This document discusses the evolution of energy markets and outlines a proposal for a decentralized "Nondominium" energy market model. Key points: - It describes the evolution from physical to centralized to potentially decentralized connected energy markets. - It proposes a "Nondominium" model as a neutral cooperative framework to jointly govern and guarantee prepayment for future energy production through "energy loans", distributing risk. - This model could take politics out of energy, bring stability, and incentivize energy efficiency through an "energy dividend" paid in tradable prepayment credits rather than dollars.

1. Energy Markets & Geopolitics
University of Strathclyde
Chris Cook
28 November 2016

2. Introduction - 21st
Century problems cannot be
solved with 20th
century solutions

3. About Me
Forensic Accounting – insolvency & fraud investigation
Regulation – enterprise & markets
Market Development
Networked Market Development
Resilience

4. Resilience
Resilience – adaptability to change
Resource Resilience
Human Resilience
Financial Resilience

5. Market Paradigms
Market 1.0 – decentralised but disconnected, physical
market presence
Market 2.0 – centralised and connected, market
presence via middlemen
Market 3.0 – decentralised but connected, network
market presence

6. Reality-based Economy
Location
- three dimensional Space
Energy
- material (resources – static energy); immaterial
(dynamic/kinetic energy)
Intellect
- subjective (knowhow, know who, etc) – dies with use
- objective (data patterns & representations) - IP

7. Protocols and Instruments
Protocols
- agreements which govern relationships between
persons and allocate use value & risk
- eg companies; constitutions; mortgage loans
Instruments
- agreements which constitute tradable assets
- eg currency, debt, derivatives, shares in a joint stock
limited liability company (equity)

8. Ownership
Property
- is not an object or thing
- it is the relationship between a subject (person) and
the object of his property
- A Bundle of Rights
– Use over time
– Fruits of use (usufruct)
– Control
– Exclusion (rivalrous)

9. Oil Market Evolution
Exchanges
Physical
Middlemen Financialisation

10. NOC's and IOCs
National Oil Companies (NOCs) – public sector oil
companies controlled by nation states
International Oil Companies (IOCs) – private sector oil
companies operating for shareholder profit

11. Strategic Aims
NOCs aim for:
- stable transparent high prices
- security of demand
- resource sovereignty (ie ownership)
IOCs aim for
- ownership of reserves
- security of supply and demand
- Profit

12. NOC's and IOCs
Until 1973 vertically integrated oil market was run by
International Oil Companies (IOCs) - Seven Sisters
Since then National Oil Companies (NOCs) have
asserted increasing control
A variety of development, operating and marketing
models have been established
NOC/IOC relationship has evolved new financing and
funding models eg buybacks, production sharing

13. Other Participant - Strategic Aims
International Oil Company (IOC)
- security of supply & demand
- stability & transparency....up to a point.....
- Booking (ownership) of reserves to satisfy shareholders
Consumer
- stable transparent low pricing
- security of supply
Trader (Middleman) - stability & transparency are Death
Bank (Middleman) – asset ownership by borrowers

14. 1973 Oil Shock – price up 400%

15. Oil Market Evolution
Exchanges
Physical
Middlemen Financialisation

16. The Age of the Middleman

17. Commodity Market Stability & Transparency
Producers require stable, transparent high prices
Consumers require stable, transparent low prices
For Middlemen price stability & transparency = Death

18. Commodity Exchanges
Volatility led to price risk and to oil futures & options
contracts aimed at managing that risk
1983 - New York Mercantile Exchange (NYMEX) -
West Texas Intermediate (WTI) crude oil contract
1988 - International Petroleum Exchange - Brent
(North Sea) crude oil contract

19. End of Oil as a Commodity: Fall of Enron
NYMEX IPE

20. Commodity Funds & 'Wall Street Refiners'
Active hedge funds enabled risk friendly speculative
investors to buy & sell commodities for $ profits
Passive funds enabled risk averse investors to buy
commodities to 'hedge inflation' & avoid $ loss
Investment banks served funds & also acted as
market-makers - Wall Street Refiners

21. 2001 - End of an Era: Fall of Enron
From 1992 to 2001 Enron borrowed $8.7bn via debt
contracts disguised as prepay commodity contracts
From 1997 to 2001 over 70% of Enron's reported
operational cash flow was through prepay contracts
Enron traded fraudulently for a decade funded by
Prepay deals opaque to shareholders & creditors
US investment banks instrumental in this deception

22. End of Oil as a Commodity: Fall of Enron
Fall of
Enron

23. Oil as an Asset: 2001/2008 – Bubble & Collapse
Bubble
North Sea producers funded Dark Inventory via Prepay
Benchmark Brent/BFOE crude removed from market &
price bubble gradually inflated spiking to $147/bbl
Collapse
In 2008 crisis oil trade/flow finance dried up, killing
demand & inventory was dumped on the market
Price fell from $147/bbl in July to $35/bbl by December

24. Oil as an Asset: 2001/2008 – Bubble & Collapse
Fall of
Enron
Bubble
&
Collapse

25. Oil as an Asset: 2009 to 2014 - the Big Long
Enron-style Prepay contracts enable price support
- Producers lend oil to passive investors
- Passive investors lend dollars to producers
If Producers can support/manipulate prices by funding
inventory they will maybe for decades eg tin, copper

26. Oil as an Asset: Oil Price & QE
In 2012 I
forecast $45 to
$50 oil post QE
But end of QE
took a long time!

27. 2009 to 2014: Petrodollars funded US Shale oil

28. US Energy Security - Outcomes
History does not repeat itself, but it does rhyme
High cost shale crude oil was viable/bankable because oil
prices were supported for 5 years above $80/barrel
Demand for oil products also fell due to efficiency
Renewable energy substituted for carbon fuels
Stone Age did not end because of a shortage of stones
US oil swing producer & security of supply. At a price
Oil market price effectively capped at $60 to $70/barrel

29. 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

30. 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?

31. Is Oil Market Price Capped?
IOC 'Oil as a Commodity' transaction model squeezed
Irresistible Force of rising E & P costs squeezes NOCs
against Immovable Object of $50/$60 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
Vertically Integrate eg Saudis, Traders
Or - transform to Capital Lite 'Energy as a Service' model

32. End of the Oil Age
“The Stone Age did not end for lack of stone and the Oil
Age will not end for lack of oil” - Zaki Yamani
Affordability – austerity & automation cut purchasing power
Substitution
- renewable energy – Chilean solar now $2.4c/kWh
- Fifth Fuel/Efficiency
Declining Energy Return on Energy Invested (EROEI)

33. 2016 – Oil at a Crossroads
Fall of
Enron
Inflation Big
Long

34. Market Now
Market re-balancing takes time
Massive excess inventory – traders are not charities & are
now losing money on cargoes with nowhere to go
Massive tanker congestion

35. 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

36. Resource Resilience
Since 1980 Denmark's GDP rose 78%, while energy
use has been stable and carbon fuel use declined
How?
Mandate - minimum carbon fuel input for a given
output of electricity, heat or power
Least energy cost policy; not Least DK (or €, $, £) Cost
Massive investment in renewables, heat, energy
efficiency, transport
Outcome – decentralisation – trend to a Natural Grid

37. Resource Resilience

38. Financial Resilience
Market 2.0 - 300 year paradigm
- Debt (Banks) and Equity (Joint Stock Company)
- October 2008 came to an end
Market 3.0 - emerging networked market paradigm
- neutral, collaborative framework - Capital Partnership
- prepayment for production or use over time - Prepay

39. Application - Caspian
Caspian Nondominium
- neutral framework for Caspian energy co-operation
- Energy Pool of future production, Energy Grid,
Energy Hub /Balancing Point benchmark
Caspian energy Prepay instrument
- energy clearing union (mutual guarantee)
- direct 'energy loan' investment by energy investors,
especially energy consumers

40. Custodian
%
Investor
Platform Service
Provider
%
Platform Users
Prepay

41. Nondominium – a Platform Co-operative
Nondominium is neither an Organisation (eg Energy
Charter) nor a Trust (eg UK North Sea Master Deed)
- consists of 2 parallel collaborative agreements
Clearing Union - agreement between stakeholders jointly
- governs & guarantees prepay issuance, exchange &
return
Capital Partnership - agreement between stakeholders
individually
- governs allocation of flows of energy production

42. Nondominium – How it Works
All existing legal rights integrated in Clearing Union as
joint custodian
Production shared by nations and service providers in
accordance with project-specific agreements within
Capital Partnership framework
Balance of production available to create and issue
prepay credits to Investors
No nation or stakeholder has dominant rights
Stakeholders have agreed rights of veto

43. Nondominium – Outcomes
Neutrality
– no sharing of sovereignty as in Condominium
– takes politics out of energy
Equity – ethical sharing of risk and reward
Stability – no stakeholder has an interest in volatility
Resilience – risk is distributed
Complementary – not alternative but addition to existing
agreements eg Law of the Sea, Energy Charter

44. Prepay Instruments
Taxation

45. Energy Credit – What it is & How it Works
Promise returnable in payment for energy supplied
Issued & sold by energy producers at discount
$1.00's worth of energy sold for 80c gives absolute
return of 25%
Rate of Return - rate over time at which promise/credit
returnable to issuer in payment for energy supplied
Rate not fixed - depends on existence & amount of flow
No right to supply – accepted in payment for supply

46. Energy Loans
Energy Credit - direct investment in future energy
production or energy savings
- the earlier the investment, the greater the risk, and the
greater the discount
- return in energy: no $ paid for the use of $

47. Energy Loans – Value proposition
Producer
- sells energy forward and locks in price
- interest-free energy loan until unit returned vs supply
Consumer
- prepays for energy and locks in price
Investor
- direct 'inflation hedge' investment in energy
- Consumers buy credits from Investors at best price
below physical energy price & return vs supply

48. Fifth Fuel - Intellect
Mega Watts - generation of power/electricity
Nega Watts - generation of power/electricity savings
Energy as a Commodity

Energy is generated & sold at wholesale bid price

Energy savings are generated at the retail price

Fifth Fuel generates energy savings

49. James Watt Steam Engine
Atmospheric Engine James Watt Steam Engine

50. A 1778 Smart Energy Trade
James Watt's steam engine was much more efficient at
pumping water than Newcomen's Atmospheric Engine
James Watt agreed that he would receive one third of the
coal saved in pumping water (ie Nega Tonnes of coal)
First Smart Energy Trade – Intellectual value exchanged
for the value of carbon fuel savings
Not pumps-as-a-commodity - Pumping-as-a-Service

51. The Smart Trade
Smart Trade is exchange of intellectual value for value of
carbon fuel savings – IP/Technology carbon fuel swap
Long term funding will be through energy loans eg natural
gas loans repaid at market value of natural gas savings
Investors in energy loans – sovereign wealth funds and
reserves, pension funds

52. Proof of Concept - Re-powering
Existing 1000 MW generation 25% fuel efficiency: new
CCGT generation 60% efficiency
CCGT supplied on EPFC basis costs $550m
Fuel savings at current price gives 3.5 year payback
Smart Market proof of concept financing & funding -
Technology/Carbon Fuel Swap - CCGT-as-a-Service

54. CNG Transport-as-a-Service
Gas producers supply gas & receive %age share of
transport revenues
Manufacturers & service providers supply equipment,
vehicles, services for %share of transport revenues
Investors - buy prepay carbon fuel credits
Consumers – pay for transport use either with conventional
currency eg $ or prepay carbon fuel credits

55. Outcome - Transition through Gas
Optimal low carbon financing & funding via Energy Loan
direct investment in carbon fuel savings
Payment of subsidies through Energy Dividend of energy
credits
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

56. Energy denominated Carbon Credits
“If you wish to keep a cow healthy you don't regulate what
comes out of the cow, you regulate what goes in”

57. Energy Subsidy
Energy dividend made in energy prepay credits not
bank-issued credits
- incentive to save energy
- not inflationary
- savings may be used to invest through energy loans
- credits may be exchanged for other value

58. Outcome – Smart Market
Conventional Smart Grid involves smart management
of connected grid supply and demand
But – power dispatched using least $ cost ranking order
In a networked market of energy swaps & credits power
dispatched using least carbon fuel cost ranking order
Outcome – Smart Market

59. Outcomes
Energy standard – standard unit of energy as
benchmark for investment
Carbon Currency – denominated in energy, not $
Energy Subsidy - energy dividend of prepay units
- incentive to save energy, & exchange units for value
Energy pool fund
Green Deal – energy loans invested directly in
renewable energy and energy saving projects

60. 21st
Century solutions pre-date modern finance