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Iraqi possible oil contracts (PSAs): some facts

by Jerome a Paris Mon Jan 8th, 2007 at 04:17:04 AM EST

The lefty blogosphere is all a-flutter after the article in the Independent about the new Iraqi oil law (flagged in this morning's Salon), which will allow foreign companies to invest in the oil sector via PSAs (production sharing agreements).

These are presented as unfair contracts, which will give the majority of the profits to the Western oil majors, and highly unusual. This is all untrue, and it obfuscates the wider truth that no major Western company will invest in Iraq (under these contracts or under any other scheme) as long as American troops are there a,d that a civil war is under way.

I've written about this as comments in various diaries, but it's time to have a full diary on this. So here goes.


(Quotes from the article in The Independent)

The US government has been involved in drawing up the law, a draft of which has been seen by The Independent on Sunday. It would give big oil companies such as BP, Shell and Exxon 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalised in 1972.

  • That the US government is involved is no big surprise, considering that it is occupying the country and de facto running it - or the bits that can be run by the central power in Baghdad anyway (i.e. not much). While this is indeed the biggest scandal, and the biggest breach of Iraqi sovereignty, it is essentially irrelevant as that power does not apply to anything within Iraq. It applies to whatever US forces directly control, but will not apply to even that as soon as US forces leave. And, I'll get back to this later, that current power may apply to existing oil production, but it will not apply to future investments.
  • Similarly, it is true that this would be the first involvement of Western companies in Iraq since 1972. This, in itself, is not necessarily a bad thing. A number of countries have nationalised their oil production, but others do authorise foreign investment, and it is not obvious which ones do better, and which ones have the most actual control over thie industry. The important thing is that investment today will not be done in the conditions prevailing before 1972, which were indeed a lot more favorable to Western oil majors. So reminding us that we exploited these countries in the past is true, but not necessarily relevant. What matters are the actual terms of the agreements today.
  • The fact that contracts are meant to last 30 years is nothing surprising. In fact, it is a requirement of the industry, which simply reflects the fact that a lot of money needs to be spent upfront and that it can take time to get a return. An oil project, typically, from the date of signature of a contract, will need a few years of exploration (i.e. ascertaining if there is actually enough oil in the designated area to make production commerically viable), then, once decision to go ahead is taken, a few more years to build the facilities, and then only actual production. So out of thirty years, you will have 5 to 10 years (and sometimes more - check the ACG project in Azerbaijan: the contract, a PSA, was signed in 1994 and large scale exports started only this year) where you only SPEND money, with no income, and then only 20 years to recoup that investment cost, plus the massive financing costs of carrying that cost over many years. And this is the oil business - we're talking billions of dollars that need to be spent upfront. These are massive amounts at risk for a long time, even for wealthy companies like the oil majors. So 30 years contracts are not scandalous - they are a feature of the business (and as a banker that has financed these kinds of projects, I can tell you that we would not put a cent without such long term contracts in place).

So the only bit a significant news here is the fact that Iraq may be open to Western investment in the oil sector - a significant bit of news for oil companies that are shut out of an increasing number of countries and desperate to get their hands on projects, and a decision that might not be taken by a sovereign Iraq, but the fact that a soveriegn Iraq does not exist also means that this law is meaningless (see below). It also does not mean that the terms would necessarily be bad for Iraq.

Oil industry executives and analysts say the law, which would permit Western companies to pocket up to three-quarters of profits in the early years, is the only way to get Iraq's oil industry back on its feet after years of sanctions, war and loss of expertise. But it will operate through "production-sharing agreements" (or PSAs) which are highly unusual in the Middle East, where the oil industry in Saudi Arabia and Iran, the world's two largest producers, is state controlled.

The first sentence, on which many focused, is meaningless. I am going to explain below, in a lot of detail, how PSAs work and thus why that assertion tells us nothing about the underlying profit arrangements. What is true is that PSAs are rare in the Middle East - for the simple reason that most Middle Eastern oil produers simply do not allow any kind of private involvement in their oil industry, national or foreign. So PSAs are just as rare as concessions, licenses or any other kind of contractual arrangement with private companies in the region - because there are none.

But PSAs are actually one of the most common form of investment and production contracts around the world these days - for the simple reason that they are usually more favorable to host countries than other contract forms.

Let me explain how PSAs work.

PSAs - production sharing arrangements are contracts between investors (oil companies) and host countries to set the rules on thedevelopment of an oil field. They determine who pays for the investment and, as their name suggests, how the revenues, once generated, are shared between the investor and the host country.

The main principle of PSAs is that oil production is split into "cost oil" and "profit oil". "Cost oil" is the oil that is used to repay the initial investment. "Profit oil", as its name suggests, is the surplus, which is pure profit from the oil production. "Cost oil" goes to the investors, but may include a slice of taxes payable to the host country. "Profit oil" is split between the investors and the host country. An important feature of PSAs is that the early production will go, for the most part, to "cost oil", to repay the investors and, as time goes by and the investment (and the agreed cost of its financing over these years) is repaid, more amounts will be available as "profit oil".

In the early days of production, most, but not necessarily all oil is "cost oil", and as time goes by, an icnreasing fraction will be "profit oil". Investors will be interested in as high a fraction of "profit oil" as they can get in the beginning, but will be willing to concede more of it in the more distant future, as it impacts their profitability today very little. Host countries, which can take a longer perspective, can benefit more form such an arrangement, and thus, the split of profit oil typically increases in their favor as time goes by (and will usually reach 90% in the end).

As the above suggests, there are many parameters that can influence what kind of income each party gets over the years. The most obvious ones are linked to the actual investment schedule: is the project on budget, and on schedule, will it produce as much as announced, and for as long. Depending on the expected technical complexity of a project, different revenue splits may be reasonable to reflect the risks taken by each side. But, very naturally, another, completely uncontrollable factor will influence the revenue split: the oil price. Higher oil prices will allow a project's costs to be reimbursed faster, and profit oil to kick in earlier (and vice versa). In the early days, prices of goods like metal and other commodities may also influence the cost of the project and the amount of "cost oil" required. In some cases, there will be mechanisms to modify project costs; in others, the numbers will be more tightly set and controlled, with less leaway for the investors, who then take risk on how much they need to spend to get the project online.

Depending on technical parameters, expected production profile (and the ability to adapt it to market circumstances, or not), price hypotheses for a number of goods, there can be a bewildering array of outcomes for the split in revenues, and it is hard to say in theory which one is better.

  • for instance, the host country can insist that a fraction of early oil production be allocated to "profit oil", irrespective of where the reimbursement of cost stands, in order to get some revenues early. That will entail more financing costs for the investments not yet repaid, and a longer requirement for "cost oil", and thus less "profit oil" in the future (the split of that profit oil being still another question);
  • a host country can decide to authorise very few circumstances under which costs can be updated (i.e. the investors must take the risk of cost overruns on their own) - thus ensuring that profit oil comes on the expected date. But in return, it will probably have to give up a bigger fraction of that profit oil, to reflect the higher risk taken by sponsors, and its own higher certainty of getting revenues at a given date. Conversely, it can decide to keep a bigger chunk of profit oil, but allow more flexibility on cost overruns - at the risk of delaying its income if the project runs into unexpected difficulties. A country with a lot of oil experience and the ability to supervise closely works (and expenses) during the investment phase will be more likely to choose such a path.
  • a host country may decide to focus on medium term scenarios with lowish oil prices, so as not to budget more money than it can reasonably expect to get. In that case, with less revenues, "cost oil" is likely to dominate for quite a while, and the country wil want to make sure that there is profit oil right from the start, and that enough of it goes to itself. In return, it may give better terms on the financial cost of rolling over unpaid costs
  • of course, in all these scenarios, we've been talking only about the "base case", i.e. the most likely outcome. But rules to split the gain, or the pain, as the case may be, if cirucmstances are more, or less, favorable, need to be defined as well. Again, many different options can be chosen, some parties focusing on certainty of revenues, others wanting to minimize potential worst cases, and others trying to grab the most in the optimistic scenarios.
  • Parties have different priorities, and they also may have access to different information: the most competent host countries will understand the oil field just as well as the oil major, while others will need to rely more on information provided by such oil major (with less ability to check it independently).
  • To add to complexity, some host countries will set requirements in terms of employment of local workers, or use of local contractors. That will influence the cost of the project, or its timetable, or the likelihood of work being done as required (and thus the importance of downside scenario planning), but it also changes the amount of money that stays in the country;

I've only touched the surface of these contracts (if you are interested to see the content of one of these, the PSA for the ACG project in Azerbaijan is public and available on BP's website here), but they are extremely complex documents, that usually set all the parameters for a project, including the whole tax package applicable, the specific environmental, labor and security standards applicable, and many other things. If relevant, they need to be compatible with the requirements of banks or multinational institutions (like the World Bank) that may finance all or part of the project, and they will need to reflect the conflicting priorities of the various investors (it is extremely rare to see one single oil company signing such contracts - most of the time, it's a consortium of oil companies, with one taking a leading role (the "operator"), and the others a slightly more passive role).

What I mean to convey here is that PSAs, per se, or even a given profit split, are not necessarily disadvantageous for the host country. If the sharing is well negotiated, and the project well supervised, they can be extremely profitable for the host country.

Countries will a long experience of oil production have a stronger hand: they know their assets, they may have enough qualified people to understand the intricate details of any project, and they may even have experience handling the subcontractors (companies like Halliburton or Schlumberger that do a lot of the actual engineering work). On the other hand, countries with little oil experience will be a lot more dependent on outsiders bringing in expetise. They can hire experts to help them, however. Similarly, countries with sufficient financial resources will require less of the investment burden to be borne by outsiders, and thus can make "cost oil" a lot smaller. Conversely, poor countries that need full external financing of the project will, per force, see revenues come to them later in the project (unless they manage to procure financing independently, which, again, is possible). Some projects (in particular those that require transport infrastructure to be built at the same time as the upstream facilities) require more complex contractual structures - and an entity able to make commitments to all third parties on the whole chain. The most complex projects, like LNG facilities (which require simultaneous investment in a gas field, gas pipelines, the LNG plant, the LNG tankers, and a regazification plant) cannot be managed by the host country and require the presence of one of the top oil majors - so far the only entities able to put in place the full chain of commitment by credibly shouldering the tens of billions of dollars of commitments that need to be made to all parties in the chain so that they do their bit of the project.

All these projects require contractual arrangements with third parties, often very long time commitments to cover the likely repayment period of the investments and reflect the fact that big multi-billion projects cannot be implemented with a minimum of oconfidence on their outcome.

Which brings us back to Iraq.

One thing that should be obvious from the above is that oil companies will invest in oil project only if they have reasonable confidence to make money in the medium term - which means, naturally, that they have acceptable contractual conditions, but also that such contractual conditions have a very high chance of being respected and/or enforced. That means dealing with stable government with a modicum of interest in seeing these conditions fulfilled.

In the bad old days, that could mean a dictator, appropriately interested, on a personal level, in the project. Today, it still means a willingness to deal with unpleasant regimes, provided that they are reasonably stable, because you have to go find the oil where it is, and not all places with oil are democracies, nor friendly (the discussion about how much linkage between oil and dictatorship or corruption will be left to another diary). But it means that oil companies will only invest in countries that are stable enough - and, more to the point, where the entity in charge of oil resources is likely to remain so, either because it is a legitimate bureaucracy or because it is, say, in control of the armed forces that protect the oil fields.

In Iraq, these conditions are not fulfilled. There is no legitimate government, and what government there is controls little of the country, including not enough of the oil infrastructure. And THERE WILL BE NO LEGITIMATE GOVERNMENT AS LONG AS US FORCES REMAIN IN IRAQ - and, in all likelihood, not until the civil war has run its course,and some form of new power structure is put in place by consensus or by force. And that new power structure will certainly not be bound by contracts, nor even by laws, put in place at the time of the US occupation. So today's law is unlikely to have any practical application.

In summary:

  • PSAs are not an evil plot by Western companies - they are a normal tool of business;
  • bringing foreign investment in a country's oil sector is not necessarily a bad thing, it all depends on the industry experience of the country and its ability to fiannce investment on its own;
  • the current law is unlikely to ever be implemented and thus is mostly irrelevant, except perhaps as another demonstration of the short-sightedness of the Bush administration.

Display:
http://www.dailykos.com/story/2007/1/7/113935/9122

Thanks for your tips (here) and recommends (over there)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Jan 7th, 2007 at 02:35:21 PM EST
Thanks very much for this timely and informative article.

It brings to mind a couple of matters floating around in the back of my mind. Perhaps you might be better informed. I recall a lot of sand-box baiting against French oil interests during the American hate campaign against France just before the invasion. The sort of, "You're not getting any Iraqi oil with your attitude."

Saddam had set up some sort of "futures" contracting system during the long embargo that saw the French, the Italians and the Russians as oil partners once the embargo was lifted. Naturally, the US had been excluded from that scheme. Do you know anything about that and could you possibly share your expertise on that?

by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Sun Jan 7th, 2007 at 07:15:50 PM EST
I think he was just dangling contracts for investment once the embargo was lifted.  Essentially same sort of deal as the PSA structure.  Share of the oil in exchange for making the investments.  
by HiD on Mon Jan 8th, 2007 at 04:28:38 AM EST
[ Parent ]
I've had the time to go through some of my meatworld files: My previous post refers to a then classified report on energy prepared by Cheney on WH request in early 2001. The report, dated May 5th, 2001, carries a list of "Foreign Suitors for Iraqi Oilfield Contracts as of 5 March 2001." The list consists of several signed or initialed Production Sharing Contracts and many "Discussions" and negotiations with major companies throughout the world.

A second page is a map of "Iraqi Oilfields and Exploration Blocks." The Exploration Blocks are nine in all covering 30% or more of Iraqi territory along the Saudi border.

So my question- call it rhetorical or naive- is, what is the status of those signed contracts now?

by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Mon Jan 8th, 2007 at 06:22:30 PM EST
[ Parent ]
They can wipe their asses with this "laws" made under occupation. Occupation must cease once...
Westerners "changed" too much blood and tears for this oil. It never comes cheap. World can manage just some amount of the theft and unlawfulness and just for some time but eventually epidemic will spread and it will explode...and it's spreading west  ...openly...that's where my fears go.

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Sun Jan 7th, 2007 at 11:03:14 PM EST
Thanks a lot for this information.  I have a couple of questions.  It seems from your comments that the new law will apply only to new projects, because you emphasize the cost of finding and developing an oil field.  What about the known oil deposits?  Isn't it important to know the real situation with Iraqi oil before evaluating the new law?  What is your opinion about the Iraqi expertise in this field?  Isn't it a bit disingenious to explain the necessity of PSA type of agreement by the alleged local lack of expertise or its loss?  These are not Northern seas after all.  I also feel that you are excessively confident about the big Western companies NOT going into Iraq before it becomes fully sovereign and reasonably secure.  They did business with puppet regimes before. And they hired private armies to fight insurgents.  Therte is a civil war in parts of Nigeria but business goes on there.  From what I heard, Iraqui oil is concentrated mostly in the south.  This is a relatively calm part of the country and oil companies, there is nothing impossible  in securing it.  Basically, from your valuable comments  seems it is not clear what is BAD about PSAs and why did they get such a bad reputation?  Did Russians go against their best interests by getting out of their PSA deal in Sakhalin?  
by snowback on Sun Jan 7th, 2007 at 11:15:33 PM EST
Yap...I want to know answers on your questions too...

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Sun Jan 7th, 2007 at 11:40:01 PM EST
[ Parent ]
The easiest answer is "how else would a nation with sweet FA in remaining capital fund the billions needed to get the existing oil fields brought up to snuff? "

They can either get cash financing (from who?) and re-pay in cash after they sell the oil and buy the expertise from either Big Oil, Russia, China or India, or go the PSA route.  Either way, they have to give up a big chunk of the revenue to get the capital up front.  The Bank of Mother Teresa doesn't exist.

Plan B is to just muddle along using the small cash stream from the existing oil flows which won't cover anything like what is needed to get them back on their feet.  2 MMBD X $55 = $110 million/day or $40 billion a year.  Not chump change, but we've destroyed the place.  They'll need far more to improve the situation except at a snail's pace.  They'll need much of that cash just to buy basics so only a portion would be available to re-new facilities that have not had proper maintenance in 20 years.

The trouble with the anti PSA argument is the wide range of opinions on what the risk is worth and therefore what level is exploitation and what is "fair".  The seller (Iraq) will want to assume 20 years+ of stable government and high oil prices such that the % going to the other party can be kept low.  The other side will be more conservative re pricing and want to get their costs covered sooner in case the place comes unglued.  There is a split that is fair and a wide range which could easily be argued as fair until 20-20 hindsight proves otherwise.  The structure itself isn't a screw job.

And quite a lot of Iraqi oil is up north near Kirkuk.  big pipeline goes to Turkey (Ceyhan) from there.    As for easily securing the southern fields, I think recent events make your assumption a bit hopeful to be kind.

by HiD on Mon Jan 8th, 2007 at 04:26:28 AM EST
[ Parent ]
"but we've destroyed the place.  They'll need far more to improve the situation except at a snail's pace."
---
Yes, you destroyed the place. Wouldn't it be just fair if you pay for what you have done (not to mention that there is no money you can pay for all the people that were killed and are and will be killed).
Then who are you /we to tell them what a hell they NEED. I say let them have referendum (even in a tragic situation they are now) and let THEM decide what they need and want. We all know what USA and big corporations wants. Fuck them!


Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Tue Jan 9th, 2007 at 12:17:05 AM EST
[ Parent ]
There's a difference between fields under production (where infrastructure exists and only needs to be maintained - relatively cheap - and protected - not so cheap and difficult) and those not yet under production, where you need to build everything - which is expensive, requires lots of people and equipement, and is much harder to protect (see how much of current US occupation forces are devoted only to securing their own supply lines).

Then there's the matter of throwing money at a place where such assets would be obvious targets for an existing, well armed, ruthless insurgency (or call it by its correct name, résistance) - it's pretty hard to protect, and it's imply too big a risk to be worth the initial investment.

Nigeria is a case in point:production is regularly disrupted, and the oil companies have effectively had to resort to focusing their facilities in areas that could be isolated (islands) or where the locals could be bought off (which doesn't always work). And that's with low level guerilla, not full scale civil war.

As to PSAs, I am not saying that they are absolutely necessary, but that they can be useful - and that the need may be higher (and the terms less favorable) if the expertise does not exist locally - which is not the case in Iraq, which could presumably negotiate good terms for its fields.

PSAs' bad reputation comes fro mthe fact that it has become the main tool for investment by Westenr companies (because it was more favorable than the earlier forms) and that some activists are hostile to ANY oil major investment in other countries, and have correspondingly attacked PSAs as the latest version of "imperialism", with varying degrees of good faith and accuracy.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 8th, 2007 at 02:01:03 PM EST
[ Parent ]
PSAs' bad reputation comes fro mthe fact that it has become the main tool for investment by Westenr companies

What about obscurity? People don't like obscurity.

When I asked you about the different broad state revenue from oil) levels between Venezuela and other countries you answered it was basically impossible to know.

When you don't know what your country is doing with foreign companies, how are you supposed to be happy about it?

by Laurent GUERBY on Mon Jan 8th, 2007 at 02:22:02 PM EST
[ Parent ]
about a PSA per se?  Just a contract with payment in oil rights rather than cash.

Corrupt gov'ts will keep any contract under wraps.  Perhaps big oil shouldn't deal there, but there are a lot of people demanding the oil and it will flow to feed the addiction.

by HiD on Mon Jan 8th, 2007 at 03:24:48 PM EST
[ Parent ]
Obscurity is not linked to the type of contract.

A PSA can be public (as the ACG one I linked to) and still obscure in that it's really hard for an outsider to know what proportion of the revenue will go where in various scenarios - some of which depend on outside factors (oil prices, cost of some supplies like steel, etc...)

Other types of contracts can rpvodie the same mix of info and uncertainty.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 8th, 2007 at 05:42:56 PM EST
[ Parent ]
State owns the underground hydrocarbons in all countries (except some parts of USA). The oil business is basically a contractual business, contract between the State as owner of the hydrocarbons and the contractor (IOC, international oil company). Objectives of the State can be several: the most frequent is maximal revenues, but you can also look for development of national company (NOC) with qualified local personnel, employment, cheap energy for local use, etc. The good points of contracting out to an IOC are that the State transfers the various risks: exploration (you spend money and find nothing), development risk (you spend much more money to develop what you found that the economics become lousy) and production risk (accidents, pollution and political unrest). By contracting out, the State also solves the financing problem (large amounts of money for a long period of time).  

PSA's were invented by OPEC to be more advantageous for countries than the previous system of concessions. It is now clear that neither form is intrinsically better for one party (i.e. State or contractor). It all depends on the parameters of the contacts. As Jerome pointed out, there are many of them. Both parties to the negotiation have their hypothesis on future oil prices, and they negotiate the parameters with that in mind. The result of the negotiation depends very much on the time it is conducted. When the price of oil is low, the States are in a weaker position to negotiate and the resulting contract is more favourable to IOCs, and conversely. Today, the States are in a better position to negotiate because there is a lack of places where IOCs can drill. The most attractive places are closed to foreign investment (Saudi Arabia, Iran, Russia) in spite of intensive campaign by the USA as well as World Bank, IMF, OECD, IEA, etc. to open their countries to IOCs.

The problem of contracting out is that you must be certain that your co-contractor will remain in place for the duration of the contract, or at least, that the forthcoming actor will keep the bargain struck by the predecessor. In the case of Iraq, the previous contracts were signed with perfect knowledge that they would be cancelled if the USA did seize power in Iraq, bur remember that no money was spent. It was bet money. (The situation might be different for Iran). What IOC can be sure that any Iraqi contract signed today will be respected by the government that will be formed after the departure of the US army? That is why there have been these intense discussions about the Iraqi constitution. The best bet would be: sign the contract but do not spend any money before the dust settles.

As for Sakhalin, the main reason for the Russian State to renege the signed contract was that it was too favourable for Shell. In particular, there was no "cost stop" mechanism, which means that most of the oil produced during the first years would be used to reimburse the contractor. No oil would go to the Russian State. Russia used the fact that Shell did not satisfy all its obligations (environmental, but also a huge over-run in construction costs, which were recoverable, therefore increasing the delay) to force it to renegotiation.

This instability of the contracted agreements are a big scare for IOCs. International law does not always supersedes local law. The renegotiation can be successful if the country has a lot of oil and is very attractive (such as Venezuela today) or not (see Bolivia).  

by energilles (gilles.darmois@wanadoo.fr) on Tue Jan 9th, 2007 at 04:51:40 AM EST
[ Parent ]
Good article , Jerome, but Snowback raises good questions.

Although there is immense political/operational risk there doesn't appear to me to be remotely the same exploration risk - ie you're not exactly drilling speculative holes a thousand metres under water off some God-forsaken coast in Force 10 weather are you?

I believe that the financial solution - and in fact the political solution - can only come from the Middle East region, which is awash in petrodollars.

Whether you use conventional investment, PSA's or even the "un-geared" (Mother Teresa ?) Islamically sound methods such as the "Asset Pool" arrangements I advocate,

http://www.opencapital.net/papers/IranBourseIFNDec2006.pdf

it seems to me that this is where the investment can, and should, come from.

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

by ChrisCook (cojockathotmaildotcom) on Mon Jan 8th, 2007 at 05:20:26 AM EST
I'll just point out, that as he says in the Salon this morning, Jérôme is travelling all day today and unlikely to be answering questions until much later.
by Colman (colman at eurotrib.com) on Mon Jan 8th, 2007 at 05:26:08 AM EST
[ Parent ]
All that does is change the "fair" ratio.  And don't be so sure it's like shooting fish in a bbl.  I worked for a company that paid $400 million for a lease offshore US.  Our platform operated at 1/2 design while spitting distance away was one that couldn't process all they found.

Still even with the exploration risks reduced, costs are not trivial.  And political risk is even worse than exploration risk.  You can lose everything overnight in a coup.

As for asset pool arrangements.  How is "co ownership of a productive asset" different than a production sharing agreement.  Both look like share cropping to me.  I'd say a PSA is more like your preferred system than not.  Or is it the source of the money you find tainted and only the cash of the Saudis/Kuwaitis that you find acceptable?

by HiD on Mon Jan 8th, 2007 at 03:32:27 PM EST
[ Parent ]
What I advocate has elements of PSA's in that I am talking about rights to future oil. The difference lies in the pricing mechanism, I suspect.

As you should know by now I share the view that "deficit-based" money loaned into existence by "Credit Institutions" aka banks is not only unethical but also one of the key drivers of unsustainable economic growth.

Some at ET appear reluctant to address this "Inconvenient Truth": others just don't give a shit.

Anything financed using such money is merely pouring petrol on the flames of Climate Change IMHO.

I make no judgement on the lucky people holding petrodollar balances. I merely hope that they use that wealth in the interests of the planet. I am sure you do, too.

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

by ChrisCook (cojockathotmaildotcom) on Mon Jan 8th, 2007 at 07:12:52 PM EST
[ Parent ]
position and just don't buy it.  

Money isn't loaned into existence except by the central banks/Fed and then only to the extent it doesn't create more than a little bit of inflation.  The medium of  money comes from the state which in the end is all of us.   And it is backed by work/hard assets to a great extent.  Banks using leverage are severely limited by law and must borrow the cash from the central authority.  They cannot just stick negative numbers on the balance sheet willy nilly.  

I think you link far too many of the world's problems to the monetary system and make a  question begging statement in " key drivers of unsustainable growth".    Far from being an inconvenient truth, it is your opinion and little more from where I sit.  Our climate change issues have far more to do with going from 1 billion to 6+ billion in the last 100 years and not wanting to live in a 1750 world of subsistence farming.  Money didn't cause the change.  Human ambition did.

The Islamic world's fundamentalist view on money led them nowhere from what I see.  It was one of the more backward corners of the world and away from the oil spigot, still is.  The petrodollars are invested following Western patterns for the most part from what I understand of Saudi and KIO investments.  While it would be nice if petrocash gets used to put Iraq back together again, they will want a fair return.  I don't see interest free loans or gifts in the cards and your "sharing" approach still gives a return.  Though, perhaps one surrounded by an eruv and therefore "clean" using some religious test.  Moreover, I rather doubt Saudi will invest in Shiite controlled oil fields even at a high return.  And Iran doesn't have enough money and expertise to handle their own fields with best available technology.

I do find it amusing that when big oil uses the shared investment/shared return model you advocate you don't like it after all.  As for ratio of return, don't all your deals have the problem of striking a fair split?  

by HiD on Mon Jan 8th, 2007 at 08:45:13 PM EST
[ Parent ]
understand the banking system, and you are not alone - 99.99% of the population actually believe that banks take in deposits and then lend them out again. I used to think that.

No newspaper will even print a true description of the system, never mind a criticism.

When a Bank creates a loan - based (using BIS Basel capital requirements)- upon its Capital, then it creates Money - "Deficit-based" Money - because, unlike a Credit Union (which is essentially lending pre-existing Money) it is lending something it does not have and which did not exist prior to the loan.

That new Money is immediately redeposited into the banking system. But we are not talking cash swilling about here: we are talking about accounting entries: accounts payable and accounts receivable, "deposits" and "loans".

Well over 97% of new money is created in this way and over two thirds comes into existence as mortgage loans - ie it is deficit-based" but "asset-backed"), the balance <3% is cash created interest-free by the Fed.

These are the facts, not my opinion.

The Fed has no control over this process whatever other than to raise interest rates to choke off demand. ie put out the fire with gasoline.

Raising interest rates above the cost of defaults and administration is IMHO inflationary, and if it is NOT, I would like to know why not.

The cause of asset price inflation is quite simple. The deficit-based Bank credit money used to buy it is for the most part base-less. This also gives rise to the phenomenon of "gearing" which all punters and businessmen take for granted as being a "good" thing.

The Islamic world has no fundamentalist problem with money per se. They have a problem with debt and with gearing. They have no problem with a Return ON Capital, but believe that the risks and rewards in any such investment should be shared equitably, which in a loan they are not.

Big Oil would not dream of using the shared investment shared return model I advocate, since they require too high a rate of return on equity, and that is why they gear up by using debt finance.

Once you actually understand the banking system (there are many clear descriptions out there, and we might even consider calling upon Jerome for his view) - and I used to think exactly the way you do from a background not dissimilar - then I suspect you will understand why I think it is the problem to end all problems.

Until then, this will be a Dialogue of the Deaf, regrettably, because I respect both your expertise and where you are coming from.


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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 05:01:50 AM EST
[ Parent ]
Big Oil would not dream of using the shared investment shared return model I advocate, since they require too high a rate of return on equity, and that is why they gear up by using debt finance.

and there's the rub.  No one will loan on the low level of return you advocate.  Hence my perhaps flippant reference to the Bank of Mother Teresa.   I see their use of a PSA as roughly equivalent to your sharing structure, but your view also includes a low (yet unstated) implied rate of return.  How does a PSA fail to fit your model otherwise?

the Islamic world has no fundamentalist problem with money per se. They have a problem with debt and with gearing. They have no problem with a Return ON Capital, but believe that the risks and rewards in any such investment should be shared equitably, which in a loan they are not.

once again,  an opinion dressed up as fact.  If the interest rate is 0.1% is that a fair share of risk/reward?  2%, 4%, 6% 20??????  When does it flip from fair to usury?  I've yet to see anything in your writing to give me any guide.

I never assumed the Islamic world had a problem with money, only with usury.  And if I understand my fundies, any interest is usury.  All these other structures have done is play the game of hiding the interest in some fashion that the long beards can pretend it isn't usury.  Put up a wire and call the whole world indoors.....  rules, shmules, pass the brandy and where are the dancing girls?

as for your view on the banking system, I'll do a bit more reading.  I was under the impression that US banks cannot be geared much beyond about 110%. And still must have a few % of liquid assets.  I guess I don't live in fear of money back by house value any more than money backed by a government's promise to tax citizenry in the future.  Or dead metal.  It's all a promise that you can trade what you have today for value in the future.  The house has value with a pretty high certainty.  More so than dead metal and more than an IOU for work already performed (greenbacks).

the idea that the banks wishing to lend money (for profit) drives the desire for people to want the modern lifestyle as opposed to the other way around baffles me.  We see the world with very different eyes.  I see banks enabling people to time travel such that they can have the use of their next 30 year's earnings to live in a house today instead of a cardboard box until they've saved up.  Sure there is a sacrifice as you must pay interest, but I still don't want the box and don't see any other real world solution to getting the rest of the population to provide me with wood, stone and labor to make the house when I have nothing to trade for it in the here and now.  

Inflation is not a desirable thing and Central Banks like to keep it low such that the  the value of money isn't eroded and people have confidence that their excess work product will retain value. Otherwise you might as well over consume, build housing over 20 years (typical 3rd world tactic to avoid money becoming toilet paper that results in billions of assets sitting around unusable) or just knock off working. But deflation is worse.  Having last year's work be worth more than this year's puts those with cash in hand at way too much of an advantage and is a sure fire way to have hoarding behaviour.  We tolerate the hidden tax of 2-3% inflation to avoid the alternatives.  

Interest is not gasoline on the fire.  It's a control rod.  No one has a gun to their head forcing them to borrow new money every day.  If rates are too painful, you just do without until you have cash from earnings instead of borrowing.  Your distaste for interest seems over the top.

I have a feeling the core of our disagreement is a socialistic view that society owes everyone a decent home, food etc off the top.  On one level I'd agree with that, but on another I believe you still must provide society with enough value to pay your way if you are able.  Once you put the burden of earning your keep on, it's hard to prevent inequities.  I really can't see a socialistic system lasting any length of time given that some percentage of the population would rather skate by not pulling their weight.  That starts the death spiral of no one pulling in the traces harder than their neighbor.  And a larger percentage will graft the system to get more than their share via strong arm tactics, political manipulation, cliques etc.  A system that doesn't reward people for extra effort or extra ability isn't likely to see the extra effort or invention.  

Whatever, I'll just stay out of your diaries.  I doubt we'll ever see eye to eye.

by HiD on Tue Jan 9th, 2007 at 07:30:07 AM EST
[ Parent ]
Whatever, I'll just stay out of your diaries.  I doubt we'll ever see eye to eye

Now I think that would be a crying shame, for me at least. I find your contributions and observations extremely useful and stimulating. If everyone agreed all the time we'd all be bored fucking stupid.

One of the problems is that the "fundies" don't understand the system either and the whole Islamic Finance edifice is shot through with contradictions.

The trouble is that debt/credit is utilised for two purposes: one is as Money (ie bridging the gap between "split barter" transactions) and the second is for quasi investment ie asset financing.

The former is "unsecured" credit aka "time to pay" and the latter is secured credit or "asset-backed" (eg by a mortgage).

The underlying ethical problem with Debt is not actually "Interest" - insofar as it represents a return on Capital - but the nature of the contract of Debt as applied in practice to financing of productive assets.

The ethical objection is that the lender requires his money back whether or not the borrower is in any position to repay. The fact of there being a return on investment is not actually the issue - it's the FIXED nature of the return that's the problem.

Maybe that makes some sense.

I don't even think we are much apart on our world view either.

I believe that those who have exclusive rights of use of a Commons (such as Land, Knowledge or conceivably renewable energy) should compensate those they exclude. That's not a "Socialist" view as far as I know, but it's not inconsistent with Socialism.

So to that extent everyone could receive some sort of "citizen's dividend" or "Commons Rental". But I totally agree with you that beyond such a basic entitlement (which IMHO should be a RIGHT not a means-tesed BENEFIT) individuals should be able to do their own thing - which they would find easier in collaboration with others IMHO.

I'm totally in favour of a market solution - but a market without "rentiers" who make money from money, as opposed to receiving a return from investment in productive assets or maybe a gain from (say) commodities.

Just as an aside, only in a deficit-based economy is Deflation a "bad thing". Otherwise it's surely a wonderful thing that we may all receive more for less?

We are accustomed to thinking of Money as a valuable object - because that is what Deficit-based Money is. But in fact - as John Law put it -  "Money is not the Value we exchange goods for, but the Value we exchange goods by".

Money, as it should be, has no Cost, and no Value, but serves as a measure for the exchange of "Money's Worth".


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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 08:32:53 AM EST
[ Parent ]
The ethical objection is that the lender requires his money back whether or not the borrower is in any position to repay. The fact of there being a return on investment is not actually the issue - it's the FIXED nature of the return that's the problem.

Except that in real life when the borrower can't repay the lender doesn't generally get her money back at all. See limited liabilty, bankruptcy and so on. The lender may get to own the assets that she paid for, but that may not be much help to her.
by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 08:41:39 AM EST
[ Parent ]
Don't get me started on limited liability!

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 08:50:44 AM EST
[ Parent ]
Oh go on, you know you want to.
by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 08:54:05 AM EST
[ Parent ]
To me, Limitation of Liability is another "Commons" issue.

The Victorians debated long and hard when it was introduced in the mid Nineteenth Century to allow Companies (which had hitherto been unlimited in liability) this measure of protection.

The trouble is that it's essentially a free ride. Companies (and LLP's, LP's whatever) don't actually give anything back to Society in exchange for it.

It's what biologists call a "semi-permeable membrane" which allows Value through in one direction, but not the other.

Now don't get me wrong: it underpins "Equity" - one of the Twin Peaks of Capitalism and without it we wouldn't be where we are today...which is a double edged statement if ever there were one.

My take on it is that those who have the benefit of Limited Liability should pay something for it - maybe a small share of their GROSS revenues or even production.

That would go some way to redressing the "externalisation of costs" that results from the uninhibited use of Limitation of Liability ie "Capitalism red in tooth and claw".

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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 09:12:35 AM EST
[ Parent ]
Corporation tax, in theory, if not in practice? That comes out of the profits before they're distributed to the shareholders.

Actually, for small enterprises the lenders have pretty much eroded limited liability away, in Ireland at least, by insisting upon personal guarantees from the owners/directors for any loans.

by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 09:15:48 AM EST
[ Parent ]
A "limited liability levy" on revenues, before any costs are applied, and collected via a generic clearing system.

Your point about guarantees is well made, and of fairly general application.

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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 09:52:19 AM EST
[ Parent ]
It's interesting to me that on one hand you don't like lenders demanding repayment from folks who can no longer pay while on the other hand you don't like limited liability.   Seems schizoid.  What am I missing?

Is it the purpose that the loaned funds were used for that leads you to the distinction?

For me, I'd never invest in a company if the investment could lead to me losing more than the original investment.  Not worth the risk.  Into the mattress...

by HiD on Tue Jan 9th, 2007 at 03:07:44 PM EST
[ Parent ]
Did I say I didn't like it?

I've nothing against it at all, rather the reverse - we wouldn't be where we are without it.

BUT it should come with a price.

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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 05:58:32 PM EST
[ Parent ]
the trouble is that (Limited liability) is essentially a free ride. Companies (and LLP's, LP's whatever) don't actually give anything back to Society in exchange for it.

It's what biologists call a "semi-permeable membrane" which allows Value through in one direction, but not the other.

Society gets the ability to make investments without unlimited risk.  Without the security of knowing you can't lose everything from the result of a small passive investment, no one would invest.  We get the modern world as a result of banding together via investment vehicles.  Now if you don't like the modern world that's a different kettle of fish.

as for one way membranes.  The investor can still lose 100% of the investment.  That stings especially when most stocks don't return much more than 5%/yr (PE of 20).  hardly a one way street as any investor in Krispy Kreme or Enron or CMGI or Webvan can tell you.

by HiD on Tue Jan 9th, 2007 at 03:16:16 PM EST
[ Parent ]
You are absolutely right in your argument for the necessity of limitation of liability. I'm 100% with you.

But you're talking about investment in Companies -which is a pretty crappy way to invest in my opinion.

Companies aren't "the modern world" - they're Victorian nonsense which became obsolete in 2001 when the UK government was blackmailed into the LLP by the accountancy profession.

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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 06:06:28 PM EST
[ Parent ]
If limited liability is a good thing and has gotten us to where we are today, how can it also be a free ride?  If society benefited, it benefited.

Just to be clear, I don't have a problem with corporate level taxation or fees.  Though I would prefer in the US that we do away with it and then ban all corporate lobbying and political action committees etc as the trade off.  Tax the cash flows to the owners as regular income eliminating capital gains and dividend preferences.

As for corporations vs LLC etc, I don't pretend to understand all the nuance, especially in UK law.  But I really don't see much of a practical difference when it comes to organizing for investment.  The rich and smart will always find or create some way to protect what they already have in hand.  Of course, the rest of us are free not to loan to, invest in or trade with them if we don't like the smell of the risk/reward profile.

by HiD on Tue Jan 9th, 2007 at 06:46:50 PM EST
[ Parent ]
Don't get me started on bankruptcy!

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Tue Jan 9th, 2007 at 08:58:24 AM EST
[ Parent ]
Fair enough I just detected a degree of snippiness in both of us.

I believe that those who have exclusive rights of use of a Commons (such as Land, Knowledge or conceivably renewable energy) should compensate those they exclude.

I don't see anyone with an exclusive right to use knowledge except for patent holders who (in theory) came up with the knowledge to our overall benefit, and then only enjoy that exclusivity for a limited period.  People do deserve to have their intellectual efforts compensated and the patent system has been a fairly successful way.  I'd listen to alternative proposals.  But not any that fail to compensate thinkers/artists/scientists for their efforts.

Those with exclusive rights to use land (which is what fee simple ownership amounts to since the flea doesn't own the dog) already compensate those they exclude.  How else would you characterize property tax?  If that compensation is too low for you, raise the tax if you have the votes.  But it can be a very regressive tax except in systems where housing is owned by the state (ugh).

I think you are too worried about ownership of alternative energy.  Patent holders will get a return, but if I buy PV panels I then own my generation.  Since I can't make a PV panel, I don't mind the idea of paying the owner of the factory and the inventors to do it for me.  There's a lot of competition so I don't see a monopoly screwing us.  Windfarms make more sense to me as a public utility rather than individual units.  Too many little towers making the world look like a pin cushion, though I am looking hard at a home unit such as the Swift device should it prove reliable.

the ethical objection is that the lender requires his money back whether or not the borrower is in any position to repay. The fact of there being a return on investment is not actually the issue - it's the FIXED nature of the return that's the problem.

This is the part of your theory that blows my mind.  If I loan you my surplus work product I really do want it back.  My (theoretical) kids still want to go to college and I'd like to eat in retirement.  Why should the borrower's troubles be transferred to me?  People live with variable returns in many investments -- common stock for example.  Even preferred stocks have a risk element.  I just see loans as a different class of  investment with greater security for the lender and therefore a lower return expected.  Borrowers are free to strike different deals if they can find a counterparty.

If I'm reading you correctly, what you want is a low return and high risk.  On that basis, I'm going to guess much of our capital goes into mattresses or half finished individual projects doing no one any good.  

as to deflation leading to more for less.  What about the worker getting less and less for his work?  Not such a good deal for him that past work has greater relative value than current work. Deflation isn't just resizing currency units.  It's a bite in the ass for the working man.  Not to mention motivating people to hoard money/hard goods again leaving much of the world's work product sitting idly on a shelf.

I see money primarily as a placeholder for my work product.  Whether money has value or merely represents the value of the item it is exchanged for the difference is just semantic to me.  You perceive most money as deficit backed.  First I doubt that.  Second, I see it as asset backed when it comes to mortgages (no get out of jail free cards for borrowers or that blows up).  Only the state gets to create money by fiat and even then it's back by the power of the law to tax.  So not merely a scrap of paper.  

You object to profit from speculation.  I guess it doesn't bother me all that much.  As long as the risks are attached, leverage cuts both ways.  

I still am very curious as to what level of return you find acceptable.  

by HiD on Tue Jan 9th, 2007 at 02:57:29 PM EST
[ Parent ]
Re Patents, I agree that exclusivity is necessary for the reasons you give, but again, it's a free ride.

Firstly I would advocate a proportional share of revenues (if any) going into the Community pot.

Secondly there is the patent troll issue, and we might give some consideration to a policy of "use it or lose it" or maybe an annual registration charge offsettable against a patent levy.

Re Land and taxes, I go along with Henry George's view that the optimum land tax is one on land rental values. We certainly should not IMHO be taxing either properties on land or property improvements. One of the key elements of a land tax should therefore be to capture unearned increases in land rental values.

eg when re-zoning takes place, or public expenditure on a new railway.

As an example, when the Jubilee Line was built in London at a cost to the public of £2bn, property prices (ie capitalised land/location rental values) along the route went up by £17 billion - an unearned private windfall.

Now that can't be right, can it?

Moving on, a loan is a loan, and investment is investment. To me a loan is when you are entitled to your money back, and an investment is when you are not. (but you can always sell your investment to someone else)

The riskier the investment, the higher the return.

No problem.

It's the NATURE of the investment I am questioning, in the light of new alternatives, where I see a whole new field of quasi-equity opening up, and replacing asset-backed debt.

Let's put the deflation issue to one side, because there are issues there concerning the nature of the employer/employee relationship itself. That is another story.

All bank created money is "deficit-based". That is what "fractional reserve banking" (BIS Basel Capital requirements yada yada) is all about: exactly what multiple of their Capital Credit Institutions may create as credit/ deficit-based Money.

It's not a secret, and it really could not be clearer: it's just that we accept it without question as being OK beacsue we think it's something other than it is.

Over 70% of this deficit-based money is asset-"BACKED" as with a mortgage over property.

I observe that there is another "Asset-based" mechanism - the Capital partnership" - now available capable of financing property. And I believe that because it constitutes a better "equity release" mousetrap than anything else out there, then it is going to catch on - big time.

If and when it does, the result will essentially be streams of property based Money.

I don't object to speculation at all - it's an absolutely necessary part of the market process that individuals may put their capital at risk in the hope of a return.

"Gearing" on the other hand, is a different issue - back to fractional reserve banking again, and margined futures, where, as I am pointing out, Islam has a big problem.


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

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 06:56:20 PM EST
[ Parent ]
how are patents a free ride?  Any profits from them are taxed no?  If people want the idea/invention and are willing to pay for it, hasn't society benefited already?  Plan B is for the inventor to just withhold the knowledge and only sell the product in a black box fashion (when possible).  For example, Microsoft refusing to share source code as a trade secret.   That's not working out so well for the public at large.  We all get stuck with crap software and Microsoft gets to ride the monopoly forever.  

Should musicians have to perform only at live venues with recording devices banned in order to get paid?  I admit I find pop music profits obscene, but no more so than pay for athletes or mediocre CEOs.  Ditto movie actors/actresses.

I don't see a serious patent troll problem.  I'm sure there are examples but for the most part, intellectual property is used.  There is rarely only one way to skin a cat.  Patents already have limited lives so you can't squat forever as well.  Not to mention the Chinese/others are happy to ignore them so you best get your finger out and make money while you can.

In well run jurisdictions, re-zoning does trigger a capture of value to the state.  We force developers to pay for new water systems, roads etc for example in exchange for up zoning.  We probably don't take enough, but it's not zero.  And the state does get to raise property tax as well once the values are re-assessed.  Didn't the property tax increase for properties along the Jubilee line?  If not, get Red Ken to work on that.  Failure to do so is a political decision  But don't ignore that the public does get to use the line too.  Beats the hell out of walking that tunnel under the Thames.  Never been so cold in my life as walking that thing.

Your investment models don't show me much real difference to existing structures.  Maybe I just can't see the extra shades of gray.  People are still free to make Senior loans  or buy bonds (lower risk, lower return) use preferred shares (higher return, bit more risk) or straight stock investment (higher risk, hopefully more return).  Loans do not entitle you to your money back.  Just perhaps first place in line when/if the remains are carved up if the borrower fails.  If the borrower has destroyed the asset, you may not see much return no matter how much of a guarantee is offered up front.  

How is a capital partnership really different than shares in an REIT anyway? (in the case of real property investment).

Gearing just doesn't scare me.  But you can't be blind to the risk and leave it unregulated.  You have to keep a much closer eye on the players to make sure they don't blow up the system by taking on too much risk (a la Enron or Nick Leeson trying to gamble their way out of a hole).

In the end, gearing just lets you lose the money faster and perhaps lose more than your lender bargained for.  I don't think it would be that hard to rein in excessive gearing.  Just ban zero down loans and other structures that let people get in over their heads.  And ban people from holding more than 10% of their 401K retirement assets in one stock.  Putting stock option grants on a Black Scholes valuation is already shining the light on that stinky swamp and option games are dwindling.  Regulation works in my opinion.

My guess is the number of people about to take a bath in US real estate because of those risky structures will lead to more regulation and less ardor for those structures.  From both sides of the table.  Speculators here are starting to squeal.  Prices are dropping and still sales volumes are low.  With a little more interest rate push, the retreat could quickly become a rout.

I still am curious what rates of interest you consider unfair.  The "higher the risk higher the return" answer is not an answer.  You seemed quick to damn the structure as unfair to Iraq without evaluating the risk/reward situation before.  

The debate of how high the risk is and what the fair return on that risk is the guts of a PSA.  I can only figure out that when both sides think they are being screwed, you're about fair.  And then in hindsight you find out the answer.  And they get re negotiated especially when sovereigns have an army to force the other side to the table (Sakhalin) or subject to outright nationalization (Venz, Aramco, and many others).

by HiD on Tue Jan 9th, 2007 at 07:41:20 PM EST
[ Parent ]
Thanks. A nice reprise.

Just by way of summing up my position, I see partnership-based structures as mechanisms for simplifying existing complexities and for providing new policy options for the sharing of risk and reward and in particular for finance, including taxation.

I believe that the UK LLP is an optimal corporate vehicle precisely because it starts with a blank sheet of paper. With it I could, if I wished, clone any existing legal entity anywhere, or combination of them, but the real interest to me lies in the new possibilities it opens up.

It is a "meta Corporate", capable - in its "Community Partnership" form - of giving rise to something which is essentially a "participative" governance mechanism/constitution. ie a State in which we are members as opposed to "Them" and "Us".

I am not saying that every enterprise will BE an "Open Corporate"/ LLP/LLC, but I am saying that those enterprises which do not utilise the form, probably through membership of generic types (ie Guarantee Society, Capital Partnership) will be at a disadvantage to those who do not: the classic condition for "emergence".

In the last two years the number of UK LLP's has virtually doubled to 13,000 and they are breeding like rabbits. But no one actually has any idea what people are doing with them, because there is no obligation to file anything in respect of what they do.

Value judgements will continue to be made, in particular in respect of risk and reward, and these will be entirely subjective.

"Fair" and "unfair" rates of interest go out of the window if you don't use loans. But a reasonable long-term asset-based return?

My view, since you ask is that taking the biggest asset class of all - land and property - maybe a 3 to 4% index-linked return on capital is reasonable for developed property - but with the "equity" risk that the land/property is not occupied.

Development returns are another issue entirely - a different risk/reward profile applies.

I'm off to Libya this weekend to meet a mega investor in relation to that very issue of development finance.

An interesting wrinkle there is that the conventional wisdom had Gadaffi's "Green Book" classified on the lunatic fringes. But if you actually look at what he was saying and imposing top down (which is never a good idea) you'll see some interesting ideas.

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

by ChrisCook (cojockathotmaildotcom) on Wed Jan 10th, 2007 at 05:31:54 AM EST
[ Parent ]
Jerome, if I have understood you correctly, the key reason why this proposed contractual framework is meaningless is that, as you see it, there is insufficient security and stability in the drilling and production environment (Iraq) for the majors to be able to quantify the risks, so they will not bite.

The times they are a-changin, methinks.

Some questions:

First, anyone in the oil production business today is aware of the rapidly deteriorating security climate for such enterprises around the world, not just in the Middle East,---hell, in Central and South America as well. Gotta go with the flow here, I think.
I do not think security concerns will stop the oil majors from developing what is said to be the easiest to produce and perhaps the largest remaining largely undeveloped, high quality oil field in the world. It's just another problem to be solved.
 How would you solve this problem if you were one of the majors who had a shot at this treasure trove? Think like an old-school Bushian oil man here. (I'd say think like Dick Cheny, but-- who would want to even pretend?) Would you perhaps, first and foremost, need to learn to deal with a lot higher risk level in your commercial environment? It is possible that the entire world will have to learn the same lesson very soon- perhaps just a couple degrees in the future.

Second, if you were creating a marketing package, a strategy for the US - the puppetmasters behind the toy government of Iraq, how would you present this opportunity to the major oil companies so that it would be attractive?

Nick Turse just did a good piece for Tomgram about military planning for the world in 2025  that discusses in detail the central thrust of our military R&D and our training plans and investment, and it is clear to me from his article and many others that we are spending a fabulous amount of money to develop ways to control insurgencies and protect selected pieces of real estate and infrastructure, both in the urban environment and elsewhere- a strategy and technology package designed to secure exactly the areas that would be essential for profitable oil field development. This and a myriad of other pieces make me confident that the current administration has anticipated this obvious problem, and has no intention of EVER removing our "security forces" from Iraq. I see no evidence that the new congress can or will change this, and a lot that suggests that they too will cooperate in the exploitation of Iraqi oil. How do you go to the parent of a dead soldier, and say--what? "Sorry, it was all a mistake." or- "Oops." In the mind of a Neocon,(whose children are probably NOT in Iraq), or a congressperson up for reelection, "your nation survives today on that oil, Mrs. Jones" might seem more---persuasive.

This month Michael Klare, a hell of a good investigator in my opinion, will do a two-part series called "The Global Militarization of Energy Policy"--again, to be on Tomgram soon. I look forward to it- I suspect it will help illuminate this question.
If the US can make a plausible case that they have the ability- or soon will have- to deliver an adequate level of security to a developer, -- the picture changes.
How would one do this?
 The world has tried to look into the administration's mind and discern their imagined mission for the "Surgistas" ever since that fantasy was floated by a desperate white House.
Could it be that at least one of the purposes of the Surgistas will be to reassure those major oil companies--looking on and doing their own planning- that the security thing can be managed?  


Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Jan 8th, 2007 at 09:55:28 AM EST
I am personally skeptical that there are enough troops to protect oil production on the scale we'd need to maintain our "way of life". What you would describe would be a state of full out war, where life would change dramatically for all of us (militarisation and draft, shortages of lots of stuff and rationing, curtailment of civil rights, etc...)

We may yet get there - sometimes it seems like the goal of this administration, but the US way of life would disappear along with the rest.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 8th, 2007 at 02:07:23 PM EST
[ Parent ]
I agree. I was not suggesting that this was a viable strategy- these guys don't do viable strategy. There is a real paradigm shift going on, and as a result there are two worlds in conflict. The world inhabited by the whole rouges gallery of dinosaurs, who view the world as a field of conquest, whether economic, social or technical-
and a newer, broader vision best described, I think, by Capra and other deep ecologists. But as yet, the dinosaurs are at the helm, and there is the not-too-faint sound of roaring water.

-There are clearly not enough troops.

-There will be a draft, and militarization, (by referring to one of your many valuable graphics on weapons spending) is history.

-There will still not be enough troops.

-Rationing is inevitable anyway, unless that paradigm shift produces a new policy world.

-Civil rights? When the pres can declare ANYONE a terrorist sympathizer and throw away the key? Bit late for worrying about that, -no?

-A permanent state of war was declared several years ago, my friend.

and as to the US way of life--- I am here with my family significantly because that is already a memory.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Tue Jan 9th, 2007 at 09:23:01 AM EST
[ Parent ]
They tried asserted control on the Middle East oil on the cheap.  The mind blowing stupidity of assuming we'd be greeted as liberators and welcomed as partners in exploiting their natural resources proved to be just that.

But Big Dick and co are seeing just how little stomach the US citizenry has for a small war once it goes poorly and drags out a little.  The idea that we'd launch the sort of worldwide empire building exercise needed to control Venz, Nigeria, Angola, the AG region is off the charts.  Not to mention the Chinese might decide to use all our IOU's to build a serious navy and change the equation.  Ditto India.  

We'll go the technology route -- wind, PV, electric cars.  With a load of whining along the way from the dionsaurs in Detroit and on the WSJ opinion page.  Our lives will change over the next generation.  The 50's crowd (and their puppet's like GWB) that run things will be dying off soon anyway.

by HiD on Mon Jan 8th, 2007 at 03:40:17 PM EST
[ Parent ]
"The idea that we'd launch the sort of worldwide empire building exercise needed to control Venz, Nigeria, Angola, the AG region is off the charts."

"The plan" from the beginning was off the charts, but nevertheless was based on the neocon theology, endlessly repeated by the Billy Kristols of the world that a good lesson in the nasty results of crossing The Empire, and the rest of the rabble would fall into line.

Yes, they will die off, --but we will live with their legacy, and that will change our range of options immensely, and in a dark way. K street as the funder of first and last resort remains. And the next election is predicted to be HALF TRILLION DOLLAR exercise in PR.

My point was that SOMEONE will develop that oil, and Bush&Co. still intends it to be his buddies. He will fail, in this, I think, -but he will leave us with the mother of all cleanup jobs.

Capitalism searches out the darkest corners of human potential, and mainlines them.

by geezer in Paris (risico at wanadoo(flypoop)fr) on Tue Jan 9th, 2007 at 09:35:41 AM EST
[ Parent ]
can't argue with that analysis.  I just don't think the Neocon nitwits will get a second bite at the apple for a generation.  the Oil Empire model didn't survive the real world.  
by HiD on Tue Jan 9th, 2007 at 03:00:59 PM EST
[ Parent ]


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