Academic journal article Texas International Law Journal

Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field

Academic journal article Texas International Law Journal

Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field

Article excerpt

I. INTRODUCTION

Islamic finance has become a significant source of investment activity in both the Muslim world and, more broadly, the global marketplace. Islam forbids the charging of interest, and otherwise limits the kinds of commercial activities in which people of the Islamic faith may engage, rendering traditional Western approaches to finance (such as loans, bonds, and other debt instruments) largely incompatible with Islamic law. Modern Islamic finance techniques-shaped by traditional Islamic legal principles and an evolving body of jurisprudence, known collectively as Shari'a-draw upon centuries of religious scholarship, enabling devout Muslims in contemporary society to participate in capital markets. Despite the growing prominence of this form of investment, its use in the energy business has been isolated and tangential. Shari'a-compliant transactions in the oil and gas sector have predominately been focused on "downstream"1 projects in the Middle East. These applications have typically merely supplemented more conventional sources of capital investment (primarily through the introduction of Islamic finance tranches in the context of conventional project financings).2 Potential "borrowers"3 operating outside the Middle East and those involved in "upstream"4 oil and gas operations, even within the Middle East, have yet to access Islamic financing.5 A potentially significant source of funding for the voracious energy industry remains almost entirely untapped, and Muslim investors have yet to participate in oil and gas transactions in the United States, with one notable exception. The existing disconnect between potential Muslim investors and Western oil and gas companies has yet to be resolved, but the potential for fruitful economic relationships certainly exists. If this multi-trillion dollar opportunity is approached correctly, however, the enormous potential of Islamic finance for the oil and gas industry may be realized.

Due to the nature of oil and gas assets under American law, there exist few legal impediments to structuring Islamic finance transactions tailored to fit the needs of both the oil and gas industry and Muslim investors. In fact, oil and gas law in most U.S. states is a near perfect fit for the principles of Islamic finance. As a threshold matter, oil and gas assets (including the real and personal property connected with petroleum operations) constitute permissible assets for purposes of Islamic investment because oil and gas operations do not violate Shari'a prohibitions on involvement in inherently "sinful" activities. Shari'a encourages shared risk through joint ownership of productive assets (such as oil and gas reserves) and business enterprises (such as drilling or hydrocarbon production). In key U.S. states, the laws governing oil and gas interests allow for investors to benefit from the security of holding well-recognized real property interests yet to remain largely passive investors; Muslim investors can benefit from partial ownership of productive assets without having to participate in the operation of the oil and gas properties. In Texas and Louisiana, for example, mineral estates (i.e., ownership of oil and gas in the ground) and interests carved out of them (such as royalties) are considered to be real property. As real property with well-defined rights under the laws, ownership in oil and gas can be cleanly transferred, in whole or in part, in a variety of ways. Both privately-owned and government-administered oil and gas leases can be severed, subleased, assigned, encumbered, or otherwise manipulated, often without altering their characterization as real property under the law. oil and gas law further allows for the transfer of certain kinds of partial ownership rights; for example, one party may control the "working interest"6 and operate the leasehold while other parties may hold "passive" royalty interests (i.e., interests that neither participate in operations nor bear any costs of development). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.