complex EU technology and services. The ECB's aim since the Euro's inception has long been to create a PetroEuro in the same way that the US/Saudi relationship since 1974 created the Petrodollar.

But if dollars are unavailable because of US stupidity, and the Euro should be avoided because of EU cupidity, how then may Iran settle their obligations to contractors such as Total?

Settlement in Energy

Iran pioneered the concept of settlement in energy many years ago using what became known as energy swaps firstly by exchanging gas for power with Armenia and gas for gas with the Republics of Azerbaijan and Turkmenistan and secondly through the Caspian Oil Swap where oil from the Caspian region was exchanged for oil from the Persian Gulf. Since then, many nations have followed Iran's lead even including the US and oil swaps with Mexico.

Total's South Pars 11 includes settlement through a new form of energy swap which Mr Cook terms a "Smart Energy Swap". This comprises the exchange of the use of Total's valuable technology, skills and experience (intellectual capital – referred to by ExxonMobil as the Fifth Fuel) for the use of a flow of valuable Iranian hydrocarbon energy.

As Chris Cook observes based upon his research at University College London: "there is nothing new about such Smart Energy Swaps: in 1778, the great Scottish engineer James Watt provided the use of his new steam engine to pump water from Cornish tin mines in exchange for a third of the value of the coal saved by the mine-owners. In other words, Watt did not sell his new pumps for profit to the mine owners; he supplied pumping as a service and shared in the value his intellectual capital created."

Energy Economy

The beauty of the Total smart energy swap deal according to Mr Cook is that the most difficult subject of all - pricing – becomes irrelevant. Why? As he explains : "Conventional contract pricing in US dollars for sales of energy will invariably become, over time, more advantageous for either the buyer or the seller as their economies diverge from that of the US economy." He further said: "this divergence arising from the variability of the US dollar as a pricing unit or benchmark leads to disputes at best and to the end of the contract at worst."

He went on to emphasise the crucial advantage of freedom from dollar pricing: "with a smart energy swap, sale prices and conflicts are not involved, because Iran's energy is not sold for dollars which are then paid to Total but is simply supplied as a flow of raw energy instead."

In support of the sustainability of energy swaps, he added: " moreover, Total appears to be comfortable enough with this partnership relationship to have agreed a 20 year contract term rather than the much shorter term of perhaps 5 years originally envisaged which would have limited investment and financial exposure."

Who Decides?

After the issue of pricing in the IPC, the issue of dispute resolution is probably the most contentious, and in particular what legal framework and jurisdiction should be used to resolve disputes effectively and at reasonable cost in time and resources?

It was in 2004, in the context of the oil market proposal which became known as the Kish Oil Bourse that Mr Cook innovated a new legal and neutral legal framework agreement within which economic international and commercial relationships may take place without any market participant having dominant rights over any other. Instead, the governance principle of what is known as a Nondominium agreement is that each participant shall have agreed veto rights over matters which concern him.

In his view, there is a need for a neutral and global energy/petroleum market user agreement and market-specific mediation/arbitration platform. All such concepts require prototypes and it appears to me that the Arash gas field to which Iran, Kuwait and Saudi Arabia all lay claim could be an excellent proof of concept for such a Nondominium agreement.

Energy Diplomacy

The effect of the recent assumption of power in Saudi Arabia by Mohammed Bin Salman (generally known as MBS) in what is essentially an intra-family coup is still being assessed. In many observers view, Saudi action in Yemen and recent ultimatum to Qatar constitutes the muscular show of force necessary within Saudi culture to attain power. The question now MBS has attained power is whether this young man will use it to conduct smart or dumb foreign policy.

In the brief period while new MBS appointments consolidate their positions in the Saudi hierarchy, observers like Mr. Cook believe, there is a window of opportunity for Iran to launch a constructive energy diplomacy initiative aimed at defusing the high tensions from regrettable incidents in the Persian Gulf.

Competition, Cooperation or Both?

While nations compete fiercely for valuable resources such as land, fossil fuels and water, it is increasingly the case they cooperate to conserve such resources. Such energy cooperation forms the basis for the strategic foreign policy doctrine of resource resilience using energy swaps which Minister Zangeneh during his term with Iran's 11th government referred to as energy diplomacy.

When Iran's 12th government begins its official work in few weeks' time one of the key questions is what will be its new energy diplomacy & policy?

Mr. Cook response to this question is: "my advice to Iran is to build on the innovative South Pars 11 contract by extending the underlying Danish principle of resource resilience (least resource cost) to South Pars gas production. By this I mean that the more locally that South Pars natural gas long is converted to power then the less gas is wasted by energy intensive transmission, whether domestically in Iran via pipeline or CNG, or internationally via pipeline or LNG."

He added: "a constructive – and probably unexpected - energy diplomacy proposal by Iran to Saudi Arabia and the Persian Gulf Cooperation Council would be to for an energy swap of gas for oil or oil products. So Iran would supply natural gas or even power in exchange for the crude oil which is being wasted to provide cooling at summer rates of more than 1.5 m barrels per day."

Finally, he thought China's involvement in the Total deal to be very significant: “The Total deal is essentially a proof of concept for the energy-as-a-service market paradigm of the future. We see a producer (Iran) directly connected with a consumer (China) in a partnership agreement with a service provider (Total). I advocate a framework – a Eurasian Energy Clearing Union - within which thousands of similar agreements may be conceived and implemented to mutual benefit.

So to conclude, when I asked Chris Cook for his final comment, he said: "in the same way that Iran's newly introduced smart energy contract supersedes dumb Western energy contracts, so smart Iranian energy diplomacy based on cooperation could come to supersede dumb US-led Western diplomacy based on conflict and competition."

I believe there is a window of opportunity to leave behind destructive 20th Century doctrines of energy competition whether for America First, EU First or even Iran First and to construct a new 21st Century global settlement based on networked energy cooperation - Energy First.

Mahmood Khaghani, now retired, has over 33 years of work experience at senior international positions of Iran's petroleum industry, including as the head of the Oil Ministry's Caspian Sea and Central Asia Department, as well as business development and joint ventures advisor of Iran's North Drilling Company. He was also the director for energy, minerals and environment at the ECO Secretariat in 1996-2000.

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