6 August 2004

THE extraordinary strength in oil prices since 2002 has, not unexpectedly, motivated Arabian Gulf oil producers to upgrade their energy infrastructure.

Gulf countries have traditionally borrowed in the international loan syndications market but a greater proportion of Middle East energy finance is now met by Islamic banks in the region or the Islamic windows of such global houses as Citigroup, UBS, BNP Paribas and HSBC. Qatar has been the most prominent borrower in the energy finance segment of the international capital markets, floating Eurobonds, project notes, sukuk (Islamic bonds), syndicated floating rates notes and Islamic loans. Since Islamic law prohibits interest, Western bankers use creative financing engineering to structure project finance transaction that provide funds at competitive spreads to Libor as well as comply with Sharia. For instance, in a recent Islamic loan structure for Bahrain Petroleum Corporation, the client receives lease payment for its property from its banks that it will sell to them and then lease back. The $300 billion in assets controlled by Islamic financial institutions worldwide have naturally increased the financing options available to the Gulf's state owned energy producers, leading to tighter pricing as conventional and Islamic banks scramble to lend to the small number of blue chip credits.

Qatari Liquid Natural Gas (LNG) terminals are the sweet spot in Middle East project finance. The Gulf emirate has floated thirty year sovereign Eurobonds and invested $30 billion in its oil and gas infrastructure, designed to make Doha the LNG capital of the Middle East. Since the financing components of Qatar's deals with Exxon or Shell are so huge, global banks with Islamic financing capabilities such as Citigroup, UBS and Hong Kong Bank have a competitive advantage. There is valuable intellectual technology transfer in syndicated finance as smaller banks from the region get invaluable experience in documentation, book running and placement from the big boys of the Euromarkets. Thus it is not coincidental that while the sukuk (Islamic debt finance) market was pioneered and lead managed by Citigroup, regional players have now catapulted to the apex of the banker's Luctite tombstone now. For instance, Dubai Islamic Bank was selected by the Dubai Government to be the lead manager for the $750 million Department of Civil Aviation sukuk, the biggest Islamic debt financing issue in the world. There is also a convergence of Islamic and Western project finance as conventional jumbo deals often have an Islamic component. Nor is Islamic project finance limited to oil and gas deals alone. A prominent borrower in Islamic project finance is Alba, Bahrain's aluminium producer.

It is significant that the growth of Islamic project finance and investment banking has not been inhibited by the post-9/11 spotlight on terrorism and Islamic banks. Citigroup, the bank that is a quintessential Wall Street financial conglomerate and even a reputed target for Al Qaeda, has been a pioneer in Islamic finance. This is not surprising to the cognoscenti of international finance. After all, Citicorp has operated in the Middle East for four decades, counts Prince Waleed bin Talal Al Saud as one of its prominent shareholders and is a leading banker in the Euromarkets. The role of government guarantees in project finance lends a political dimension to this business - note that BP and Shell scrambled to do deals with Libya after Tony Blair's visit to Colonel Gaddafi last spring. Refinery upgrades, LNG terminals, airport construction, aircraft leasing, tanker fleet purchases - the spectrum of Islamic financing in Gulf projects is increasing dramatically. In the process, an acceptance of Islamic finance in Western banking circles is evident. Obviously, when big money is at stake, there is no "clash of civilizations" between the bankers of Islam and the West.

FROM MATEIN KHALID (CREEKVIEW)

© Khaleej Times 2004