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Energy Fintech Introducing the ECO Moscow 20th July 201818

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

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Energy Fintech Introducing the ECO Moscow 20th July 201818

  1. 1. Energy Fintech Introducing the ECO Chris Cook Moscow 20th September 2018
  2. 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 2
  3. 3. Dollarisation of Oil Oil as Asset Oil as FundingOil as Commodity July 1st 2017 Energy Dominance
  4. 4. Oil Market financialisation began in earnest in 2004...... ….from early 2004 gas & oil diverged
  5. 5. Oil market is (financialised) Sell-side Market...... …gas market has been over-supplied Buy-side Market
  6. 6. Volatility - mid 2007/mid 2009 oil went $80>$140>$35>$80/bbl …...while physical supply & demand varied by <3%
  7. 7. US Energy Dominance: Dollar now directly oil-backed Energy Dominance Announced
  8. 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. 9. Oil Standard – US linked the dollar to Oil in Q1 2018 End Q1 2018 Emerging Markets Collapse vs $
  10. 10. China launches Shanghai contract: Buy-side Market Shanghai Oil Contract opens 26th March 2018
  11. 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. 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. 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 13
  14. 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 14
  15. 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. 16. Promises (Prepay Credit Obligations) Prepaid Talk Time Prepaid Taxation Prepaid Energy
  17. 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. 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. 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. 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. 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. 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. 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. 24. Oil for Product Swap RefineryRefinery Investors Consumers Service Providers %Product ECOs Oil Producers Products
  25. 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. 26. Pumping as a Service 1778 - first Smart Swap Newcomen Atmospheric Engine James Watt Steam Engine
  27. 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. 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. 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. 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. 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 31
  32. 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. 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 33