legal guide09.indd - Islamic Finance News

Developments in Islamic Energy Finance —
The Middle East
By Craig Nethercott and Mohammed Al Sheikh
In 2004, the Qatargas II LNG project achieved
financial close on about US$500 million Istisna/Ijarah
financing for part of the US$6.5 billion Qatargas II
LNG facilities. Islamic financing did not feature in the
subsequent Qatari oil and gas financings.
The Qatargas Islamic structure, which was itself based
on developments in the UAE ADWEA power deals,
was later followed in Oman — the Sohar aluminium
smelter, in Saudi Arabia — the Saudi Aramco/
Sumitomo Chemical joint venture PetroRabigh in
the amount of US$600 million and later in the SABIC
Kayan project for a significant US$1.6 billion.
In large part, these financings did not provide the
all-important “additionality” to funding sources.
Commercial banks split their participation between
commercial and Islamic windows. The additional
dollars from the dedicated Islamic finance institutions
were not perceived as justifying the time and cost for
development of the Islamic finance participation.
These path finding Islamic project financings
arguably had more to do with the political desire for
the involvement of Islamic financings in projects than
the fundamental need to establish a fully-funded
financing plan. While the Islamic financing market
has achieved greater involvement in non-energyrelated
project financings in the Middle East since
2004, the large energy projects have been financed
primarily in the non-Islamic banking market.
Fast forward five years and the project financing
market looks very different from the heady days of
2004-2007. Crude oil pricing is at nearly half the
levels achieved in 2007. Project finance loan volumes
are at 2005 levels based upon some statistics. Many
of the major non-Islamic banking participants have
withdrawn from the market or are participating
at much lower levels of commitment. The recent
distressed restructurings in the Middle East have
also weighed upon regional and international bank
appetite.
The one silver lining in an otherwise gloomy
assessment is that pricing, one of the main deterrents
to Islamic bank participation in low margin energy
financings prior to the credit crunch, has improved
“marginally”.
The reduction in the availability of non-Islamic
bank financing and the slump in crude oil pricing
means that the monster-sized energy projects under
development will have to look more closely at Islamic
financing participation in financing plans. Financing
a multi-billion dollar project in today’s markets will
require more creativity than in the 2004 to 2007
period.
The Istisna/Ijarah structures used in the earlier
Qatargas/Rabigh/Kayan string of financings will still
form an important part of the financing plans for the
new energy projects coming on stream in the Middle
East.
Formerly the Istisna/Ijarah Islamic bank participations
in energy project involved many of the international
bank participants splitting the exposure between
non-Islamic bank participation and Islamic
participation through their Islamic banking windows.
The involvement of the non-Islamic banks through
their Islamic windows can be expected to decline.
The emergence of new Islamic banks and the
entrance of the more established institutions in the
project finance market will offset the disappearance
of the Islamic window participants to some degree.
Although there is significantly more Islamic bank
capacity to participate in transactions than five years
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