Introducing the Energy Credit Obligation (ECO) concept as part of a new Energy Fintech initiative

1. Energy Fintech
Introducing the ECO
Chris Cook
Moscow 20th
September 2018

2. Context – Commodity Market 101
Market Dominance – Sell-side/Buy-side contest markets
Market Support – if Sell-side can support prices by funding
inventory then they will (eg tin, copper, diamonds)
Boom & Bust Hard-wired – cure for high prices is...high
prices & cure for low prices is....low prices
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3. Dollarisation of Oil
Oil as Asset Oil as FundingOil as Commodity
July 1st
2017
Energy Dominance

4. Oil Market financialisation began in earnest in 2004......
….from early 2004 gas & oil diverged

5. Oil market is (financialised) Sell-side Market......
…gas market has been over-supplied Buy-side Market

6. Volatility - mid 2007/mid 2009 oil went $80>$140>$35>$80/bbl
…...while physical supply & demand varied by <3%

7. US Energy Dominance: Dollar now directly oil-backed
Energy Dominance Announced

8. US Dollar on the Oil Standard
Enronisation - Tripartite Prepay Contracts
70% of Enron revenues never existed
Enron fooled creditors/investors by opaque tripartite
prepay contract funding via Citibank & JP Morgan
US fools the Oil Market via tripartite prepay contract
funding/monetisation of US shale oil reserves
1/ Massive 'Big Long' support of global oil price
2/ Saudi T-Bill capital funding
3/ Federal Reserve Bank repo liquidity
New oil market paradigm put in place by Cohn/Tillerson8

9. Oil Standard – US linked the dollar to Oil in Q1 2018
End Q1 2018
Emerging Markets
Collapse vs $

10. China launches Shanghai contract: Buy-side Market
Shanghai Oil
Contract opens
26th
March 2018

11. Oil Standard – Outcomes
Since US Energy Dominance was implemented, global oil
price has almost doubled from $45/bbl
Oil buyers must borrow $ trillions for oil, typically
Eurodollars: China alone must find additional $7bn/month
If I were China, I would:
1/Implement a new buy-side market – Check
2/Build massive inventory to resist seller demand - Check
3/Recruit an Asia Buyers Club – Work in Progress
4/Transfer liquidity to Buy-Side forward contract auctions
Major risk of oil price war/meltdown: need an oil Plan B11

12. Russia – Market Issues
Price Stability
Market boom/bust makes long term planning impossible
Affordability
Conventional subsidies are dysfunctional
Resilience & Security
Need for long term security of supply & demand
Dollar Dominance
Two tier oil market with access dominated by US
Funding
Systemic funding problem 12

13. Transition to Services
Energy Intensity
Peak Affordable Oil – secular increase in energy intensity
of Production & fall in Energy Return on Energy Invested
Smart Energy – higher the $ oil/gas price more $ profit in
smart energy efficiency (Fifth Fuel) & renewables
“Stone Age did not end for lack of stones & Oil Age will not
end for lack of oil” - Zaki Yamani
Capital Intensity
Commodity market is capital intensive (infrastructure
funding; market/credit risk) but services are Capital Lite
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14. Transition to Services – Energy Fintech
Energy Services
No-one uses raw energy: oil, oil products, natural gas.
People use heat/cooling, power, mobility, light,
communications
Raw energy must be converted into energy services
Energy Fintech - Smart Market in Energy Services
Smart Institutions – Energy Treasuries & Clearing Unions
Smart Instruments – Energy Credit Obligation (ECO) &
Energy Swaps
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15. Early Fintech - Promises and Proofs
Tally-as-Proof - receipt for past utility (eg energy) but no
future utility
Tally-as-Promise - Prepay credit for future utility requires
trust in promissor
Single Entry – the instrument IS the accounting record
Authentication – the grain of the wood is nature's encryption!

16. Promises (Prepay Credit Obligations)
Prepaid
Talk Time
Prepaid
Taxation
Prepaid
Energy

17. Fintech 1.0 - Blockchain & Coins
Blockchain as Agreement
- collective machine protocol for encrypted transaction database
- authenticates electronic instruments – no 'double spend'
- But....entire database is encrypted for every new transaction
Coins as Instruments
- Proof of past value creation (eg Proof of Work/Stake)
- Subjective value in exchange but no objective utility (use value
over time)

18. Venezuela and El Petro
Petro is based on Oil
- many different types & qualities of oil
- acceptability of currency is based on use
- But consumers use gas, oil products, energy services NOT oil
Petro is a Proof not a Promise
- Petro is evidenced by oil reserves & is a receipt for payment
- But - Venezuela has no obligation to deliver either oil or money
- Petro holder has no right to use Petro instead of Dollar to pay for
Venezuelan oil

19. Energy Fintech – Swaps & Credits
Instruments

Energy Swap - neutral, collaborative framework
for allocation of energy flows

Energy Credit Obligation (ECO) - prepayment for
energy production or use
Institutions (Agreements)

Energy Partnerships – production/cost sharing

Clearing Union – risk sharing/mutual assurance

20. Energy Credit Obligation (ECO)
An ECO is
- Promise issued by energy producer for value received
- Returnable in payment for supply
- a new asset class
An ECO is not
- Debt - no right to demand money
- Derivative – no right to demand delivery
- Equity – no ownership right in respect of energy assets
ECO requires trust framework for issuers & investors

21. Types of ECO
Gas ECO (Heat/Power)
- ECO issued by Gazprom, Qatargas, NIGC returnable in
payment for gas supply within Gas Clearing Union
- Investors buy Gas ECOs as inflation hedge
- Consumers eg China, Turkey, EU prepay for gas as
Energy Loan hedge/investment
Fuel ECO (eg Euro 5 Gasoline)
- ECO issued by refiners using crude/product swaps
- Investors buy Fuel ECOs as inflation hedge
- Consumers prepay as hedge/investment
- Government issues ECO subsidy instead of bank money

22. Types of ECO
Energy ECO (Electricity)
- ECOs issued by power generators denominated in kWh
- fossil fuel generation via swaps eg gas for power
- renewable generation from technology as services: solar-
as-service; wind-as-a-service - Smart Swaps

23. Energy Swaps
Regional Swaps
- Energy delivered to one location exchanged for energy
delivered from another eg Caspian Oil Swap
Conversion Swaps
- Flows of raw commodity energy exchanged for flows of
energy as a service
Hybrid
- Regional Conversion Swaps – Iranian oil for Russian
products

24. Oil for Product Swap
RefineryRefinery
Investors
Consumers
Service
Providers
%Product
ECOs
Oil
Producers
Products

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

26. Pumping as a Service 1778 - first Smart Swap
Newcomen Atmospheric
Engine
James Watt Steam Engine

27. Smart Subsidies
Optimal low carbon financing & funding via Energy Loan
direct investment in carbon fuel savings
Payment of subsidies through Energy Dividend of ECOs
eg on mobile phones
Least resource cost principle cuts emissions: higher the $
fuel price, the more $ profit in savings
Instead of oil priced in $ (or €) and gas indexed against oil,
dollars, euros & oil are priced in energy unit of account

28. Levy/Dividend replaces Energy Subsidy
Energy dividend made in ECO not Rouble distributions
- incentive to save energy
- not inflationary
- savings may be used to invest through energy loans
- credits returned in payment for energy as a service

29. Fintech 2.0: Clearing Union
Supplier A
Member
Credit
Value
Platform Service
Provider
Shared
Database
Buyer B
Member
Authenticated A->B
Bilateral Data
Authenticated A->B
Bilateral Data
Authenticated A->B
Bilateral Data

30. Risk Sharing via Mutual Assurance – P&I Club
For 150 years, Protection & Indemnity (P&I) Clubs have
mutually guaranteed shipping risk Lloyds won't cover
For 130 years P&I Clubs have been managed by
Thomas Miller as platform service provider

31. Transition through Gas
Global smart market design: Energy-as-a-Service
ECOs – Heat/Power & Transport ECOs (Mmbtu equivalent)
& Energy ECOs (KwH equivalent)
Oil no longer be priced in $ and gas priced vs oil
Oil, gas, $, € will be priced in energy
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32. Carbon ECOs – 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”
The Kyoto Carbon Market Cow

33. Energy First – not America First
Problem
Energy Dominance – US dominates global energy market
Dollar payments/funding weaponised
Solution
Energy as a Service - new energy services market design
Payments – Gas,Fuel, Electricity ECOs & Clearing Unions
Funding – investment via ECO Energy Loans
Energy no longer priced in $, dollars are priced in energy
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