New investments in Bahrain's energy sector aim to overhaul power generation and increase oil production

The year 2014 marked the 80th anniversary of oil exports in Bahrain. The resource was first discovered in the Bahrain field in October 1931, and in 1934 the nation began exporting, shipping 285,000 barrels per day (bpd) of oil. Since then, however, production levels have fallen, but efforts are now under way to double output from this field to 100,000 bpd by 2020. This goal, while ambitious, seems quite achievable given increased drilling and the application of enhanced oil recovery (EOR) techniques.

This new push for increased oil production is one of several large ongoing projects in the country, which include the construction of a new refinery, a liquefied natural gas (LNG) import terminal, and expansion of electrical generation and distribution networks. While Bahrain, along with Oman, is not a member of OPEC, the kingdom has been a member of the Organisation of Arab Petroleum Exporting Countries since 1970 due to its involvement in the export of refined and petrochemical products. Bahrain possesses 6.7trn standard cu feet (scf) of natural gas, roughly 0.1% of the world’s total known reserves. The country also produces 557.97bn scf per annum of natural gas, according to BP’s “Statistical Review of World Energy 2014”.

Black Gold

Proven oil reserves in the kingdom are just over 100m barrels, and Bahrain has the lowest levels of oil consumption per capita in the GCC, according to Eni’s 2013 “World Oil and Gas Review”. After contracting by 8.5% in 2012, the oil sector grew robustly in 2013. According to the Bahrain Economic Development Board (EDB), the industry saw 15% real GDP growth in 2013. EDB’s projections for 2014 are for 3.1% real GDP growth for the sector, which is based on a price of $90 per barrel, although actual oil prices have varied greatly. In the first quarter of 2014 Brent crude prices climbed to over $100 per barrel, but by December 2014 prices had dropped to below $60 per barrel and continued to fall into 2015, trading at under $50 as of late January.

Bahrain boasts two producing oilfields: the offshore Abu Safa field, which is shared with Saudi Arabia, and the older Bahrain field, which is onshore and is also referred to as the Awali field.

Bahrain and Saudi Arabia have jointly managed the Abu Safa field since 1958. Figures for 2013 mark a sizeable growth in production, given the fact that 2012 saw an 8.5% fall in oil production, due in part to unscheduled maintenance operations at Abu Safa that reduced output to 128,000 bpd in 2012. In 2013 its production rebounded to 149,700 bpd, representing 99.8% of Bahrain’s share of the field’s known full capacity of 150,000 bpd. The Bahrain field saw a more modest production increase in 2013 to 48,000 bpd, up from 45,000 bpd in 2012.

Regulatory Shuffle

Prior to July 2012, Bahrain’s Ministry of Energy was primarily responsible for oil and gas affairs. However, oversight of the sector was transferred to the minister of finance that month. The move was in recognition of the importance of the hydrocarbons sector to Bahrain’s economy and government revenues. While the kingdom’s output ranks close to Turkey or the Netherlands, its small population means that oil and gas is a key part of the economy, and in 2012 87% of government revenues were generated from hydrocarbons. In 2000 oil and gas represented 44% of real GDP, but that figure dropped to 19% of real GDP in 2012. Despite boasting the GCC’s most diversified economy, a Kuwait Finance House report from February 2013 noted that Bahrain needed a break-even price of $103.80 per barrel. The domestic oil and gas sector also contributes to the viability of both power generation and manufacturing in Bahrain, and these two segments of the economy accounted for a further 15% of real GDP in 2012.

Overseeing The Sector

Since the appointment of the new Cabinet in December 2014, responsibility for matters related to oil and gas has been restored to the Ministry of Energy. At the sub-ministerial level, the National Oil and Gas Authority (NOGA) consolidates the functions that were previously held by the Supreme Oil Council, the Ministry of Oil and the National Gas Committee. NOGA was established in 2005, and NOGA Holding was formed in 2007 to handle the kingdom’s strategic oil and gas investments. In addition to attempting to increase production in the kingdom, NOGA Holding is involved in the financial aspects of the development of two mega-projects that will impact Bahrain in the medium term.

In 2014 plans were announced for the kingdom’s first LNG terminal to be built at a site on the eastern side of the main island. The LNG regasification facility will have the capacity to import some 3m tonnes per annum and will be developed under a build-operate-transfer arrangement.

NOGA Holding also works with the Bahrain Petroleum Company (Bapco) on the expansion of the Sitra Refinery. With estimates putting the cost of the expansion as high as $9bn, it will be the largest project ever financed in the kingdom.

NOGA Holding has stakes in many of the country’s most important oil and gas firms. The holding company is the sole owner of Bapco and the majority owner of Bahrain National Gas Company (Banagas, with a stake of 75%), the Bahrain Aviation Fuelling Company (BAFCO, 60%), the Bahrain Lube Base Oil Company (55%) and Tatweer Petroleum (Tatweer, 51%). NOGA Holding also has smaller stakes in Bahraini closed shareholding company Skaugen Gulf (35%) and Gulf Petrochemical Industries Company (GPIC, 33.3%). As the national oil company, Bapco has primary rights over exploration and production (E&P), refining and sale of the country’s crude oil, natural gas and petrochemical products.

The total 2013 exports of Bapco equalled 85.5m barrels, a 1% increase from 83.6m barrels in 2012. Some 90% of Bapco’s exports are sent to the GCC, Asia or Africa. In 2013 the breakdown of the company’s product line was 57% intermediate products, 19% fuel oil and 19% naphtha, with the final 5% of production being a range of petrochemicals. Despite ongoing planning and studies for the Sitra Refinery, the company managed to slash costs by 5% in 2013.

A New Round Of Exploration

Since the Bahrain field’s discovery in the early 1930s, no new fields have been uncovered. Other than drilling deeper at existing fields, the most viable option for future E&P will be offshore or on Bahrain’s outlying islands. Thus, this is where all four of Bahrain’s oil and gas exploration blocks are located, and the kingdom had been expected to open a fourth round of exploration in an effort to discover new fields in 2015. However, in light of the significant decline in oil prices, as of January 2015, some companies – including ConocoPhillips and Occidental – had announced that new projects in Bahrain would be deferred.

After an international ruling in 2001 resolved Bahrain’s dispute with Qatar over the currently uninhabited Hawar Islands, new opportunities have opened up for offshore exploration in Bahrain Bay. In terms of oil and gas, the bay is divided between Bahrain’s Block 3 and 4. Block 3 (1088 sq km) stretches from the western coast of Bahrain to north of the Hawar Islands, and Block 4 (1478 sq km) includes the Hawar Islands and the offshore areas around them. However, the islands’ primary status as a nature reserve and tourist destination means E&P efforts there must proceed carefully. Meanwhile, Block 2 (2228 sq km) sits offshore of the Bahrain field, and Block 1 (2858 sq km) stretches off the northern coast into the larger Gulf and parallels one of the world’s largest natural gas fields which is split between Iran (where it is known as South Pars) and Qatar (where it is known as the North field).

Bahrain Field Development

The Bahrain field is still producing more than 80 years after its discovery, making it the oldest producing oilfield in the Middle East. The field is 15 km long and 5 km wide and effectively covers almost 80% of Bahrain’s main island. The shallow oil lies in two structures: Aruma (blue shale) and Mishrif (rubble), both approximately 381 metres underground.

The deepest commercially viable oil find in Bahrain is the Dhruma structure at a depth of 1981 metres. The development of the field is conducted by Tatweer, which is a joint venture between NOGA, Abu Dhabi-based Mubadala Development Company and the US’s Occidental Petroleum Corporation (Oxy).

Following the 2008-09 global financial crisis some advanced EOR techniques were unprofitable, and NOGA launched Tatweer in 2009 to focus on the Bahrain Field Development Project.

Taking Steps To Boost Production

Growth in production has been achieved both through an aggressive drilling campaign and the application of some EOR techniques, many of which are being used on the Bahrain field for the first time.

Between 2009 and 2011, Tatweer increased production from the field by 27,500 bpd to reach 40,700 bpd without the use of extensive EOR techniques. Rather, the company launched a new drilling campaign and reservoir management programme. From its launch in 2009 to early 2013, the company had drilled more than 500 wells.

However, the government subsequently decided to revisit new EOR techniques that were previously thought to be prohibitive from a cost perspective. New exploration work had slowly been returning to the industry, but stalled during the decline in oil prices at end-2014. Bahrain’s current energy strategy is to increase levels of production from existing fields with improved efficiency and EOR techniques.

Beginning in 2011, Tatweer implemented the first steam-injection pilot to extract heavy oil from the rubble reservoir. This was launched in conjunction with a water-flood pilot programme at the Mauddud reservoir, and marked the first effort to produce heavy oil in the kingdom.

Currently, Bahrain’s oil is often considered sour, meaning it is at least 0.5% sulphur, while its American Petroleum Institute (API) gravity index rating means Bahrain’s oil is classified as “medium”.

Should artificial lift techniques fail, more expensive EOR and drilling techniques may be applied in the future. Associated natural gas discovered during oil production is already being used in the kingdom. Indeed, the Mauddud formation, found in the Bahrain field at depths of just over 600 metres, has been injected with natural gas since 1938 to maintain oil reservoir formation.

New Techniques

Tatweer has also introduced new reservoir management techniques in the Bahrain field since 2009. These have included the installation of applications for wireless digital canopy data networks, allowing real-time data monitoring and more accurate decisions about field and reservoir management. A new challenge for Tatweer is increasing urban encroachment on the Awali field – which may limit the number of future wells. However, new horizontal drilling could also help to address this.

In 2014 Oxy was planning to drill the country’s first ultra-deep well to search for reserves below the Bahrain field. Three wells will be drilled. The firm is responsible for funding this drilling programme, but, if successful, Bahrain and Oxy will enter into a production-sharing agreement that will allow the oil company to recoup costs. Oxy also has operations in neighbouring states like Qatar that involve EOR techniques that might prove applicable in Bahrain.

The sharp fall in oil prices in late 2014 and into 2015 may put a wrinkle in things, however, and cause some plans involving more costly drilling and EOR techniques to be put on hold.

Natural Gas Production

Banagas – which is held by NOGA Holding (75%), Saudi Arabia’s Boubyan Petrochemical Company (12.5%) and Chevron (12.5%) – is the primary entity responsible for the development of the kingdom’s gas reserves into petrochemical products for export.

The company was founded in 1979 and, as of 2013, had a Bahrainisation rate of 48%. Since the Awali field is also the source of Bahrain’s natural gas, the Tatweer-led Bahrain Field Development Project is expected to boost natural gas output capacity from just over 1.5bn scf to 2.7bn scf per day.

Deep drilling for oil in 1948 revealed natural gas in a formation known as the Khuff reserve. The gas field was left untouched until the 1960s, when, as part of the nation’s industrialisation plan, aluminium production first started. Today proven gas fields in Bahrain include Wara (609 metres), Khuff (2682 metres) and Tawil (3962 metres).

Bahrain’s natural gas production increased by 31% from 2003 to reach 438.47bn scf per day in 2012, and the kingdom’s associated gas production hit 104bn scf per day in the same year. The country’s natural gas production is set to rise further under the development programme, with additional quantities of natural gas being used for onsite electricity generation or as a feedstock for local industry.

Gas from the Bahrain field is pumped from the Tatweer well into a series of nine compressor stations, from which a total of 300m scf is pumped into Banagas’s processing trains every day.

Currently, Banagas has two trains that process 300m scf of gas per day. The facility turns this gas into 3000 bpd of propane, 3200 bpd of butane and 4500 bpd of naphtha. While small quantities of these products are consumed within the kingdom, the majority is exported overseas. Within Bahrain, most of the demand is for methane and ethane, which are used domestically for power production. Propane and butane are shipped to clients overseas, while naphtha is sent on to Bapco’s Sitra Refinery.

The relationship with Bapco is reciprocated through a transfer of flare-off waste gas. This unused gas, a by-product of the refinery, is pumped back into the Banagas trains for processing. This off-waste gas is rich in propane and butane, which is processed by Banagas to make an additional 2400 barrels of product. Indeed, Banagas is exploring further opportunities to capture more flare-off waste gas for use as a feedstock. According to an estimate from Gas Recapture Systems, Bahrain was burning off $900,000 worth of by-products ever day, or roughly $300m worth of associated natural gas every year.

At the 2014 MEED Bahrain Energy Conference, Sheikh Mohammed bin Khalifa Al Khalifa, CEO of Banagas, announced that a feasibility study for a third gas-processing train at the firm’s facility was under way. Banagas estimates that Bahrain could soon be producing an additional 8000 bpd of associated gas found dissolved in oil or as a free-standing gas cap above oil reservoirs in the Bahrain field.

Banagas has turned to the Bahrain National Gas Expansion Company (BNGEC), incorporated in 2008 and a wholly owned subsidiary of Banagas, to explore associated gas-production issues. BNGEC is also involved in the operations of the current natural gas trains that Banagas operates.

Downstream

Sitra Island is home to the country’s oil refinery. The Sitra Refinery first opened in 1936 with a production capacity of just 10,000 bpd. Several expansions over the ensuing decades have brought refinery capacity to around 260,000 bpd. Bapco has announced plans for a major upgrade of the facility. These include an expansion of the refinery’s capacity to 360,000 bpd that is projected to cost as much as $9bn (see analysis). A number of competing refinery projects are being planned or have recently been completed in the region. For example, the Yanbu Saudi Aramco Sinopec Refinery Company project in Saudi Arabia started trial runs in September 2014 and commenced exports in January 2015. This refinery will have the capacity to process 400,000 bpd of Arabian heavy crude oil into petrochemicals and transport fuels. Further afield, Kuwait is planning a new Al Zour Refinery, which will be the largest in the Middle East when it is completed in 2018 or early 2019. Strategically, the Sitra project will end the production of fuel oil at the site and instead focus on products such as ultra-low-sulphur diesel.

Pipeline

The refinery is primarily supplied by the Arabia-Bahrain (AB) Pipeline, a 54-km subsea pipeline from Saudi Arabia that was completed in 1945. The line provides the refinery with roughly 220,000 bpd of crude oil, while an additional 40,000 bpd came from domestic production. According to the expansion plans, the capacity of the AB Pipeline will be expanded from 230,000 bpd to 350,000 bpd. The contract for the work is expected to be released in the near future, with the entire refinery project planned to reach completion by the end of 2019.

The new pipeline will stretch for total of 115 km to pump Arabian light crude from the Abqaiq complex in Saudi Arabia to the Sitra Refinery in Bahrain. Bapco currently maintains facilities capable of storing 14m barrels of refined products via 170 storage tanks around the country.

Additionally, near the refinery on Sitra Island, Bapco maintains a seven-berth wharf facility that can handle ships of up to 70,000 tonnes. Given the high value of exports, only 5% of Bapco’s products are used domestically, and the facility loads refined product shipments onto more than 700 ships per annum.

One of Bapco’s minor goals for the near future will be to explore ways to develop more retail locations and franchises selling petrol. In 2013 an Isa Town Bapco station saw a complete upgrade of its storage tank, as well as its insulation material. New sophisticated monitoring equipment was also installed to monitor reservoirs and fuel levels in line with international standards. Similar retrofitting is planned for other Bapco stations in the near future.

Aviation Fuel

BAFCO is the primary source of aviation fuel in the country. Its main tank farm is located near the Sitra Refinery and is capable of holding 34.5m litres. From there, a pipeline runs from Sitra to BAFCO’s storage tanks in Arad, where a 9mlitre tank farm holds it for later use. The firm transfers 9000 barrels of Jet A-1 to the airport daily.

When BAFCO’s Arad storage facility was first built, it was in a largely isolated area, but has seen steady urban encroachment in the last decade. As such BAFCO plans to move the facility from Arad to a new location within the Bahrain International Airport. The move is part of a $980m upgrade of Bahrain’s principal airport (see Transport chapter).

Aéroport de Paris Ingérierie has been named as the design and engineering consultant, and an engineering, procurement and construction contractor for the project is expected to be named in 2015. The $42m tank-expansion project will increase the total capacity of BAFCO to four storage tankers, each of which will have a total capacity of 10m litres.

In April 2014 the parliamentary coordination committee also announced that it had tabled a 30% discount on jet fuel supplies to Gulf Air, one of BAFCO’s principal clients. Since the government of Bahrain essentially owns both entities the cost of this fuel purchase programme would be absorbed by the state, although the ramifications of the move for both the transport and the energy sectors are as yet unclear. Currently, 60% of the aviation fuel used in fuelling operations at Bahrain’s airport comes from BAFCO, with Chevron (27%) and Air BP (13%) fuelling smaller percentages of visiting aircraft.

Petrochemiical Sector

At present, GPIC is the primary petrochemicals plant in Bahrain. The company was incorporated in 1979 and is a joint venture between NOGA Holding, the Saudi Arabian Basic Industries Corporation and Kuwait’s Petrochemical Industries Company. In 2013 it broke the overall production record it had set the previous year with an output of 1.6m tonnes of ammonia, methanol and urea, of which 1.2m tonnes was destined for use outside of the GCC. The company ships its products to diverse markets, with some 66 shipments sent to destinations such as India, China, Bangladesh, the US and Australia in 2013. The US alone accounted for 37% of its ammonia, urea and methanol exports in 2013, and 52% of Bahrain’s total urea exports. Meanwhile, China, the second-largest market for GPIC, accounted for 22% of total urea exports.

GPIC posted $186m in net profits in 2013, growth that has been buoyed by methanol’s rise as an important fuel substitute in the US and EU. The company has also achieved a Bahrainisation rate of 92%.

With the firm’s current production facility dating to 1985, GPIC has announced a $1.7bn expansion of its ammonia and urea fertiliser complex.

The facility is located on Sitra Island, not far from the Bapco refinery. At the 2014 MEED Bahrain Energy Conference, GPIC announced that pending a final agreement with the government, the tender for construction of the project would be floated before the end of 2014. Plans call for the building of new urea and ammonia plants at a joint facility that will be capable of processing 2200 tonnes per day of ammonia and 3600 tonnes per day of urea.

In total the maximum annual production of the facility will be just over 1m tonnes of urea – a substantial expansion given that the current facilities produce just under 700,000 tonnes.

The GPIC expansion was first mooted in 2005, but the increase in natural gas production in the kingdom has made the project more attractive since 2011. The government has ensured that feedstock costs for the project will be capped at $2.50 per million British thermal units (mBtu) for the first three years after the facility begins operation.

Under current plans, the project will be completed in 2018 and is forecast to subsequently inject $227m per annum into the local economy. Some 70% of the project will be financed via debt, with the final 30% being financed by equity.

While the overall project consultant on the project will be Mott Macdonald, the technology for the facility is being developed by Snamprogetti of Italy and Germany’s ThyssenKrupp Uhde.

With 90% of the world’s urea production used to create various nitrogen-release fertilisers, Bahrain works with groups such as the International Fertiliser Industry Association to ensure its urea production meets international standards.

Power Generation

The Electricity and Water Authority (EWA) has launched a feasibility study of three new independent water and power projects (IWPPs) that could have an estimated total value of $5bn and are expected to be completed in 2019. In the short term the EWA is developing smaller-scale solar and waste-driven generation plants to diversify the country’s energy mix.

At present, around 80% of Bahrain’s power generation needs are met by IWPPs and independent power projects (IPPs). The most recent addition to supply is the Al Dur IWPP, which produces 1.23 GW and was completed in February 2012. Al Ezzel IPP, which opened in 2007, generates 950 MW, while the Al Hidd IPP in the Al Hidd Industrial Area produces 1 GW of energy. The Al Hidd IPP was the first such project in Bahrain and began operations in 2006.

As of 2012, the most recent statistics available from the EWA, Bahrain had installed 10 transmission substations operating at 33 KV and 21 transmission stations operating at 220 KV. However, the bulk of the system was 66 KV, for which there were 114 stations. The EWA is currently overseeing a massive upgrade of the electrical transmission network as part of the infrastructure push to expand power generation capacity in the kingdom.

Keeping Up

While at present, according to statistics from the EWA, the country produces more than enough electricity, the margin between electrical grid demand and power generation supply is narrowing. In September 2013 electricity demand spiked to 2917 MW, while the grids’ total capacity was 3641 MW. Demand is largely seasonal in nature due to the need for air conditioning in summer months. As of the first week of January 2015, for instance, the maximum available capacity was 3032 MW, while consumption peaked at just 1384 MW.

Nevertheless, if Bahrain sees a return to annual GDP growth of 8-10%, as it experienced in the half decade prior to 2008, it will rapidly need to expand its electrical generation capacity (see analysis). Since GDP growth has mirrored a rise in energy consumption, the kingdom is planning to stay ahead of a possible increase in demand with new energy projects.

This is in keeping with wider GCC trends, as the Economist Intelligence Unit estimates that energy demand in the GCC will rise by an average of 7-8% per year each until 2020 during a period of economic growth across the region. According to the EDB, real GDP growth was 5.3% in 2013, which was a full percentage point higher than earlier predictions of 4.3% and higher than the GCC average of 3.7%.

The power-generation sector is the largest consumer of natural gas in the kingdom, followed by GPIC and Aluminium Bahrain (Alba), the country’s main aluminium producer. In 2012 the price of natural gas was raised from $1.5 per mBtu to $2.25 per mBtu, signalling the government’s willingness to reduce direct subsidies to the sector. The gas subsidy represents 47% of the subsidy budget. If subsidies are to be reduced further, this will likely need to be done in phases to reduce the impact on Bahrain’s industrial sector (see Industry chapter). Alba has benefitted from energy subsidies since it began operations in the early 1970s and cheap energy is part of the company’s core business model.

Outlook

The ongoing development of the Bahrain field is part of larger oil production trends that have seen increased efforts to revive mature fields around the globe. According to Halliburton, some 70% of the world’s oil production comes from mature fields in their secondary or tertiary phases. There are still plenty of greenfield projects in Bahrain’s energy sector at present, including the soon-to-be-launched LNG project, a third natural gas processing train for Banagas, the $9bn Sitra Refinery upgrade and the building of new power plants. Indeed, those three projects are just some of the roughly $14bn worth of oil, gas, power and water projects planned or under way in the kingdom as of 2014.

The new refinery project will help ensure Bahrain remains competitive at a time when a host of new refineries in the region are in the works and there is increased global demand for products that meet stringent new environmental standards. While the discovery of a new field in the fourth exploratory round would likely be a game changer, the kingdom’s current mix of upstream and downstream projects should help the sector maintain its position as Bahrain’s economic engine for the foreseeable future.