Wednesday 09, May 2018 by Jessica Combes

Black gold: a blessing and a curse


Making the largest oil discovery since 1932 may not impact Bahrain’s economic and fiscal metrics for at least another five years.

The government of Bahrain on 1 April 2018 announced the discovery of a new tight oil— the Kingdom’s largest discovery since 1932—and this was no Aprilfool’s joke. Breathing a new lease of life into the Kingdom’s concerning fiscal and economic conundrum, the oil was found in a deep gas resource in the Khaleej Al Bahrain Basin, located off the west coast of the Kingdom.

Bahrain’s National Oil and Gas Authority (NOGA), alongside international consultants DeGolyer and MacNaughton, Halliburton, and Schlumberger, in a press conference, revealed that the tight oil discovered amounts to at least 80 billion barrels. The new resource is forecast to contain highly significant quantities of tight oil and deep gas, understood to dwarf Bahrain’s current reserves. Tight oil is a form of light crude oil held in shale deep below the earth’s surface that is extracted with hydraulic fracturing, or fracking, using deep horizontal wells. “Today we announce that initial analysis demonstrates the find is at substantial levels, capable of supporting the long-term extraction of tight oil and deep gas,” said Shaikh Mohamed bin Khalifa Al Khalifa, Bahrain’s Minister of Oil.
“DeGolyer and MacNaughton’s and Haliburton’s independent appraisals have confirmed NOGA’s find of highly significant quantities of oil in-place for the Khalij Al Bahrain, with tight oil amounting to at least 80 billion barrels, and deep gas reserves in the region of 10-20 trillion cubic feet.”

The discovery, made within the 2,000 square kilometres Khalij Al-Bahrain Basin, is located in shallow waters off the Kingdom’s west coast, close to a fully-operational oil field with ready-to-connect-to facilities, according to Halliburton, who added that this unique factor provides potential for significant cost optimisation. It was discovered during the last three months of 2017 following Bahrain’s search for new fossil fuel deposits, with details of their viability to be released in due course. Additionally, a separate discovery of significant gas reserves in two accumulations below Bahrain’s main gas reservoir were also confirmed.

Extensive work has already been carried out to evaluate in-place volumes. The first well in the drilling programme is planned to produce in August, and over the next two years focus will be given to maximising production and commercial efficiency. “Agreement has been reached with Halliburton to commence drilling on two further appraisal wells in 2018, to further evaluate reservoir potential, optimise completions, and initiate long-term production,” the Minister added.

In a commentary on this development, Moody’s suggests that this supports Bahrain’s sovereign credit over longer term. It could stimulate private investment in the country’s energy sector over the near term, and in the medium term could increase government oil and gas-related revenue and reduce the country’s fiscal and current account deficit.

Bahrain is the GCC’s oldest oil producer, having started oil production in the early 1930s. However, its hydrocarbon endowment is relatively small, with an output of less than 200 thousand barrels per day (bpd), of which around 150,000 bpd comes from an offshore field that it shares with Saudi Arabia (A1 stable). Bahrain’s onshore oil reserves, which the US Energy Information Administration (EIA) estimates at 125 million barrels, are all located in the Awali oil field and at the current rate of production, they will last less than seven years.

As such, a significant oil and gas discovery could improve Bahrain’s economic and fiscal strength by allowing the kingdom to boost its rate of hydrocarbon production (and hence gross domestic product) and/or to extend its current rate of production for a number of additional years, explained the ratings agency.

“Oil in place of 80 billion barrels is based on a P50 resource estimate,” said DeGolyer and MacNaughton Senior Vice president, Dr John Hornbrook. “The discovery breaks new ground for the Bahrain oil and gas industry using established technologies.” It was also noted that, typically, only a small fraction of any reservoir’s ‘oil in place’—which is what the 80 billion barrels in the official announcement refers to—can be recovered using available technologies and at a cost that would be economical given the prevailing market conditions and prices. And only resources that are technically and economically recoverable with a high degree of certainty can be considered proved reserves, which is the measure of oil reserves that we use when assessing the underlying economic strength of an oil exporter.

The newly-discovered resource, which officials expect to be ‘on production’ within five years, is expected to provide significant and long-term positive benefits to the Kingdom’s economy—both directly and indirectly through downstream activities in related industries.

The next stage of development will focus on ensuring robust frameworks, data and terms are in place to facilitate further activities and commercial opportunities with international partners.

Based on EIA research, the average recovery factor for tight oil deposits ranges between three per cent and six per cent of the initial oil in place. For Bahrain, the technical recoverability of its new-found oil reservoir could be closer to the lower end of the range because it is located offshore, below the seabed, and hence its recoverability is likely to be technically more challenging and costly. As the reservoir is tight, what can be recovered may well be within the one to seven billion-barrel range.

span style="font-size: small;">Under the assumption of a three per cent recovery factor, Bahrain’s new oil find may yield up to 2.4 billion barrels of recoverable oil reserves—a little less than half of Oman’s proved reserves. Despite Bahrain’s low oil and gas endowment relative to its GCC peers, hydrocarbon-related revenue still accounted for 75 per cent of government revenue in 2017, down from a recent high of 87 per cent in 2013. A large increase in Bahrain’s oil production, and associated fiscal revenue, could therefore materially reduce Bahrain’s budget deficit, which was as high as 17.8 per cent of GDP in 2016.  

Bahrain’s current account would also benefit. When oil prices declined after mid-2014, the dollar value of Bahrain’s oil exports dropped significantly, and the country’s current account swung from surpluses averaging eight per cent of GDP in 2012-13 to deficits averaging 3.7 per cent of GDP in 2015-17.

Bahrain’s current account deterioration has driven the large erosion of foreign exchange reserves from a peak of $5.8 billion at the end of 2014 to a low of $1.3 billion in July 2017. The reserves have since recovered somewhat on the back of large sovereign external bond issuances, including $3 billion in international bonds in September 2017 and $1 billion in international Sukuk in April 2018. But with foreign reserves of $2.8 billion at the end of November covering only 1.4 months of imports of goods and services and less than 10 per cent of Bahrain’s short-term external debt, pressure on Bahrain’s pegged exchange rate regime is now at its highest since the formal peg of the rial to the dollar was introduced in 2001.

Therefore, Moody’s does not expect new oil production to impact Bahrain’s economic and fiscal metrics for at least another five years. In the meantime, the kingdom’s credit profile could still remain the weakest among GCC peers and the most vulnerable, fiscally and externally, to potential declines in oil prices, its vulnerability of which is captured by the highest combination of fiscal and external breakeven oil prices in the region.


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