While the political sensitivity of the issue is fully acknowledged, it is not the objective of this research to represent the viewpoint of a particular political and religious group. It is also not the intent to present any biased opinion pertaining to a special clique. The objective and focus of this exercise strictly remains: to investigate the challenges presented to international petroleum industry by Islamism. These challenges include the legal and economic issues that can arise from the application of Islamic legal and economic principles on the oil sector of Middle East and North African Muslim countries.  

Lack of sufficient reference material has handicapped my ability to undertake extensive research on the subject. I have however greatly benefited from Professor Noreng's  ‘Oil and Islam' which offers an elaborate discussion on the subject. While Professor Noreng's work is the result of a major multi-year effort, the current research work is much more limited in scope and content. One may also notice a possible overlap between the two documents; however this research does not limit itself to the social and economic issues only and encompasses the legal aspects as well in true tradition of CEPMLP's graduate research practice. I have also used references from Dr. Walied El- Malik's ‘ Mineral Investement Under Sharia' Law' which is an excellent source on the application of Islamic law in natural resource contracts.

This dissertation is organised into 6 chapters.

It might seem strange to have excluded Islamic Republic of Iran from the list of countries chosen for case studies. The Iranian revolution in 1979 was an incredible political development that shook and eventually uprooted the very foundation of US and Western cultural and economic objectives in the region. The movement was led by the Ayotullah from exile in Paris and had a pure Islamic and religious theme. Overnight Iran became the focal point of Shi'i world and movements like Hizbullah which took inspiration started gaining strength in other parts of the world. To some observers Iranian Revolution and Islamist politics are inextricably linked. However over the years the revolution has exhibited contradictory aspects as well. Iran's foreign policy gradually transformed itself from pure Islamic ideological goals to geo-political state interests. Iran does not fit in fully in a discussion on the topic in hand for various reasons.

• In the first place the Muslim world is bi-polar, very strictly distributed between the dominant Sunnite and minority Shi'i Islamic sects. Iran represents only the minority and as such does not qualify to represent the entire Muslim world. The revolution in Iran has come out more limited and contained than initially feared or hoped. Although there had been ideological and moral inspiration in places like Lebanon and Bahrain but the ideology was more Iranian and Shi'i and thus could not be exportable. Iran's traditional rivalry with the Arabs continued even after the revolution and the long war with Iraq was fought with a strong anti- Arab motivation. Any move by Iran to spread the revolution to Arab areas would prompt a most vehement opposition from Arab regimes. In a true sense Iranian Islamism is a clerical movement whereas non- Iranian Islamist movements are anti- clerical in nature.
   
• Iran historically enjoyed an amicable relationship with USSR and the break-up of USSR into new states created problems for Iran. Iran's very large Azeri minority could now look towards Azerbaijan as their new home and it was important for Iran to have a weak and unstable Azerbaijan. Hence it sided with Christian Armenia in its war against Muslim Azerbaijan on Karabakh issue.
   
• Iran's not so loud opposition to Russia in its mass destruction of Chechnya also shows Iran's preference for geo-political gains rather than ideological issues. Iran is also opposed to the Pushtun Talibans in Afghanistan who are fighting a war against pro-Iran Persian speaking ethnic Tajik and Uzbeg Northern Alliance. The recent Islamist uprising  in Daghestan and Chechnya is linked to the Talibans rather than with Iran.

Political Islam has evolved primarily as a reaction against authoritarianism and corruption. Domestic factors commonly attributed to its emergence are:

• A general failure to become part of globalisation;
• Inability of the secular elites to live up to the expectations of the people;
• Authoritarian and repressive nature of regimes and an erosion of the socio- cultural and economic life leaving the mosque as the only place for intellectual freedom;
• The changing role of the merchant class in relation to the establishment;
• Reaction to uneven economic development and unplanned urbanisation.

Various events in international politics during recent past have also contributed in increasing the negative sentiment in Muslims of being humiliated by the West. These include:

• The creation of the state of Israel and an inextricable US-Israel security alliance;
• World community's war against Iraq and the build up of massive US military presence in Saudi Arabia;
• Russia's annihilation of Chechnya;
• The ethnic cleansing of Muslims in former Yugoslavia.

The overall impact of all these factors could be summarised in the emergence of two trends: anti US sentiment in Muslims and the rise of Islamism.

2.1   Islamism and Western Perception

The Iranian revolution was a classical demonstration of these two trends. The fundamental rallying point of the Iranian revolution was Islam and the main expression and outburst was against the United States. It seemed that almost overnight an established secular and liberal society was turned into one of religious zealots.  The Islamic revolution in Iran provided a competing paradigm that sent shock waves throughout the world and caused fear among the western policy makers. Can the phenomenon spread to other countries of the region, especially those with abundance of oil wealth? How much can a regime with fundamentalist priorities impact the oil policies? Such questions suddenly become extremely important requiring a closer scrutiny and investigation.

In the west Islamic fundamentalism has effectively replaced communism as a parallel ideology and the main anti-west theme after the fall of USSR. Terms like ‘the Islamic threat', ‘the green peril' and ‘Islamic terrorism' are frequently used in western media to describe sometimes even non-violent Islamic movements. Islamic fundamentalism has come to be seen as a disruptive force that threatens western friendly Arab regimes; is a threat to the flow of oil and a source of terrorist activity. It is being regarded as violent a movement as Bolshevism, Fascism and Nazism and is considered authoritarian, anti-democratic and anti- secular. The US policy links Islamist movements and organisations with terrorism and views it as a force that threatens the flow of oil to the west leading to the establishment of Iranian-style regimes. Although the Islamist movements are much too diverse, disunited and incoherent to gain power in the Muslim countries, the fundamental western fear is if they can become powerful and popular enough to form governments.

An opposing group however regards these threats as grossly overstated. According to them Islamism is a form of political activism that aims to achieve political power and does not represent any hostile intentions and pose a threat to the energy supply. It aims to change the social, cultural and political life of Muslims within peaceful and just means.  According to this view, the whole phenomenon of political Islam is overrated and even if there is some future victory for political Islamists it would have no effect on the current energy situation in the Middle East. The overrated expression of Islamist threat resembles the anti-Soviet paranoia of the 50s in a lot of ways that became common wisdom of the 60s and 70s. They claim that in such situations, the perception of reality becomes important rather than reality itself.  Islamism, in essence is a ‘mass mobilisation of people against unpopular and unaccountable governments who have squandered the oil wealth of the Middle East and North African oil exporting countries through mismanagement of economic resources and excessive and wasteful expenditure on arms purchases. Its main objective is to alter or overthrow the present social and political order'. It is not the purpose of this study to establish which of the two views is correct but in view of these contrasting theories it is useful to learn more about Islamism itself.

The first task is to differentiate between ‘Islamism' and ‘Islamic fundamentalism' as the two are often (mis)used interchangeably. The fact is that there is a distinct difference between the two terms. Fundamentalism owes its origin to western classification of Protestant movements in North America and does not appropriately describe the Islamic movements in the Muslim world. Fundamentalism represents a return to a specific historical foundation whereas the current Islamic emergence is a result of contemporary circumstances. Moreover associating the term ‘ism' with Islam which along with Christian and Jewish religions represents the three religions of the Book seems somewhat derogatory. However owing to its wide usage and application in western media, the term has become synonym with the current Islamic resurgence. I shall therefore use the word Islamism throughout this study to refer to Islamic revivalist movements.

2.2   Sharia and Muslim Societies

All Islamist movements aim to rid the Islamic society of heretical tendencies and introduce Islam in its purest form based upon Quranic theological and juridical principles.  There is no universal international effort behind the groups and movements claiming to be Islamists. One can notice a considerable diversity in the points of view of numerous Islamic movements in the Muslim world, the ideals that they profess and how these ideals should be implemented. Despite these differences in the political programmes and approaches, these movements which present a serious challenge to existing power set up in most Arab oil producing countries, are unified in their demand for the implementation of Sharia or Islamic law. The issues lying at the core of the problems confronting the Muslim world today include the established western model of separation of church from the state. This model is not recognised by these movements and is considered to be a cause of all the social and economic ills in the Muslim world. It is claimed that the lost Muslim power can only be regained by a return to true Islam. It is the duty of the state to introduce laws based upon Sharia in order to create a moral and just society. If the government fails to fulfil its mission of upholding the unity of the Ummah and provide a peaceful living to its subjects, it no longer remains Islamic and has to be replaced.

The unanimous concern of Islamist movements (whether reformist or revolutionary) to implement Sharia is unequivocal. So strong is it that the direction of most Islamist movements has taken a mainly legal course. It was the ‘ Najaf' school of Islamic law during the 60s and 70s that provided the ideological and political inspiration to the Iranian revolution. The effect was so strong that created upheavals in an established political and legal system. Some believe that there would have been no Iranian revolution without the Najaf school. Law plays a pivotal role in the current Islamic revival as well and it is in this context that west should make a deliberate and focussed effort to understand the nature and theory of Islamic legal system.

It is for this reason that an introduction to Islamic legal and economic principles has been included in this study. The focus however remains on the effect of Islamic legal principles on the petroleum industry in Muslim countries. Table 1 outlines the constitutional role of Islamic law in various Muslim countries. It can be noticed that constitutional role of Sharia is well acclaimed and acknowledged in almost all the countries.

2.3   Sharia- Basic Principles

There are two major sources of Islamic law. The first is a set of basic laws as revealed to the Prophet Muhammad (PBUH) and written down in the Muslim holy book of Quran. Thus the Quran is the premier origin of Muslim law, containing 6,219 verses which were revealed to the Prophet Muhammad (PBUH). 500 verses out of these are legally significant and around 300 of these define what Muslim jurors call ‘laws of men' or ‘ huqooq ul ibad'. This category encompasses all what is covered by French and German private law. The other verses which define what is essentially ‘laws of God' or ‘huqooq ullah' are considered forming Islamic public law.  For the Muslims it is a matter of belief and faith to understand, respect and obey these laws. No one is allowed to encroach upon this area. This description does not imply that these ‘divine' laws are contrary to the human (individual and community) rights, needs and demands and progress. These are based on the principles of natural justice and there is a very strong rationale behind every law.  It is for the Muslims to understand this. For example Islam strictly forbids drinking and gambling. While mentioning wine and gambling the Quran says'

‘In them is great sin, and some profit, for men; but the sin is greater than the profit…'.

Hence while the Quran recognises some benefits of alcohol and gambling, it stresses that the disadvantages far outweigh the advantages and orders the Muslims to refrain from indulging in these two practices. It does not however pinpoint the medical or scientific logic behind this and it is for the Muslims to find a scientific rationale behind the prohibition of this practice.

The next major source of Islamic law is the Sunna- a whole system of traditions and precedents of individualism, humanism, rationalism and legal principles protecting human and community rights based upon the traditions of the Prophet Muhammad (PBUH). It is a record of the state of being and the mode of action of the Prophet Muhammad (PBUH). The Sunna contains his teachings, his way of life; it depicts the Prophet (PBUH) acting as the leader of the Muslim community and solving its everyday problems. In other respects, by the fact that he sometimes let his disciples preach or carry out certain acts in his presence, without ever objecting, legal theologians concluded that he had tacitly approved of what they said and did.  From the legislator's point of view, although not forthcoming from a divine revelation, the Sunna has the same legal value as the Quran.

In the two centuries following the Prophet (PBUH) Islamic law was developed by a systematic application of the principles of Quran and the Sunna by the religious leaders of Muslim community and thus evolved a particular juristic system of legal norms (Fiqh) which covered all areas of human life.  If the answer to a particular question is not to be found directly in the Quran and the Sunna, it can be deduced by religious leaders of the Muslim community through the institution of Ijma. It is based on the principle of the infallibility of a consensus of opinion on a solution to a specific problem in the light of the following saying (Hadith) of the Prophet  Muhammad (PBUH):

‘My people are never unanimous in error'.

Finally the last source of Islamic law is Qiyas. These are legal problems whose solutions cannot be found in any other source of Muslim law. Hence these are solved by drawing an analogy.

Islamic economic system evolves from Islamic law and law becomes the centrepiece of the direction of Islamic economics. While major work on Islamic legal system was done in the two centuries following the Prophet's death, Islamic economic system is a fairly modern development. It has mainly developed as a reaction to the neo-classical economic systems of Western imperialism and colonialism and is an attempt of Muslim societies to find an original path of development. Islamic economics rests on four pillars:

• Zakat is a capital wealth tax levied upon the rich for income redistribution to the poor. It is mandatory for every Muslim and is collected annually as a part of working capital as well as on property and savings. The rate at which zakat is levied varies: from a 2.5 on cash assets to 10% on produce from irrigated land. On mining it is applicable at 20% ad-valorem and the same applies to modern oil exploitation.
   
• Together with Riba (prohibition of usury), the second cornerstone of Islamic economics, Islam stresses the need for a redistributive mechanism in society. The purpose of both the instruments is to curb the power of the rentier class by undercutting income from hoarded capital. The aim of forbidding usury is to prevent wealth accumulation through lending money at a cost to borrowers.
   
• In order to encourage sharing of risk and profit, the institution of mudarabaha is provided for in the Islamic economics system. It allows for capital participation in economic ventures with risk and profit sharing and is the Islamic substitute for to the use of interest. The sharing of risk and profit is especially encouraged between labour and investor. The institution of mudarabaha recognises the equal rights of workers and investors.
   
• The prohibition of waste and idleness is the fourth pillar of Islamic economics. Israf  prohibits wasteful consumption, wasteful production and idleness of productive resources. The social cost of luxurious consumption and production is that fewer resources are allocated to the production of goods of common good with a higher marginal utility. Productive resources should be used for common good rather than fulfilling the luxurious wants of a few.

3.1   Oil and Muslim Societies

Nature was kind and generous to the Muslim world when it came to distributing the precious oil and gas resource. More than 2/3rd of world's oil and more than 1/2 of gas lies underneath the countries which are Muslim (see tables). The lion's share is in the Middle Eastern countries especially the ones of GCC and Iran. The disintegration of USSR and the coming into being of numerous Muslim countries with abundance of petroleum resource effectively means that this share is going to be increased further. In order to get an idea about the extent of resource endowment, Saudi Arabia, world's largest oil producer has reserves that can last for more than 100 years if production at this rate continues. Just how useful is this source of revenue for these countries of Middle East and North Africa can be gauged by the analogy drawn by Hossein Askari:

‘In a sense having oil was akin to receiving large amounts of foreign exchange that these countries did not have to repay. It was as if they received a foreign loan in perpetuity, on which neither interest nor principal was due in the future'.

In Professor Noreng's phraseology,

‘The ability to extract oil for export was to some extent equivalent to having a license to print international money'.

The considerable rise in real oil price after the 73 embargo and the 79/80 crisis resulted in much increased revenue for these countries.

With falling per capita income and deteriorating social conditions, the Middle East is probably the only region in the world unable to feed its rapidly growing population from indigenous sources. Governments in the region seem to be running into serious economic difficulties with rising internal debts. The situation is not much different in North Africa that has experienced growing decline in real per capita GDP rate since 1980. The unfulfilled expectations of the masses and serious economic problems of the governments resulted in the masses becoming more conscious and critical of prevailing authoritarianism, unpopular and corrupt leaders, and lack of socio-economic justice and equality causing a social unrest in the Middle Eastern Muslim societies with potentially ominous political repercussions. The problem is having a strong indirect effect on non-oil economies of the region that rely heavily on remittances like Jordan, Egypt, Lebanon, Yemen, etc.  The ideological void thus created was immediately filled by Islam by virtue of its social promise and its special place in Muslim societies. The offer of providing social and economic justice and equality was ideally suited to replace the existing ills of Middle Eastern and North African Muslim societies. Thus the mosque became the centre of this new movement in the lack of any democratic and representative institutions.

3.2   The Curse of Oil

The stress of falling revenues and growing internal pressure could be noticed everywhere in the GCC countries especially after the Gulf war. In Saudi Arabia, for example, budget deficit has constantly been in the tune of around $12 Billion since 1990. The resulting financial belt-tightening is forcing the governments in the region to diversify their revenue base to non- oil sources. The governments are thinking of introducing new taxes; subsidies are being cut off under pressure from IMF and World Bank; reforms need to be introduced in the government sector in order to attract foreign investment. An important effect of these reforms would include laying off people in the public sector. The effect can be enormous as the region is passing through a demographic shift. Population in the region doubled from 1970 to 1992 and only in Saudi Arabia it trebled in the same period. In perhaps a response to rising prosperity of the early and mid 70s, the pace of demographic growth picked up tremendously in the 80s. The result is that the population of young people is tremendously high. More than 78% of population is under the age of 34. This situation presents serious risks. It has resulted in an increasing utilisation of precious water resources, arable land and increased food consumption. The exceptionally high number of youth means that the government has to spend much more in education and then the graduates are to be absorbed in the job market. Less than 50% of Saudis graduating from Universities every year are able to find jobs. Although the government has recently embarked upon a major initiative to attract massive foreign investment in gas sector, it remains unlikely that it would increase the job market situation. In an area where local participation in job market is among the lowest in the world, it is bound to increase discontent among the masses.

As a consequence, the general population has grown more critical of the fact that oil wealth is not properly used in planning the development of vital economic sectors including defence. No alternative sources of foreign exchange are being developed and the industrial sector is still very weak. The progressive rise in Islamist tendencies in the region from the mid-80s onwards coincided with falling oil revenues and this is perhaps the major link between oil and recent Islamic resurgence. Whether an enhanced oil price during this era may have reduced this trend is something extremely difficult to analyse.

It would be interesting to see how the masses and especially the Islamists view the west and western companies in relation to the present situation. In order to fully comprehend the situation it is important to have a background knowledge of the recent political history of Middle East and North Africa. The present political map of the Middle East and the power set-up in GCC countries owes its origin to the post war arrangement created by the allies. Britain and France who colonised most part of the Middle East and North Africa had much to contribute to the post world war I and II political arrangement. The United States that emerged as the decisive force in the two world wars and the leading economic and military power also played a key role in this arrangement. Owing to the geo-political and economically strategic importance of the region, it was important to have stable political regimes in these countries and as a result monarchies were installed throughout the region. The west supported these regimes even after the pullout of Britain and France from the region. As a consequence most of the ruling families have been strongly pro-west in their attitude.

The repressive measures taken by these regimes to suppress internal political unrest and disorder have not been criticised by the west. In view of the fact that western military presence in the past and US military presence after the Gulf war is motivated by oil interests; it is logical that the Islamists in these countries see the west as an aid to the existence and maintenance of these non-Islamic regimes. Thus in a broad sense oil is seen as a negative influence on the society and a tool by virtue of which the unpopular and repressive regimes are holding on to power. The Islamists see oil as an excuse by which the west set foot on the territories of these countries and ‘infiltrated' the local societies and corrupted the leaders. The situation is much different in the Central Asian Republics where one can notice a strong pro-west attitude in the culture as a consequence of more than half century of Russian occupation. The presence of American forces in the Middle East region since the Gulf war is being regarded as a western move to militarily protect its oil interests and hence is a source of much opposition to the regimes in Saudi Arabia and Kuwait. Thus in a popular Islamic culture, oil is viewed as a negative and corrupting force which has invited western penetration and hegemony.

3.3   Changing Role of the Merchant Class

The present process of cultural shift presents new challenges to the ruling elites in their relationship with the private sector and it is important to assess the changing role of the merchant class in this context. Following Iran's example of 1953 most Middle Eastern countries nationalised their oil sector in the late 60s and early 70s. The emerging large, capital intensive and cash rich nationalised companies became a major economic force and  disturbed the existing socio-economic balances. While nationalisation of this key economic sector gave the state direct control over accumulation of capital, it also marginalised the private sector. The private sector was either too weak, unreliable or unable to take over the large capital intensive and technical oil and industrialised sector. Thus emerged a new class of public sector technocrats who took over the task of planning and organising production. This group of educated urban middle class was essentially in competition to the merchant class or private sector and became much more powerful because of their access to information and ruling elite. Another consequence of nationalisation was the shifting of capital accumulation to state treasury as the state became the leading business operator. Private sector now became dependent on public sector for its economic growth. After oil the next biggest sector in Middle East and North African economies is defence and this gave rise to a powerful group of military elite or bureaucrats. As a consequence a new cultural relationship evolved between the more powerful and influential technocratic or bureaucratic class and the private sector or the merchant class. Oil has a lot to contribute to this new arrangement as it strengthened the state and bureaucracy at the cost of private interests.

3.4  Technocratic Class- New Influences

Historically the oil industry of the Middle East and North Africa was developed by western oil companies. The host countries simply lacked the commercial and technical resources to undertake what was to become the most important economic activity in this region. The leading personnel of the western oil companies were expatriates from home and local population was restricted to lower levels. Over time however, more Arab professionals proceeded to the US for specialised education and training in oil industry. The ruling elite wanted to develop the indigenous industry on the western model and as a result these professionals held a prestigious position in the local society by virtue of their high technological prowess. Their ability to communicate with English speaking western expatriates and operate as a bridge between the two cultures enhanced their usefulness in the eyes of western expatriates as well. The situation suited western interests as ‘imitation is the best form of flattery'. As control of oil sector operations passed to native hands the role of these western educated professionals became increasingly important in the overall decision making and policy formulation.

In the last 10 years there has however been a shift in this trend that could have a noticeable impact on the situation. As the number of Muslim immigrants from Arab, African and Asian countries grew substantially in the west, there has also been a tremendous growth in the Islamist tendencies they openly profess. The US for example, where the Muslims form the largest religious minority is the centre of a strong Islamist movement. The UK also hosts many Islamist revivalist movements which is primarily a result of its policy to offer asylum to political refugees escaping persecution in their native countries. The most vocal organisation opposing Saudi ruling family is based in the UK. These movements have much more freedom to propagate their views more openly as against the home countries where political opposition is not tolerated. The result is that the west has become a breeding ground for Islamist tendencies and these have an influence on students and professionals coming to western universities. Thus the process of ‘imitating' or emulating the western model has suffered a serious blow and the search for new cultural and political identity is affecting the western educated elites as well. It is difficult to gauge the impact of this shift at present but the result could be more visible and pronounced in the years to come

This chapter introduces how the Islamic legal and economic principles view the present day petroleum agreements prevalent in Muslim countries of the Middle East and North Africa. It has been stated earlier that while major work on Islamic legal system was done in the two centuries following the Prophet's death, Islamic economic system is a fairly modern development.

Islam is opposed to monasticism and lays a lot of importance on economic activity. On the one hand a lot of emphasis is placed on engagement in prayers and fulfilment of one's religious duties is regarded as meritorious. On the other hand engaging in economic activity is just as lawful, sometimes even mandatory and obligatory. The Quran says,

' But seek the abode of the hereafter in that which Allah has given thee, and neglect not your portion of the world, and be kind, as Allah was kind to you and seek not corruption in the earth, lo' Allah loves not corrupters.'

Islamic economics is a normative system, based upon ethical guidelines for conduct of business. In Islam the real objective of man's existence is to worship Allah through righteous conduct by living with humans. So all those things that are necessary for this life become essential to man. However this pursuit for material gains should not become the objective of one's existence: it should be only a means rather than an end.

4.1  Ownership

Ownership constitutes one of the important incentives for engaging in economic activity as the owner has the right to use or dispose of it. In the Islamic system absolute ownership lies with Allah and the Muslim is only an owner by proxy. The Holy Quran says,

‘Unto Allah belongeth whatsoever is in the Heavens and whatsoever is in the Earth'.

Hence when a person owns something; he holds it in trust, acts as a guardian and is responsible to Allah for its use or misuse. Hence the absolute ownership is with Allah and the de facto or ad-interim ownership lies with man.

Islamic legal system does not impose any restrictions on the amount of wealth or property an individual can possess. It is for the Islamic economic system to regulate or control the means of ownership so that individuals acquire the right to property in a just manner.

While so much emphasis is laid on private or individual ownership, there is a concept of community or collective ownership as well. According to Ibne Qudamah the Prophet Muhammad (PBUH) is stated to have said,

Thus an important question now emerges relating to the ownership of the depletable natural resource. Who does the oil belong? The state, the citizens, the ruling family or the entire Ummah in general? Can petroleum resource be regarded as a combined property of all Muslims? The existing legal and constitutional framework in the Middle Eastern countries offers at times varied explanations. In Kuwait, for example, according to the Constitution, the subsurface minerals and the rights to extract these belong to the state. In Iraqi Constitution however, natural resources are owned by the people. Table 5 shows how the Constitutions of a few Muslim countries view the ownership and exploitation of petroleum/natural resources and it becomes clear that no country recognises the ownership of petroleum by private individuals. The ownership invariably lies with government no matter what the choice of words the Constitution adopts- public, state, government, people, etc. 

Hanafi Law

The ownership of a mine discovered in land that is owned belongs to the surface owner. On the other hand if the discovery is made in land which has not been enclosed, the mine belongs to the surface owner subject to his paying one fifth of the proceeds to the Sovereign who represents the Muslim community. If a mine is found in a public domain, then it belongs to public and cannot be exploited by an individual under a concession unless the concession is rightfully granted by the Imam.

Shafi Law

According to Shafi school petroleum belongs to the surface owner subject to his paying the relevant taxes. If petroleum is found in a dead land or public land, it is for the state to grant a concession to an individual for its exploitation.

Hanbali Law

The predominant view is that petroleum belongs to the community as a whole and as such to be managed by the state. The state can confer rights to mine and own these minerals to an appropriate investor. There is another view that recognises the right of the owner of the land to own the petroleum by analogy to crops and solid minerals.

Maliki Law

Irrespective of ownership of the land, all minerals whether hidden or unhidden belong to the Ummah and therefore are under the direct control of the state.

The divergent view of Muslim scholars on ownership of petroleum can be classified in two groups, i.e those restricting ownership strictly to the state and those allowing private ownership of petroleum resource. Table 6 explains that most Muslim oil exporters of note (with the exception of Iraq) belong to group II. Thus their schools of jurisprudence disallow private ownership and only the state can own the petroleum resource. Hence broadly speaking, it would be appropriate to refer to this group as representing the intellectual opinion of Muslim theologists and scholars in important oil producing countries. This group views the ownership of petroleum as lying with the state. It is up to the state to carry out its exploitation itself in trust to the people. It is also free to grant the rights of exploration and exploitation to an individual or a company subject to appropriate taxation.

4.2  Types Of Petroleum Agreement

The Islamic economic principles of ownership of natural resources are in line with the basic principles of current legislative schemes in most developing countries. The ‘state has title to the minerals in the ground irrespective of private rights over the surface whether freehold, leasehold or customary'. The type of petroleum agreements signed between the ‘sovereign' government and the ‘private' oil company in modern times is a subject of debate under Islamic law. Table 3 details the type of petroleum agreements prevalent in Muslim countries. It would be useful to briefly describe how the present day complex and complicated petroleum agreements have evolved from their simpler forms at the start of last century.

The first half of last century witnessed a gradual progress of various legal/contractual arrangements between the oil companies and governments. Large colonial style concessions used to be the norm during the early days of oil exploration in the Middle East. A concession has been defined as,

‘An agreement between a government and a company that grants the company the right to explore for, develop, produce, transport, and market hydrocarbons or minerals within a fixed area for specific amount of time. The concession and production and sale of hydrocarbons from the concession is then subject to rentals, royalties, bonuses, and taxes. Under a concessionary agreement the company would have the title to the resources that are produced.'

The concession granted to William Knox D' Arcy was a classical concession. He had a 60 year grant to explore, develop, produce, transport and sell hydrocarbon anywhere under Iranian soil in return for a modest bonus and the undertaking to fund the exploration and development effort. Concessions granted to Iraqi Oil Company in Iraq and American Arabian Oil company in Saudi Arabia were not much different.

The traditional concession agreements worked to an advantage of the oil companies mostly from the USA, Britain and France. The companies had a strong bargaining position to wield power over the host governments by virtue of their control over the markets, access to technology and sources of supply and support from the home government. In the 50s and 60s however, governments grew more conscious of their sovereignty and conflicts between the companies and governments became more intense. Increased taxation, host country participation and other new rent seeking arrangements evolved as a result. The overall result was an innovation in the structure of mining agreements that broke the tight link between ownership, control, and financial risks and rewards that was inherent in the traditional concession. New forms of revenue collection emerged which generated rents for the government in more ways than the concession agreement including production sharing and service agreements. Production sharing is essentially an arrangement in which the investor and the host government share the output of the operation in predetermined proportions. It is a contractual arrangement between a contractor (oil company) and a host government whereby the company bears all exploration costs and risks and development and production costs in return for a stipulated share of the production resulting from this effort. Important feature of a production sharing agreement is cost recovery to the contractor through the proceeds of initial oil production including capital costs (both tangible and intangible) and interest on capital. The production sharing agreement was first used by Indonesia in the 60s but this form grew much popular and today many countries in the world use one variation of PSCs or another. While the PSCs, together with service agreements, are used by a majority of countries, the old style concession agreements have become extinct. The current day royalty/ tax agreements are the closest to concession agreements and are much less popular as compared to the PSC (see table 7).

It is now important to find out how the Islamic legal system looks at the modern petroleum agreements. Although the principles of ownership can be clearly located in Muslim law, it is extremely difficult to find out any clear cut guidelines in the major sources of Sharia on the issue of petroleum exploitation agreements. However using the Quran and the Sunna as the guiding principles one can find rules that regulate even modern day complex petroleum agreements.

It is interesting to find out that concessions of an extremely simple form were known to early Islamic communities. There are numerous instances of the Prophet (PBUH) in the capacity of the leader of the Muslim community granting concessions to various individuals. While these were mainly concessions to ‘vivify' land, some also covered mining of precious metals like gold, silver, iron and copper. Various forms of legal and administrative instruments were used to carry out mining arrangement between the government and the private party, however the early Islamic administrative instrument of Iqta seems closest to 20^th century concession.  The main characteristics of Iqta contracts have been defined as:

• It covered public, state owned and ownerless lands.
• It covered defined geographical area.
• It is the discretionary power of Imam to decide size of the area according to location or any other reason.
• The Imam should fix the initial period.
• The grant invests exclusive right for the investor to explore and exploit the minerals.
• The Imam can unilaterally revoke the concession after the expiry of initial term if the investor fails to fulfil the work commitment. 
• The investor should pay a royalty in cash or kind to the government.
• The investor can assign/ transfer his rights and obligations to a third party.

Dr. Walied El-Malik is of the opinion that because of their similarity with Iqta the early concessions as granted by Saudi Arabian government to Aramco are in line with Islamic law. While there is no doubt that concession agreements of early 20^th century have some resemblance with the Islamic contracts of Iqta, they seem to miss two fundamental features which have to be present in every Islamic contract. First: At a broad level, the Islamic theory of ownership of natural resources does not allow a private ownership of petroleum. Under the traditional and even modern R/T agreement the title to petroleum lies with the contractor or the oil company and this is not in conformity to the Islamic legal principles. Second: The fundamental idea behind the Islamic theory of contracts is equality of contracting parties meaning that the parties should be placed on an equal footing. The same principle can be found in the ‘financial equilibrium' or ‘financial equation' under French Contract Law. Similarly the doctrines of ‘ justa causa' under Roman Law and ‘consideration' under Anglo American Law are closely related expressions.  The early concessions signed by the oil companies with the governments of Saudi Arabia, Iran or Iraq were heavily biased towards the oil companies. These concessions‘ covered very large areas of territory, in some cases the whole country with no obligation to relinquish. They gave enormous managerial freedom to the companies virtually creating a state within a state. The companies decided what exploration should be done, which fields should be developed and what production should be. They also determined unilaterally the posted price which was used to compute taxes.' Hence this was an unequal arrangement and unlawful under Islamic legal principles. The present day cousins of concession agreements, the R/T agreements are much more balanced in favour of host governments but the mere fact that they contain an element of Riba or interest during cost recovery make them un-Islamic as well.

Table 7 clearly demonstrates that production-sharing arrangement is the preferred choice of upstream petroleum arrangement among most Muslim countries. This is not surprising as the PSAs have emerged as a preferable contractual arrangement for both the oil companies and host governments in the last 20 years. However the fiscal design of the production sharing agreements might not be consistent with Islamic legal principles in their present form. All production-sharing agreements contain an element of interest (Riba) and uncertainty (speculation) which is forbidden under Islamic legal thinking. While the importance of the prohibition of usury has been stated earlier in this dissertation, it must be mentioned that Muslim law is equally hostile to any commercial operation containing a risk which could possibly amount to a violation of the rule, found in the Quran against gambling and therefore is a cause of disorder.

The scriptural foundation of the rule is found in various verses of the Quran. For example, the Quran says;

‘O ye who believe! Intoxicants and gambling, dedication of stones, and divination by arrows, are an abomination,- of Satan's handiwork: Eschew such abomination, that ye may prosper.'

Hence all speculative contracts are against the principles of Islamic legal system.

It would be interesting to note whether the service agreement are in accordance with Islamic principles or not. The Iranian buy back are perhaps the most important of service contracts and deserve special mention. After an isolation of more than 10 years the country opened up for foreign investment and was able to generate much interest from European companies in spite of US sanctions. Interestingly enough the buy back service agreements predate the Islamic revolution and were introduced in the 1974 Petroleum Act. To date the total investment committed under the buy back arrangement by western companies is more than $ 2 Bn. While there is no doubt that the present interest and commitment to Iran's oil and gas resources is an achievement for the government, the structure of the buy back agreements invites some criticism as well.  First: the term of the agreement (15 years) is too brief for companies to invest in these highly capital intensive projects. The usual term for oil field lease is 20- 25 years. Secondly, there is no upside potential for contractors as the fee is predetermined in advance. While this reduces the risk of failure for the oil company it terminates the chance for any upside whatsoever. Oil companies are traditionally in the business of taking risk and although a guaranteed profit offers some comfort, a permanent and more enduring arrangement would most likely be based upon production sharing. From an Islamic legal point of view however the most important observation is that the buy back agreements contain element of interest.

The above discussion effectively implies that modern petroleum agreements are inconsistent with the principles of Islamic law and economics. The old style concession agreement is closer to the Islamic legal principles but yet does not fully conform to Islamic law. The modern Royalty/ Tax agreement also does not adhere to Sharia tenets by virtue of its containing elements of Riba and the same problem exists with Production Sharing Agreement. Hence a true Islamic petroleum agreement would be a deviation/modification of the any of the arrangements existing today in the petroleum industry.

The cultural and ideological transition and the search for a new cultural and political identity in the Islamic world can pave the way for political instability which can cause temporary disruption of supply. However it is important to explore the long term and wide ranging impact on oil production and distribution.

In the first place there is nothing intrinsic in Islam that prohibits trade and therefore production and distribution of oil to non- Muslim foreigners. In fact trade is much encouraged in Islam and the Prophet Muhammad (PBUH) himself engaged in trade to earn his living. The Quran says,

‘O ye who believe! Eat not up your property among yourself in vanities: but let there be amongst you traffic and trade by mutual good will'

Certain elements of religion can however be used to upset the status quo by Islamist groups which have an anti-west agenda.  While establishing the relationship between oil and Islamist movements we found out that there is generally a negative perception in masses against oil in the Middle Eastern and North African societies. This is so because the benefits of oil have been restricted to a select few and the trickle down effect has not fully taken place. Apart from the provision of free education, health care and a tax free society, the state has not carried out much redistribution of the oil wealth within the wider segments of society. Those at the extreme end of this view advocate a total destruction of all oil related facilities. As the west is considered a partner in the present misery of the general population by its supporting the ruling elite. A similar view is total abandonment of oil trade with the west.  This is however a much extremist and impractical view as no one in power can afford to cut off a major source of foreign exchange and the lifeline of economy.  A more practicable and plausible measure could be to reduce output and limit sales to western countries. Again not all Muslim oil exporters can afford that. Those with diverse economies as Indonesia/ Malaysia and Iran might be able to do that but certainly the Gulf countries with no alternative source of revenue are not capable of doing this.

5.1  Religion and Policy

The Iranian experience should prove useful in understanding the impact of Islamists on oil policy. After the revolution, the Islamists in Iran made a conscious effort to build up relations with neighbouring economies like China and India in order to diversify and reduce dependence on the west. The oil sector was already nationalised and a western involvement/ participation seemed out of question. However the major disposal of Iranian oil still remained the western companies and uptil the enforcement of US sanctions the major buyer of Iranian oil  were US refineries. Thus the rhetoric of ‘ burn the oil' or ‘ leave the oil in the ground' did not materialise and selling it to ‘ infidels' remained a necessity. 20 years after the revolution, one can see Iran opening up its oil and gas sector and western (European) companies showing keen interest to operate under the buy back contracts (an improvement over even pre-revolution Iran). Thus the Iranian experience shows that even under the worst case scenario, a total disruption of Middle Eastern oil supply to the west does not seem plausible and the threat is grossly overstated. Supply would remain intact and foreign participation is bound to increase.

One important lesson to be learnt from the Iranian revolution is that no matter how strong and powerful a regime is, it can be overturned by a popular movement from within. Religion has a very strong appeal for Muslims and has been successively used by leaders to rally general population in their support. Thus it is important for the government to have some sort of religious legitimacy to stay in power against opposition from Islamic political groups. This is where the Islamists can impact the existing oil policies and where the real challenge lies? The pressure against the regimes in Muslim countries is growing from internal Islamist elements and already a few signs are visible where the governments has acceded to demands by the religious groups. In Saudi Arabia for example, the Ministry of Religious Affairs was created in 1992 under pressure from Islamists. The Ministry is in charge of mosques, religious property, and proselytising. Growing opposition forced King Fahad to establish the ‘Supreme Council of Islamic Affairs' in 1995 with an overall supervision mandate for all religious activities in the Kingdom. The Majlis al Shura (Consultative assembly) in Saudi Arabia (and Kuwait) has shown more exercise of power and authority in recent past and proving more than mere rubber stamp. Issues of participating in government and economic and social development in Qatar are being considered by the Emir. These measures are a clear act of the government effort to garner support and legitimacy to the regime by religious groups. It remains to be seen whether the Islamists would be content with these measures or demand more radical changes in governance.

Ironically Ibne Saud's claim to the throne throughout the last century gained legitimacy on religious grounds. The King is regarded as the custodian of the ‘two holy places of Muslims' and is looked up to by Muslims from all over the world as the protector of Muslim religious interests. Saudi Arabia has also shown an affectionate attitude for poor Muslim countries of Asia and Africa and has generously funded Muslim causes. The decision to allow foreign troops to be stationed in Saudi Arabia has however caused serious dents to this image and legitimacy. Together with the problem of persistent budget deficit and high unemployment for the Saudi youth, a very serious challenge lies for the administration of Crown Prince Abdullah. It looks that in the short run Saudi Arabia might overcome budget deficit problem owing to a windfall exceeding levels forecast in the 2000 budget but in the long run however, much more needs to be done to improve situation drastically in unemployment levels and silencing the Islamists.

5.2 Privatisation and Merchant Class

Given the central and strategic importance of oil sector in Middle Eastern and North African economies, privatisation is a sensitive issue. However it is imperative that owing to the economic difficulties, privatisation presents a realistic solution to many economic ills if not all. While the main aim of privatisation is to attract western oil majors to participate in the Middle Eastern (especially Saudi and Kuwaiti) oil sectors, the governments are also targeting domestic capital.  As a result of the present economic situation the governments shall have to entice the private sector to participate in the future economic development. This however poses new risks and might have some unexpected results. The merchant class is disillusioned because of rising levels of social and economic injustice and lack of any representative institutions. The business class is calling for more accountability to public spending and demands a more systematic process of budget allocations. Past evidence testifies that the ruling elites shall have problem to share power with private sector and this could have disastrous effects. Their support of the opposition groups could play a decisive role in the overall political stability of the region. In view of decreasing funding from foreign sources (Libya, Iran), this new source of finance could be vital for the Islamist movements.

One way to relieve the kingdom of investing in highly capital intensive oil/ gas projects is to involve foreign capital. The present Saudi administration seems firm to open the country's hydrocarbon sector for western companies after years of Aramco's monopoly. The situation in Kuwait is not different and the country decided to increase production in the northern fields with the help of western oil companies. The exact nature of the contracts is not known at this moment in time but one way of ‘appeasing' the Islamists could be that the contracts are designed to conform with Islamic legal principles. With pressure mounting from Islamist opposition groups within the countries to cut out a ‘ fair' deal with foreigners, one fears that these contracts would be designed under the Islamic law and would have the approval of religious lawyers. In Chapter 4 we also looked at whether the modern petroleum agreements conform to the basic principles of Islamic law and economics. We found out that among the three most widely used petroleum agreements in the world (PCA, PSA, Service Agreements), no one is in full conformity with Islamic legal principles. The most popular production sharing arrangement contains features that are not in conformity with Islamic economic principles in their present form. It is therefore plausible to assume that Muslim jurors would influence a modification in the existing production sharing agreement to do away with the un-Islamic interest and uncertainty.

5.3  Islam and Depletion Policy

Oil is a special commodity in many respects. Historically oil markets have acted as if oil is price in-elastic is in the short term (73, 79 crisis). The low short-term price elasticity of oil demand means that even a moderate restraint of supply can trigger significant rise in price. For example, if the short term price elasticity is 0.1, the immediate effect of holding supplies by 5% can trigger a 50% rise in price (Noreng p 116). This logic has been proven during the price shocks of 73 and 79. The same logic applies in the reverse direction as well. The immediate effect of a supply increase of 5% if the short-term price elasticity is 0.1 can reduce price by 50%. This logic was proved in the 1986. This dilemma is especially pertinent to Middle Eastern producers as they hold more than 2/3^rd of world oil reserves. Hence the depletion policies of Middle Eastern governments have a key bearing on global oil price.

We shall now see how the Islamic economic principles can affect the existing depletion policies of the Middle Eastern and North African oil producers. We have discussed earlier that prohibition of interest is a cardinal principle of Islamic economic system. Islamic economic thinking encourages active participation in business ventures through sharing of risk and is against the rise of rentier class. We also discussed that Islam is against the wasteful consumption and production and idleness of productive resources. These instruments of Islamic economic system can have a great bearing on the depletion policies of Muslim oil producers.

The choice of depletion rates for oil and gas has to consider the current and future need for revenues. Under western economic principles this choice is dictated by the condition that marginal utility, measured as net present value of sale must be equal over time. In other words western economics argues a critical role for interest rates in calculating present value of future oil profits in order to determine how much oil to produce  today, versus how much to leave in the ground for future production. This principle however does not apply to Islamic economic system that is indifferent to interest on capital or time value of money. The loss of wealth to these economies due to either a too slow or too fast depletion/ production can be enormous from western economic point of view. In addition, the effect on global oil price due to a constrained or accelerated production can be enormous.

In an Islamic outlook, oil is a commodity jointly owned by the Muslim community. Hence a consideration must be made for the future generations while producing this exhaustible resource. How would the Islamists' influence the depletion policy? Considering the enormous population growth rate in the Middle Eastern countries, it is likely that the Islamists would prefer to use a negative discount rate mainly to offset oil producer's focus on immediate profits. This effectively means leaving more oil in the ground. Hence for an Islamic government there would be an incentive to leave part of oil unproduced as a consideration for future generations. The implementation of israf also applies to the government spending of revenue. Capital is also a productive resource and should not be wastefully consumed or spent. Hence the governments of Muslim countries are liable to produce just enough oil to meet their budgetary requirements. In a theoretical implementation of the principle of Riba and israf on the depletion policies of Muslim oil producers, one feels that countries with large populations and small reserves like Algeria, Indonesia, etc shall have more freedom to pump out more oil from the ground. However countries like Saudi Arabia, Kuwait and UAE that have smaller population and extensive reserves will be much restrained when taking decisions on production and depletion of reserves.  So far the existing depletion policies of Muslim countries have been discretionary and based upon political rather than religious considerations. However it is likely that these are bound to change under the influence of an Islamic regime. During the opposition movement against the Shah of Iran the depletion policy came under fire. The government of the Shah was accused of exhausting the petroleum resource of the country too quickly in an effort to appease the western economies. In view of the anti- west agenda of the current Islamic movements it is likely that a consideration for a change in existing depletion would be given.

The Middle Eastern and North African Muslim countries where oil is the major source of countries' revenue are faced with a challenge if the Islamic economic principles are applied in their entirety. In the 70s and 80s major part of revenue was spent on defence purchases. This is in violation of Islamic principles as defence is not a productive industry that ensures the economic benefit of future generations. Hence oil production to acquire arms of destruction represents a wasteful production. The indulgence of Middle Eastern countries after 73 in questionable ‘grandiose' purchases overseas has been criticised as unwise in economic terms. This move is questionable in Islamic terms as well as Islam does not encourage rentier income. Hence investment into developing new sources of income at home should be on priority of the Islamists.

Hence Islamic economic thinking allows oil depletion according to revenue targets taking marginal utility into account. Until the time the country has the capacity to reasonably absorb oil revenues into productive sectors of domestic economy, keeping oil in the ground will be a better option. It is important to use the revenue from a depletable and finite resource into developing more lasting and productive sources of national economy so that future generations can get the benefit as well.

The effect of the institution of zakat on oil production is also of interest since it can have serious effect on global supply and demand scenario. The question as to whether zakat is applicable on oil production is a subject of disagreement among Muslim scholars. However most Muslim scholars believe that zakat is applicable on oil production at a rate of 20%. The next question relates to the qualification of the receiver. Exactly who is entitled to received this revenue- the poor people in general or poor Muslim countries? Also should zakat be paid in cash or kind as required by Muslim law on agricultural produce? Owing to the fact that oil production and exploitation has remained embryonic in Muslim law, all these questions are not clearly addressed in contemporary Islamic literature. In any case, a situation where rich Muslim oil exporting countries are to donate 20% of their production in kind to poor Muslim countries, can lead to a serious effect on global oil supply and demand and in turn price. Whether it shifts the demand curve to the left or deletes it altogether is not known but it has the potential to create an energy crisis of enormous magnitude. What remains unanswered is if the Muslim countries can use it as a weapon to influence global supply and demand and hence the prevailing oil price?

5.4  The Threat of Sanctions

The possibility of Islamist regimes in the Middle East and North African countries setting up a depletion policy which aims at cutting down existing production and leaving more oil in the ground might not be amenable to western consumers. Since the first discovery of oil in the Middle East, it has remained a cardinal point of the western (especially US) foreign policy to ensure a smooth and uninterrupted supply of oil from the Middle East. Any regime that can threaten this critical western foreign and economic policy goal is bound to face opposition from the west. The fact that many Islamist groups are allegedly involved in using violence to achieve their ends and have been branded as terrorists by US administration increases the possibility of a sanctions regime enforced on the Muslim oil exporters. While it is difficult to ascertain whether the sanctions regime would be unilateral (as in the case of Iran and Libya) or would have the support of international community, the effect of sanctions can be discussed briefly.

‘Global petroleum industry since its origin has operated and learnt to operate, in often highly politically charged environment.' The unilateral economic sanctions imposed by the US on Iran and Libya (ILSA) with a legally questionable extra territorial jurisdiction has taught the international (non-US) petroleum community to devise new and innovative methods of political risk engineering. European companies showed a cautious interest to operate in Iranian oil and gas fields and over time have increased the level of their commitment to the Iranian oil sector substantially. Thus the long-term effect of sanctions has not wielded the results which the ‘ enforcers' initially anticipated. In fact to some extent sanctions policy has reinforced an upward trend in global oil price because of constrained production. Thus the economic loss to the sanctioned countries because of reduced foreign investment might have been compensated due to increased revenue. It is for these reasons that a sanctions regime if enforced unilaterally might come under criticism and could not achieve the required results.

6.1  SAUDI ARABIA- ‘ Unholy' Alliance with US

The dynamics of internal political and economic developments in Saudi Arabia deserve careful assessment as the kingdom is passing through a period of transition at the top. This can have important ramification including a slowdown of the decision making process. It seems for the time being the leadership is pre occupied with the troubled state of country's finances and the massive debt incurred by financing the Gulf War. Important considerations for the administration include demographic pressure and the need to create suitable jobs for the increasingly large numbers of youth. The merchant class is seeking a greater participation both in political and economic matters.

The presence of large number of foreign troops in Saudi Arabia hand the Islamists an important rallying point. It enables them to refer to neo-imperialism and to the fact that the Saudi King, custodian of the two holy cities of Mecca and Medina, can only maintain his position with the help of western troops. There has been a rise in demands for greater human rights, decreased dependence on US and democratisation of the system. Ironically the call for change has come from both religious and secular quarters. Increased activism of Islamist groups opposed to the regime is a serious concern for the administration and because of these issues the Saudi regime is operating under some political, economic and financial constraints. So far the regime has met with the opposition either by repression or appeasing them with large financial donations. The latter strategy however is hard to continue in view of recent (pre 2000 price hike) financial constraints.

The Saudi administration is set to induct western majors in huge upstream and gas projects in the country inspite of the Aramco's disliking. Its a major challenge for the administration of Crown Prince Abdullah as this can trigger serious discontent domestically as the regime is already accused of harbouring western soldiers on its territory. Many regard this move as a reversal of the victories of the 70s and an abrogation of sovereignty. What remains to be seen is the structure of the deals to be cut out with foreign investors?

6.2  ALGERIA- Islam and Perceived Repression

Algeria presents a classic example that illustrates key factors that need to be addressed when considering the negative impact of Islamic activism on energy production and distribution. These include

• Islam can be a means of identification and unification for oppressed elements of population
• The ruling political elite that is perceived as ‘un-Islamic' is particularly vulnerable
• Close identification of this elite with a foreign country can have dangerous repercussions to both the elite and energy companies perceived as aiding that elite

Historically Algeria has had a love hate relationship with France. The country fought a long violent war to seek independence from France and then became a very strong dependent on French economic support and political influence. Unlike the countries of the GCC Algeria has had very little influence from either the US or UK and in fact had very strong economic link with the Soviet Union. Like other oil exporters of the region the Algerian government has overwhelmingly relied on dependence on oil and gas exports and thus could not concentrate on other sources of revenue.

The employment of Islam as a rallying cry for the disaffected in Algeria would probably not have been as effective if it had not been for the fact that the ruling elite was perceived as religiously and culturally disconnected from the masses. Thus developed a serious cultural bridge between the ruling elite and the masses. The bridge was widened by the fact that ruling elite was bi-lingual in French and Arabic while the masses were conversant in Arabic only. Arabic speaking students became increasingly aligned with religious institutions and thus leading to a cultural conflict between the Francophile elite and Arabic speaking Islamists.

Algeria is the only country where the oil installations have come under terrorist attacks by the Islamists. This shows that the religious opposition in Algeria closely associates western companies as an aid to the ruling elites. Although this violent strategy has not been able to halt western investment in the country, it might have increased the cost of doing business.

As more foreign companies become active in the country to work with Sonatrac under Production Sharing arrangement, one must keep in mind that in case of an Islamists' take over these agreements might come under strict criticism from religious leaders. Also the strong anti- west and anti- French theme of the Islamists' agenda can be extremely detrimental to the interests of western and French companies operating in Algeria.

6.3   AZERBAIJAN- Lost Identity

This study has so far only focussed on the issue of rise of Islamic tendencies in the Middle East and North African region. Of the nearly 1 Billion Muslims living in the world more than half live outside the Arab Middle East and North Africa. Because of the incredible difference linguistically, ethnically, racially and culturally no other region has been touched so far. From the perspective of oil two other oil producing zones, i.e. South East Asia and Central Asia have a special and we shall now discuss the case of Azerbaijan.

Not long after Colonel Drake drilled the first oil well in Pennsylvania, Baku emerged as the booming centre of oil in the eastern hemisphere. Stories of big gushers, booming business, emerging nobility and increasing foreign investment from a century ago are still fresh. Religion never featured in these stories at all and the focus had always been different. The experience of living for more than 70 years of living under the Soviet rule without even a shade of religious liberty was a unique one for most Azeris. Religion and its institutions suffered attack, repression and abuse by the Soviet state. As a result most young and middle aged Azeris have a disjunctured or broken knowledge of the main line of thought and history of Islam. Religion is mostly only practised on two occasions, death and marriage.

The assault on Baku by Soviet troops and the post independence war against Armenia resulted in the displacement of most non-Muslim population to outside Azerbaijan in striking contrast to the nearby Caspian state of Kazakhstan.  Most Russians, Jews and Armenians left the country and the population now is predominantly Muslim. Surprisingly, Muslim Azerbaijan is not fighting war with Christian Armenia with a religious motivation. Although recently there has been resurgence of Islamist movements in Northern Caucasus, religion plays no role in the Karabakh conflict. Islam is not a primary collective identity for the Muslims in Caucasus and forms one of the multi-layers of identity.

Western analysts mention the traditional conflict in Azerbaijan between a liberal and mystic Sufi (folk, secular) Islam and a more reformist (intolerant and pure) Wahhabi Islam. My own perception is little different in the light of my personal experience. In my view most Azeris are not even aware of the distinction between these two lines of Islamic theory and practice. Pork and alcohol are consumed in everyday life, something that even the most secular form of Islam does not allow. The Constitution of the country does not grant any special status to Islam and there is a clear separation between religion and state. Religious parties are illegal and clerics can not run for office in Azerbaijan.

The last 8 years have seen an unprecedented response from foreign investors in the oil riches of Azerbaijan. Before the oil crisis of 1997 Baku was a bustling city of a large oil related western expatriates. The issue of governance looms very high on the scene and there are widespread stories of rampant corruption by the influential government officials. Very few have benefited from the surge of foreign investment. In fact there is evidence which suggests that the condition of general population might have had worsened from before. Under the Soviet rule the state was responsible for at least providing the basic amenities but these have to be purchased at a high price from the market.

The collapse of the USSR provided an opportunity for the republics to assert independence from the centre. For Azerbaijan it was a process of redefining its cultural and political identity. That the people in Southern Caucasus had to live with an increasingly changing identity can be judged by the fact that the alphabets in Azeri language have been changed 4 times in the last 75 years. ‘ Historically the crux of the dilemma of the Azerbaijani identity lies in the intersection of Albanian, Islamic , Turkic, Perso/ Iranian, Russian and  Soviet socio- cultural and political life. This, coupled with the contemporary issue of European/ non Europeanness, East/ West, modern/ traditional status and sense of identity, results in a rather complex organisation of culture that requires astute managing and negotiating' on a national level.  The Azerbaijani identity is under threat and the situation presents many threats. Add to it the growing discontent among the population, the unfulfilled expectation from the magic that oil exploitation could bring to the country and the lack of a popular regime in Baku, a change is bound to occur.

In this situation of identity crisis, Islam has an undeniable position in the search for cultural roots. Most observers note that there is an increasing tendency among Azerbaijanis to rediscover, readopt and revitalise religion in everyday life. It can be safely stated that religion is becoming an important source of identity for the Azeris. The combination of an impoverished economy, falling standard of living for the majority, lack of democratic representative institutions, the slow process of trickling down of oil wealth to the people and a visible affluent lifestyle of selected few and foreign oil executives can trigger an active Islamist reformation. It would not be unfair to compare the present day Azerbaijan with pre-revolution Iran. Iran of the early 1970s presented a picture of a model secular and liberal society. The speed with which Islamic revolution brought about the change took most people by surprise. In my view it was the combination of religious persecution aided by political repression. The situation in Azerbaijan today is not much different.

The existing production sharing agreements are bound to come under criticism if the Islamists take over the power of the country because of their non-conformity with Islamic law. Even if this happens it is not bound to create any de-stabilisation of the country's oil sector. The more serious and noticeable effect however would take place in the oil export sector. Ever since the opening of its oil sector, the country has single mindedly towed the US line of  developing only the western route for export pipelines. The economic feasibility of this option when compared to alternative Iranian route is highly questionable. Due to US sanctions on Iran it has so far not been possible for the companies to give any serious consideration to this option. The new Bush administration in the US might take a lenient view of the situation considering that the Vice President was at the forefront of anti-sanctions campaign against Iran. Moreover, Shell's pipeline project linking Turkmenistan to Turkey via Iran has been given okay by US government. The significance of this project is very high because if materialised, it would be a groundbreaking project to export Central Asian resource to the west through Iranian route. An Islamist control of the government in Azerbaijan can open the way for a possible linkage to the Iranian system for exporting its resource in line with Turkmenistan.

It would be naïve to believe that there is uniformity in the existing legal systems prevailing in Muslim countries.  While there is a wide contrast in the choice of legal systems adopted, one common meeting point is overwhelmingly obvious: there is an underlying basis of the Sharia law of Islam in greater or lesser degree in the constitutions of almost all Muslim countries. Sharia remains the core and focal point of common law in Muslim countries. It seems apparent that an Islamists' take over shall trigger a rapid and outright Islamisation of the legal system in accordance with the Sharia. In Pakistan for example, although the constitution stresses that the laws of the country cannot be in conflict with Sharia, the banking system has always been based upon interest. In a landmark ruling last year, the Supreme Court of the country has ordered the government to rid the financial system of usury in accordance with the tenets of Sharia.

It is a matter of experience that western companies have a tendency rely too heavily on the view that the only source of country law is the constitutional law. One must keep in mind that Sharia is supreme watchdog over and above the constitutions of Muslim countries. Any law, decree or legislation which is against the tenets of Sharia can be challenged and declared illegal by virtue of it being un-Islamic. While there is no doubt that Sharia is a great legal system, only the most sanguine would defend it as ideally suited in its present form to regulate modern commercial transactions. It has earlier been pointed out that the two main sources of Sharia are over 14 centuries old. While a lot of work was carried out in the two centuries following the Prophet Muhammad (PBUH) to interpret and elaborate the Sharia to adapt to changing times, the tradition died down since then. Hence the challenge is enormous and a great amount of work needs to be done in this greatly developing area. It is therefore increasingly important for a western company to develop an understanding of the Sharia law.

At an intellectual level, Muslim scholars see the ownership and exploitation of depletable natural resource as a public trust that must be saved for the future. This can have a significant effect on the structure of upstream contracts and depletion policies in Muslim oil exporting countries. We have earlier noted that none of the modern petroleum agreements conforms to the Islamic legal and economic principles. The most commonly used Production Sharing arrangement contains elements of interest and uncertainty that are categorically disallowed by Islamic legal principles. Keeping in view the universal acceptance of production sharing agreements it is likely that modifications may be carried out in the existing structure of PSA to eliminate the un-Islamic features to make them more acceptable to Islamic law. Also the implementation of the prohibition of interest and wasteful consumption and production can have significant impact on the depletion policies of Muslim oil exporters. It has been argued earlier that a proper implementation of these rules can result in significant production cuts and the impact on global supply and price can be enormous.

No matter how radical the policies of political Islam seem on the surface, the fact is that once in power the regime has to prioritise issues based on reality. The rhetoric of ‘burning the oil' or ‘stop selling to infidels' might be a good slogan to rally the masses, but a regime in power would have to rationally analyse its trade policy. The example of Islamic Republic of Iran has been cited earlier whose biggest buyer were American refineries until the imposition of US sanctions in 1995. More than a ‘threat of denial' it seems the Islamists would use oil in an offer of supply. The expanding dependence of Asia on energy imports is particular from Middle East has the potential to create new tests for the world political order. Asian countries particularly Japan, China and India can react to their energy vulnerability by taking precautionary steps. This could include forming alliances with Middle Eastern nations by sourcing their energy needs and providing military capability and technological infrastructure. The recent CIA report forecasting world's future for the next 25 years has speculated that a new security alliance would emerge between India, China and Russia. This only corroborates the statement made earlier. Already, ONGC (Videsh) is one of the few companies that has been promised a participation in the post-sanctions Iraq. Similarly China's CNPC and various Japanese companies under the flag of Japex are also becoming increasingly involved in African and Asian exploration scenes. One must also keep in mind that the urge to buy a nuclear weapon is very strong in these ‘ rogue' states. It therefore leads one to predict that a new economic and security alliance can emerge in Asia with India and China providing the security and Middle Eastern countries fulfilling the energy deficiency.

The threat of unilateral American sanctions should also be considered. It is clear that US foreign policy views the Islamist elements as contrary to American interests. The most wanted person by US authorities is an Islamist (Ben Laden) who is alleged to lead a movement using violence against US personnel and facilities. In case of Islamists forming government in any of the Muslim countries it would not be far fetched to predict that sanctions might be enforced by the US administration. This situation could present serious risk to western companies operating in the region. Companies could resort to new and innovative tools of avoiding the sanctions threat using sophisticated forms of political risk management. The effect of ILSA against Iran and Libya has not attained the desired effect and we have numerous western companies operating in these two countries.

Strong US pressure on Central Asian states so far held them back in pursuing an export route towards the Iran in the South. So far the entire focus seems to be on the westward export options towards Turkey in spite of the fact that the economic viability of this route in comparison to the southern option is far less.  There is an increasing talk among European oil companies of funding an alternative route through Iran. Relations between Azerbaijan and Iran might not be ideal at present but a growing influence of Islam on Azeri state and society can result in a serious consideration of the Iranian option.  Turkmenistan has already opened a line to Iran on swap basis and if more countries opt for this option, the US policy of ‘dual containment' of Iraq and Iran would suffer a serious blow.

Glossary of Arabic Terms

Quran     also as Koran, Al-Quran, Muslim holy book

Sunnah     also as Sunna, the tradition of Prophet Muhammad( PBUH)

Hadith     also as Hadis, an authenticated saying of the Prophet Muhammad( PBUH)

Hadood     Islamic penal code

Ijma     consensus of Muslim religious leaders on an issue which has not been clearly defined in either the Quran and the Sunna.

Israf     wasteful consumption of productive resource

Mudarabaha    Islamic instrument of conducting interest free business

Riba     Prohibition of usury

Qiyas     analogy by reason

Sharia     also as Shariah, Muslim law system

Shi'i     also as Shi'ite- the dominant Muslim sect in Iran

Sunni     also as Sunnite- the dominant Muslim sect

Ummah     Muslim community in general

Wahhabi     Islamic puritan movement after Ibn- Wahhab

Zakat     Muslim religious tax

Major Schools of Muslim Jurisprudence

Shafi     after Imam Muhammad Al- Shafi( 767 AD- 820 AD)

Maliki     after Imam Malik Ibne anas( 710 AD- 795 AD)

Hanafi     after Imam Abu Hanifa( 700AD- 767 AD)

Hanbali     after Imam Ahmad Ibne Hanbal( 780 AD- 855 AD)