By Mahmood Khaghani

From Bazaar to Bourse

May 24, 2019 - 10:45

On 20th May 2019, the Shana news agency reported that NIOC on the instructions of the Ministry of Petroleum will undertake, pursuant to the current Iranian year budget law, a sales programme of six million barrels per month of Iranian Light and Heavy Crude Oil and Iranian gas condensates on the IRENEX exchange platform. These sales will be priced in US dollars against UK Brent/BFOE (BWave) and Dubai US $ price benchmarks. I am unaware of any reason why this programme should be any more successful than the last, but it is possible that potential buyers have been discreetly found who are willing and able to buy this material.

I shared my opinion with many experts including Chris Cook, Senior Research Fellow at the Institute for Strategy, Resilience & Security at University College London, for their views on this new development.

Almost all were sceptical of the sustainability of the policy in the medium and long term energy policy even bearing in mind the need for Iranian lawmakers and Ministry of Petroleum for short term policies to cope with current sanctions. Mr. Cook said: “The first point is that in this sales programme IRENEX is not acting as a Bourse (where financial instruments such as company shares are traded) but rather as a Bazaar, where physical goods are offered for sale by private negotiation or auction.”

On this point, I recall that it proved extremely difficult to explain to key officials the legal design of the proposed Kish Island Oil Bourse financial technology (Fintech) developed from 2004 onwards until its controlling shareholder, the Oil Industry Pension Fund (OIPF), eventually decided to discontinue its operation.  The proposed Kish Island Oil Bourse market had two elements: firstly, the simple swaps of energy flows pioneered by NIOC during my time there in office, and secondly, I believe the winner of the tender to study the Bourse (a consortium in partnership with Wimpole International Ltd) outlined an innovative method of monetising energy flows through energy “Units”, since described, to avoid confusion, as Energy Credit Obligations (ECO) but which were never understood.

In fact, this misunderstanding reminds me of a wise saying: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

The importance of Energy Fintech to Iran

Clearly, the early Fintech solutions provided by the Wimpole consortium nearly two decades ago and developed subsequently were well ahead of their time. But perhaps, with the support of the ICCIMA Energy, Refining Industries & Petrochemical Commission a series of workshops could now be held to take these concepts further?

A friend during exchange of views for writing this article told me:  “As the famous literary detective Sherlock Holmes pointed out, once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.”

The lesson to be learnt from this is that, having tried all other options, Iran may now have no other choice?

To explore this fact further I asked Mr. Cook’s opinion. He said:  “That is correct. We see Russia  already supplying oil to Greece through a similar oil for product swap to that first proposed to NIOC managers for the Grangemouth refinery in Scotland, and then subsequently also suggested for Greece and elsewhere. You know an idea has gone mainstream when you see that even the notoriously risk averse and deliberate Saudi Arabia is now getting in on the act in Europe with similar swaps”.

But with such inattention to innovative ideas by Iran's decision takers, is it now too late?

The UCL Senior Research Fellow tells me: “Not necessarily. This system architecture bypasses the banking system altogether, because rather than selling physical product flows for dollars or Euros, Iran could exchange instead receive valuable oil product Energy Credit Obligation (ECO) instruments, such as Euro 5 gasoline ECOs to be exchanged for much needed imports.”

If this idea were accepted in Iran does this mean the INSTEX system is no longer necessary?

In the light of his research, Mr. Cook responded:  “Possibly in due course it will become obsolete, but in the short and medium term the ECO/Energy Swap proposal could be a Plan B – in other words, a complementary or additional means of payment for transactions impossible via INSTEX.”

Domestic resistance

The question is that would it be possible to overcome resistance from vested interests (those who benefit from economic sanctions) within Iran?

By way of response, Mr. Cook said:  “A very good question and I suspect that sort of resistance is probably not the sort of resistance economy the Supreme Leader has in mind. However, I should point out firstly that I have never concerned myself in the past with the physical oil market – the Bazaar, if you will - and I certainly do not propose to start now. Whether or not the IRENEX auctions are successful, and I wish my friends at IRENEX every success, a parallel track of bilateral energy swaps can be pursued where my colleagues and I have identified several interesting opportunities.”

He further elaborated: “Secondly, it is proposed that the Kish Island Oil Bourse should be reactivated for the purely financial purpose always intended for it. In fact it is to say, as the regional hub of a global wholesale market trading network and clearing union for Energy Credit Obligation (ECO) instruments”.

So, this answer encouraged me to ask whether he saw an ECO opportunity for other Iranian exchanges.

He replied:  “Yes indeed I do. IRENEX is well-placed to be the domestic Iranian ECO trade liquidity hub, where large-scale wholesale market energy service providers interact with retail energy consumers. The Tehran Stock Exchange, on the other hand may fulfil the traditional Bourse role of bringing ECO investors together with investments in renewable energy, and especially energy efficiency projects, where there are laws in place such as what is known in Iran as the Article 12 incentives are generous, but little used. Such prepaid energy investments give rise to a form of Energy Loan which offers from an Islamic Shariat point of view a sound way of mobilising not only conventional pension investment but also the significant amount of hoarded gold and hard currencies currently sitting idle at people’s home in Iran.”

Having personally directly recommended all the aforementioned concepts to Ministry of Petroleum, NIOC, OIPF, and Ministry of Energy in addition to many articles published by domestic media, I cannot understand why no-one has so far even paid attention, let alone rejected the ideas based on rational arguments.  However, in the course of concluding this friendly consultation with colleagues, I asked Mr. Cook whether he would be returning soon to Tehran, so that further workshops on the subject could be convened?

He said: “I certainly hope so. As you know, we hope to reactivate the dormant Kish Island Oil Bourse as an Energy Fintech hub and this requires negotiations between all the interested parties. By way of a first step we believe that the Energy Credit Obligation (ECO) and energy swap concepts may be rapidly proven in the EU and UK as a parallel path to the Euro INSTEX initiative involving banks. In this way a 20th Century Bazaar could be transformed via Energy Fintech into a 21st Century Bourse for energy payments and investment via the I.R. Iran in Caspian Sea and Persian Gulf energy resources and then beyond, as we always intended.”

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