Volume. 12227

Gas war....or gas diplomacy?
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It is generally agreed in discussions of global geopolitics that energy security has probably been for at least a century the most important driver of the foreign policy of great nation states.

Gas and Gaza
While as the tragic death toll rises, and observers increasingly refer to the current conflict in Gaza as in terms of a Holocaust, a recent article published in a European newspaper has explored the role of natural gas in Israel’s invasion of Gaza. 
As the author, a security journalist put it:  “Israel desperately covets Gaza’s gas as a ‘cheap stop-gap’ yielding revenues of $6-7 billion a year. United Kingdom (UK)  and United States (U.S.) energy  companies are lined up to do the dirty work - but first Hamas must be ‘uprooted’ from Gaza, and Fatah bullied into cutting off its talks with a Russian major gas company.” 
However, by contrast a pro-Israel article recently published in Europe rejected the aforementioned idea as follows:  “Israel is nowhere close to experiencing an energy crisis and has no urgent or near-future need for the natural gas located offshore Gaza. While Israel gains nothing for its energy industry by hitting Gaza, it stands to lose significantly more.”
Whatever the reason, the scale of deaths of Palestinians due to Israeli actions has raised concerns throughout Europe, and the scale of physical destruction of Gaza is now such that Palestinians will find great difficulty in paying for reconstruction without resorting to a distressed sale of their offshore energy assets.

Gas and Ukraine
A London newspaper (The Independent) reported that Angela Merkel and Vladimir Putin are negotiating a plan to stabilize the borders of Ukraine and to provide the financially troubled country with a strong economic boost, particularly through a new energy agreement ensuring security of gas supplies.
The report says if Ms Merkel’s deal were to be acceptable to the Russians, the international community would need to recognize Crimea’s independence and its annexation by Russia, a move that some members of the United Nations might find difficult to stomach.
Sources close to secret negotiations have said that at the same time, the Ukrainian president would agree not to apply to join NATO.  In return, President Putin would not seek to block or interfere with Ukraine’s new trade relations with the European Union under a pact signed a few weeks ago. Also, Ukraine would be offered a new long-term agreement with Russia’s Gazprom for future gas supplies and pricing. At present, there is no gas deal in place; Ukraine’s gas supplies are running low and are likely to run out before this winter, and this would spell economic and social ruin for the country.

End of dollar diplomacy
Chris Cook, a former director of the International Petroleum Exchange (IPE-London) in his recent article published by Asia Times says: “In my analysis, U.S. dollar hegemony came to an end in Iraq in 2007 in a ‘Suez Moment’ - when China exercised a similar economic veto over U.S. energy adventurism to that exercised in 1956 by the U.S. over the UK over Suez.  From that point on, I believe, the world has been militarily unipolar and economically bipolar.”
He believes since the collapse in 2008 of Lehman Brothers in USA the global dollar economy has been functionally dead and ‘in zombie mode’.  Those who believe that the BRICS (Brazil, Russia, India, China and South Africa) countries are capable of creating an alternative bank-centric global reserve currency simply do not understand how deficit-based money creation systems work.
In relation to the Ukraine Mr. Cook is of the view that there are two key factors to consider. Firstly, the U.S. is in no position to intervene militarily. Secondly, the trusting relationship between Chancellor Merkel and the U.S. was terminally destroyed by the Snowden and subsequent U.S. spying revelations. 
As a result, Germany is now both politically willing and economically able to pursue its own energy diplomacy on whatever terms Merkel thinks fit. Crimea is ethnically Russian; was the subject of an internal transfer to Ukraine within the former Soviet Union (USSR) by Khrushchev; and whatever the U.S. and UK choose to make of it, Merkel is quite prepared to cede it to Russia in exchange for suitable guarantees.

Gas as a service
Chris Cook explains that the current gas market model is for Russian gas to be sold as a commodity through a chain of Ukrainian and EU intermediary middlemen who extract profits either opaquely or relatively transparently. In his opinion, this is no longer sustainable, and the solution is now for a market model - Gas-as-a-Service - whereby neutral gas market service providers receive an agreed payment for developing and operating the necessary infrastructure and market platform. 
In Cook’s view, the enabling financing and funding comes not from conventional equity and debt finance capital – which are useless where the rule of law is weak – but rather from the use of prepay credit instruments issued by suppliers like Russia, Iran, Caspian Sea region etc. and returnable in payment for natural gas supplied. 
Mr. Cook further says, through this simple but radical mechanism – which has already been the subject of a direct  more than  $85 billion crude oil prepay transaction between Russia’s Rosneft and China’s Sinochem – it is possible for end-user producers to financially engage directly with end-user consumers. 
The idea of a multilateral institutional framework for producer and consumer cooperation was emphasized by President Rouhani at Davos and has been repeated many times by Iranian Petroleum Minister Bijan Zanganeh as integral to his energy diplomacy.
If Mr. Cook’s doctrine of an Energy Accord were to be accepted by producers and consumers, then this would affect both the physical and financial energy markets, initially in natural gas. Firstly, a networked Eurasian physical energy market, pricing hubs and benchmarks (e.g. Caspian Sea) and secondly a financial “Energy Clearing Union” agreement whereby energy producers and consumers would engage in mutually guaranteed generic energy and value exchanges. 
As Mr. Cook concluded: “The use of generic energy credit instruments for financial settlement enables bank-manufactured currencies such as $ and € to be dispensed with other than as a unit of account or numeraire. There is no reason why such a unit of account must necessarily be the dollar; and Chancellor Merkel would appreciate the possibility of Euro energy pricing.”  
Next steps 
Clearly, Europe is both willing and increasingly able to take practical steps to recommence trading links with Iran. 
In that context, Austria’s energy links with Iran may well be discussed in a state visit to Iran by the Austrian president now scheduled for November this year. If so, then the Nabucco pipeline, (which was designed to bring Iran’s gas to an Austrian gas hub or gateway to the EU) is relevant to an existing but dormant 2007 gas supply contract for the supply of 5bcm per day of gas between Iran’s NIGEC and Switzerland’s EGL.
But above all, the fact that Russia and Iran find themselves in almost precisely the same geo-political position opens up the possibility for a joint, holistic and constructive ‘energy clearing union’ approach to the EU to secure a simple, radical, but above all, constructive framework for energy cooperation, financing and funding.

Mahmood Khaghani is a former director general for Caspian Sea oil and gas affairs of the Iranian Ministry of Petroleum. He is now retired and is a business development and joint venture advisor.

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