LONDON, 20 June 2005 — Saudi Aramco, the world’s largest crude oil exporting company, is emerging as the driver behind Islamic ship finance. Demand for ship finance is further fueled by increased demand for bigger capacity crude oil carriers such as Very Large Crude Carriers (VLCCs).

Demand for VLCCs is driven by the big oil and gas producers in the Middle East such as Saudi Arabia, Abu Dhabi, Kuwait and Qatar and in South East Asia such as Brunei. Last year, the carrier Brunei LNG opted to use Islamic ship finance for the first time. In the 1980s Al-Rajhi Banking and Investment Corporation (Arabic) through its London office arranged a number of Islamic ship leasing transactions mainly for Gulf exporters and carriers.

Bankers stress that with increased demand for crude oil coming from the high-growth economies of China and East Asia, and the fact that China, Japan, Taiwan, and South Korea are the Kingdom’s largest oil export markets, the demand for VLCCs has dramatically increased. Saudi Aramco alone requires the use of 90 VLCCs per year to carry mainly crude oil to its core export markets in China, Japan and East Asia and elsewhere. In reality Saudi Aramco owns only 19 VLCCs, which means it has to charter some 71 carriers every year.

Shipping finance, according to bankers such as Richard Thomas, head of ABC International Bank (ABCIB’s) Islamic Asset Management subsidiary, especially with a charter and leasing component, is also very adaptable to Islamic financial structures such as Ijara (leasing) and Sukuk (Islamic bonds).

ABCIB Islamic Asset Management recently structured, arranged, and co-underwrote the $26 million Al-Safeena Ijara Sukuk, the first such issue that combines Islamic equity with conventional debt for the same asset, in this case a VLCC called Venus Glory, which is owned by Pacific Star (PacStar) International Holding Corporation, which in turn is owned by Saudi Aramco. The VLCC is chartered on a bareback charter basis through a maze of intermediate and sub-charter arrangements to Vela International Marine Ltd, also a wholly-owned subsidiary of Saudi Aramco.

Thomas is confident that the Al Safeena Ijara Sukuk structure can be tailored to many types of shipping transactions. ABCIB anticipates a growing need for financing solutions in the MENA region involving Islamically-compliant structures.

The eventual structure that was approved by ABCIB’s Shariah adviser provided for the transfer of the vessels usufruct to investors in the Sukuk, allowing the legal title in the Venus Glory to remain with PacStar. The charter revenues being received from the underlying lessee, Vela International Marine, are completely rent-based and therefore free of Riba (interest) and acceptable for a Sukuk issue.

Islamic shipping finance can be vanilla leasing transactions. It can be in the form of a fund such as the $150 million Al Islami Oceanic Shipping Company (AOSC) launched in 2004 and promoted by Dubai Islamic Bank and the UK’s Tufton Oceanic Limited. The first deal of AOSC was indeed the purchase of a VLCC from Saudi PacStar, which was then leased back to a vessel owned by a subsidiary of Saudi PacStar. The third alternative is the Sukuk transaction, which bankers stress is much cheaper to structure and is tradable.

Institutional placements for a Sukuk structure, says ABCIB Islamic Asset Management’s Richard Thomas, is also much more efficient especially in the corporate asset market. Tradability also allows for securitization opportunities. The Al Safeena Ijara Sukuk issuance, for instance, is listed in Jersey, which is keen to attract Islamic finance deals and has effectively formally recognized the Sukuk structure. The Jersey Financial Services Commission, for instance, has given its consent under Article 4 of the Control of Borrowing (Jersey) Order 1958 to the issue of Sukuk by the Issuer, Al Safeena 1 Limited.

Saudi Aramco alone has the potential to make the market in Shariah-compliant ship finance transactions simply by committing a certain percentage of its huge VLCC chartering requirements to Islamic facilities, of which the Al Safeena Sukuk structure has demonstrated a definite cost and adaptability advantage.