The year 2012 marks 80 years since the Kingdom made its initial oil discovery near Jebel Al Dukhan, or the “Mountain of Smoke”, in Sakhir. As the first GCC country to discover hydrocarbons, the Kingdom is now moving into a new period in its history where more complex techniques are required to extract its oil and natural gas deposits. The finite nature of these resources means that the Kingdom is undergoing an evolution to an energy future in which various types of fuels, from traditional hydrocarbons to renewables and nuclear power, may all come to contribute to the country’s energy mix.

OIL PRODUCTION: Hydrocarbons, such as oil and natural gas, still dominate in terms of energy significance, although output has declined in recent decades. During the 1970s, crude oil production at the Bahrain Field amounted to some 75,000 barrels per day (bpd), but by December 2009 it had fallen by more than half to 30,000 bpd. To address this, the Kingdom has sought to extract more from its mature fields in recent years. Indeed, a new large-scale enhanced oil recovery (EOR) project is now under way at the Bahrain Field. These efforts seem to have paid off as well, with the average production rate for 2011 at 42,500 bpd, according to a January 2012 report from Tatweer Petroleum, the main producer at the Bahrain Field. Over January-February 2012 oil production stood at 45,000 bpd.

Statistics regarding domestic oil consumption vary. Figures from the Bahrain Petroleum Company ( BAPCO) indicate that 92% of refined products are exported, with local consumption equating to around 21,000 bpd. According to the US Energy Information Administration (EIA), however, consumption has risen steadily over the last 30 years, from about 16,000 bpd in 1980 to some 45,000 bpd by 2009.

SMALL BUT STRONG: In comparison to its Gulf neighbours, the sector remains small in size, with proven reserves of 250m barrels of crude oil and 290bn cu metres of non-associated natural gas. Upstream policy is now firmly focused on maximising extraction from existing fields, while also still exploring for new reserves offshore. Oil continues to play a major role in the Kingdom’s economy. Production rates have declined slightly over the last decade, but increasing oil prices have helped maintain the sector’s contribution to GDP. According to data from the Economic Development Board (EDB), the country’s investment agency, oil’s share of GDP amounted to 24.3% in 2001 and 24.8% in 2010. This was despite a fall in Bahrain Field oil output over the last decade, declining from 14m to 12m barrels per year between 2003 and 2010. This trend has been reversed by the new Tatweer joint venture (JV).

NEW INVESTMENTS: Given that high oil prices have helped sustain the oil sector’s export earnings and contribution to the economy, the Kingdom has undertaken a renewed effort to increase its crude oil output. The country plans to invest more than $20bn in the energy sector over the next two decades. Some $5bn-7bn is earmarked for upstream exploration and increased production from onshore and offshore fields, while $5bn-7bn will be used to modernise and upgrade the country’s refinery at Sitra.

Natural gas is also vital to the health of the Kingdom’s heavy industries, primary amongst these being Aluminium Bahrain, better known as Alba, and the associated downstream businesses it supports, as well as a source of feedstock for petrochemicals manufacturing. It is also the main source of fuel for the country’s power plants. At present the Kingdom is able to produce enough natural gas to meet its needs, but with demand continuing to rise, it has taken steps to boost local supply. Indeed, Tatweer is overseeing a project to increase production at the Khuff gas reservoirs, with a goal of securing a sufficient gas supply through at least 2024.

As an alternative to local production, the government has also sought out a number of future supply agreements with countries such as Russia, Qatar and Iran, and is looking to build a receiving terminal to import liquefied natural gas (LNG) to meet future demand. The government has already tendered for a contract to build such a terminal, as well as to operate and manage it upon completion.

These developments suggest that the Kingdom has entered into a new period in its energy history. Upstream investment is aimed at increasing crude oil production at the Bahrain Field from 45,000 bpd to 100,000 bpd by 2017-18 and to boost capacity of non-associated gas from 42m cu metres per day to 70m cu metres per day. US firm Occidental also signed a 30-year exploration and production sharing agreement (EPSA) with the government in February 2011 to drill for deep gas onshore. Offshore, the Kingdom continues to receive 150,000 bpd from the Abu Safa field it shares with Saudi Arabia’s national oil company, Aramco. Finally, the government has also opened up three offshore exploration blocks to Occidental and one to the Petroleum Authority of Thailand Exploration & Production (PTTEP) to search for oil and natural gas deposits.

STRUCTURE: To prepare the Kingdom for its future energy challenges, the government has restructured the sector in recent years to streamline decision making. The National Oil & Gas Authority (NOGA) was established in 2005, replacing the Supreme Oil Council, the Ministry of Oil and the Gas Committee. NOGA is charged with organising, supervising and developing the oil and gas sector as well as related industries. Overall energy policy is developed by the Supreme Committee for Energy, which has as its chairman the crown prince.

NOGA’s subsidiary, nogaholding, was set up in 2007 as the investment and development arm of NOGA, and is involved in all new investment projects, upstream and downstream. “We are here to give an extra push to strategic investments,” Sheikh Mohamed bin Khalifa Al Khalifa, the CEO of nogaholding, told OBG. “We see the private sector as the main driver of growth in this area. However, we do not expect it to undertake multibillion-dollar projects alone, which is why NOGA can take the lead.”

In addition to those tasks, nogaholding also is responsible for overseeing the country’s energy firms, managing the government’s share in eight companies: BAPCO, Bahrain National Gas Company (BANAGAS), Bahrain National Gas Expansion Company (BNGEC), Bahrain Aviation Fuelling Company (BAFCO), Tatweer Petroleum (developer of the Bahrain Field), Skaugen Gulf Petrochemical Carriers (SGPC), Bahrain Lube Base Oil Company (BLBOC) and Gulf Petrochemical Industries Company (GPIC). BAPCO and BNGEC are 100% state-owned while the rest are JVs with the private sector. The state holds 75% of BANAGAS, 60% of BAFCO, 51% of Tatweer, 35% of SGPC, 55% of BLBOC and 33.3% of GPIC.

BAPCO: Since it was established in 1929, BAPCO has remained the Kingdom’s principal upstream and downstream integrated energy company and the government’s technical adviser on all strategic projects. The company was responsible for exploration and production of crude oil and non-associated gas from the Bahrain Field, until the formation of Tatweer. Now it manages the government’s interests. BAPCO also manages the Kingdom’s refining, marketing and export trade of petroleum products. BAPCO owns and runs the Kingdom’s 265,000-bpd refinery at Sitra, the oldest in the GCC. The firm also oversees 170 storage tanks at several sites across the country, with a total capacity of 14m barrels of oil.

In September 2010, the strategic planning unit at BAPCO, in coordination with consultants Arthur D Little, launched a wide-ranging review of the company, putting together a 15-year roadmap, with a first phase six-year strategy from 2011 to 2017 aimed at enhancing the firm’s position in the region. Increased profitability, competitiveness, cost efficiency, improved management practices, brand awareness and retention of a skilled, motivated workforce were the main priorities forming the basis of the plan.

UPSTREAM: In terms of overall upstream strategy, NOGA’s primary focus has been to increase output from the Bahrain Field (see analysis). Established in 2009, Tatweer was designed as a project company to run the ambitious EOR project at the Bahrain Field, aiming to increase production to 100,000 bpd by 2017-18. The firm is a JV between nogaholding (51%), Occidental (29.25%) and the Abu Dhabi-based Mubadala Development Company (19.75%).

One of the main challenges is the type of oil that Tatweer expects to find. “These current production targets are sustainable for the future in terms of the resources still available in the Bahrain Field,” Anwar Khalaf, the general manager of exploration and petroleum engineering at BAPCO, told OBG. “Out of this 100,000-bpd target we expect to produce 30,000-40,000 bpd of heavy oil from steam flooding. We have already conducted a mini-pilot concerning the challenges facing us on heavy oil in terms of how to mobilise it and get it out of the ground.”

Offshore discoveries of significant new oil deposits have been less forthcoming. In 2009, NOGA apportioned the country’s territorial waters into four blocks, ranging from north to south, which it offered for tender, eventually awarding three blocks to Occidental and one to PTTEP. Since then, both firms have carried out seismic studies and drilled an exploratory well in each of their blocks, as they have been required to do according to the terms of their contract with the government.

Bahrain also receives 150,000 barrels per day from the Abu Safa offshore field, which it shares with Saudi Arabia. About five-sixths of the crude refined at Sitra comes from Saudi Aramco, via the ArabiaBahrain (AB) pipeline. The current pipeline has a capacity of 226,000 bpd, but there are plans to replace it with a new $305m, 76.2-cm-diameter pipeline running for 105 km and capable of transporting 350,000 bpd of Arabian light crude.

DOWNSTREAM DEVELOPMENTS: Increased and improved throughput for the AB pipeline would facilitate expansion at the Sitra refinery, one of the most important projects in Bahrain’s downstream oil sector. At present, the 265,000-bpd refinery produces naphtha, gasoline, kerosene, aviation turbine fuel, ultra-low sulphur diesel, heavy lube distillate, fuel oil and asphalt. Up to 92% of its refined products are exported. Indeed, Abu Safa crude exports are a vital source of revenue for Bahrain. Net oil revenue contributed BD3.7bn ($9.77bn), according figures released by the Ministry of Finance.

Chevron Lummus Global, a Chevron subsidiary, has prepared a master plan that looks at reconfiguring the Sitra refinery to allow it to compete with top refineries in the Middle East and Asia Pacific regions. The primary goals are to boost capacity up to 450,000 bpd and to improve the range and quality of products it processes, as well as revise existing environmental standards and energy efficiency. At a cost of $5bn to $7bn, modernising the facility will allow it to eventually begin production of high-quality, low-sulphur fuels.

Technology selection and base engineering design is expected to start towards the end of 2012. The front-end engineering and design contract is likely to be tendered in 2013 or early 2014, with an engineering, procurement and construction contract expected to be launched by 2015.

The private sector is likely to be involved in the upgrade and expansion of the refinery. “NOGA will look at every option on the table,” Ebrahim Abdulla Talib, the deputy chief executive for refining and marketing at BAPCO, told OBG. “Private sector participation is more than likely for this project, as we have already enjoyed success with the JV on lube base oil production with [Finland’s] Neste Oil.”

Previous partnerships have led the way. BLBOC was a JV set up in 2009 between Neste (45%) and nogaholding and BAPCO, which jointly retain a 55% stake in the firm. South Korea’s Samsung Engineering Company built the 400,000-tonne-a-year lube base oil plant, which was commissioned in the third quarter of 2011, near the refinery at Sitra. BLBOC could also provide opportunities for additional downstream development in the Kingdom, according to Majeed Shafea, the country chairman of Chevron. “Currently, Bahrain has no lubricant blending plants. The UAE and Saudi Arabia have the only lubricant blending plants in the region, so with the completion of the Bahrain lube base oil project, there is an opportunity for Bahrain to develop lubricant blending facilities,” he told OBG.

TRANSPORT CENTRE: As Bahrain gradually makes the transition from a net oil exporter to an oil importer, the government has looked at ways to maximise the benefits of the Kingdom’s geographic position in the Gulf in terms of its potential as a transport centre for petroleum products (see analysis). “There is clearly a lot of work being done upstream in terms of oil and gas exploration,” Sheikh Mohamed told OBG. “In terms of energy transportation in its broadest sense, there is a plan to look at this. An independent terminal that would act as a large-scale storage facility for liquefied petroleum gas (LPG) and other products has been under consideration. We would look to attract oil storage tank farm companies to lease land from the terminal.”

In an attempt to further develop as an energy transport hub, NOGA is considering setting up several new companies focused on the liquefied gas and petroleum sector over the next few years, although it has not yet provided specific details. “If our efforts are successful, we will be looking at Bahrain becoming the region’s central hub for petroleum and associated logistic services,” Abdul Hussain bin Ali Mirza, the minister of energy, told OBG.

NOGA has also identified oilfield services as a niche market to focus on for the future. The Kingdom’s push on upstream hydrocarbons exploration over the next 6-10 years at least has led to the growth in opportunities for not just international firms but also domestic ones.

Tatweer’s redevelopment of the Bahrain onshore field and the ongoing exploration activities of Occidental and PTTEP offshore have proved a steady source of work. Houston-based firm Schlumberger has been awarded all five oilfield service contracts related to Tatweer’s projects.

UPSTREAM GAS: While oil exports are a major contributor to the government’s revenues, natural gas is vital to the Kingdom’s long-term energy security. Tatweer is overseeing the major upstream gas developments in the Bahrain Field and the Khuff gas reservoir, both of which are located in Awali, with the aim of boosting overall capacity. At the same time, Occidental and PTTEP are also exploring for gas and oil prospects in their offshore blocks. Finally, Occidental’s 30-year deep-gas contract may yield results in the near future as well.

FURTHER EXPANSION PLANNED: Ever since gas was first found in the Khuff formation back in 1948, the reservoir has been producing gas for the Kingdom at depths of 2700-3400 metres. Currently it produces around 36.6m cu metres per day. Between 2008 and 2010, up to seven wells were drilled. Under Tatweer’s new programme a further 18 wells are planned to be drilled during the 2015-18 period. A multi-year compression project set to start in 2016 will also ensure a continued supply of gas.

“Our focus is on making modifications to the existing facilities in the Khuff reservoir such as reducing the pressure at wellheads to increase output,” Khalaf told OBG. “BAPCO remains the technical arm for NOGA, although Tatweer will implement the new drilling programme and make deliveries to BAPCO, who will in turn supply its customers. This project will add significantly to the Kingdom’s gas reserves.”

Khalaf also sees a good deal of potential in the deep gas deposits found. “Occidental’s 30-year EPSA has been ratified by parliament. BAPCO made the first discovery of the deep gas accumulation,” Khalaf told OBG. “Occidental will strive to discover additional gas reserves in the deep Paleozoic section of the Bahrain Field. The cost of drilling at depths of 6100 metres can rise to $30m or $40m. We know it is there but the key is how to unlock it – that is the challenge.”

ALTERATIVE SUPPLY: Increasing the domestic supply of natural gas would be a welcome development in Bahrain, where gas is still the primary source of energy for power generation and is used as a major feedstock for the petrochemicals sector, as well as a source of power for heavy industries such as aluminium production. All the Kingdom’s natural gas is consumed domestically and demand has increased rapidly over the past few decades, from 2.8bn cu metres per year in 1980 to 12.6bn cu metres per year by 2009, according to the EIA.

The government is focusing on two main ways to address the potential future supply shortfall in the Kingdom. The first is to increase production through upstream exploration and potential agreements with countries bordering the Gulf or Russia. The second is to look more closely at the true cost of supply in terms of existing energy subsidies in an effort to lower the amount of demand.

“Our aim is to put ourselves in the best position for the future,” Khalaf told OBG. “We must be prepared for all future possibilities in the gas market. In terms of importing gas we have already looked at importing from our neighbours such as Qatar and Iran. Despite the current politics with Iran, the door is always open to them on gas imports in the future if they are willing to trade. However UN sanctions makes this difficult at present. The new LNG terminal we are planning should be seen in terms of keeping all of our options open.”

LOOKING ABROAD: The Kingdom has sought out a number of countries to secure gas supplies in the future. Qatar, Iran, Russia and Turkmenistan have all been approached. During the first quarter of 2012 the government was in talks with Russia’s Gazprom to import an average of 11.3m cu metres (400m cu ft) per day of natural gas to the new LNG terminal, which is due to open by 2015. The country will initially import around 3m tonnes a year of LNG but may buy more to meet demand.

“Originally we would start off with say 400m cu ft per day of gas and that could be slowly ramped up,” Mirza told news agency Reuters in early March 2012. A framework agreement was also signed with Iran in 2008, but negotiations ended over a disagreement on price. Talks remain stalled given the current geopolitical situation in the region.

Boosting supplies and exploration activities is one part of the solution, but passing on the actual cost of gas to the end-user is also becoming part of the government’s strategy. In January 2012 there was a government-sanctioned increase in gas costs from $1.50 to $2.25 per million British thermal units.

Energy Minister Mirza, speaking to reporters at the time, stated that natural gas costs could be raised again. “This is the situation now,” he told the press. “If the situation demands it then we will take action. The price of gas is low compared with international prices. So we wanted to gradually adjust the price so we are not burdened in the future with international prices without raising the local prices. When the time comes, we will decide,” he said.

Other policymakers agree. “Bringing consumption down is the main challenge,” Sheikh Mohamed of nogaholding told OBG. “People have talked about increasing tariffs for power, but of course this is politically sensitive. Yet the energy subsidy bill keeps rising, particularly with high oil prices at present and the gas needed for power stations and industry. The Electricity & Water Authority (EWA) and other pol- icymakers like NOGA are increasingly looking into energy efficiency solutions such as smart meters for residential consumers and the installation of more efficient turbines in power plants.” UTILITIES: Indeed, as the Kingdom’s economy has expanded, EWA has worked hard to keep up with demand. Over the last 28 years net annual electric- ity consumption in the Kingdom has jumped from 1.4bn KWh in 1980 to 10.5bn KWh in 2008. In August 2010 electricity consumption hit a daily record of 2.71 GW, up from 2.67 GW per day in July 2009. Pow- er demand is generally cyclical in the Gulf states, peaking over the hot summer months when air conditioning systems tend to draw heavily on the grid.

Unsurprisingly then, EWA’s primary aim over the last few years has been to boost generation capacity, and increasingly it has turned towards the private sector. Down in the far south of the island, the Kingdom’s largest independent water and power project (IWPP) at Al Dur became operational at the beginning of 2012. Al Dur adds 1234 MW of power to the national grid and produces 181,700 cu metres per day of water. The plant is run by the Al Dur Power & Water Company, whose owners include IPRGDF Suez META (45%), a major operator of IWPPs in the Middle East, and Gulf Investment Corporation (GIC, 25%), a financial institution wholly owned by the six GCC member states. The remaining 30% of the shares are held by Bahraini institutional investors.

Al Dur is the latest addition following the Kingdom’s first IWPP in 2007, the 950-MW Al Ezzel plant run by the Al Ezzel Power Company, in which GDF Suez (70% owner of IPR-GDF Suez META) and GIC are also the largest shareholders. In 2006 UK-based International Power led a private sector consortium consisting of GDF Suez and Japan’s Sumitomo Corporation in a take-over of the operation and management of the 1000-MW Al Hidd power plant from the government. EWA continues to operate the 709-MW Riffa plant and the 126-MW Sitra plant. With the new addition of Al Dur, total installed capacity now stands at 4000 MW, according to EWA.

“Electrical and mechanical contracting is one of the main indicators of how the economy is performing. The less electricity production and installation directly reflect the decrease in construction industry and vice-versa,” Abdulla Juma, the chairman of Bin Juma Holding Company, told OBG.

ADDITIONAL SUPPLY: Additional electricity supply comes via the 400-KV GCC Interconnection Grid, which currently links Saudi Arabia, Kuwait, Bahrain, Qatar and the UAE, with Oman to be added soon. The grid proved its worth in September 2010 when Qatar agreed to supply the Kingdom with 150 MW of electricity after the power outages in August that year. Extending the national grid across the Kingdom is now EWA’s main focus (see analysis).

“In 2011 we commissioned 22 substations for the 220-KV and 66-KV Transmission Development Project 2007-11,” Sheikh Nawaf bin Ebrahim Al Khalifa, the chief executive of EWA, told OBG. “At a cost of BD320m ($845m), this is the largest transmission and distribution project in Bahrain, although we may yet exceed this estimate. In addition, we have the 400-KV Transmission Development Project 2009-13, which will mean we will need to add more 220-KV substations to improve our connections from the 400-KV GCC grid. We are upgrading the network completely.” There are also plans for a new $30m control centre for the new transmission systems.

A MASTER PLAN: But perhaps the most important scheme is appointing a consultant to carry out a master plan for the country’s future energy and water needs up to 2030. “We have seen unprecedented growth in terms of energy,” Sheikh Nawaf told OBG. “The aim of the study will be to review everything going forward: electricity, fuel and water requirements, and all factors affecting growth and demand.” The scope of the master plan and the terms of reference for the consultant have been finalised with the tender board and appointment is due to be made imminently. “The consultant will visit every agency in Bahrain to measure where future growth and demand will come from in order to make savings,” Sheikh Nawaf said.

Once completed, the master plan will be vital in helping direct national strategy on energy-saving projects, which are now the main concern for policymakers at NOGA and EWA. Smart meters to measure an individual household’s consumption is one tool that is currently being considered.

“We have a pilot study under way at the new ERA Tower, the results of which we hope will inform future strategy,” Sheikh Nawaf told OBG. “But we are taking our time to get things right on smart meters. We don’t want this to be a luxury, we want it to become a way of life.” It is hoped that by introducing smart meters over time they will start to have an impact on the level of electricity demand.

Public awareness campaigns are also being planned, to be introduced at a later stage. Already EWA has a Conservation Directorate that carries out energy audits in government buildings, measuring areas including electricity consumption, air conditioning, lighting and district cooling.

RENEWABLES: Although gas, whether domestic or imported, will continue to remain the main fuel for all the Kingdom’s power plants well into the future, steps have also been taken to look at what renewable options might be possible.

To direct renewable energy strategy in the Kingdom, in 2010 a National Committee for Renewable Energy was established, comprising representatives of EWA, NOGA, Alba, the Ministry of Industry and Commerce and the University of Bahrain. To gain a greater understanding of the potential that exists for renewables, EWA launched a pilot project that involves developing a combined 5-MW solar and wind plant and is being led by Germany’s Ficthner.

“The challenge is to harness the energy,” Sheikh Nawaf told OBG. “You are going from macro to micro. We also want to see if you can install photovoltaic panels on residential buildings to help reduce electricity consumption further.”

WATER DEMAND: Like power, water demand in the Kingdom has risen steadily in line with economic growth. Residential and industrial consumption combined came to 121.89m cu metres of water in 2011, a 26.5% rise since 2008, according to EWA.

Since 2006, when the government opened up its utilities sector to private investment, EWA has sought to use desalination, rather than the extraction of groundwater reserves, to meet demand, with 588,300 cu metres a day currently produced at the country’s plants at Al Hidd, Sitra, Alba, Ras Abu Jarjur and Al Dur. The Kingdom now depends on desalination for up to 90% of its drinking water, with only 10% being provided by dedicated underground aquifers.

Under the BD243m ($641m) Water Transmission Development Programme, EWA will increase the Kingdom’s existing water storage capacity from 1.24m to 2.37m cu metres. This project involves the construction of new pumping and distribution stations and the installation of some 155 km worth of water transmission pipelines.

OUTLOOK: With $20bn worth of investment planned across the sector, the Kingdom is committed to securing a sustainable energy supply for its expanding economy. Much emphasis has been placed on the new upstream developments, which may yield large commercial deposits of oil and gas in the near future through onshore and offshore exploration. Tatweer Petroleum’s EOR projects at the Bahrain Field and the Khuff gas reservoir are currently the principal focus, and NOGA is confident of boosting the existing levels of production coming from these fields.

Occidental’s exploration for deep gas will also be closely followed by those involved in the industry. Although seismic studies have revealed deposits, a greater sense of their commercial significance will become clearer following the results of the drilling programme. Finds may also come from Occidental and PTTEP’s offshore blocks.

In the oil sector the most important project is the modernisation of the country’s main refinery, which already exports up to 92% of its petroleum products to markets in Asia and Europe. Upgrading the AB pipeline, which supplies the refinery with the bulk of its crude oil (54.7m barrels of oil in 2010) from Saudi Arabia, is a crucial project.

Elsewhere in the power and water sectors a switch is being made from large-scale generation and desalination projects to consolidation. Improved electricity distribution across the country and projects aimed at boosting water storage capacity now constitute the main focus for officials.

To take pressure off the projected demand for natural gas in the future, EWA and NOGA are also looking much more closely at schemes designed to reduce power consumption through energy saving and the more widespread use of renewable energy. Renewables are unlikely to replace natural gas as a source of fuel, but they are expected to form part of the Kingdom’s energy mix in the future.

However, at present the national priority is still to secure future supplies of natural gas, which will remain the main fuel for the country’s power stations into the future. Power stations in the Kingdom rely on the fuel to supply both residential consumers and leading heavy industries such as aluminium and petrochemicals. The new LNG terminal will give the government a strategic alternative while imports from Russia, Iran, Qatar and/or Turkmenistan will also be pursued over the short to medium term in order to help match projected demand. In the long term, however domestic growth looks well in hand.