History of petroleum licensing

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The growing influence of the Islamic law and its economic rules:

When the oil industry began in Russian Azerbaijan in the 1840s (itself formerly a Shia Muslim jurisdiction, which had been wrest from the Persian empire by the Russians in 1826) the upstream petroleum contractual matters and their financing derived largely from non-Muslim commercial and banking practice. Nevertheless the Muslim law did certainly recognize lawful mining transactions.  

The sovereign or the private landlord severed the mineral estate under his land using a form of mining lease and conveyed it to the private investor. The mining lease thus described does not convey title to the minerals in situ, only those minerals produced at the mine-mouth, or the well-head in the petroleum sector. This practice also had Muslim sanction: In the early days of the new Muslim empire the prophet Mohammed had granted to some of his followers the estates in land and minerals along the lines just described. This practice provided the precedent for the grants of rights in petroleum in the Moslem lands in the late nineteenth/early twentieth century.

Towards the end of the nineteenth century the Ottoman sultan (a Sunni Hanafi monarch) vested the mineral and petroleum rights throughout his empire into the state treasury. This breach of the Hanafi system of the Islamic law set a precedent for the legal ownership of minerals today in the ex-Ottoman countries. Not only that, it provided minerals ownership there with a distinctly statist cast. In Persia (Iran) the Shia Ja’afari, Imami system of the Islamic law in force vested petroleum rights in the Shia Muslim monarch, to act on behalf of the Islamic state.

Since the time of the great MENA petroleum concessions which were mostly struck in the period 1880’s to 1950s, things have moved on. The Indonesians and the Iranians (both Muslim countries) have had a profound influence on modern practice in upstream petroleum licensing. The development of the Contractor Agreement in Iran in the 1950s and then the Contractor Agreement (Production Sharing) in Indonesia in the 1960s changed the legal status of the international oil company, IOC, from proprietor to contractor, a legal subordinate to the state oil company/national oil company.

Nevertheless both of these contractual models appear to owe more to motives of economic nationalism than to religious imperatives.
At present the Muslim legal aspects of modern petroleum practice are subject to a good deal of mystery so far as the foreign investor is concerned. Although the major U.K. banks offering services in Islamic banking do retain Muslim scholars, the ulama, to ensure the Sharia-compliance of their financial products these Muslim authorities have published little in English on the petroleum sector.

To be sure some English law firms, notably Norton Rose Fulbright, have made a valuable contribution with their guide-books to Islamic finance but the subject has not yet been adequately glossed in English in depth. Those best placed to open this subject to study and to rule upon it are the Islamic scholars, the ulama with their years of study of the Quran, the Sunna, and of the other influences on the interpretation and practice of the Islamic law.

As a result the Islamic finance industry’s growth is fraught with challenges, including disagreements between Shariah scholars on what is or is not allowed under Islamic law. As the Nigerian central bank governor the Muslim Mallam Sanusi Lamido felt able to put it at the WIEF……” it is almost impossible to have complete agreement in Shariah rulings”.

Islamic financial transactions are growing at the rate of 20 percent per annum and are expected to amass assets worth $5 trillion by the year 2020, up from today’s $1.2 trillion. Authoritative publications are clearly needed.

First of all the convenors of the WIEF conference, led by Prime Minister Tun Abdul Razak of Malaysia, explained the importance of Islamic finance in the world economy. Of this Europe has an 8 percent share, the U.K. 5 percent and the U.S. 1 percent. It seems obvious to this author that even at its present diminished price the production and sale of oil will transfer a great deal of world wealth from western Europe, China and North America into the hands of the newly enriched citizens of the Arabian Gulf countries. Many of these will be private investors who will wish to invest their wealth into ethical Shariah-compliant investments and so the percentage of the world economy invested into Islamic financial instruments can only be expected to grow.