Volume 42 | Number 1 Fall 2006
Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field
VI. Conclusion
Islamic finance has just now emerged as a realistic option for oil and gas financing for exploration and production assets in the United States and elsewhere. Muslim investors will likely be flush with petrodollars for years to come. As the market grows, Shari’a-compliant deals backed by U.S. oil and gas assets may eventually become a less exotic alternative to traditional lending and debt and equity offerings, if not evolving eventually into a mainstay of corporate finance. While full of promise, this nascent form of financing requires careful planning and industry-specific expertise.163 Future Islamic finance transactions used to raise funds for American oil and gas projects or for U.S. and/or international energy companies may at some point become a rather routine method of financing; at present and for years to come, however, each deal, given its novelty, will likely be highly negotiated and carefully structured, requiring the dedicated attention of experienced counsel and financial advisors. Having a legal advisor with Arabic language training, familiarity with Shari’a, and a cultural appreciation of the Muslim world is invaluable to the success of a deal, especially in the early stages when relationships are forged and fundamental terms are being agreed. Shari’a scholars will need to be brought on board to monitor (and at times closely assist with) the structuring, to issue the requisite Fatwa, and to provide ongoing Shari’a audits. Law firms involved in such transactions will need to have a good understanding of Islamic finance and investment techniques, as well as documentation coupled with a mastery of the oil and gas aspects of the deal, plus tax, bankruptcy, finance, and securities law experience. For legal issues related to characterization of assets under state law, local counsel in jurisdictions such as Louisiana, Texas, or New Mexico may need to be consulted to properly understand, document, and record the transfer of property rights. It is also critical for bankers involved in the transaction to have deep connections with the Islamic investment market, which remains somewhat insular despite its growing economic power. An ideal investor would be savvy, have at least a basic understanding of both energy projects and Islamic precepts, and be willing to take calculated risks; yet a carefully structured and marketed deal can appeal to otherwise sophisticated investors without a history of investing in Islamic products or oil and gas deals. With the correct team in place, lawyers serving the energy industry and financial institutions will be able to tap into a potential bonanza of financing opportunities which could potentially reach into the billions, if not trillions, of dollars and extend far beyond the United States.
Although the content of this Article has been tailored to the specific opportunities associated with Islamic finance and U.S. oil and gas assets (a truly promising field not yet explored in any meaningful way, notwithstanding the groundbreaking transaction described above), the general precepts outlined herein can be applied to other types of Shari’a-compliant transactions involving real assets and natural resources (including renewable energy) in both the United States and elsewhere. Imagine, for instance, a Sukuk backed by Canadian timber properties or by toll road receipts in Brazil, an Ijara financing an oil platform off the coast of Nigeria, an Istisna’a financing of a factory in Shenzen, or a Mudaraba investment in a LNG facility in Indonesia. Such projects are not only realizable, but may well be on their way to materializing. For example, an Italian developer has considered using Islamic finance techniques to finance the development of wind farms.164 Such a project highlights the close interaction between Islamic investing and socially responsible projects in fields such as renewable energy. The established but rapidly expanding field of Islamic finance can, and should, achieve at least a tangential convergence with the financial markets serving the energy industry in the United States and worldwide. But the precepts detailed above support a realm of possibilities limited only by the creativity, knowledge, and acumen of the “borrowers” and investors behind the deals and the attorneys and bankers who serve them. Bridging the gap between a ready supply of Muslim capital and the voracious appetite for funding in non-Islamic markets in United States, Europe, Latin America, Africa, and Asia could also play some small role in reducing the friction—and often the suspicion—associated with cross-border commercial and economic cooperation with the Islamic world.
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Footnotes
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