Thursday, 26th April 2018

Shale oil find a boon for Bahrain, if it doesn’t torpedo reforms

The discovery of a reserve of more than 80bn barrels of shale oil in shallow waters off the west coast of Bahrain, first revealed on 1 April along with some significant new gas finds, could hardly have come at a better time for the Gulf Co-operation Council (GCC) region’s weakest economy. A few days earlier, the government had pulled a planned multi-tranche sovereign bond issue after being spooked by the high returns demanded by investors. A $1bn sovereign sukuk issue went ahead at the end of March and the government has indicated it could try to tap the international debt capital markets again later this year.

The oil find might give Manama and investors the confidence they need to push a deal through. In a research note published on 3 April, Dubai-based Emirates NBD head of fixed income research Anita Yadav said that “following on from the positive sentiment generated on the back of this ‘find’, the Bahrain sovereign may plan to re-approach the bond market for completing bond sales that were shelved last week.”

However, there are concerns that the potential for a huge new oil revenue stream could tempt the government to ease off on a reform programme that is needed to put the economy on a more sustainable longer-term footing. “I’d be concerned if on the back of this find they would slow down progress,” one regional analyst told GSN. Indeed, reform efforts have been fitful. While Bahrain introduced excise duty on imported tobacco and sugary drinks at end-2017 (three months after the UAE and Saudi Arabia had brought in similar measures), it has yet to bring in a value-added tax; (Saudi Arabia and the UAE were the only GCC members to bring in VAT on 1 January as planned (GSN 1,051/9).) Bahraini officials have suggested Manama may follow suit by end-year.

Bahraini sources are split on whether the latest energy finds will further alter Manama’s macroeconomic strategy. One former government official suggested the find meant the move away from fossil fuel dependence was “a somewhat less imminent possibility”. But another local analyst said “it doesn’t necessarily change the strategic direction of the country to move to a post-oil economy”.

Manama doesn’t really have much room for manoeuvre. It is by almost every measure the GCC’s weakest economy; even Oman is in a better position. “External reserve buffers in Oman and Bahrain have taken quite a beating over the last few years and are at very low levels,” said Moody’s Investors Service senior analyst Alex Perjessy. “But there are differences. Bahrain is a much smaller economy, but Bahrain’s vulnerabilities are much higher. Its foreign reserves cover only one and a half months of imports. That number is six and a half for Oman, a much stronger position. Moreover, unlike Bahrain, Oman can access some liquid reserves that it has in the sovereign wealth fund.”

Much depends on how much of shale oil can be extracted and at what cost. Answers will not emerge for some time, but such tight reserves could prove to be a problem. “A tight reservoir means a low recovery factor and only a fraction of the 80bn-plus barrels is likely to be recoverable,” said consultant Wood Mackenzie senior analyst for Middle East upstream Tom Quinn: “The oil will also be technically challenging and potentially high-cost to develop.”

Bahrain’s National Oil and Gas Authority (Noga) – which is working with DeGolyer and MacNaughton (Demac), Halliburton and Schlumberger on the discovery – unveiled further details on 4 April. Bahrain’s largest ever oil discovery is estimated at 81.5bn bbls; it was made within the Khalij Al-Bahrain Basin. A separate natural gas find estimated at 13.7tcf was made in two accumulations below the country’s main gas reservoir, the Bahrain or Awali field. To put these discoveries in context, Bahrain’s reserves were previously estimated at 125m bbls of crude and 3.25tcf of natural gas. Schlumberger has gained positive results on the oil reserve from test well drilling close to the Saudi maritime border. This suggests the formation could be classified on the edge of conventional and unconventional. Oil minister Sheikh Mohammed Bin Khalifa Al-Khalifa told a 4 April press conference that Halliburton would drill two further appraisal wells in 2018 to evaluate reservoir potential. The authorities hope to start production within five years. Industry analysts say Manama will have to offer more generous contract terms than it has done in the past to attract IOCs.

The discoveries are a much-needed fillip to the struggling local oil sector. While Manama’s target is for 100,000 b/d of crude output, the Bahrain field has been producing closer to 45,000 b/d (GSN 1,048/10). New finds could in time significantly raise output, but policy decisions made in the meantime will decide whether the new reserves will be used to support a more diversified economy or to delay the hard decisions still needed.

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