Manama digs deep for oil and gas resources

02 May 2011

Plans to explore and develop new oil and gas reservoirs in uncharted offshore areas are under way as Bahrain looks to increase revenue streams to fund diversification

key fact

In 2010, Bahrain earned revenues of about $5.8bn from selling oil and gas

Source: MEED

It has not been a good year for the Bahraini government. Tensions between the Sunni elite and its Shia majority have boiled over in recent months, with mass demonstrations prompting neighbouring GCC states to send in troops to quell unrest.

Manama has been the most vulnerable of all the Gulf states to what has come to be the named the Arab Spring. Analysts cite sectarian divides, a lack of reform and weaker government revenues as key contributing factors for unrest in the small, oil-rich state. In 2010,

Manama made about $5.8bn from selling oil and gas, compared to the tens of billions of dollars raised by neighbours Kuwait, Qatar, Saudi Arabia and the UAE.

Revenue contribution

The oil and gas sector accounts for just 13 per cent of Bahrain’s gross domestic product (GDP). Dwindling hydrocarbons reserves have led the government to better diversify its economy compared to some of the other Gulf states.

The banking and finance sector was by far and away the most productive, making up 25 per cent of economic output in 2010, according to the Washington-headquartered International Monetary Fund.

“Tatweer is also working on developing new ‘deep’ gas supplies, which are thought to lie under the Awali field”

However, a quarter of GDP is reliant on industries that do not appreciate unstable environments. “The country may struggle in the next one to two years,” says Samuel Ciszuk, senior Middle East energy analyst at the London-based consultancy IHS Global Insight. “Confidence might not be growing, but even declining, which will make the hydrocarbons sector even more important.”

Manama’s economy is expected to become more dependent on its oil and gas earning potential. In 2010, 80 per cent of revenues came from the hydrocarbons sector and this is set to grow.

State developer the National Oil and Gas Authority (Noga) forecasts Bahrain’s oil output could hit 250,000 barrels a day (b/d) by 2017.

In February, Abdul-Hussain bin ali-Mirza, oil and gas minister and head of Noga, announced production from the Awali field had hit 40,000 b/d after decades of decline.

This is an increase of 7,000 b/d from 2009. The expansion by energy major Saudi Aramco of the offshore Abu Safa field, which crosses Saudi Arabian and Bahraini territory is understood to have translated in a 10,000 b/d-plus increase in Manama’s share of output. Noga also plans to build a new pipeline linking Bahrain with Saudi Arabia. This would allow imports of up to 350,000 b/d, including the Abu Safa allocation, up from the current 220,000 b/d ceiling on oil transport between the two.

A capacity expansion at the country’s Sitra refinery, from 260,000 b/d currently to 350,000 b/d by 2016, would also allow the government to boost its hydrocarbons revenues, which are largely made up of gasoline exports.

Noga hopes to increase gas production - a key driver in the state’s drive towards industrialisation - from an average 1.5 billion cubic feet a day (cf/d) today to as much as 2.5 billion cf/d in 2020.

The current development plan has been under way since Noga was formed in 2005. It consists of three parts: the development of existing resources through a new public-private joint venture, Tatweer Petroleum; exploration for new reservoirs; and ongoing development of downstream assets by state oil firm, Bahrain Petroleum Company (Bapco).

Enhancing recovery

Tatweer is a relatively recent addition to the industry. It was officially formed in 2009, as a 20:48:32 joint venture between Noga, the US’ Occidental Petroleum and Abu Dhabi’s Mubadala Development Company. Its remit is to boost production at the Awali field to 70,000 b/d. Under the terms of the joint venture, the partners only start earning a cut once production has topped 50,000 b/d, a strong incentive to reach the target.

In 2010, the company brought in four new workover rigs, which helped drill and bring on stream 25 new wells. In 2011, the company plans to drill a further 43 wells in order to meet its aggressive expansion targets.

Tatweer is also investigating using cutting-edge enhanced oil recovery (EOR) techniques such as water-flooding and steam injection to boost output at more than 100 wells, according to Edward Hanley, Tatweer’s chief executive.

The 70,000 b/d target is achievable under Noga’s current timeline. “When it comes to Awali, this project is effectively being operated by Occidental and Mubadala,” Ciszuk adds.

“They must have a good reason to project those numbers; they haven’t been picked out of thin air.”

Digging deep

How long production from the 80-year-old field, the first to be developed in the region, can be maintained for is a concern. The challenge is to dovetail production with the government’s aim to create an economy over the next 20 years that is completely unreliant on oil and gas revenues. According to Hanley, production will plateau for about seven-10 years, while Noga believes output will be maintained until around 2030.

“They [the government] aren’t so much between a rock and a hard place as throwing themselves towards the rock”

Samuel Ciszuk, IHS Insight

Tatweer is also working on developing new “deep” gas supplies, which are thought to lie under the Awali field, at depths of up to 20,000 feet. Occidental won the contract to produce a forecast 500 million cf/d of gas from the field in December 2010, taking over from state gas developer Banagas. Early forecast by Banagas suggest the project could cost up to $200m to complete. MEED understands that the project was subsequently incorporated into Tatweer’s mandate in the country.

Executives working in the country and international oil company (IOC) sources speculate that plans to explore for and develop new oil and gas reservoirs in uncharted offshore areas are under way. In July 2008, Bapco signed exploration and production licence agreements for four blocks with Occidental and Thailand’s PTT Exploration and Production (PTTEP). Both companies are in the process of conducting surveys of the offshore areas.

Given existing expansion plans for production increments in the oil and gas industry, executives hope that Occidental and PTTEP will be able to add about 30,000 b/d of oil to the country’s overall output, along with a further 500 million cf/d of associated and non-associated gas.

“Bapco had been exploring these areas for a while before the bid round, and frankly, given that Bahrain has been producing oil and gas for longer than anyone else in the region, you’d think that they’d have found something if it was there,” says an executive at another IOC. Occidental and PTTEP were two of only three to bid for the rights to explore the area, along with the relatively unknown Zarubezhneft of Russia. Plans to build the country’s downstream sector by expanding the Saudi-Bahraini pipeline and the Sitra refinery have been around since the mid-2000s.

Saudi concerns over planned reforms in Bahrain and problems faced by Manama in raising financing for the two projects, which could cost up to $3bn, have resulted in little progress to date.

However, Bapco has had some success in recent years in upgrading the refinery. In 2007, it commissioned a $700m low-sulphur diesel unit, bringing diesel produced at the refinery up to international standards. It followed this in 2009 with a gas desulpherisation unit to reduce noxious emissions from the plant at a cost of $140m.

Expansion schemes

Most recently, in August 2008, a joint venture of Bapco, Noga and Finland’s Neste Oil awarded a $340m engineering, procurement and construction contract to South Korea’s Samsung Engineering for the construction of a base oil refinery. It will produce high-quality lubricants for sale into international markets. Sources close to the scheme say that the government has been careful to make sure that it goes ahead despite the unrest. The project is scheduled for completion by the end of 2011.

Even if these projects go ahead they are unlikely to solve the country’s deep-rooted social problems.

Only further political reforms that allow the country’s minority a voice in the day-to-day running of the country and more job opportunities can help calm the turbulent environment. This is unlikely to happen.

The increased government revenues will be useful from a security standpoint and allow Manama to spend more on development projects. But it will fall short in providing the economic boost the financial sector gives to the country.

“They [the government] aren’t so much between a rock and a hard place as throwing themselves towards the rock,” Ciszuk says.

The state relies more than ever on Saudi oil to boost government revenues and gas from neighbouring states fuel industrial expansion. This leaves little room for political manoeuvre.

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