Bahrain seeks to diversify its sources of energy

 

While Bahrain has pushed successfully to become one of the most diversified economies in the Gulf region, petroleum products still make up a significant share of the country’s total exports; 50% of all exports in 2016, according to data from the United Nations International Trade Statistics Database and the World Bank. In addition, the drive to establish a flourishing industrial base, coupled with favourable oil and gas subsidies over the years, has put pressure on the kingdom’s ability to meet domestic energy needs with its own supplies of natural gas. The construction of a liquefied natural gas (LNG) terminal, which will start receiving LNG in 2019, as well as reductions in energy subsidies, are likely to help address this shortfall. However, in the long term more will need to be done to raise domestic production or import more oil and gas into the country.

The kingdom has been utilising modern techniques to extract more oil out of its onshore and offshore oil fields, while efforts are under way to expand Bahrain’s sole oil refinery, located in Sitra. At the same time, Bahrain has embarked on efforts to improve its electricity distribution networks, as well as bring new renewable energy projects on-line.

HISTORY: Local oil exploration commenced in the 1920s, when British-New Zealand geologist and mining engineer Major Frank Holmes – also known as “Abu Al Naft”, the father of oil – was granted the first oil concession by Sheikh Hamad bin Isa Al Khalifa. However, it was in June 1932 that Bahrain Petroleum Company (Bapco), then a subsidiary of Standard Oil of California, which had earlier bought the rights for $50,000, first discovered oil in the Bahrain Field, which is still producing oil today. The government of Bahrain acquired a 60% stake in Bapco in 1975, taking the company into full government ownership in 1980. A few years earlier, in 1972, Bahrain signed a production-sharing agreement with Saudi Arabia related to the offshore Abu Saafa field, which had been discovered in 1963 and had begun producing oil three years later. In total, Bahrain currently produces around 200,000 barrels per day (bpd) of oil, including output from Abu Saafa.

ECONOMIC CONTRIBUTION: In 2016 revenue from oil and gas fell to BD1.4bn ($3.7bn), down from just short of BD1.6bn ($4.2bn) in 2015, according to the Ministry of Finance’s 2016 consolidated final accounts. However, this was a notable fall from 2014 figures – the year global oil prices dropped markedly – when Bahrain’s oil and gas revenue reached BD2.7bn ($7.2bn). In 2016 oil and gas income accounted for 75.7% of the government’s total revenue of BD1.9bn ($5bn), roughly equal to 2015, when oil and gas revenue made up 78.4% of the BD2bn ($5.3bn) collected that year. Overall, government revenue decreased 7% year-on-year (y-o-y) between 2015 and 2016. However, this was on the back of the 34.2% fall seen between 2014 and 2015. Between 2011 and 2014 oil and gas income made up roughly 87-88% of all government revenue.

The government’s budget projections for 2017 and 2018 target revenue of BD4.5bn ($11.9bn) over the two-year period, and assume an average oil price of $55 a barrel, with oil revenue accounting for BD1.7bn ($4.5bn) of the overall BD2.2bn ($5.8bn), or 77%, in 2017, and BD1.8bn ($4.8bn) out of the BD2.3bn ($6.1bn) total, or 78%, in 2018. At the same time, the government projected a deficit of BD1.3bn ($3.4bn) in 2017 and BD1.2bn ($3.2bn) in 2018.

According to the Bahrain Economic Development Board (EDB), during the first three quarters of 2017 the crude oil and natural gas sector shrank by 1.4%, while the economy as a whole grew by 3.6%. Meanwhile, the non-oil sector expanded by an annual rate of 4.7% during the same period.

STATE INVOLVEMENT: In June 2016 Sheikh Mohammed bin Khalifa bin Ahmed Al Khalifa, a long-standing member of the board of the Central Bank of Bahrain and a former chairman of both the National Oil and Gas Authority (NOGA) and Bapco, was appointed Bahrain’s new minister of oil. Meanwhile, Abdul Hussain bin Ali Mirza moved from being the minister of energy, with responsibility over oil, gas and utilities, to become the minister of electricity and water.

NOGA, the industry’s regulatory body, which was incorporated as the umbrella organisation in 2005, is a key player in the kingdom’s economic growth plans and the realisation of its Bahrain Economic Vision 2030, the nation’s roadmap for government strategy published in 2008. NOGA, through which the state fully owns Bapco and its refinery in Sitra, Bahrain National Gas Expansion Company (BNGEC) and Tatweer Petroleum, among other industry players, drive much of the strategic planning for the oil and gas sector. This structure could facilitate the development of both hydrocarbons and the energy sector in general. “Gas is very important for not only oil production, but also electricity generation, so Bahrain is in a good position to take advantage of ongoing offshore exploration and enhanced productivity from the Bahrain Field, now that it is fully under NOGA,” Hichem Bouhlel, general manager of oilfield services firm Schlumberger, told OBG.

OIL PRODUCTION: The US Energy Information Association (EIA) forecast in September 2017 that the average price of Brent crude would be $51.07 per barrel for the year. This was up from $43.74 per barrel in 2016 and almost on a par with the $52.32 per barrel seen in 2015, though far below the 2014 average of $99. The EIA estimated that the price will not change significantly in 2018, with an average price of $51.58 a barrel, indicating a continuation of lower government hydrocarbons revenue. Meanwhile, the EDB expected a price of $52 a barrel for Arabian Medium in 2017, up from $43 in 2016, and rising to $55 a barrel in 2018 and 2019.

Oil output fell in 2017 due to seasonal maintenance on the Abu Saafa field in December and the gradual decline in production. Average daily output during the year was 197,276 bpd, down 2.4% from 2016, according to the December 2017 “Economic Quarterly” issued by the EDB. Offshore production from Abu Saafa was flat y-o-y, with a marginal 0.3% decline. The 2017 average was 153,038 bpd, while production from the onshore Bahrain Field fell 8.8% to 44,239 bpd. The fourth quarter was the weakest of the year, with Abu Saafa producing 132,906 bpd and the Bahrain Field 43,203 bpd.

While Bahrain is estimated to export 150,000 bpd out of its 200,000-bpd output, oil imports from Saudi Arabia rose from 76m barrels in 2014 to over 78m barrels in 2015, according to the EDB, highlighting the kingdom’s continued reliance on imported oil. However, this was lower than import figures from the preceding decade, when the average annual oil import from Saudi Arabia was 81m barrels in 2005-15, peaking in 2010 at just under 86m barrels.

Oil sales from Bahrain Field totalled BD278.6m ($738.8m) in 2016, compared with BD230.7m ($611.8m) in 2015, according to Ministry of Finance figures. Oil sales related to Abu Saafa dropped from BD957.4m ($2.5bn) to BD723.7m ($1.9bn). This was BD418m ($1.1bn) less than budgeted, pointing to a significant drop in predicted earnings.

TATWEER PETROLEUM: Established in 2009, Tatweer Petroleum was originally a joint venture (JV) based on a development and production-sharing agreement between nogaholding, the investment arm of NOGA, Occidental Petroleum from the US and Mubadala Petroleum of Abu Dhabi. The agreement was aimed at optimising production at the mature Bahrain Field, and has achieved some notable successes over the last eight years.

Focusing on enhanced oil recovery (EOR) techniques, Tatweer has initiated over 20 EOR projects across seven reservoirs to test commercial viability. The first of the two main pilot projects being undertaken is the Mauddud Light Oil Steam Flood project that targets more than 400m barrels of oil, of which over a quarter could be recovered using steam injection. The second project is the Rubble Heavy Thermal project, which aims to access 100m barrels of oil in a low-permeability, shallow carbonate reservoir by using high-pressure steam injected for low-pressure production in vertical wells.

In 2016 the company drilled 38 new wells, with an average oil and condensate production of 48,500 bpd, including 44,400 bpd of black oil production, which was 1200 bpd above the target, though down from the daily crude and condensate production of 50,600 bpd in 2015, which had been the highest levels of output at the field since 1978. Meanwhile, in 2016 production of non-associated gas was maintained at 2.1bn cu feet per day.

Since Tatweer Petroleum commenced drilling in 2010, the company has drilled 883 wells, with 1076 active oil and gas producers in operation at year-end 2016. In May 2016 it was announced that the JV would be dissolved, with the government of Bahrain assuming full control of Tatweer Petroleum. Despite the successes of the previous seven years, the JV had not achieved the 70,000-bpd rate that had been targeted. Speaking to OBG in late 2016, Tommy McKenzie, then-CEO of Tatweer Petroleum, said that Occidental and Mubadala had not been able to see the return on investment they had anticipated when the initial agreement was signed in 2009. “The terms of the agreement tended to favour the government, so that while the company was successful in increasing oil production and gas capacity by 50%, performance was not good enough to be profitable for the partners,” he told OBG.

Tatweer Petroleum continues to push ahead with EOR techniques to extract more oil from Bahrain Field. “Tatweer Petroleum is currently exploring the possibility of collaborating with international service companies to target difficult reserves. This is in progress,” Sheikh Mohammed said in an interview with Oil and Gas News in March 2017.

In May 2017 Bapco’s oil exploration team was merged with Tatweer Petroleum, placing Tatweer not only in charge of Bahrain Field but also of exploration in Bahrain’s waters as well as for deep gas in the Bahrain Field. “It is an important development as it brings all upstream resources together,” Mohamed Al Qassab, general manager of field operations at Tatweer Petroleum, told OBG.

REFINING: Like many of the Gulf states, Bahrain is trying to make use of its petrochemicals wealth as it diversifies, seeking out opportunities to further develop its downstream sector and move up the value chain. According to NOGA data, of the 98.1m barrels of petroleum products that the Sitra refinery produced in 2015, 87.6m barrels, or 89% of the total, were exported. Local sales stayed steady at around 10.5m barrels. These numbers represented the highest total sales of refined products since 2007, with export volumes the highest since 2008, when the global financial crisis began.

In December 2017 Bapco awarded a consortium – led by French-US firm TechnipFMC and including South Korea’s Samsung Engineering and Spanish firm Tecnicas Reunidas – a $4.2bn contract to expand the capacity of the Sitra refinery from 267,000 bpd up to 360,000 bpd. Expected to be completed in 2022, the project entails improving energy efficiency, valorisation of the heavy part of the crude oil barrel (bottom of the barrel), increasing the number of products and meeting environmental compliance.

The Sitra refinery is the oldest of its kind in the Gulf, having been established in 1936 with an original capacity of 10,000 bpd. That capacity was increased to 250,000 bpd in 1968 after a significant expansion project. In 1981 Bapco was reconstituted as a JV refining company owned 60% by the Bahraini government and 40% by Caltex, but in 1997 the government assumed full ownership of the refinery, receiving full revenues from its petroleum product exports. An ultra-low-sulphur diesel complex was completed in 2007 after the government secured $1.1bn in financing to fund an earlier modernisation programme, which was followed by the inauguration of a $430m lube-base oil plant in 2011. In 2013 the facility received a new $120m wastewater treatment plant and two new 14-MW steam turbo-generators, costing a combined $108m, aiming to improve thermal efficiency and lower maintenance costs.

In addition to boosting capacity, the modernisation programme aims to increase the variety of petroleum products manufactured at the refinery, while using new technologies to improve efficiencies in production. “We are hitting the cost curve at the right time, which will make the expansion cheaper,” Pete Bartlett, CEO of Bapco, told OBG. “Financing, though, is still one of the biggest challenges.”

NEW PIPELINE: In order to supply the refinery expansion, in September 2015 Bahrain and Saudi Arabia signed contracts for the construction of a $350m, 115-km Arabia-Bahrain (AB) oil pipeline, with Saudi company Al Rabie responsible for constructing the 74-km onshore section and UAE-based National Petroleum Construction Project tasked with completing the 41-km subsea section. The pipeline will have the capacity to transport 350,000 bpd of oil between Saudi Arabia and Bahrain, and is scheduled for completion in 2018. The pipeline is set to double the capacity of the existing connection, which was the world’s longest commercial submarine line when it was laid in 1945, but is now too close to urban areas and needs replacing.

GAS PRODUCTION: While overall oil and gas revenue dropped between 2015 and 2016, gas actually registered a rise in revenue, increasing from BD412m ($1.09bn) in 2015 to BD443 ($1.17bn) in 2016, according to the Ministry of Finance.

Natural gas was first discovered in Bahrain in 1948, one and a half decades after oil was found. According to the 2017 “BP Statistical Review of World Energy”, Bahrain had proven natural gas reserves of 5.8trn cu feet at the end of 2016, with a reserve-to-production ratio of 10.5%.

In 2015 Bahrain produced 751.6bn standard cu feet (scf) of gas, including 519bn scf of natural gas and 232bn scf of associated gas, according to NOGA. This was up from 728.4bn scf in 2014, and a considerable increase from output in 2009, when Tatweer Petroleum took over operations at the Bahrain Field.

As part of efforts to further develop and utilise non-associated gas resources at the Bahrain Field, in September 2015 an engineering, procurement and construction (EPC) contract was signed between Tatweer Petroleum and UK-based Petrofac for the construction of a $100m, 500m-scf-per-day (scfd) gas dehydration unit, the first in a series of planned gas capacity projects scheduled for the 2018-20 period, with building works beginning in June 2016.

CONSUMPTION: In an interview with regional media, Ali Mirza highlighted the continuing growth of energy demand in the kingdom and the need to address this. “The growth in the energy demand in Bahrain has averaged around the level 6-8% annually. Such demand growth rate in peak electricity system demand is alarming, and data further shows that the expected demand for the total energy sector will continue at a pace of 4% annually with the domination of ‘gas’ at 83% as a primary energy, and the remainder 17% oil,” he said, adding that the electricity and water sector accounts for more than 43% of consumption of all natural gas supplies.

Industry accounted for 41% of total demand for natural gas in Bahrain in 2015, with half of that coming from Aluminium Bahrain (Alba), one of the largest aluminium smelters in the world. Major new industrial facilities coming on-line in the near future, notably Alba’s Line 6 expansion, which is scheduled to be completed in 2019, are expected to more than double the demand for natural gas in the medium term, putting further pressure on gas supplies.

The government is investing heavily in new upstream and downstream petrochemicals capacity, with three key developments being the expansion of the kingdom’s oil refinery, the construction of a LNG import terminal and the Bahrain Gas Plant Project. Sheikh Mohammed told industry press in March 2017 that nogaholding had ambitious plans to invest in excess of $7bn across several separate ventures over the next five years.

GAS PROCESSING: Bahrain National Gas Company (Banagas) and BNGEC own and operate two gas processing plants in the country. In March 2017 BNGEC announced the signing of a BD194m ($514.4m), eight-year financing facility to be used to fund the expansion of the company’s gas-processing facilities, including the construction of a third train with the capacity to process an additional 350m scfd of associated gas. The expansion will also include a pipeline and storage facilities at Sitra Wharf. “It is estimated that they will recover an additional 10,000 bpd of liquefied petroleum gas and naphtha from the third train, which will add to what we already make from Bahrain Field,” Tatweer Petroleum’s Al Qassab told OBG. “They are already getting 10,000 bpd from the current plants, and if you add it all together, you are talking about 65,000 bpd from the Bahrain Field,” he added, pointing to its long-term viability.

JGC Corporation and JGC Gulf International were awarded the EPC contract, with its 34-month time-frame expected to move forward in 2018.

LNG TERMINAL: In March 2015 Bahrain LNG, a consortium comprising Bahrain’s nogaholding, Teekay LNG Partners of Canada, South Korea’s Samsung Construction and Trading, and Gulf Investment Corporation of Kuwait was formed to construct Bahrain’s first LNG import terminal. The facility aims to supplement the domestic natural gas supply, as the kingdom is very reliant on gas for its power needs.

A consortium of nine international and regional banks are helping to finance the project, which will cost an estimated $741m, with Korea Trade Insurance Corporation providing commercial and political risk cover for approximately 80% of the loans.

The terminal, which will be located near the Al Hidd industrial area of Muharraq and is being developed on a 20-year build-own-operate-transfer basis, will have a floating storage unit, an offshore LNG receiving jetty and adjacent regasification platform, a subsea gas pipeline to shore, a gas receiving facility and an onshore nitrogen production facility. The terminal is scheduled to be operational in early 2019, and will have an initial capacity of 400m scfd, which can be expanded to 800m scfd to meet growing needs. Bahrain is expected to receive its first deliveries of LNG from Russia in early 2019, following a deal signed with Moscow in September 2016.

“The LNG import terminal forms a vital part of the energy infrastructure of Bahrain – it will give the kingdom security of supply that it needs to meet its growth in demand for natural gas to fuel large industrial projects, to generate power and water and for EOR,” Sheikh Mohammed told industry press in March 2017. “Bahrain’s LNG import terminal will provide it with both an insurance policy in case of potential shortages of gas and the ability to supplement domestic gas supplies with gas from LNG.”

ELECTRICITY CONSUMPTION: Bahrain’s domestic gas production amounted to 15.3bn cu metres in 2016, one-third of which was utilised for domestic power generation. However, with plenty of energy-intense projects on the horizon, notably Alba’s Line 6 expansion, the kingdom will require a lot more gas to meet domestic demand (see Industry chapter). In fact, according to Arab Petroleum Investments Corporation (APICORP), Bahrain will need to increase its power generation capacity by 6% per year to keep up with rising demand.

APICORP estimates that while capacity stood at 4.2 GW in 2017, the kingdom will require an additional 1.4 GW of capacity by 2021.

Bahrain has embarked on efforts to expand and upgrade its existing power infrastructure in order to meet the increasing energy demand from industry and population growth (see analysis). It is also looking to other sources of energy, notably renewables. In October 2016 the government endorsed a National Plan for Energy Efficiency and a National Plan for Renewable Energy, later approving targets of 6% national electrical energy efficiency by 2025, with 5% of electricity on the grid coming from renewable energy by 2025, rising to 10% by 2035. Key to hitting these targets will be the utilisation of Bahrain’s abundant sunlight (see analysis).

CUTTING SUBSIDIES: Lower oil prices have led to a fall in government revenue across the Middle East, and oil-producing countries such as Bahrain have re-evaluated the level of support they give their citizens and companies when it comes to energy subsidies. In recent years the kingdom – along with other countries in the region – has reduced subsidies it provides for fuel, electricity and water.

For Bahrain, which lacks the deep pockets of some of its Gulf neighbours, reducing subsidies is an important part of efforts to rein in the budget deficit, which reached $4bn in 2016. Subsidy cuts began in late 2015, and in January 2016 Bahraini drivers were paying 60% more for 95-octane Mumtaz fuel and 56% more for 91-octane Jayyid. Prices have also increased for diesel and kerosene. This has had an impact on drivers’ choices, with premium car fuel dropping from 65% of total consumption to less than 40% after the price changes. Further fuel price increases are likely, and government officials have suggested this is a transition period that will last for a few years, during which time fuel prices will adjust upward gradually until they reach adequate levels.

NEW ELECTRICITY RATES: New tariffs were also introduced for electricity and water, effective from March 2016. Prices will eventually double for expatriates and larger industrial companies. The new rates do not affect Bahraini citizens with a single domestic account, who will enjoy significantly lower prices for both water and electricity.

Electricity bills are split into bands of 0-3000 units, 3001-5000 units, and 5001 units and above, and priced in fils. There are 1000 fils to the dinar, with the currency pegged at BD1:$2.65. Domestic citizens on a single account pay 3, 9 and 16 fils, respectively, while non-Bahraini residents and other domestic accounts pay 13, 18 and 22 fils in 2017, rising to 21, 23 and 25 fils as of March 2018, and 29 fils per unit regardless of usage from March 2019. Previously these companies and individuals paid the same rate as Bahrainis with a single account.

For commercial customers the bands are 0-5000 units, 5001-250,000 and 250,001-500,000, with a rate of 16 fils for the first 5000 units of electricity. Prices have risen from 19 fils in 2016 for 5001-250,000 units to 25 fils in March 2018 and 29 fils in 2019. For usage of 250,001-500,000 units commercial customers pay 26 fils as of March 2018, and will pay 29 fils from March 2019, with the rates for usage above 500,000 units staying flat at 29 fils.

WATER TARIFFS: Water usage rates, which are measured in cu metres, have similarly risen for non-Bahraini domestic accounts. Bahraini domestic customers will continue to pay 25, 80 and 200 fils for usage of up to 60 cu metres, 61-100 cu metres and anything above 100 cu metres, respectively. However, other residents have seen their rates rise to 200, 300 and 400 fils, respectively, as of March 2017, with these rates increasing to 450, 500 and 600 fils in 2018 and 750 fils irrespective of usage from March 2019. As of March 2017 commercial customers have been paying rates of 550, 600 and 750 fils, with these rates set to increase to 650, 700 and 750 fils in March 2018 and to a flat rate of 750 fils as of March 2019. The government predicts that the new rates for electricity and water will save $1.1bn when fully implemented, broken down into $769m savings on electricity and $386m related to water.

In an August 2017 interview with regional media, Ali Mirza estimated that the Bahraini government had spent BD350m ($928.1m) on electricity and water subsidies in 2013 and 2014, falling to BD325m ($861.8m) in 2015, which put a significant financial burden on the government. Following the cuts in subsidies he estimated that government budget support for electricity and water would be approximately BD230m ($609.9m) in 2017 and down to BD189m ($501.2m) in 2018. “It’s important for the public to understand that the electricity consumption levels per capita are high, and have averaged around the level of some 11,500 KWh per capita,” he said. “This is mainly attributed to ‘unrestrained’ consumption behaviour during the past era. Such consumption levels exceed the world’s consumption average, and are higher than the industrialised nations’ consumption, such as Europe and Japan.”

It is widely believed that the move to cut subsidies will positively influence energy usage in Bahrain. “The removal of subsidies will encourage a better philosophy of being more thoughtful regarding the use of power,” Gareth R Brown, CEO of OAK Group Holdings, a commercial utilities developer and a specialist solutions provider to the oil, gas and petrochemicals industries, told OBG. “Oil price volatility could not sustain the previous energy prices.”

OUTLOOK: Bahrain is making considerable efforts to diversify its energy sources, as well as improve its ability to utilise available resources, both upstream and downstream. Work is already under way to improve crude oil, gas processing and refining capacities, and when these projects are up and running they will have a notable impact on the kingdom’s overall economy. At the same time, efforts to rein in subsidies and increase energy prices for domestic consumers should help to reduce state spending.

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