The coronavirus pandemic has spread to more than 300,000 people, grinding the economy to a halt and leading oil prices to plummet to $28 per barrel of Brent crude (as of writing) after OPEC+ talks to further limit supply floundered.
The Ministers of Finance of the Kingdom of Saudi Arabia, the United Arab Emirates, the State of Kuwait…1099 | the publication reaches you by | Bahrain News
“The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilisation has begun,” said S&P Global’s Chief Economist Paul Gruenwald. “Europe and the U.S. are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year.”
The market turbulence has created a heavy fog of uncertainty at a time when many countries are looking to expand their upstream presence.
“We are going to have to reassess our investment plans and make sure that they still are viable under market conditions,” says Sheikh Mohamed bin Khalifa bin Ahmed Al Khalifa, oil minister of Bahrain, noting that the coronavirus pandemic and oil price drop have not impacted operations in Bahrain. He heads the National Oil and Gas Authority, which controls the Bahrain Petroleum Company (BAPCO), Tatweer Petroleum, and other oil and gas entities through its investment arm, nogaholding.
“It is unprecedented,” he says in a phone interview. “Certainly the demand conditions are not favorable because of the coronavirus. Had there been an [OPEC+] agreement, markets would be better balanced.”
The OPEC+ meeting came to a bitter end when Russia refused to further limit its production, to which Saudi Arabia responded by removing its own output limits. It is set to produce at its maximum sustained capacity of 12 million barrels per day (mbpd) in April, drawing an additional 300,000 bpd from its stocks. Meanwhile, the energy ministry has requested Aramco to increase its maximum sustained capacity to 13 mbpd. In doing so, Saudi Aramco also slashed its own crude oil prices, hoping to capture more market share, with Iraq, Kuwait, and the UAE following suit.
“For anybody who has extra volume, this is the time to produce it,” he says. “As supply overtakes demand, inventories will start filling up. Structurally that will always be negatively impactful to supply/demand dynamics and ultimately the price.
“The longer this continues, the worse it gets for the oil and gas sector in terms of price and investments,” Al Khalifa warns. “But eventually this will have a negative impact on future supplies, because at current market prices, most international oil prospects become uneconomic. And if you do not invest in oil, you will soon face a supply disruption.”
Although a fraction of the scale of its Gulf neighbors, Bahrain has big growth plans which will be catalysed by a new approach to partnerships, as the region’s national oil companies open up to investments from the private sector. Most recently, Al Khalifa said that Bahrain could move some energy assets to a state-run fund, selling shares to local investors.
“The idea is to make some of the oil and gas assets available for the private sector,” he says. “We have been talking to the pension fund here, and the quality of the assets we have are certainly part of what they would regard as good investments; they have good returns.”
“The idea behind the energy sector fund is to help us grow further and to expand downstream and upstream,” he adds. “Today we are in the initial stages.”
When asked if this would be limited to local investors, Al Khalifa says that the local market is the initial scope, “but Bahrain being an open economy, we will always be open to international investment as well.”
He believes this could accelerate existing development plans, while giving investors access to assets that were previously unavailable to them. “In light of the government looking at the private sector as a true engine of growth for the economy, this is one way of adding the private sector into the oil and gas industry.”
This is part of a wider initiative to involve other players in the industry. In June 2019, the prime minister issued an edict which would allow foreign companies to own 100% of oil and gas drilling projects, with its offshore blocks in mind. It awarded offshore block one to Italian energy company ENI last year, which is planning to spud its first well in April.
“We were successful in granting ENI their concession, and we have three other blocks that we are working on today,” Al Khalifa says. “Later in the year, we might be going through a road show, hopefully signing up a few more international oil companies for the remaining blocks.
While he expects that seismic interpretations and processing should be finished by mid-year, he is conscious of the current economic climate. “We are currently reassessing the best times and it has to be linked to market conditions.”
In April 2018, it discovered a major offshore tight oil and deep gas field containing an estimated 80 billion barrels of oil, although the true amount of recoverable oil has yet to be determined. Still, it is a boon to the country’s upstream sector which produces approximately 40,000 bpd from the onshore Bahrain field, and a further 155,000 bpd from the offshore Abu Sa’afah field, which it shares with Saudi Arabia. Al Khalifa says that one well from the tight field, being managed by Tatweer Petroleum, is currently being assessed. Of course, it is being aided by a fleet of consultants and oilfield services companies, including Schlumberger, Halliburton, and Baker Hughes.
“We are producing it and we are taking note of the data, assessing the flow rates, understanding the geological formations,” he says, noting that the information will be publicly available “in good time”.
Tight resources can be more technically challenging than their conventional counterparts, but after recent tests of deeper gas zones, Al Khalifa is optimistic that it could be commercially viable. “We were successful with flow rates that are competitive in terms of cost, so we are fairly confident that the reserves can be produced at a fairly low cost.
“We are currently assessing the size of the reserves and we are beginning early development already with drilling wells in those new formations,” he adds. “I think we have a better control of what the costs are going to be and they are way below the current market price here in Bahrain for gas.”
Before moving into the development phase, a few more wells are typically required, and Al Khalifa says he is considering an additional well or two, although he notes that the timeline for development will hinge on market conditions.
“Ultimately, to attract the right companies, we need to have the right market conditions,” he says. “Currently, with the oil price issues and what has transpired of late it is unclear, but hopefully towards the end of the year will be a clearer picture.”
Generally, a key theme for Bahrain is supply security. Al Khalifa hopes the tight gas resources will make the nation self-sufficient in terms of gas reserves, and is working with international companies on an LNG supply terminal to be used during peak demand in the summer. The floating storage unit can also be chartered when not in use.
Increasing supply also means optimising hydrocarbon recovery rates at more mature fields. Al Khalifa says enhanced oil recovery (EOR) is one focus area which serves the dual purpose of improving recovery while also enabling the circular carbon economy. “We are looking at the possibility of using [CO2] for enhanced oil recovery in the Bahrain field, and that is being tested technically with subsurface geologists,” he says.
“The Bahrain field has a substantial amount of oil in place, but because of its geological challenges, we are trying to apply technologies to increase the recovery rate.” Al Khalifa explains, noting that the field is split into multiple layers requiring different technologies including steam injection, CO2, mini fracs, and gas lift, with the latter currently used for production. Schlumberger was involved in an early pilot to improve recovery rates at Bahrain field, and Al Khalifa says that they “are soon to move into the development side.”
Gulf Petrochemical Industries Company also currently reuses emitted CO2 to produce urea fertiliser, and Al Khalifa is considering other potential uses for CO2 with the goal of “ultimately creating a market for it.” He notes that all of these initiatives exist to transform CO2 emissions in CO2 reuse, achieving sustainability goals.
On the downstream side, the BAPCO Refinery project, which Al Khalifa says is the biggest project to date in the history of Bahrain, could carry risks of supply chain disruption under current market conditions. “We are looking at a potential alternative rerouting of the supply chain in case we have some challenges there,” he says, noting that the upstream supply chain is also being examined for other alternatives.
“So far, everything is smooth, but they are putting up plans in case there is disruption further down the line.”
The oil and gas industry has built up its resilience to market turbulence, because it is impossible to predict what will happen in the future–in the past year, we have swung wildly from concerns about supply disruptions to fears about low demand. In 2019, geopolitics came into the forefront with the US-China trade war, US sanctions on Iran, and attacks on Saudi facilities deepening worries that supply would fall short of global demand. OPEC+ continued to monitor the market and adjusted its production, but with the alliance in disarray and leading producers rushing to grab more market share as demand is slashed by the coronavirus, it is unclear how the situation could play out if the pandemic continues without an end in sight.
“Hopefully this is short lived and the coronavirus epidemic is contained soon,” Al Khalifa says. “If it isn’t, it is going to mean some troubles ahead for the oil and gas sector.”
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