Tehran Times once more welcomed Chris Cook, a senior research fellow at the Institute for Strategy, Resilience and Security Studies at University College London and a leading global expert in energy markets and financial technology, and Mahmood Khaghani, one of Iran's experienced and informed energy experts, to discuss the challenges and opportunities facing Iran as the 40th anniversary of the Islamic Revolution approaches.

Following is the text of the interview:

(TT) Welcome to Iran once more, Mr. Cook I understand that your presence in Iran is related to energy strategy, security and resilience?

(CC) Indeed so. I have in the last couple of years made a breakthrough in my research in the field of legal design of market institutions and instruments, based upon a study of the emergence of what is called Financial Technology or Fintech. I have addressed the Delphi Economic Forum in Greece on the subject and was also asked last year by a Russian deputy energy minister to outline our approach to Energy Fintech generally and the Energy Credit Obligation (ECO) specifically.

(TT) Mr. Khaghani, you have collaborated with Mr. Cook for many years in relation to energy markets. Are you optimistic in respect to the ECO proposal?

(MK) Indeed I am, since it represents a development of the joint proposal Mr. Cook and I made in Tehran in 2008 for a “Petro” unit, but regrettably this was premature. More importantly perhaps, is the fact that Iran (in common with most nations) lacks an energy strategy capable of being independently implemented when Iran is virtually detached from the global financial system and payments, conventional development financing and long term funding are all almost impossible.

(TT) Do you think the recently launched European Instrument for the Support of Trade Exchanges (INTEX) will assist Iran?

(MK) Anything that facilitates trade is helpful, but in my view this vehicle cannot address the U.S. threat to international banks and businesses that they can either do business with Iran or the U.S.  While specialized regional banks and SME businesses may participate, major banks and businesses will not. Add to that the strong suspicion in Iran that the aim of European Central Bank and private banks is to tie Iran into PetroEuro relationships through € debt development financing and long term funding.

(CC) I understand Mr. Khaghani's pessimism, but I remain optimistic because I believe that there are now constructive agreements and instruments available which can resolve these issues. Indeed, that will be the subject of our upcoming Energy Fintech workshop with the Iran and Tehran Chambers of Commerce kindly convened by H.E. Ambassador Dr. Shams Ardakani, whom I look forward to meeting again.

(TT) What do you mean by Energy Fintech?

(CC) Financial Technology or Fintech, has been around for a long time, and in simple terms describes the convergence of financial and physical markets with communications technology and professional services such as accountancy and law. My particular interest and expertise is in the legal design of market agreements and rules, and of the contractual instruments which are traded, cleared and settled on markets.

I first took an interest in Fintech around 1992 while a director of a global oil exchange which developed an electronic trading system. Then in 1998 I invented an online shared transaction registration system - OilClear - which gave legal effect to oil market contracts of all types, whether they were arranged on or off an exchange; manually or automatically. This market operating system exists to this day at major global exchanges who simply appropriated the concept as their own, and now make billions of dollars selling market information to the buyers and sellers who originated it.

(TT) Is this shared market database related to the Blockchain concept?

(CC) Yes and No. On the one hand encryption of online transactions authenticates & validates them. But on the other hand, the cost of replicating shared databases throughout networks, and encrypting an entire shared database for every new transaction soon becomes prohibitive in cost and performance.

(TT) Is your Energy Credit Obligation (ECO) related to energy-based Coins, such as Venezuela's Petro?

Again, Yes and No. Firstly, the average Iranian does not own an oil refinery, and therefore would not be particularly interested in consuming crude oil. Oil products such as gasoline or diesel fuel are another matter. Secondly the Petro is essentially only a receipt for payment which is nominally backed by Venezuelan oil reserves. Crucially, Petros cannot be used to pay for crude oil instead of dollars even for those who own refineries.

(TT) So Iranian oil refineries could issue ECOs in exchange for money, goods and services from investors who could then use them to pay for (say) gasoline, or sell them to investors or consumers. But what is to prevent them issuing ECOs excessively, so that insufficient gasoline is available for all holders to return their ECOs?

(MK) There is significant current parliamentary criticism of H E Zanganeh in relation to domestic sales of oil and gas, and a long standing difference of view between the Oil and Energy Ministries continues in relation to the desirability of domestic or international sales. The ECO potentially enables resolution of these difficulties, since it makes possible the raising of domestic prices to match international prices.

(CC) Note that the Caspian Oil Swap made clear the need for transparency of ECO issuance, and for professional management by an expert service provider. The most important ECO risk is that an issuer is unable to supply products because the cost of his raw materials such as oil and gas has risen. Oil for product energy swaps enable producers to supply crude oil in exchange for the rights to a proportion of the flow of oil products, or to oil product ECOs rather than selling oil on the open market. As I have been pointing out since the global oil market platform 2001 is owned, controlled and thoroughly manipulated by traders and investment banks with an interest in volatility and low transparency.

(TT) One of the most difficult current Iranian political issues is how to fund energy subsidies when Iran's revenues are constrained by sanctions. How may the ECO proposal help resolve this?

(MK) The proposal is firstly to gradually increase fuel prices, which creates an Energy Pool fund in rials. And rather than distributing subsidies in new rials, which we know from experience will cause inflation, an Energy Dividend distribution of ECOs will be made which may be presented in payment for fuel, transport of all kinds or to back investment in energy efficiency and renewable energy projects.

(TT) So the ECO comprises new and non-inflationary credit or money in Iran's financial system. But how do the financial and banking systems fit in to the ECO picture?

(CC) Clearly neither the Central Bank nor private banks can issue ECOs since they do not provide energy services. However, private banks may firstly manage ECO issuance, and secondly arrange energy Loans whereby investment is made out of the Energy Pool fund in rials with a return to investors in ECOs.
In other words, banks will have an additional line of business, and this will require very little financial capital compared to conventional banking. Central Bank monetary supervision and oil and energy ministry expertise will be combined in a new Energy Treasury institution.

(MK) We also envisage that for business users, and major investors, the ECO and energy swaps represents new domestic trading opportunities and asset classes for Iran's exchanges and financial services industry. There is a vast amount of idle capital in Iran, much of it in gold, hard currency cash, and property, and here we believe that the ECO at last represents an instrument which may mobilize these assets and stimulate Iran's domestic economy.

(TT) What outcomes do you hope for from domestic ECO use? And what would be the next steps?

(MK) It is not an exaggeration to say that the ECO and energy swaps represents a new paradigm which Ambassador Dr. Shams Ardakani observes, and this will enable an energy revolution in Iran, through funding massive investment in the cheapest energy of all – energy savings – and in harnessing Iran's abundant renewable energy resources. It is appropriate that such an energy revolution should begin now, on the eve of the 40th anniversary of Iran's Islamic Revolution.

(TT) Moving on from Iran's domestic energy policy, does Energy Fintech open the way for what H E Zanganeh refers to as Energy Diplomacy?

(CC) Indeed so. Applied on an international scale, risk, cost and production sharing agreements, combined with the ECO instrument, which knows no borders, opens up new policy options. By way of example, we may use Energy Fintech to address the deficiencies of the new INTEX vehicle and any Iranian counterpart vehicle which deals with INTEX.

So our complementary proposal is for a neutral Swiss custodian to hold a shared registry of Energy Credit Obligation (ECO) transactions and for the new INTEX to manage ECO issuance, exchange and settlement as a service provider. Businesses would then transact in ECOs via energy swaps through membership of an ECO Clearing Union association which would mutually assure performance and standards under 'Club Rules' similar to the way Protection & Indemnity (P&I) Clubs mutually assure shipping risks on a global scale.

(MK) I have myself been involved in innovating energy swaps, such as the Caspian Oil Swap, and Armenian Gas for Power swaps and also their extension in Nakhchivan (Republic of Azerbaijan) to avoid a humanitarian disaster, which was termed Energy for Peace.

I observe great potential for new generations of international energy swaps, whereby energy commodity producers like Iran no longer sell oil & gas on a financial oil market under the control of Wall Street, but supply it to overseas refineries in exchange for a flow of oil product ECOs.

By way of example I have long advocated implementing oil for product swaps with Greece, a country which I regard strategically as a “Golden Gate” to Europe, and which I understand is one of the few European jurisdictions prepared to take the risk of engaging with Iran. So Iran could supply oil to Greece in exchange for a flow of Greek issued ECOs which would be accepted throughout the region by consumers of Greek oil products.

(TT) Gentlemen, thanks for a fascinating discussion, and I wish you every success in developing the ECO concept.