1. Introducing the PetroTrust A New Approach to Energy Investment Chris Cook – International Oil Refining Conference Teheran October 2008

2. We live in Interesting Times…..

3. ….some say, “the end of the financial system as we know it”

4. If the global system of credit creation is indeed in terminal decline……

5. ….might the solution lie in a new approach to investment?

6. Iran needs massive investment in energy infrastructure…..

7. ....but the Credit Crunch has made worse the existing problem of US sanctions

8. The PetroTrust may help Iran in obtaining that investment….

9. …and the “Trust” approach could allow Iran to lead the creation of a viable alternative….

10. ….to the “Western” model of financial capital.

11. How did the Banking system go wrong?

12. A Bank is a Credit Intermediary – or “Middleman” Bank Borrower Depositor £ £

13. But it does not lend pre-existing money….

14. ….it creates new money as interest–bearing credit….

15. ….which is then deposited back into the system

16. Now, if you think about it, a bank’s true economic function….

17. …is to guarantee that the borrowers’ credit is good…

18. Interest is charged for the use of the guarantee Bank Interest Borrowers

19. ..from which Interest is paid to Depositors.. Bank Interest Borrowers Depositors Interest

20. ..Default and Operating costs deducted... Bank Interest Borrowers Depositors Interest Costs

21. ..and a profit to Investors normally results Bank Interest Borrowers Depositors Interest Costs Investors

22. So Banks create a Pyramid of Credit, on a base of Equity Bank Credit Bank Equity

23. Demand for Credit has been so high…

24. ….that Banks began to “outsource” their guarantee to rid themselves of risk.

25. …and thus allow Equity to support more credit creation

26. Banks outsourced risk totally – through “securitising” debt and sale to investors….

27. …temporarily – with “Credit Derivatives” (a time-limited guarantee)….

28. …and partially – using credit insurance from insurers such as AIG

29. The Result is a bigger Credit Pyramid than Banks alone could sustain… Investor Equity Credit Bank Equity

30. …and an opaque “shadow banking system” of Investors holding “sliced and diced” risk… Investor Equity Credit Bank Equity

31. This extended Pyramid of Credit funded the “Mother of all Bubbles” in US property prices….

32. …and servicing this credit finally exceeded the financial capacity of the US population.

33. In August 2007, the Bubble started to deflate and attention turned at last to defaults …

34. ..but by now no-one knew where the Risk lay… Investor Equity Credit Bank Equity

35. Banks started to think, “if this is what our balance sheet looks like…..”

36. “…what does everyone else’s look like…..?”

37. The problem is not shortage of money - liquidity – Central Banks can handle that….

38. …..it is shortage of Equity - a Solvency problem – which Central Banks cannot handle…..

39. Bank Equity is being eaten away by defaults….

40. …Investors are licking their wounds…

41. …and will risk no more of their Equity…

42. The Result? Equity Credit

43. So, Credit is becoming both scarce and expensive….

44. …Central Banks are irrelevant….

45. …and further defaults will destroy yet more Bank Equity…..

46. ….and drain money out of the system in a “deflationary spiral”....

47. ….leading inevitably to a Depression....

48. So much for the Credit Crunch problem

49. Clearly the solution cannot lie in creating more credit

50. So we will take a new approach to “Equity” investment instead.

51. Conventional Equity consists of shares in a Limited Company or “Corporation”….

52. Ownership by a Corporation is what makes the “Private Sector” Private

53. While the Corporation may be conventional, it is not the only enterprise model there is

54. While all eyes have been on Credit innovation…

55. …”Asset-based” finance has been developing “under the radar”….

56. Canadian “Income Trusts” use a Trust law framework to “unitise” gross Corporate revenues….

57. Income Trust Corporation Gross Revenues Unit Investors Unit Investors % % Units Costs Dividends?

58. Units are sold to risk averse investors such as pension funds…

59. …who consider investment less risky if they access corporate revenues…

60. ….before the management does….

61. We are also seeing new asset classes such as Exchange Traded Funds (“ETF’s”)….

62. …“Real Estate Investment Trusts” (“REIT’s”)…

63. …”Hedge Funds” constituted as “Limited Partnerships”…

64. …and of course….”Sukuks”

65. In 2001 the UK introduced the Limited Liability Partnership (“LLP”) – not in fact, a “Partnership”

66. …but simply an infinitely flexible corporate form – an “Open” Corporate

67. If productive assets are held by a “Custodian”.. Assets Custodian Ownership

68. …Investors put in Financial Capital in money, or “money’s worth”… Assets Investors Custodian Ownership Financial Capital

69. …Managers put in Human Capital of time, expertise and experience.... Assets Investors Managers Custodian Ownership Human Capital Financial Capital

70. …and Users pay for the use of this Capital… Assets Investors Users Payment Managers % Custodian Use

71. …the result is a “Capital Partnership” Assets Investors Users Managers Custodian

72. A “Capital Partnership” enables new forms of Equity…

73. (a) Equity Share Units - proportional (%age) ”n’ths” such as billionths.....

74. …..which may be bought and sold, but never redeemed, because there must always be 100%

75. (b) Redeemable Units – eg Kilo Watt Hours; rights to occupy 1 hectare of land for a year….

76. ….or barrels of oil and litres of gasoline

77. Such Units have a value in exchange, but carry no rights to production or income over time…

78. They hold their value because they are asset- based on value provided by the issuer …

79. ….rather than being deficit-based upon a claim over value issued by a Bank

80. Let’s have a look at how a Capital Partnership might work as a “PetroTrust”.

81. Example: imagine that a new refinery is needed in the Caspian region…..

82. We create a Refinery Trust Refinery Investors Oil Suppliers Managers Custodian Units% of Units

83. For as long as they supply oil or management services members receive a %age of production

84. Investors provide development Capital by purchasing redeemable Units

85. Contractors may invest equipment & materials but must invest their agreed profit margin

86. Contractors’ costs are covered by selling Units from the “Production Pool” to financial investors

87. Example: imagine that a gas liquefaction plant is necessary for gas currently being flared

88. We create a Gas Trust Liquefaction Plant Investors Gas Pool Managers Custodian Units% of Units Units

89. Units are redeemable in natural gas or LNG

90. An “Equity share” of production goes to the Managing member

91. Contractors receive money, Units or both…

92. Investors purchase Units of the “Gas Pool” of future production

93. The PetroTrust ensures that Iranian assets remain in Iranian ownership and control.

94. …and the financial effect is that Units of production may be sold at a fixed price.…

95. …..resulting in Sharia’h compliant Interest-free investment.

96. If prices rise, Investors gain and Iran foregoes part of the profit…

97. ..if prices fall, Iran is protected, but Investors lose – but even so, gain by lower energy costs

98. The outcome is to raise finance by Unitising future production, simply and flexibly…

99. …through new forms of “Co-ownership” Equity within a Capital Partnership framework…

100. …and the Pyramid of Risk is very different…. Management Equity Investor Units National Equity

101. Issues...Legal framework; Regulation; Taxation; Sharia’h Compliance; Market Infrastructure

102. PetroTrust potential is immense….

103. Iran already uses cross-border frameworks.eg NICO based in Jersey, operates in Switzerland..

104. PetroTrust framework allows flexible and simpler new variations of “Buyback” contracts

105. PetroTrust creates a simple new framework for cross-border collaboration…

106. eg Iranian Oil Company (UK) Ltd is a signatory to the North Sea MasterDeed framework….

107. ….which is based on Trust, not partnership, law and is costly, complex and cumbersome

108. But a Caspian Master Partnership…. Assets and Infrastructure Assets and Infrastructure Investors Caspian Nations Managers Custodian Units% of Units Units

109. ….creates a simple new framework for Caspian “Pools” of oil and gas production…

110. ….which may be “Unitised” to enable necessary Caspian investment for all Caspian nations.

111. The PetroTrust enables a Carbon currency based upon the intrinsic value of energy…

112. ..rather than a market in value-less Units of CO2 emissions, imposed by governments …

113. ….and designed by the same people who brought us the Credit Crunch….

114. A trader’s metaphor illustrates the fundamental uselessness of a deficit-based carbon currency…

115. “If you want to keep a cow healthy, you don’t regulate what comes out of it……

116. “……you regulate what goes in….”

117. I believe that conditions are now right for a Carbon Currency, and “Clearing Union”

118. Next Steps

119. “You don’t know what you’ve got ‘til it’s gone”

120. And…you don’t know what you haven’t got ‘til you see it….

121. I recommend that Iran….identifies and removes any domestic obstacles to “Unitisation”

122. …identifies suitable schemes for “Proof of Concept” Trusts….

123. ….and initiates a global dialogue towards a new global financial settlement – “Bretton Woods II”.

124. Thank You,