April 21, 2018

A large oil and gas


A large oil and gas discovery in Bahrain

The discovery of large quantities of oil and gas off the coast of Bahrain may alter the country’s economic fortunes.

Date: 05 April 2018

By Pierre Noël, Senior Fellow for Economic and Energy Security

Large quantities of oil and gas have been discovered off the western coast of Bahrain, potentially altering the economic fortunes of the small Kingdom. The announcement was made on 2 April; on 4 April, the country’s minister of oil held a press conference where a few more details were given.

This is evidently a large oil and gas discovery, but it is impossible – from what has been made public so far – to estimate with any degree of certainty what it may mean in terms of future production, let alone revenues.

The authorities in Manama have announced that the discoveries – which are held in source-rock formations akin to North American shales – contain 80 billion barrels of oil in place, and 13 trillion cubic feet of natural gas.

If 10% of the oil in place proved recoverable with existing and future techniques, it would make the field one of the 30–40 largest operating oilfields in the world. Rates of production for a field with 8bn barrels of recoverable oil can be between 200,000 and 600,000 barrels per day; Bahrain, under these assumptions, could increase its oil production by a factor of two to four. Some fields have much larger shares of recoverable oil as a fraction of oil in place.

The oil discovered in Bahrain, however, is held in source rocks. In the US, the source-rock (or shale) oil deposits can hold very large volumes of oil in place – only a small fraction of which is recoverable. The Bakken Shale is said to hold up to 500bn barrels, of which some say as little as 1% may be recoverable with current technology.

Oil wells drilled in shale formations are typically highly productive at first, with high rates of decline afterwards. Sustaining production requires lots of drilling – and increasing production even more so. The cost of doing this in the waters off Bahraini shores will be higher than in the plains of North Dakota or Texas. Manama may have to offer much more generous contractual terms than is the norm in the region to attract investors, reducing the fiscal benefits for the government.

The volume of natural gas discovered – as quoted by the minister – is also significant, though less impressive than the oil discovery. A 12 tcf field may be able to feed an export project of 1 bcf per day. It would correspond to Myanmar’s exports to Thailand, a tenth of Qatari exports or a twentieth of Russian exports to Europe. At current liquefied natural gas (LNG) market prices, the gross value of the revenues would be about US$2.5bn per year. At this stage, though, the 12 tcf figure and the 1 bcf per day production rate should be treated as highly speculative.

Bahraini authorities revealed relatively little information – probably because not much is known. Oilfield technology companies Schlumberger and Halliburton are said to be working on the discovery, drilling appraisal wells that will reveal information about recoverable reserves and the likely cost of developing them. On the basis of this information, Manama will negotiate contracts with oil and gas companies, which will develop and exploit tranches of the giant field. At best, it will take years for hydrocarbons to reach the market.

That said, unless terrible news emerges from the appraisal drilling campaign, this new oil and gas wealth will surely improve Bahrain's fiscal outlook. The country’s credit rating may improve even before actual production and exports start, in turn reducing the cost of infrastructure investment. Whether this structurally improves the prospects for sustainable growth will depend on many factors but, if well managed and leveraged, the new oil revenues could help. The difficult issue will be to maintain national momentum for economic transformation and diversification, and avoid a fallback into a rentier mentality and public policies.

Beyond its local impact, the large discovery in Bahrain raises the issue of possible major shale oil and gas discoveries in other Middle Eastern producing countries. Such discoveries would have contradictory implications for the success of economic transformation plans (including in Saudi Arabia), global oil prices and the global transition to low-carbon energy.

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