Introducing the PetroTrust

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• Introducing the PetroTrust
• A New Approach to Energy Investment

Chris Cook International Oil Refining
Conference Teheran October 2008
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We live in Interesting Times..
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.some say, the end of the financial system as
we know it
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If the global system of credit creation is indeed
in terminal decline
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.might the solution lie in a new approach to
investment?
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Iran needs massive investment in energy
infrastructure..
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....but the Credit Crunch has made worse the
existing problem of US sanctions
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The PetroTrust may help Iran in obtaining that
investment.
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and the Trust approach could allow Iran to
lead the creation of a viable alternative.
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.to the Western model of financial capital.
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How did the Banking system go wrong?
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A Bank is a Credit Intermediary or Middleman
Bank
Borrower
Depositor


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But it does not lend pre-existing money.
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.it creates new money as interestbearing
credit.
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.which is then deposited back into the system
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Now, if you think about it, a banks true
economic function.
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is to guarantee that the borrowers credit is
good
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Interest is charged for the use of the guarantee
Borrowers
Interest
Bank
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..from which Interest is paid to Depositors..
Borrowers
Interest
Interest
Bank
Depositors
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..Default and Operating costs deducted...
Borrowers
Interest
Interest
Costs
Bank
Depositors
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..and a profit to Investors normally results
Borrowers
Interest
Interest
Costs
Bank
Depositors
Investors
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So Banks create a Pyramid of Credit, on a base of
Equity
Bank Credit
Bank Equity
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Demand for Credit has been so high
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.that Banks began to outsource their guarantee
to rid themselves of risk.
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and thus allow Equity to support more credit
creation
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Banks outsourced risk totally through
securitising debt and sale to investors.
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temporarily with Credit Derivatives (a
time-limited guarantee).
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and partially using credit insurance from
insurers such as AIG
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The Result is a bigger Credit Pyramid than Banks
alone could sustain
Credit
Investor Equity
Bank Equity
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and an opaque shadow banking system of
Investors holding sliced and diced risk
Credit
Investor Equity
Bank Equity
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This extended Pyramid of Credit funded the
Mother of all Bubbles in US property prices.
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and servicing this credit finally exceeded the
financial capacity of the US population.
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In August 2007, the Bubble started to deflate and
attention turned at last to defaults
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..but by now no-one knew where the Risk lay
Credit
Investor Equity
Bank Equity
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Banks started to think, if this is what our
balance sheet looks like..
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what does everyone elses look like..?
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The problem is not shortage of money - liquidity
Central Banks can handle that.
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..it is shortage of Equity - a Solvency problem
which Central Banks cannot handle..
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Bank Equity is being eaten away by defaults.
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Investors are licking their wounds
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and will risk no more of their Equity
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The Result?
Credit
Equity
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So, Credit is becoming both scarce and
expensive.
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Central Banks are irrelevant.
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and further defaults will destroy yet more Bank
Equity..
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.and drain money out of the system in a
deflationary spiral....
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.leading inevitably to a Depression....
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So much for the Credit Crunch problem
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Clearly the solution cannot lie in creating more
credit
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So we will take a new approach to Equity
investment instead.
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Conventional Equity consists of shares in a
Limited Company or Corporation.
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Ownership by a Corporation is what makes the
Private Sector Private
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While the Corporation may be conventional, it is
not the only enterprise model there is
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While all eyes have been on Credit innovation
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Asset-based finance has been developing under
the radar.
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Canadian Income Trusts use a Trust law
framework to unitise gross Corporate revenues.
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Income Trust
Gross Revenues
Units
Income Trust
Unit Investors


Costs
Corporation
Dividends?
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Units are sold to risk averse investors such as
pension funds
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who consider investment less risky if they
access corporate revenues
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.before the management does.
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We are also seeing new asset classes such as
Exchange Traded Funds (ETFs).
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Real Estate Investment Trusts (REITs)
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Hedge Funds constituted as Limited
Partnerships
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and of course.Sukuks
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In 2001 the UK introduced the Limited Liability
Partnership (LLP) not in fact, a Partnership
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but simply an infinitely flexible corporate form
an Open Corporate
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If productive assets are held by a Custodian..
Assets
Custodian
Ownership
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Investors put in Financial Capital in money, or
moneys worth
Assets
Custodian
Ownership
Financial Capital
Investors
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Managers put in Human Capital of time, expertise
and experience....
Assets
Custodian
Ownership
Human Capital
Financial Capital
Investors
Managers
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and Users pay for the use of this Capital
Users
Payment
Use
Assets
Custodian


Investors
Managers
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the result is a Capital Partnership
Users
Assets
Custodian
Investors
Managers
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A Capital Partnership enables new forms of
Equity
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(a) Equity Share Units - proportional (age)
nths such as billionths.....
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..which may be bought and sold, but never
redeemed, because there must always be 100
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(b) Redeemable Units eg Kilo Watt Hours rights
to occupy 1 hectare of land for a year.
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.or barrels of oil and litres of gasoline
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Such Units have a value in exchange, but carry no
rights to production or income over time
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They hold their value because they are
asset-based on value provided by the issuer
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.rather than being deficit-based upon a claim
over value issued by a Bank
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Lets have a look at how a Capital Partnership
might work as a PetroTrust.
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Example imagine that a new refinery is needed in
the Caspian region..
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We create a Refinery Trust
Oil Suppliers
of Units
Refinery
Custodian
Units
of Units
Investors
Managers
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For as long as they supply oil or management
services members receive a age of production
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Investors provide development Capital by
purchasing redeemable Units
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Contractors may invest equipment materials but
must invest their agreed profit margin
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Contractors costs are covered by selling Units
from the Production Pool to financial investors
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Example imagine that a gas liquefaction plant is
necessary for gas currently being flared
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We create a Gas Trust
Gas Pool
Units
Liquefaction Plant
Custodian
Units
of Units
Investors
Managers
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Units are redeemable in natural gas or LNG
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An Equity share of production goes to the
Managing member
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Contractors receive money, Units or both
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Investors purchase Units of the Gas Pool of
future production
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The PetroTrust ensures that Iranian assets remain
in Iranian ownership and control.
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and the financial effect is that Units of
production may be sold at a fixed price.
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..resulting in Shariah compliant Interest-free
investment.
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If prices rise, Investors gain and Iran foregoes
part of the profit
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..if prices fall, Iran is protected, but
Investors lose but even so, gain by lower
energy costs
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The outcome is to raise finance by Unitising
future production, simply and flexibly
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through new forms of Co-ownership Equity
within a Capital Partnership framework
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and the Pyramid of Risk is very different.
Investor Units
Management Equity
National Equity
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Issues...Legal framework Regulation Taxation
Shariah Compliance Market Infrastructure
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PetroTrust potential is immense.
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Iran already uses cross-border frameworks .eg
NICO based in Jersey, operates in Switzerland..
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PetroTrust framework allows flexible and simpler
new variations of Buyback contracts
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PetroTrust creates a simple new framework for
cross-border collaboration
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eg Iranian Oil Company (UK) Ltd is a signatory to
the North Sea MasterDeed framework.
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.which is based on Trust, not partnership, law
and is costly, complex and cumbersome
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But a Caspian Master Partnership.
Caspian Nations
Units
Assets and Infrastructure
Custodian
Units
of Units
Investors
Managers
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.creates a simple new framework for Caspian
Pools of oil and gas production
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.which may be Unitised to enable necessary
Caspian investment for all Caspian nations.
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The PetroTrust enables a Carbon currency based
upon the intrinsic value of energy
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..rather than a market in value-less Units of CO2
emissions, imposed by governments
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.and designed by the same people who brought us
the Credit Crunch.
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A traders metaphor illustrates the fundamental
uselessness of a deficit-based carbon currency
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If you want to keep a cow healthy, you dont
regulate what comes out of it
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you regulate what goes in.
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I believe that conditions are now right for a
Carbon Currency, and Clearing Union
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Next Steps
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You dont know what youve got til its gone
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Andyou dont know what you havent got til you
see it.
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I recommend that Iran.identifies and removes any
domestic obstacles to Unitisation
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identifies suitable schemes for Proof of
Concept Trusts.
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.and initiates a global dialogue towards a new
global financial settlement Bretton Woods II.
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Thank You,