By Chris Cook
The recent conference in Ashgabat convened by the Energy Charter organization under the auspices of the United Nations and hosted by the Turkmen government was on the subject of 'Reliable & Stable Transit of Energy'.
However, the Turkmen government and the big players - the EU, US and China - had only one thing on their minds, and this was unfettered access to land-locked Turkmen natural gas. More specifically, the aimed for outcome of the conference was a Declaration facilitating the building of a Trans-Caspian pipeline to feed the 'Southern Corridor' energy route via Turkey to the EU. For the EU this represents energy security through diversifying their sources of energy supply: for the US this represents another move against Iran and Russia in the 100 year long Great Game.
For Iran and Russia, however, the issue is in fact purely commercial, rather than political. Turkmenistan is - as far as the EU is concerned - simply a competitor in sales or potential sales, of 'upstream' oil and gas - in other words, energy as a commodity. Naturally whatever the reasons - such as environmental concerns - given for objecting to the proposed pipeline everyone knows that the real reason is commercial considerations.
Over the course of the ministerial/governmental session, and two days of expert discussion - in which I participated - the Russian delegation successfully ensured that the outcome of the meeting was a neutral declaration which essentially prevented any progress on a UN sponsored diplomatic initiative to open up Turkmen access to Trans Caspian gas transit.
Iran was expected to take a similarly negative approach to that of Russia, but in fact Azizollah Ramazani, the shrewd Head of International Affairs for the National Iranian Gas Company (NIGC) envisaged an entirely different, and constructive solution.
Mr Ramazani made the point that it is a mistake to view energy transit purely in terms of natural gas, and that what matters is the optimal way to meet the consumers need for energy as a service. As he outlined, it makes far more sense for new Caspian energy infrastructure to be built what generates and transmits energy in the most efficient possible way, minimizing the massive losses currently made throughout the region.
So by way of example, it would make sense for new gas fired Combined Cycle Generation Turbines (CCGT) - which are 60% efficient - to feed sub-sea High Voltage Direct Current (HVDC) links to the Caspian littoral states such as Azerbaijan and Kazakhstan initially.
Moreover, when the gas - which is a finite resource - has gone, the proposed grid will still be available to carry and balance Caspian renewable energy flows. In this context, other delegates pointed to the need for hydropower links from Kyrgyzstan to Kazakhstan, and so on.
Dr Alavi, the thoughtful Deputy Secretary General of the Economic Co-operation Organisation (ECO) pointed out to the meeting that when they last met in 2013, the ECO energy ministers unanimously agreed in respect of the need for co-operation not only in gas-to-power but also power transmission.
So the clear message from the meeting was that even though upstream co-operation in energy as a commodity may be impossible, there is a clear appetite for investment in energy as a service, and for the creation of a next generation 'Caspian Energy Grid'.
But how could this be funded? This was the subject of my presentation.
As Trend readers will know, I take the view that if conventional means of bank financing and investor funding are not working - and everyone agrees that the current market volatility makes a bad situation worse - then additional or complementary mechanisms and instruments must be deployed instead.
My proposal is for the re-introduction of a new (in fact ancient) form of funding, which is simply the issuance and sale by producers of prepay credit instruments, which they will then accept in payment for energy supplied. Note that these credit instruments are not debt - which gives the holder a right to demand payment of money, nor a forward contract/derivative that confers the right to demand delivery. Prepay energy credit instruments are no more and no less than a means of pre-payment for energy supply.
Naturally, such a prepay energy instrument requires some form of framework of trust so that producers may accept each others' credits, and account to each other. This requires transparency, and also a quality control mechanism to ensure that producers do not over-issue.
The requirement is for a 'Caspian Energy Clearing Union' agreement including a mutual guarantee, and also a mutual agreement covering the use of Caspian energy resources, which would bring together both government (G2G) and businesses (B2B) to co-operate in optimal and sustainable use of the common resources of the Caspian Sea.
Such an agreement must neutrally provide to each stakeholder suitable veto rights of governance such that their rights are protected and none - whether a government or a mighty corporation - may impose themselves on the others.
There was considerable interest in the concept, and it appears clear that the Economic Co-operation Organization is perhaps best placed in the region to take forward not only the concept of a Caspian Energy Grid, but also the Caspian Energy Union within which such critically necessary infrastructure may be made a reality.
Chris Cook's exclusive article for Trend. Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.
