Bahrain: Energy sector going downstream

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The Kingdom is moving toward finalising plans to refurbish its only oil refinery, part of a wider programme that will see the Gulf’s first oil producer increase its focus on value-added downstream activities, rather than depending on its ever-decreasing reserves for revenue.

On March 11 Adel Al Moayyed, chairman and acting CEO of the Bahrain Petroleum Company (Bapco), told reporters that the final plans and feasibility studies for the modernisation of the company’s refinery at Sitra were being reviewed, with work on the project likely to begin by the end of 2013. Under the plan, which is expected to cost around $10bn, the refinery will see its production capacity increased from 260,000 barrels per day (bpd) to more than 450,000 bpd.

However, it will not be Bahrain’s own fields that will provide most of the crude for the upgraded refinery. The Kingdom’s reserves are dwindling, with some estimates suggesting proven deposits of around 120m barrels. However, this figure includes oil in heavily exploited and ageing fields, which require advanced extraction technology to continue production. Instead, the revamped refinery will primarily be fed by oil from neighbouring Saudi Arabia.

The two countries are already linked by an undersea pipeline, which first came into operation in 1945. The current line, which has a capacity of 230,000 bpd, will not be enough to meet the anticipated capacity of the upgraded refinery at Sitra. As part of the shift away from upstream production to downstream, Bapco and the Saudi Arabian Oil Company (Saudi Aramco) are planning to invest $350m to increase the carrying capabilities of the pipeline.

Engineering plans for the 70-km line from Ras Tanura in Saudi Arabia to the Bahrain facility are in their final stages, according to a statement from Bapco. The new line will be able to transfer about 350,000 bpd, which, along with domestic production from local wells, should allow Bahrain’s refinery to operate at full capacity. In late January 2013, France-based bank BNP Paribas and HSBC Holdings were tasked by Bapco to advise on raising at least $6bn for the refinery expansion, which would leave up to $4bn to be found from other sources.

In addition to overhauling Bapco’s refinery, Sheikh Ahmed Bin Mohammed Al Khalifa, the minister of finance, is also looking to make Bapco independent of direct government control, with plans to transfer it to the state’s sovereign wealth fund.

“All of the possible scenarios will be presented to parliament, and most likely the government will repay what it owes to Bapco through instalments in a similar fashion to what it has done with [state-owned aluminium producer] Alba in the past, before moving it to Mumtalakat [the Kingdom’s sovereign wealth fund],” Sheikh Al Khalifa told members of parliament on February 12.

While Bapco will remain under state ownership, the proposal to separate its finances from the government, which has already been sanctioned by the Cabinet, would give the firm more autonomy. It could also see Mumtalakat take at least part of the company public, as it did with Alba in 2010, when 10% of the firm’s shares were floated in an initial public offering. Such a step would be more appealing for investors, particularly when considering the massive modernisation programme that is planned for Bapco.

It will be important for both Bapco and the Kingdom’s economy that the modernisation programme is carried forward as quickly as possible. Despite efforts to broaden the base of the government’s revenue, hydrocarbons still account for 88% of state income.

Ratings agency Standard and Poor’s recently warned that this has left the budget “highly sensitive to declines in price or volume”. Any delays to upgrades at the Sitra plant or to the planned pipeline could see government revenue fall, which would be particularly bad timing as the government looks to boost spending on social and economic development projects.

Plans to refit and boost capacity at the refinery, as well as to increase the throughput of the pipeline from Saudi Arabia, have been around for at least five years, with the cost of the projects having risen over time. Additional delays could see the price tag for the expansion project increase further, as more investments could be needed to upgrade ageing equipment. Just as significantly, pushing back the proposed completion date of 2018 for the upgrade of the Sitra refinery could dry up Bahrain’s downstream aspirations as other regional rivals expand their own processing capacity, making the project less viable.

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