From OPEC to NOPEC

February 18, 2016 - 0:0

When the history of this period of the oil and gas markets is written, the meeting on Tuesday in Doha between Russia, Qatar, Saudi Arabia and Venezuela and Wednesday’s meeting between Iran, Iraq, Qatar and Venezuela in Tehran may mark the definitive end of OPEC.

I asked Chris Cook, a Senior Research Fellow at University College London his view of the market.
“For the two biggest global oil producers to 'freeze' production at record levels left the market unimpressed at best and unbelieving at worst. In the absence of significant coordinated production cuts the market price will fall to or even through $20/barrel and will not regain $50/barrel for years, if ever.”
If that is the case then, in my view, Saudi Arabia is in deep domestic trouble. Several observers believe that current military adventurism by the Saudis is due firstly to internal factional politics; secondly, that such nationalism serves as a possible means of distracting the population from the approaching end of a very privileged lifestyle; and thirdly, it is simply a means of preserving a measure of national dignity.
---Cooperation or competition?
I asked Mehdi Moslehi of Petro Scotland on options available to Iran in their relationship with Saudi Arabia and the oil market generally, and he said, “There is a very simple choice. Cooperation or Competition? There is a great deal of profit to be made from competition and conflict by a few, at the expense of the many. OPEC has been destroyed – aided and abetted by non-OPEC members producing flat out - by competition to sell oil as a commodity and the current 'race to the bottom'.”
But what form could energy cooperation take, I asked? And how may we get there?
Mr Cook explained: “We have seen how Saudi Arabia has maintained market share with the U.S. through a refining joint venture, at the expense of suppliers such as Nigeria in particular. They are exploring further joint refining ventures in China and elsewhere. Iran is rapidly reopening oil sale agreements with Europe, and these are aimed at achieving security of demand and re-establishment of market share, but this will necessarily be at the expense of others in the market.”
But surely this will make the market situation worse, not better?
“Of course. That is why the only solution is the creation – as President Rouhani suggested at Davos in 2014 – of new multilateral institutions for the oil market. An energy Bretton Woods-style conference or process is urgently necessary, involving both energy producers and consumer nations.”
Is this what you mean by cooperation? I asked Mr Moslehi.
“I envisage what is essentially a consortium of producer nations engaging & cooperating directly with a consortium of consumer nations: a Cooperative of Cooperatives if you like.”
But where would banks and oil companies fit in such a market model? I asked Mr Cook.
“Simply put, oil companies do not produce oil – they buy and sell it for a $ profit- while banks print dollar and euro claims over oil & gas – they cannot print the oil & gas itself. These middlemen, and their exchanges and banking systems created a monster which has built, controlled, and has now finally destroyed, the oil market as we have known it since 1973.”
Mr Moslehi, who is a noted expert in market networks and systems explained further. He said: “I believe that the direct instant connections of the internet are leading to a transition by middlemen such as these towards the provision of services instead.”
But surely these middlemen will resist this, I said. As they say in the U.S., why would turkeys vote for Christmas?
“You would think so”, replied Mr Moslehi, “But in fact service providers need very little financial capital for their operations, since they are essentially providing intellectual capital instead. So we are already seeing transformation by energy companies such as Schneider and E:ON away from a transaction model towards a service model”.
---Back to the future?
Mr Cook agreed with Mr Moslehi's view: “In fact, the future is visible in tried and tested models from the past. Those familiar with the world of shipping will know that there are certain risks that members of Lloyds of London – the principal global insurance market – will not take. Vessel owners – including Iranian owners - therefore formed associations known as Protection & Indemnity (P&I ) Clubs about 140 years ago to mutually assure these risks, and five years later appointed a service provider – Thomas Miller – the company which administers the clubs and manages the risks to this day.”
I observed that his sort of mutual risk assurance is well known in the Islamic world, and I asked Mr Moslehi if such mutual institutions might apply to the oil and gas market.
“Precisely. When we think of institutions, we think of organisations, such as OPEC, the Energy Charter Treaty organisation; World Trade Organisation and so on. Personally, I believe we have enough organisations as it is and do not need any more. What the oil market does need however, is not a new – OPEC 2.organisation - but agreements or protocols (there are numerous protocols in the world of Information Technology) which consist of mutual risk and production sharing agreements to a common purpose.”
What do you think of this? I asked Mr Cook.
“I have advocated just such global agreements & protocols for more than 15 years and I refer to the use of the P&I model in the energy markets as an 'Energy Clearing Union'. But unlike the Clearing Union unsuccessfully proposed by the great economist J M Keynes at Bretton Woods in 1944, this would not have a centrally issued currency, with organisations and bureaucracy like the World Bank and International Monetary Fund imposed by the U.S.”
---Iran and Saudi Arabia
What would your advice be to Iran in dealing with Saudi Arabia? I asked Mr Cook and Mr Moslehi. Mr Moslehi sees the situation very rationally and strategically.
“No matter what differences may exist in cultural, religious or ideological matters, there is always scope for cooperation in relation to the essential and deeply connected resources of energy and water. So while there will continue to be conflict in relation to upstream oil and gas sales, there is a shared common interest downstream in increased energy efficiency and new energy generation and distribution infrastructure.”
Mr Cook's advice was more specific. “Firstly, gas for oil swaps would make sense, whereby Iran would supply a flow of gas in exchange for a flow of Saudi oil, thereby reducing Saudi carbon intensity and maintaining gas production and use in the region, without wastefully shipping many thousands of kilometres at vast energy cost.
Secondly, there is the possibility, within a suitable neutral framework, of Energy Free Zones covering disputed joint fields and with gas to power generation on-site. The possibilities through the use of energy swaps and credits are endless.”
Finally, I asked whether we are now seeing a move from OPEC to NOPEC?
Both agreed, but pointed out that a valuable role potentially exists for OPEC as a founder and service provider of a new global energy market framework. Moreover, both considered that Iran, due to prolonged exclusion from the market, is uniquely well placed to lead a constructive initiative to create such a framework.
As an observer of Iran's domestic politics it is my earnest hope that a newly elected administration will be open to such constructive policy making, and that they will look forward to energy cooperation rather than back to energy competition and conflict