Good fiscal terms needed to make Bahrain oil discovery viable, say analysts

Bahrain, the region's smallest crude producer, has found 80 billion barrels of shale oil

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Bahrain will need to prepare viable fiscal terms to attract international oil companies to develop unconventional reserves of oil and gas found offshore - the biggest discovery in the island kingdom in over eight decades, analysts said.

“Bahrain’s National Oil and Gas Authority will be approaching international partners to contribute funding and technical expertise," said Tom Quinn, senior analyst, Middle East upstream at consultancy Wood Mackenzie. "However, Bahrain’s previous oil contracts had tough fiscal terms by international standards, and the international oil companies' partners made meagre returns. Therefore new fiscal terms will be needed to attract suitable partners.”

An estimated 80 billion barrels of shale oil and up to 20 trillion cubic feet of tight gas have been discovered off the west coast of Bahrain in the biggest greenfield discovery for the kingdom since oil was discovered in 1932. Significant amounts of gas have also been found in pre-Khuff reservoirs beneath the historic Bahrain Field, where the first well was spudded in the early thirties.

Bahrain, the smallest producer in the region and the first to discover crude, was also the earliest to suffer significant output declines, forcing an early diversification in its economy. Bahrain’s current production averages just under 50,000 barrels per day onshore, as well half the yield from the offshore Abu Safah field shared with Saudi Arabia, which averages 300,000 bpd.

Bahrain’s greenfield discoveries, while significant for the region and for its debt-laden economy, would require “expectation management”, said Robin Mills, chief executive at UAE-based Qamar Energy.

“Only five to 10 per cent of the [80 billion barrels] could be recoverable,” he said.

He cited examples of shale basins in the Americas, such as Argentina’s Vaca Muerta, where only 16 billion barrels of the 270 billion barrels is recoverable.

Bahrain’s discovery however is still “large” and “highly significant”, he added, comparing recent discoveries, such as Wolfcamp Shale in the US Permian basin, which is estimated to contain around 20 billion barrels of oil and 16 tcf of associated natural gas.

Bahrain’s announcement of its shale reserves has been in the works for a long time, with state-owned Bahrain Petroleum Company (Bapco), scouting interest among international oil service companies in its tight onshore and deep offshore gas reserves.

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Following exits from the onshore Bahrain Field, which until 2016 had Abu Dhabi’s Mubadala Investment Company and Occidental Petroleum as partners, Bahrain has been trying to woo investment back to the country’s energy sector.

With oil prices close to $70 per barrel, Bahrain has now begun ramping up work, with drilling onshore set to commence in "two months' time" after technical and commercial evaluation of bids submitted by US service companies Halliburton and Schlumberger, Yahya Al Ansari, Bapco's exploration director told The National on Wednesday.

The state oil company is also holding discussions with international oil companies to form joint ventures onshore. While offshore, where Bahrain says it has found light unconventional oil, the government is set to make initial investment to encourage  international oil companies to chip in. Bahrain is working with US-based DeGolyer & MacNaughton as well as Halliburton to drill two appraisal wells offshore this year to evaluate reservoir potential and initiate long-term production.

The completion of the appraisal will make the “full significance” of Bahrain’s discovery clearer, noted Stuart Lewis, senior director of energy at London-based IHS Markit.

“The launch of a 2018 Bid Round has been preceded by a period during which interested parties have been invited to participate in joint study agreements and technical evaluation agreements. They were intended to identify offshore areas for oil and gas exploration, as wells as onshore exploration for gas resources,” he said.

Information gathered after the appraisal will help Bahrain develop a “working geological model” for the country, he added.

However, a contractor working in Bahrain remains sceptical about the finding, noting that Bahrain’s announcement of its shale reserves coincides with widening deficits, ballooning public debt and possible taxes. Bahrain has the highest public debt to GDP among Arabian Gulf countries, which is teetering towards 90 per cent of GDP and forecast to reach 100 per cent of GDP next year, according to Moody’s Investors Service.

“An offshore well will cost three times as much as an onshore well, around $25 million. Does Bahrain have that money?” queried a contractor who asked not to be identified.