Refining operations: A new round of upgrades is planned for the Sitra refinery


In May 2016 nogaholding, the investment arm of the National Oil and Gas Authority (NOGA), signed a $570m credit agreement allowing it to move ahead with a $5bn overhaul of the country’s existing refining facility. This move would boost output capacity to 360,000 barrels per day (bpd), up from the 276,676 bpd produced in 2015. Bids were submitted in October 2016 for the engineering, procurement and construction (EPC) of the new refinery, with the contract set to be awarded in the second quarter of 2017.

LONG HISTORY: Established in 1936, the Bahrain Petroleum Company (Bapco) refinery at Sitra is the oldest of its kind in the Gulf. Its original capacity was 10,000 bpd. In 1945 the Arabia-Bahrain (AB) pipeline opened, allowing the refinery to receive crude oil directly from Saudi Arabia. In 1968 a significant expansion plan was completed that increased capacity to 250,000 bpd. It was not until 1997 that the Bahraini government assumed 100% ownership of the refinery and received the full revenues from its exports of petroleum products.

A number of changes were subsequently made to reduce the environmental impact of the refining process and broaden the range of products it produced. In 2005, $1.1bn in financing was secured to fund a modernisation programme that saw the development of a new ultra-low-sulphur diesel complex in 2007 and the inauguration of a $430m lube base oil plant in 2011. A waste water treatment plant costing $120m was opened in 2013, and in the same year two new 14-MW steam turbo-generators were installed at a cost of $108m to lower maintenance costs and improve thermal efficiencies at the refinery.

PROJECT PARTNERS: In early 2013 France’s BNP Paribas and the UK’s HSBC were contracted to provide financial advisory services for the latest upgrade project. The two banks had also structured the financing for the upgrade in 2005. The autumn of 2014 saw French company Technip awarded the front-end engineering and design contract, and Chevron Lummus Global of the US was contracted to upgrade low-value residual oils into high-value middle distillate products. Bapco awarded the Australian firm WorleyParsons the project management contract in December 2015 in a deal valued at A$120m ($88.4m). WorleyParsons will help Bapco monitor, manage and appraise the front-end engineering and design contractor and the EPC contractors working on the scheme. In May 2016 a team of 10 local and international banks provided nogaholding with its sharia-compliant $570m murabaha (a type of sales contract) issue.

At the beginning of the upgrade process, NOGA estimated in its 2012 annual report that the programme would take up to six years to complete. This suggests that if work on the facility commences in 2017, the changes to the refinery could be completed by 2023.

NEW PIPELINE: A key component of the Sitra refinery expansion will be an improved supply of imported crude oil from Saudi Arabia, which will be achieved through a new $350m AB pipeline, due to be completed in the second quarter of 2018. The existing pipeline, which was constructed in 1945 and now finds itself closer to Bahrain’s built-up areas, has a capacity of 230,000 bpd. The new 115-km pipeline will have an initial capacity of 350,000 bpd, with a full design capacity of 400,000 bpd. It will run from Saudi Aramco’s Abqaiq facility to the Sitra refinery. The first 43 km will be onshore in Saudi Arabia, followed by a 41-km subsea section and another 31 km onshore in Bahrain.

Replacing the old pipeline is also expected to make both the environment and the supply of oil more secure. 144.2m imperial gallons of Bahrain’s total daily water consumption of 165.3m imperial gallons come from desalination plants, so an oil spill in the country’s waters caused by any failure of the old pipeline would have a potentially catastrophic impact on water supplies. (Adipex)

IMPROVING THE MIX: According to the Bahrain Economic Development Board (EDB), a key objective of the upcoming refinery expansion is to modify the mix of petroleum products it is able to manufacture while simultaneously using new technology to deliver greater efficiencies in production. This will enable Bapco to adapt the products it sells in its home market – and more significantly, the international market – to meet the changing demands of customers. Of the 98.1m barrels of petroleum products the Sitra refinery produced in 2015, 87.6m barrels, or 89%, were exported.

The most recent detailed description of Bapco’s refinery product output came in the company’s 2012 annual report. At that time, middle distillates accounted for 57.1% of total product exports, while heavy oil, including asphalt and fuel oil, accounted for 22.8%, sold primarily to the Middle East bunker market. Naphtha, which was sold to Asian petrochemical manufacturers, accounted for 19%. Bapco’s entire sulphur production was sold to Asia, with 92% going to the Indian subcontinent. Through the lube base oil project the refinery supplied lube oil to Europe, the US and Asia. The Middle East accounted for a dombined 49% of all exports; the Far East, including Japan, received 20%; African nations purchased 16% of exports; Europe comprised 12% and the Indian subcontinent received 3%.

REGIONAL RIVALS: Given the significance of the Middle East market to Bapco’s existing exports, it is important to mention that many of Bahrain’s GCC neighbours are also expanding their own refining operations to ensure they do not find themselves exporting crude, but exporting more expensive petroleum products. The EDB highlighted in its September 2016 “Economic Quarterly” report that Saudi Arabia’s National Transformation Plan envisages its own refining capacity increasing from 2.9m bpd to 3.3m bpd by 2020. Although construction work has been delayed, the new Jazan refinery – which was due to be completed in 2017 – will add 400,000 bpd. The EDB says Saudi refineries saw a 17.6% yearon-year increase in output in the first half of 2016 to 2.8m bpd, and that Saudi petroleum product exports have more than doubled since late 2011 to 1.4m bpd – 16% of all hydrocarbons exports from the kingdom.

In Fujairah in the UAE, a 200,000-bpd refinery is due to be completed by 2018, and a year later a 615, 000-bpd refinery will open at Al Zour in Kuwait, becoming the sixth-largest refinery in the world.

ONWARD: According to the think tank McKinsey Global Institute, there were 900,000 bpd of refinery closure announcements in 2015, mainly in Europe and Japan. However, it calculated there will be 9.4bn bpd of capacity added globally up to 2020, indicating a 1.6% annual growth rate in global capacity compared to a 1.2% historical growth rate over the previous 10 years. The report notes that this increases uncertainty around refining market conditions beyond 2020. Although there are risks inherent in such a substantial investment, Bahrain is placing its faith in the long-term demand for petroleum products and is spending during a downturn in prices in the hope that the new refinery will prove profitable when prices turn upward again.