Energy as a Service. New least resource cost energy market paradigm for the Caspian

1. Caspian Energy at the Crossroads
Energy Cooperation, Smart Markets & Transition through Gas
Bogazici University
Chris Cook &
Mahmood Khaghani
17 March 2017

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

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

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

5. Energy Economics
Location and Intellect have demand and a subjective price in
a unit of account such as $ or €
Energy cost is the only objective cost

6. Protocols and Instruments
Protocols
- agreements which govern relationships between persons
and allocate use value & risk
- eg companies; constitutions; mortgage loan agreements
Instruments
- tradeable agreements/contracts (financial assets)
- eg currency, debt, derivative, company share (equity)

7. 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

8. Trend to Services
Intermediary middlemen use finance capital to fund assets
and finance risk
– Market price risk
– Credit risk
Service providers use intellectual capital and do not own
assets or take market or credit risk
With the right business model (agreements & instruments)
service providers out-compete middlemen

9. Oil Market History
Exchanges
Physical
Middlemen
Financialisation

10. The Age of the Middleman

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

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

13. Oil as an Asset: 2001/2008 – Bubble & Collapse
Bubble
North Sea producers funded Dark Inventory with prepayment
& this removed Brent/BFOE benchmark crude oil from market
Price gradually rose & mid 2008 spiked 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 2008
In 2 years financialised oil price moved from $80 to $147 to $35 to
$80 per barrel while physical oil supply varied by 3%

14. Physical & Financial Oil Markets Compared

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

16. 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!

17. 2009 to 2014: Petrodollars funded US Shale oil

18. US Energy Security
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
US oil swing producer & security of supply. At a price
Oil market price is now effectively capped at $50 to $60/barrel

19. Bitter Lake to Bitter End?
US energy security through shale oil is the most significant
market event since Bitter Lake 1945
Saudis are now dispensable & the Petrodollar deal is over
US is now pivoting to the last remaining significant reserves of
undeveloped low cost oil in Iraq, Kurdistan

20. 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
Energy Intensity
– declining Energy Return on Energy Invested (EROEI)

21. The Aramco Question
If oil price outlook is good why would Aramco do an IPO?
Oil-as-a-Commodity market paradigm squeezes producers
Irresistible Force - rising E & P costs (EROEI)
Immovable Object - $50/$60 bbl US shale oil price cap
IOC Options
Switch to natural gas eg Shell
Compete for last remaining low cost oil in Iran/Iraq
Vertically integrate eg Saudis, oil traders
Or - transform to 'capital lite' Energy-as-a-Service paradigm

22. 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 - to a Natural Grid

23. Natural Grid - Denmark

24. 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

25. Prepay Instruments
Taxation

26. Energy Credits
An Energy Credit is a Promise issued by an energy producer in exchange for
value received and which he will accept in payment for energy production
An Energy Credit is not
Debt Contract - the holder may not demand money
Forward (Derivative) Contract– the holder may not demand delivery
Equity Share – the holder has no asset ownership or dividend
An Energy Credit holder may simply use the credit to pay for energy supplied
by the Promissor or by another energy producer who will accept it
Investors & Consumers trust producers to supply energy for which they may
pay using Energy Credits – this requires a “Trust Framework”.
Nordic Enterprise Trust has developed an “Energy Clearing Union” Trust
Framework
26

27. Energy Clearing Union
Energy producers accept each others promises/credits
in payment for energy supplied
Producer performance guaranteed through membership
of Guarantee Society (mutual assurance – P&I Club)
Issuance, risk management, dispute resolution, by a
service provider consortium

28. 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

29. 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

30. James Watt Steam Engine
Atmospheric Engine James Watt Steam Engine

31. 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

32. 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 resource 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

33. Re-powering
Existing 1000 MW generation 25% fuel efficiency: new CCGT
generation 60% efficiency
CCGT sold for profit costs $550m
Fuel savings at current price gives 3.5 year payback
Smart Market financing & funding - Technology/Carbon Fuel
Swap - Generation-as-a-Service

34. CNG for Transport Swap
Vehicle Companies
(eg taxis & buses)
Vehicle Companies
(eg taxis & buses)
Investors
Transport
Users
Service
Providers
%Prepay
Natural
Gas
Gas Producer
Transport as
a Service
%
% Pay

35. 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 fuel credits
Consumers – pay for transport use either with conventional
currency eg $ or prepay carbon fuel credits

36. 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

37. 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 energy swap/credit market power is
dispatched using least carbon fuel cost ranking order
Outcome – Smart Market

38. Outcomes - Policies
Energy standard – standard unit of energy as benchmark for
investment
Energy Dividend - energy subsidy paid in energy credits
- incentive to save energy & exchange credits for value
Energy pool investment fund
Green Deal – energy loans invested directly in renewable
energy (MegaWatts) and energy saving (NegaWatts) projects

39. Outcomes – Economic
Energy Cooperation – compete on quality of service but
cooperate on costs
Capital Efficiency – finance capital is replaced by 'smart'
intellectual capital
Fifth Fuel – the higher the price of finite resources, the more
profitable it is to save them

40. Institute for Resilience
Global post-doctoral research & development network to
address major international challenges
Public/Private – Public research funding & private
development
Faculties
– Resource resilience – least resource cost development
– Human resilience – capacity building
– Financial resilience – energy economics
Launch – Caspian Energy Grid/Union initiative

41. Institute for Resilience
Academic/Private
– Initial Founders – Turkey, Iran, Norway
– Financial resilience – Turkey/Norway
– Resource resilience Iran/Norway
Government Policy
– Caspian Development Forum

42. Enlarged European Energy Union?
€/EU-centric energy-as-commodity market model
(Post-Brexit Proposal - Chatham House)

43. Eurasian Energy Clearing Union
Caspian–Centric - Eurasian Energy Clearing Union
Caspian
Eurasian
Euro/ECO-Caspian
ECO-Caspian
ECO, Russia
Turkey
Iran
Norway
EU, EEA + UK
Switzerland
Energy Charter, SCO