Caspian Energy Markets in Transition

Caspian Energy Market in Transition

Mahmood Khaghani

Education & Research Institute – Iranian Chamber of Commerce & Mines (ICCIM)

Bosphorus Energy Club 11th October 2016

An Inflection Point – Peak Demand

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” Zaki Yamani

Peak Demand - Energy is the only 'hard' or objective resource cost & dollar cost of energy services has become systemically unaffordable

Energy Intensity - carbon fuel use per unit of energy as a service has reached unsustainable levels eg US fracking, Canada tar sands

Fifth Fuel – the higher the oil & gas $ price the more profitable it is to substitute with renewable energy or energy efficiency: the Fifth Fuel

2June 2016 Caspian Energy Grid – Silk Road

Peak Demand Oil Producers squeezed between

- Immovable Object – Oil Price Cap (around $50/barrel)- Irresistible Force – rising Exploration & Production (E&P) costs

- Conflict between resource sovereignty & commercial requirements

Conventional Options:- Consolidate - does not solve the problem- Switch to Gas - eg Shell- Vertical Integration - Saudi US refinery, IOCs & major traders

- political (eg nationalisation), environmental, commercial risks


Iran Post-SanctionsUpstream oil & gas – colossal investment requirement for regeneration of existing fields & development of new fields

Downstream energy – massive investment requirement in legacy & new energy infrastructure for transition to low carbon economy

Increasing sales of oil & gas as a commodity risk flooding the market

Equity & debt instruments conflict with Iran resource sovereignty & dollar investment unlikely even in the medium term


Iran at the Crossroads

Least Resource Cost principle successfully demonstrated in action since 1973 Oil Shock for resilience/energy security reasons

Iran is at a crossroads: Reform to the Left; Resistance to the Right

What is the way forward?

June 2016 Caspian Energy Grid – Silk Road 5

The Way Forward – Resource Resilience

Resource Resilience Organising Principle - Least Resource Cost

For any given consumption of energy as a service – mobility/transport; heat/cooling; light; power the use of finite resources is minimised

Denmark mandated this principle and invested in renewable energy and energy efficiency across all services: power, heat, transport & electricity

Danish GDP doubled while carbon fuel use & CO2 production has declined significantly – but Iran & Denmark's fiscal systems very different!


Resource Resilience – Denmark


Iran's Smart Solution - Energy Swaps

Energy Swap An Energy Swap is an exchange of an energy flow for another flow

Location SwapA flow of energy into one location is exchanged for a flow of energy out of another. eg the Caspian Oil Swap

Category SwapA flow of energy of one type is exchanged for a flow of energy or value of another type eg Iran gas for Armenian power

Hybrid SwapA combination of Location & Category Swap eg international Oil for Product Swap Iranian oil exchanged for Scottish oil products


Transition through Gas Natural Gas is the bridging fuel to a Low Carbon Economy and ECO region has the

greatest global natural gas reserves

For Iran to ship gas internationally whether via pipeline or LNG is extremely inefficient, costly and potentially risky

Electricity is at the end of the Energy Value Chain “From Well to Wall.”

When the oil price fell 74% , and the gas price fell by 42% , the wholesale electricity price fell by only 2 to 3% and the retail price fell by even less.

Cheapest energy is energy saved – Fifth Fuel - a Kilo Watt Hour of electricity saves 5 to 10 kWh of upstream energy in production, generation & distribution


Power Generation Technology

Power Generation & Electricity Transmission efficiency has improved dramatically in the last two years

Combined Cycle Gas Turbines (CCGT) generation is now 60% efficient

High Voltage Direct Current (HVDC) links are much more efficient than Alternating Current (AC) links over long distances

HVDC is particularly suited to Caspian Sea, Black Sea marine links – examples are UK North Sea BritNed, NorNed HVDC links


Iran's Energy Grid – a Natural Grid?

Iran's energy grid transmits oil & gas fuelled power and oil & gas

Application of resource resilience principle will increase efficiency of oil & gas production & use and implement decentralised renewable energy

Iran's energy grid can be transformed from centralised National Grid to distributed and resilient Natural Grid

Iran's energy grid must also address crucial environmental combination of Water & Electricity – Least Water Cost


ECO Regional Energy Grid

Oil for Products – optimising Kashagan flows

Gas for Power – Turkmen power generation & regional HVDC power supplies

Hydro for Gas – inter-seasonal swaps between upstream and downstream ECO nations

Virtual Transmission - CASS 1000 project- dispatch & use power as locally as possible- geographic swaps replace expensive, inefficient & vulnerable long distance transmission


Energy as a Service

Least Resource Cost – not Least $ or € Cost

Supply – not Sale Co-operation not Competition – shared cost reduction not a race to the bottom

Smart Markets - Intellectual Capital replaces Finance Capital


Business

Caspian Energy Markets in Transition