Friday, September 23, 2011

Nondominium - the Caspian solution... A Caspian partnership...

Nondominium - the Caspian solution... A Caspian partnership...
By Chris Cook

Twenty-first century problems cannot be solved with 20th century solutions. Nowhere is that saying so true as in territorial disputes where oil and gas are involved.

The riches of the Caspian Sea have been the subject of dispute for years, and relatively simple - but still intractable - binary issues between Iran and Russia are now multiplied by the conflicting claims of what are now five littoral Caspian nations: Azerbaijan, Iran; Kazakhstan; Russia and Turkmenistan. Their claims relate not just to rights on the Caspian Sea surface, but to rights in the sea, and above all to the rights to the treasures that lie under it.

There are two 20th century legal approaches: international law and common law (equity). There have been proposals for "co-ownership" by the nations, but such a condominium - as it is known - has received little favor. In the North Sea, rights to production from oil and gas fields are now dealt with through the use of a common law "Master Deed" agreement. While this is imperfect, it is a great improvement on the complete legal nightmare that preceded it.

At the Gas Infrastructure World Conference in Baku, Azerbaijan, this week the hot topic was the unprecedented agreement of all 27 European Union nations to join forces in support of the proposed Trans-Caspian Gas Pipeline, which will enable Turkmen gas to fill - and make more economically viable - the proposed and troubled Nabucco gas pipeline to Europe.

Good news and bad news
There was no official Iranian presence at the conference, but, speaking purely in a personal capacity, Mahmood Khaghani had some very interesting things to say in response to the UK Foreign Office representative, Angus Miller. Khaghani was for many years a very senior, and innovative, official of Iran's Petroleum Ministry, including a period as the director general of oil and gas affairs in the Caspian region. He originated the Caspian Swap, whereby Caspian producers of crude oil could supply crude oil to Iran and receive in exchange crude oil in the Persian Gulf.

After dryly congratulating the EU 27 on being able to agree on something, Khaghani's intervention was to the effect that he bore good news and bad news. The bad news was that in his opinion, neither Russia nor Iran had any interest - under the current Caspian international regime - in consenting to such a sub-sea Trans-Caspian pipeline.

The good news was that he brought with him a constructive and innovative 21st century proposal that may enable the current Caspian logjam to be broken. Moreover, if the proposal can work in the Caspian, it can probably work anywhere.

A Caspian partnership
The proposal is that the littoral states should form a Caspian Foundation legal entity, and commit to that entity all existing rights in respect of the use, and the fruits of use (usufruct), of the Caspian Sea, and everything on it, in it, or under it. The Caspian Foundation would act as custodian or steward and the nations would have agreed governance rights of veto.

This negative or passive veto right of stewardship is very different from conventional property rights of absolute ownership and temporary use under condominium. Moreover, it does not have the active power of control held under common law by a trustee on behalf of beneficiaries, and the legal complexities and management conflicts which go with it.

The Caspian Foundation would be a subscriber to a Caspian Partnership framework agreement between the nations, investors of money or money's worth, and a consortium of service providers.
This Caspian Partnership would not be yet another international organization, with everything that goes with that. It would not own anything, employ anyone or contract with anyone: it would simply be an associative framework agreement within which Caspian nations self-organize to the common purpose of the sustainable development of the Caspian Sea.

While such a consensual framework agreement would tend to align the interests of the Caspian nations, it is entirely possible that expectations will diverge so much as to make any agreement impossible.

My first reaction is that within such a framework agreement much is possible. In particular, I can envisage a new "pool" of Caspian oil and gas production that would open up the sort of new financing and funding options through unitization (ie simply the issue and sale by producers of credits redeemable in payment for gas) of which I have written previously.

It also opens up the possibility of a Caspian "balancing point" spot gas price in just the same way as there is already a virtual national balancing point at which the UK spot natural gas price is set.

Many indigenous peoples, such as American Indians and Australian Aborigines, find it impossible to understand how anyone can own land. Whereas, most religious traditions - including Christianity, Islam, and Judaism - were all founded upon a belief that absolute ownership, particularly of land, is God's alone, and that a tribute should be paid accordingly, such as a tithe.

I believe that an apt term to describe this proposal's essentially Gandhian approach to the property relationship is as a Nondominium - and my instinct is that such a framework could revolutionize international economic relations.

Chris Cook is a former director of the International Petroleum Exchange.

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