Introducing the PetroTrust
A New Approach to Energy Investment
Chris Cook – International Oil Refining Conference
Teheran
October 2008
We live in Interesting Times…..
….some say, “the end of the financial system as
we know it”
If the global system of credit creation is indeed
in terminal decline……
….might the solution lie in a new approach to
investment?
Iran needs massive investment in energy
infrastructure…..
....but the Credit Crunch has made worse the
existing problem of US sanctions
The PetroTrust may help Iran in obtaining that
investment….
…and the “Trust” approach could allow Iran to
lead the creation of a viable alternative….
….to the “Western” model of financial capital.
How did the Banking system go wrong?
A Bank is a Credit Intermediary – or
“Middleman”
Borrower
Depositor
Bank
£
£
But it does not lend pre-existing money….
….it creates new money as interest–bearing
credit….
….which is then deposited back into the system
Now, if you think about it, a bank’s true
economic function….
…is to guarantee that the borrowers’ credit is
good…
Interest is charged for the use of the
guarantee
Borrowers
Interest
Bank
..from which Interest is paid to Depositors..
Borrowers
Interest
Interest
Bank
Depositors
..Default and Operating costs deducted...
Borrowers
Interest
Costs
Interest
Bank
Depositors
..and a profit to Investors normally results
Borrowers
Interest
Costs
Interest
Bank
Investors
Depositors
So Banks create a Pyramid of Credit, on a base
of Equity
Bank Credit
Bank
Equity
Demand for Credit has been so high…
….that Banks began to “outsource” their
guarantee to rid themselves of risk.
…and thus allow Equity to support more credit
creation
Banks outsourced risk totally – through
“securitising” debt and sale to investors….
…temporarily – with “Credit Derivatives”
(a time-limited guarantee)….
…and partially – using credit insurance from
insurers such as AIG
The Result is a bigger Credit Pyramid than
Banks alone could sustain…
Credit
Investor
Equity
Bank
Equity
…and an opaque “shadow banking system” of
Investors holding “sliced and diced” risk…
Credit
Investor
Equity
Bank
Equity
This extended Pyramid of Credit funded the
“Mother of all Bubbles” in US property prices….
…and servicing this credit finally exceeded the
financial capacity of the US population.
In August 2007, the Bubble started to deflate
and attention turned at last to defaults …
..but by now no-one knew where the Risk lay…
Credit
Investor
Equity
Bank
Equity
Banks started to think, “if this is what our
balance sheet looks like…..”
“…what does everyone else’s look like…..?”
The problem is not shortage of money - liquidity
– Central Banks can handle that….
…..it is shortage of Equity - a Solvency problem
– which Central Banks cannot handle…..
Bank Equity is being eaten away by defaults….
…Investors are licking their wounds…
…and will risk no more of their Equity…
The Result?
Credit
Equity
So, Credit is becoming both scarce and
expensive….
…Central Banks are irrelevant….
…and further defaults will destroy yet more
Bank Equity…..
….and drain money out of the system in a
“deflationary spiral”....
….leading inevitably to a Depression....
So much for the Credit Crunch problem
Clearly the solution cannot lie in creating more
credit
So we will take a new approach to “Equity”
investment instead.
Conventional Equity consists of shares in a
Limited Company or “Corporation”….
Ownership by a Corporation is what makes the
“Private Sector” Private
While the Corporation may be conventional, it is
not the only enterprise model there is
While all eyes have been on Credit innovation…
…”Asset-based” finance has been developing
“under the radar”….
Canadian “Income Trusts” use a Trust law
framework to “unitise” gross Corporate
revenues….
Income Trust
Gross
Revenues
Units
Unit
Investors
Income Trust
%
%
Costs
Corporation
Dividends?
Units are sold to risk averse investors such as
pension funds…
…who consider investment less risky if they
access corporate revenues…
….before the management does….
We are also seeing new asset classes such as
Exchange Traded Funds (“ETF’s”)….
…“Real Estate Investment Trusts” (“REIT’s”)…
…”Hedge Funds” constituted as “Limited
Partnerships”…
…and of course….”Sukuks”
In 2001 the UK introduced the Limited Liability
Partnership (“LLP”) – not in fact, a “Partnership”
…but simply an infinitely flexible corporate form
– an “Open” Corporate
If productive assets are held by a “Custodian”..
Assets
Ownership
Custodian
…Investors put in Financial Capital in
money, or “money’s worth”…
Assets
Financial
Capital
Investors
Ownership
Custodian
…Managers put in Human Capital of time,
expertise and experience....
Assets
Financial
Capital
Investors
Ownership
Human
Capital
Managers
Custodian
…and Users pay for the use of this Capital…
Users
Payment
Use
Assets
%
Investors
Custodian
%
Managers
…the result is a “Capital Partnership”
Users
Assets
Investors
Custodian
Managers
A “Capital Partnership” enables new forms
of Equity…
(a) Equity Share Units - proportional (%age)
”n’ths” such as billionths.....
…..which may be bought and sold, but never
redeemed, because there must always be 100%
(b) Redeemable Units – eg Kilo Watt Hours;
rights to occupy 1 hectare of land for a year….
….or barrels of oil and litres of gasoline
Such Units have a value in exchange, but carry
no rights to production or income over time…
They hold their value because they are assetbased on value provided by the issuer …
….rather than being deficit-based upon a claim
over value issued by a Bank
Let’s have a look at how a Capital Partnership
might work as a “PetroTrust”.
Example: imagine that a new refinery is needed
in the Caspian region…..
We create a Refinery Trust
Oil Suppliers
% of Units
Refinery
Units
Investors
Custodian
% of Units
Managers
For as long as they supply oil or management
services members receive a %age of production
Investors provide development Capital by
purchasing redeemable Units
Contractors may invest equipment & materials
but must invest their agreed profit margin
Contractors’ costs are covered by selling Units
from the “Production Pool” to financial investors
Example: imagine that a gas liquefaction plant
is necessary for gas currently being flared
We create a Gas Trust
Gas Pool
Units
Liquefaction Plant
Units
Investors
Custodian
% of Units
Managers
Units are redeemable in natural gas or LNG
An “Equity share” of production goes to the
Managing member
Contractors receive money, Units or both…
Investors purchase Units of the “Gas Pool” of
future production
The PetroTrust ensures that Iranian assets
remain in Iranian ownership and control.
…and the financial effect is that Units of
production may be sold at a fixed price.…
…..resulting in Sharia’h compliant Interest-free
investment.
If prices rise, Investors gain and Iran foregoes
part of the profit…
..if prices fall, Iran is protected, but Investors
lose – but even so, gain by lower energy costs
The outcome is to raise finance by Unitising
future production, simply and flexibly…
…through new forms of “Co-ownership” Equity
within a Capital Partnership framework…
…and the Pyramid of Risk is very different….
Investor
Units
Management Equity
National Equity
Issues...Legal framework; Regulation; Taxation;
Sharia’h Compliance; Market Infrastructure
PetroTrust potential is immense….
Iran already uses cross-border frameworks .eg
NICO based in Jersey, operates in Switzerland..
PetroTrust framework allows flexible and simpler
new variations of “Buyback” contracts
PetroTrust creates a simple new framework for
cross-border collaboration…
eg Iranian Oil Company (UK) Ltd is a signatory
to the North Sea MasterDeed framework….
….which is based on Trust, not partnership, law
and is costly, complex and cumbersome
But a Caspian Master Partnership….
Caspian
Nations
Units
Assets and
Infrastructure
Units
Investors
Custodian
% of Units
Managers
….creates a simple new framework for Caspian
“Pools” of oil and gas production…
….which may be “Unitised” to enable necessary
Caspian investment for all Caspian nations.
The PetroTrust enables a Carbon currency based
upon the intrinsic value of energy…
..rather than a market in value-less Units of
CO2 emissions, imposed by governments …
….and designed by the same people who
brought us the Credit Crunch….
A trader’s metaphor illustrates the fundamental
uselessness of a deficit-based carbon currency…
“If you want to keep a cow healthy, you don’t
regulate what comes out of it……
“……you regulate what goes in….”
I believe that conditions are now right for a
Carbon Currency, and “Clearing Union”
Next Steps
“You don’t know what you’ve got ‘til it’s gone”
And…you don’t know what you haven’t got ‘til
you see it….
I recommend that Iran….identifies and removes
any domestic obstacles to “Unitisation”
…identifies suitable schemes for “Proof of
Concept” Trusts….
….and initiates a global dialogue towards a new
global financial settlement – “Bretton Woods II”.
Thank You,