Country Focus: Bahrain attempts energy sufficiency

Taking into account its modest oil production, the Kingdom intends to improve its energy infrastructure and the downstream sector to reduce dependence on imports and insulate itself from the blow of the oil and gas downturn

Bahrain's oil and gas sector, Bahrain's upstream sector, GCC energy market, Low oil prices, Oil market balance, ANALYSIS, Industry Trends

When its first oil well was spudded in 1931, Bahrain became the first oil producing nation in the Gulf region. Just three years later, the Kingdom had already begun exporting oil. It wasn’t until 1970 that the country’s oil production peaked to reach 79,000 barrels per day (bpd). Shortly after these initial prosperous days, Bahrain’s output started to decline and in 2009 the nation’s oilfields produced as little as 32,000 bpd.

Today, oil production in the Kingdom, which is not a member of the Organisation of the Petroleum Exporting Countries (OPEC), is no longer sufficient to meet domestic demand. The main oil output comes from its share of the 300,000 bpd-capacity Abu Safa offshore oilfield, which Bahrain shares with Saudi Arabia.

The rest comes from the onshore Bahrain Field, previously known as Awali, which the Kingdom is banking on to counter the decline in production. In 2009, the government launched Tatweer Petroleum, a joint venture (JV) that ‘assumed responsibility for the stewardship and revitalistion of the mature Bahrain Field and the execution of all activities related to the petroleum operations’, according to the official website. With this in mind, the government aims to increase the Bahrain Field output to reach 100,000 bpd by 2018.

Ups and downs

Indeed, Tatweer Petroleum did boost production, increasing yields from 27,500 bpd to 40,700 bpd between 2009 and 2011. The company completed several key enhanced oil recovery (EOR) projects to achieve these results, including 399 workovers and 220 wells acid stimulated, 9 high volume Electrical Submersible Pump installations, conversion of 7 wells to annular gas lift, and opening 165 beam pump wells to the Casing Vapor Recovery (CVR) system. However, the progress came at a slow pace with production hitting 51,000 bpd in 2015.

The low oil prices certainly did not help, particularly the impact of the cost-intesive EOR technologies. The JV’s partners Occidental Petroleum and Abu Dhabi’s Mubadala Petroleum, who were both suffering from the dip in oil prices, reportedly had been trying to renegotiate terms of the 20-year contract with Tatweer. Eventually, the partners announced that they had reached an agreement with the Bahraini government to exit the project by mid-2016.

Coping with the new norm

Negating the government’s efforts to improve production, the falling crude oil prices took a toll on the Kingdom’s energy sector. According to ratings by Fitch and Standard & Poor (S&P), the country’s fiscal vulnerability increased and was left with no support from neighbouring countries in the region.

Even though OPEC and non-OPEC members struck a deal in late 2016 to decrease output, countries with modest production like Bahrain have a long way to recover from deficits, experts say.

According to Mustafa Ansari, energy economist at APICORP, the rise in oil prices following the OPEC cuts were nothing short of the average price for the previous year, which will not have a significant impact on government revenues.

Looking forward, he said, prices are not expected to recover significantly and thus Bahrain will need to focus more on diversifying its economy and reducing its dependence on oil revenue.

“Over 80% of Bahrain’s revenues comes from oil and gas,” Vikas Handa, managing director of energy consultancy firm Beas DWC-LLC, said. “Hence the rise in oil prices have certainly helped Bahrain to a great extent, but not enough to cover the deficit. Bahrain’s production cuts of 12,000 bpd were significant given that total production was only around 50,000bpd. On the other hand, Bahrain’s domestic consumption had been increasing steadily and some estimate it to be to the tune of 50,000bpd doubling from 25,000 bpd in 2001.”

Filling the void

Even though, traditionally it has been an oil producing country, Bahrain is now looking to leverage on other energy sources. The Kingdom needs supply for its own growing domestic consumption as well as to compensate for its lack of ability to export oil.

One of the new projects that has become central to the Kingdom’s plans entails a new liquefied natural gas (LNG) terminal and regasification facility. Expected to be finalised by 2018, this will consist of a floating storage unit, offshore receiving jetty, regasification platform and an underwater pipe network linking the facility to the shore and an associated onshore receiving facility.

In 2015, Banagas and Bahrain’s National Oil and Gas Authority (Nogaholding) signed a $685mn contract with a consortium formed by Canada’s Teekay LNG Partners, South Korea’s Samsung C&T and the Gulf Investment Corporation (GIC). GS Engineering & Construction was selected as the engineering, procurement and construction contractor, while Teekay is to supply the ‘floating storage unit’ vessel through a 20-year time charter. Once finished, it is expected to have an initial capacity of 400mn standard cubic feet per day (scfd), expandable to 800mn scfd.

In a recent interview, Abdul Hussain bin Ali Mirza, Bahrain’s former energy minister, who, after having been replaced with Mohamed bin Khalifa bin Ahmed Al-Khalifa, serves as the current Minister of Electricity and Water Affairs, said that a “key agenda item is building the infrastructure to import liquefied natural gas (LNG). This project will enable Bahrain to import LNG to augment gas production from the Bahrain Field, helping to manage the seasonal swings in gas demand, and lengthen the life span of gas reserves, while also providing additional reliability at peak demand.”

These plans are in addition to replacing and rerouting the 72-year-old Arabia-Bahrain (A-B) pipeline. The old 55km pipeline will be replaced with another one that extends for 115km, with 43km onshore Saudi Arabia, 41km offshore between the two kingdoms, and 31km onshore Bahrain. Once completed in 2018, the pipeline’s capacity is expected to increase from 220,000 bpd to 350,000 bpd, supplying the Bahrain Petroleum Company’s (Bapco) Sitra refinery.

The refinery will also see expansions in order to increase capacity from 267,000 bpd to 360,000 bpd, which should enable it to take full advantage of the A-B pipeline supply. Having awarded the front-end engineering design (FEED) contract to Italian contractor Technip, the modernised refinery should come on-stream in 2020, with five units consisting of a residue hydrocracker, a vacuum gas oil hydrocracker, a diesel hydrocracker, a sulphur recovery unit and a delayed coker.

“Bahrain’s downstream capacity far outweighs its upstream. The current crude capacity is 50,000 bpd and is expected to rise to 100,000 bpd. However, it relies heavily on imports from Saudi to supply its Sitra refinery,” explains Ansari. “Building new refineries is a part of a wider initiative to integrate the crude, refining and petrochemical industries to create more value. As well as increasing the availability of feedstock, the use of refined products provides opportunities to produce more sophisticated petrochemical products that are essential to extend the value chain.”

Handa also believes that these expansions will benefit the Kingdom, “To me this is the obvious thing to do given the abundance of feedstock availability in the region and the limited reserves that Bahrain has. They must expand their economy to curb the deficit and this seems to be a low hanging fruit.”

Key partnerships

While Bahrain has been left wanting help from neighbouring countries, finding alternative partners was key for the Kingdom to take its first steps to becoming a gas hub. Bahrain will need some support to face other gas competitors in the region. Qatar and Iran have some of the highest gas reserves in the world. Production in Iran, however, is barely keeping pace with domestic consumption and is therefore unlikely to be a major exporter at least in the short to medium term. Qatar, on the other hand, is the largest exporter of LNG and, according to Ansari, the state’s production in 2015 was nearly 12 times higher than that of Bahrain.

To this end, Bahrain is looking to develop a partnership with Russia in LNG. Last year, Nogaholding signed an Memorandum of Understanding (MoU) with Russia’s Gazprom, when Russia’s President Vladimir Putin met Bahrain’s King Hamad bin Isa al-Khalifa in Moscow. Russian state firm Rosgeologiya (RusGeology) and Nogaholding have also signed a MoU to strengthen their partnership in oil and gas exploration.

These agreements potentially entail Russia, rich with gas as it is, to supply the Kingdom with LNG. ‘Co-operation in the energy sector is of mutual interest … The five-year programme for geological exploration offshore of Bahrain starting from 2017 has been prepared’, as per the official MoU documents seen by Reuters.

Handa believes that strategic cooperation with Russia “makes a lot of sense” especially “given that the OPEC deal was made possible with Russia cutting 300,000 bpd of its production” and the “ever increasing domestic consumption in Bahrain and abundance of gas in Russia.”

Soaring domestic demand

Given its modest production, Bahrain’s energy consumption has started to outstrip its supply. Thus, the Kingdom is attempting to find new ways to be able to fuel large industrial projects, generate power, manage water and develop EOR technology that can enhance yields from oilfields.

The recent moves to build the LNG and the downstream sectors are expected to meet some of the forecasted energy needs of the domestic market. This will also help the Gulf state position itself as a gas hub and an LNG distribution centre.

However, the Kingdom needed to find partners in order to continue developing its energy sector.

“Bahrain is not a crude oil exporter. The break-even oil price is the price needed to balance the government budget given an assumed quantity of crude exports,” Ansari comments. “Therefore, it carries many assumptions not least the quantity of crude that will be exported. Lower than expected production and/or higher domestic demand can put a strain on exports, requiring a high break-even price to compensate.”

“Moreover,” Ansari added government spending plans can change throughout the year based on changing circumstances and competing priorities that may include reducing spending and thus a lower breakeven price. Finally, low oil prices have, to an extent, paved the way for more private financing which can reduce the burden on government spending.”


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