Bahrain invests in industry capacity to leverage the use of the kingdom's natural resources

Several major expansion projects are currently under way in the hydrocarbons sector, pointing both to the significant role the industry still plays in the economy and to the positive efforts being taken to leverage the use of the kingdom’s natural resources.

Although Bahrain has achieved a higher degree of economic diversification than many of its Gulf neighbours, it still relies heavily on hydrocarbons. Petroleum-based products comprised 77% of the kingdom’s exports in 2014. However, since global oil prices fell in the middle of that year, Bahrain has seen a sharp reduction in its earnings from petrochemicals: between 2014 and 2015 Bahrain’s revenue from the oil and gas sector dropped from BD2.7bn ($7.2bn) to BD1.6bn ($4.2bn), according to the 2016 consolidated accounts released by the Ministry of Finance, and the amount dropped further to BD1.4bn ($3.7bn) in 2016. That year oil and gas accounted for 75% of overall government revenue of BD1.9bn ($5bn), down from an average of 87% between 2011 and 2014.

NEW MINDSET: Even with prices rising since mid-2017, the next phase of the global oil and gas industry is likely to be a markedly different one, in part due to rising production of shale gas. “With rapidly increasing supply and continuing modest growth in demand, the petrochemicals industry as a whole is still coming to terms with the new price reality on the back of US shale gas and China’s drive to become self-sufficient,” Abdulrahman Jawahery, president of Gulf Petrochemical Industries Company (GPIC), told OBG.

On the other side of the profit equation, operating costs have been gradually escalating for the past decade regardless of oil price fluctuations and market temperament. According to Jawahery, the industry must shift to view business operations and capability independently of the current, challenging economic environment. “Recent price drops in the market are by no means a driving force of eventual change, but rather a message to take swift action. Gone are the days of reasonably easy profit and returns, and our industry must now focus on effective business practices and optimised processes,” he added.

OUTPUT: According to data from the National Oil and Gas Authority (NOGA), the country produced 73.9m barrels of petroleum products from its two fields in 2016, while importing 76.7m barrels of Saudi crude. That year, 82.5m barrels were exported, 10.7m went to local sales and 3.4m were sold as aeroplane fuel.

Oil output in Bahrain averaged 197,276 barrels per day (bpd) in 2017, according to the Bahrain Economic Development Board. This is down 2.4% on the 2016 average of 202,063 bpd, which was the result of efforts in recent years to increase production. Key to the output drive was the establishment of Tatweer Petroleum in 2009, originally a joint venture between nogaholding, the investment and business development arm of NOGA; Occidental Petroleum of the US; and Mubadala Petroleum of Abu Dhabi, which is now wholly owned by nogaholding. The company is tasked with raising production at the mature onshore Bahrain Field using enhanced oil recovery techniques.

DOWNSTREAM: Significant investment is also being targeted to expand downstream operations. A $5bn project at state-owned Bahrain Petroleum Company (BAPCO) is under way to boost the processing capacity of the kingdom’s sole oil refinery from 267,000 bpd to 360,000 bpd, as well as increase the variety of petroleum products manufactured at the facility. The final execution phase of the project is likely to begin in 2018, with commissioning and start-up in 2021.

The refinery is the oldest of its kind in the Gulf, having been established in 1936 with an original daily capacity of 10,000 barrels. In 2007 an ultra-low-sulphur diesel complex was added after the government secured $1.1bn in financing, and a $430m lube base oil plant was inaugurated in 2011.

GPIC: Established in 1979, GPIC is jointly owned by NOGA, Saudi Basic Industries Company (SABIC) and Petrochemical Industries Company (PIC) of Kuwait. The entity, which has 480 employees and is situated in Sitra, uses natural gas as a feedstock for the production of ammonia, urea and methanol. Between 1985 and 2016 GPIC produced 13.1m tonnes of ammonia, the compound from which nitrogen fertiliser is made, as well as 12.9m tonnes of methanol. It has also produced 11.6m tonnes of urea – another input for fertiliser – since beginning its production in 1998.

Despite a challenging global landscape in which prices of fertiliser are down, GPIC reported record production and sales in 2016. Urea output reached 704,003 tonnes, methanol production hit 445,880 tonnes and ammonia output was 467,539 tonnes. The total production of over 1.6m tonnes was almost 3% higher than the company’s target for the year. Meanwhile, exports of ammonia equalled 70,481 tonnes.

Despite major new ammonia and urea capacity coming on-stream in the US, Russia, Malaysia and Nigeria, adding to a testing environment, GPIC saw sales pick up in late 2016, helped by production cuts in China and Ukraine. According to the company’s 2016 annual report, the latest available at the time of publication, close cooperation between GPIC, SABIC and PIC led to smooth export operations, with nearly 1.2m tonnes of product shipped aboard 64 vessels that year. Brazil received 29% of total exports – taking 51% of the urea stock – with the US and Taiwan each accounting for 16%, China 11%, India 10% and Africa as a whole 7%. Around 15 tonnes of methanol and 986 tonnes of bagged urea were also sold domestically.

CHEMICALS: According to Jawahery, fertiliser prices continue to be sluggish despite some signs of improvement, with the mixed performance of key products highlighting the fact that the industry still faces tough conditions. “The market saw significant improvement in pricing in 2017 for nitrogen products like ammonia and urea compared to 2016, when prices touched a new low,” he told OBG. However, in the case of urea, there is still uncertainty going forward. “Several capacity expansions due for completion in late 2017 and early 2018 could somewhat dampen the price sentiment,” Jawahery added. “On a positive note, we remain optimistic regarding untapped demand for urea and other fertilisers in Africa. We anticipate that the development of the African market will revitalise the whole of the fertiliser industry.”

In March 2017 Japan’s JGC Gulf International announced that it had been commissioned to build a new facility under GPIC that will produce urea formaldehyde. The project, worth $8.8m, is expected to be complete in 18 months and begin production in the third quarter of 2018. Urea formaldehyde is a key component in the manufacturing of urea granules, something GPIC currently imports. The facility will ultimately produce 22 tonnes of urea formaldehyde per day, using environmentally safe technologies designed by Danish firm Haldor Topsoe.

BANAGAS: Bahrain National Gas Company (Banagas), another important player when it comes to downstream petrochemicals, was established in 1979. The company turns associated gas into propane, butane and naphtha, and is 75% state owned, with the remaining 25% held by Boubyan Petrochemical Company of Kuwait and Caltex Bahrain (Chevron). Banagas currently operates two liquefied petroleum gas facilities in Bahrain, with the gases then transferred to refrigerated storage tanks at Sitra Wharf for shipping. Naphtha, meanwhile, is sent to BAPCO for storage and export. The company currently employs 500 people, 92% of whom are Bahraini.

INVESTMENTS: Bahrain National Gas Expansion Company (BNGEC), a fully owned subsidiary of nogaholding, announced in August 2017 the signing of a BD194m ($514.4m), eight-year syndicated financing facility to be used to fund the expansion of the company’s gas-processing operations. The project includes the construction of a central gas plant able to treat 350m standard cu feet (scf) of associated gas per day. The expansion will also include a pipeline and storage facilities at Sitra Wharf, with JGC Corporation and JGC Gulf International appointed as engineering, procurement and construction contractors for the project, which is expected to move forward in 2018 and take just under three years to complete. Once the expansion is done, the combined daily capacity of BNGEC and Banagas is expected to reach 653m scf.

In October 2016 NOGA and Kuwait’s PIC signed an agreement to construct an aromatics plant in Bahrain. According to reports, the plant will produce paraxylene and have an annual capacity of 1400 tonnes when fully operational. However, as of early 2018 progress updates had yet to be announced.

While petrochemicals prices – and therefore producers – have been strained in the last few years, the industry will continue to play a substantial role in Bahrain’s economy over the medium term. Investments currently taking place to expand domestic production facilities and increase output should put the industry in good standing as and when global prices recover.