Houston is often described as the energy capital of the world, and for good reason. This city demonstrates all the skills and infrastructure needed as a global hub not just for the oil and natural gas sectors but also for renewable energy.
More than 5,000 energy-related firms now call Houston their home because policymakers and industry have worked together to meet the challenges of the day and exploit new opportunities.
In this post-credit-crunch world, however, energy companies both large and small face a difficult business environment.
The financial crisis has led to significant job cuts and hit margins across the sector due to concerns over global demand, with the price of crude oil slumping from record highs in mid-2008.
Meanwhile, tightening domestic and international liquidity in the face of burgeoning fiscal deficits has only exacerbated these difficulties at a time when extra business investment, especially in capital-intensive areas such as exploration and production, is precisely what is needed.
But new challenges also bring new opportunities.
The limited availability of capital through conventional sources makes it all the more important that the oil and gas industry, in particular, consider alternative financing products.
Shariah-compliant finance has the potential to unlock largely untapped liquidity in the Gulf and elsewhere that could add to and complement existing pools of capital required by the sector.
(According to the Times of London, Shariah-compliant government bonds, known as sukuk bonds, comply with Islamic law, which forbids the earning of interest on money lent. Instead, bondholders receive “rent” on leasing government assets such as buildings. At the end of the bond term, the Treasury buys back the asset, releasing payments to the investor. Most Islamic financial products work on the principle of investing in a fixed asset able to generate a rate of return, such as property that yields rent, or an asset that can repay a larger capital sum on redemption.)
This financing method is a growth market worldwide but currently supplies only a tiny fraction of the funds needed by industry players. However, U.S. companies in other sectors are beginning to exploit its potential. In fact, only two months ago General Electric became the first Western industrial company to issue a sukuk bond, worth around $500 million.
Clearly, there is a strong business case that Shariah-compliant finance — worth more than $1 trillion worldwide — could benefit the oil and gas industry by adding flexibility to the marketplace. Broadening the investor pool would allow companies to diversify their portfolio and lower the cost of capital. And as real property with clearly defined rights under Texas law, oil and gas are assets that perfectly fit the Shariah-compliant model.
Both independent companies and conglomerates stand to benefit from this underutilized funding stream. This is particularly true for those looking to launch new capital-intensive projects such as oil refineries, liquefied natural gas terminals and petrochemical plants in the Middle East and Central Asia at a time when credit conditions are unfavorable.
So where does London come into this? The U.K. today is the leading Western country offering Shariah-compliant products — with $19 billion in assets — and the leading market outside the Muslim world. London is the location of choice as far as Middle East capital markets are concerned, and 20 sukuk offerings on the London Stock Exchange raised $11 billion to the end of 2009.
Supportive government policies have also helped London become the most advanced Western market for retail services, with a range of Shariah-compliant banking products from mortgages to car loans already on offer.
As global ambassador for all U.K.-based financial services, I continue to emphasise that Shariah-compliant finance in the London market is not something strange, exotic and arcane.
Rather it is a natural and welcome addition to the range of products and services that the city can offer to international investors operating in the 21st century.
So we hope Houston's oil and gas industry will view us as natural partners when it comes to exploiting the advantages of this alternative financing method.
The balance of the global economy has radically altered and is evolving rapidly. These shifts have been accompanied by changes in financial techniques and products. The emergence of Shariah-compliant finance will play a major part in these developments.
And Houston and London are well-positioned to lead the way — together — in this energy-finance new world.
Anstee, lord mayor of the city of London, was the keynote speaker at an Islamic Finance Forum at the Houstonian Hotel this week.
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