The following text is a letter delivered early July to President A, who has been a bit pre-occupied recently.

My recent interview

http://www.energybulletin.net/19237.html

has just been translated into Farsi by a publication in Tehran and there should be some excitement there in the next week or two as a result.

Best Regards

Chris Cook

Letter

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06 July 2006

His Excellency Dr. Mahmoud Ahmadi Nejad,
President of Islamic Republic of Iran,
Presidential Office
Tehran,
Iran

Your Excellency

Petroleum Exchange Project

We had hoped that we would not need to write this letter, but regret to say that all other avenues having been exhausted, we must approach you directly in respect of a matter of urgent importance both for the global market in energy and for Iran specifically.

In June 2001 we wrote to the Iranian Central Bank in respect of the excessive oil market volatility - and consequent losses to Iran - due to market manipulation by oil traders and investment banks. We recommended that Iran lead the formation of a Middle Eastern Petroleum Exchange in order to address this problem by developing a Persian Gulf oil market benchmark price.  The problem of excessive volatility we identified has recently become much worse due to massive speculation by "hedge funds".

The Wimpole Consortium, of which we are the founder Members, and in which the Tehran Stock Exchange Services Company ("TSESC") is our valued Iranian partner, was awarded the contract in mid 2004 by the Oil Ministry to take forward this important initiative. Profiles of key individual Consortium members are attached for your information: the Consortium also included a major UK law firm and an oil market consultancy, among others.

We carried out a great deal of work to a very tight schedule and delivered a major pre-feasibility report to the Oil Minister's Advisor in August 2004 without either pre-payment or a formal contract, having been persuaded to do so by the Advisor's eloquent argument that trust and integrity in business dealings are the Islamic way and that his oral and informal written instructions were entirely reliable.

Since then progress has been more apparent than real and while our comprehensive report has been used as a reference document by the Oil Ministry for the purpose of acquiring permission from the Exchange

Council of Iran for the establishment of the exchange as a legal entity, its contents have in practice otherwise not even begun to be implemented and we remain unpaid in respect of it.

This letter was prompted by our concern - and sheer disbelief - at finding that it is apparently the intention for the proposed "Oil Exchange" to be a mere "photocopy" of the existing Tehran Metal Exchange, which itself is not a noted success, nationally or internationally.  

Metals markets are entirely different in nature from markets in the many different qualities, delivery points and specifications of oil and oil products which typically require the services of "brokers" to facilitate transactions.  Metals transactions are "quote-driven", being centred upon a community of "market-makers", while oil markets are "order-driven" facilitated by brokers.

When compared with recent developments in Dubai (NYMEX) and Qatar (Energy City/ IMEX) such a travesty of an Exchange - little more than an expensive new NIOC sales office - would expose Iran to international ridicule, particularly in view of the massive, and justified, global interest in the "Iranian Oil Bourse" project.

This project has from the outset been plagued by obstruction and delays to the extent that we were obliged to call upon your predecessor personally in order to be able to make the little progress which has taken place so far.

The reason for the delays appears to be resistance from elements in the Oil Ministry who oppose any change to existing market practice and we and TSESC are agreed that the effect of the current proposal -which clearly emanates from this faction -will be to entirely nullify the project's intended purpose.

This is in direct contradiction of your Excellency's clearly stated desire for increased transparency in the oil market both within Iran and internationally.

With your Excellency's permission, we will briefly summarise for you our proposed strategy, based upon our report two years ago, but considerably updated in the light of recent market developments.

Firstly: we propose an International Energy "Clearing Union" - essentially a decentralised market network on which buyers and sellers transact with each other backed by a collective "mutual" guarantee and "default fund".  

This "partnership-based" model is both Islamically sound (being a very
close cousin of "Takaful") and, we believe, superior to the existing centralised Western "Clearing House" model.

Secondly, we propose "asset-based" contracts based upon actual "ownership" of  "Equity Shares" in "Pools" of crude oil, products or even LNG. The effects of this structure would be:
(a)    a new mechanism for foreign investment in the development of Iran's energy assets without the complexity and problems of "buybacks";
(b)    a new pricing mechanism specifically for LNG which will supersede existing crude-oil based pricing, which is subject to manipulation;
(c)    to address -through the creation of a more viable alternative - the un-Islamic aspects of "deficit-based" Western derivative contracts.

Thirdly, we propose to integrate this Clearing Union with an upgraded and updated Iranian Banking and Capital Market system and strongly recommend therefore that this simple market infrastructure project now be re-assigned to the Iranian Central Bank, with appropriate Ministerial oversight. This was the logic that lay behind our proposal being addressed to the Central Bank governor at the outset.

 If the neutral Central Bank were to be responsible for the project, then there would no longer be the current conflict of interest - and lack of credibility internationally -of the proposed Exchange largely controlled by its principal Seller.  

We believe that it is both possible and desirable for Iran to lead the extension of this proposed "Clearing Union" to include other producer and consumer States, and we would aim to assist in the development of contracts and trading mechanisms to provide a new oil pricing benchmark in the Persian Gulf, and possibly other pricing points, free of manipulation, speculation and hence of excessive volatility.

In summary, through this plan Your Excellency can deliver upon your undertaking to the Iranian people to improve transparency in oil transactions in Iran and at the same time play the leading role in the development of regional financial markets that is proportional to Iran's influence and pre-eminent status.  Moreover, by adopting the above strategy, excessive market volatility - and consequent losses at the expense of market intermediaries - may be reduced to a minimum.
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At such a sensitive point in international relations, Iran can provide a constructive and positive new partnership-based approach to global trade and finance founded upon the values and traditions of Islam and demonstrating conclusively Iran's good faith and peaceful intentions.

Finally, we wish formally to request the opportunity to explain our strategy to you personally and, if you approve, to then brief key members of your administration and plan implementation, perhaps at seminars to be convened for the purpose.

We trust that Your Excellency will be able to give explicit instructions that we be paid forthwith in respect of the work carried out in all good faith almost two years ago and thereby clear the way for what has the potential to be perhaps the most important development in global markets of this century.

Yours sincerely,

Chris Cook - Senior Partner


"The future is already here -- it's just not very evenly distributed" William Gibson