By Mahmood Khaghani

Iran: Energy First

July 3, 2017

The recent UN Security Council meeting on Thursday, June 29, may have marked a turning point in Iran's relationship with the global community of nations. The U.S. Ambassador to the United Nations Nikki Haley found herself in an impossible position diplomatically. On the one hand she announced that the U.S. would adhere to the JCPOA deal while on the other hand when she criticised Iran's allegedly "destructive and destabilizing" actions she found virtually 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 UN 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-U.S. 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."

Europe returns to Iran

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

According to Tehran Times 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 be 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 an 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 was 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 are to be concluded using the new Iran Petroleum Contract (IPC) template may come to be regarded a crucial turning point in global energy markets. Total's CEO was recently 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 U.S. 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 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 U.S./Saudi relationship since 1973 created the Petrodollar.

But if dollars are unavailable because of U.S. 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 U.S. 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 U.S. 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 U.S. economy." He further said: "this divergence arising from the variability of the U.S. 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.

As an excellent proof of concept the partiers concern to apply it for the Arash gas field to which Iran, Kuwait and Saudi Arabia all lay claim.

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 sitting government referred to as energy diplomacy.

When Iran's next 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 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 adds: "a constructive – and probably unexpected - energy diplomacy proposal by Iran to Saudi Arabia and the Persian Gulf Cooperation Council would be 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."

In fact, the establishment of Energy Free Zones/Hubs on national borders for power generation would facilitate energy cooperation in a very practical way. When I shared this idea with Ambassador Dr. Shams Ardekani (head of ICCIMA Energy Commission) he welcomed it as part of a broader strategy of the proposed resilient Caspian Energy Grid energy infrastructure.

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 U.S.-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.

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