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Nogaholding Poised For Bahrain Energy Sector Expansion

Nogaholding, the investments and business development arm of Bahrain’s National Oil and Gas Authority (NOGA), is helping its parent company push through a comprehensive expansion of the country’s energy sector. It is aimed at hiking not only upstream oil and gas production capacity, but also refined products and petrochemicals output. The company’s Chief Executive Mohamed bin Khalifa bin Ahmed Al-Khalifa talked to MEES about the expansion and its financing amid currently difficult market conditions. Melanie Lovatt reports from Manama.

Nogaholding has responsibility for the Bahraini government’s hydrocarbon assets (see table) and was set up in 2007 shortly after Bahrain’s sovereign wealth fund (SWF), Mumtalakat, was started the year before to hold the country’s assets outside the oil and gas sector. But rather than being an SWF, like Mumtalakat, Nogaholding is more of an industrial conglomerate, said Shaikh Mohamed. “We’re very sector-focused and the view is that in the short to medium term we concentrate on expanding existing assets,” he told MEES.

Bahrain’s ambitious expansion program, spearheaded by NOGA, involves hiking the crude oil production capacity of nogaholding’s 51%-owned subsidiary, Tatweer Petroleum, from the current 45,000 b/d to 100,000 b/d by the end of the decade and doubling current 1.5mn cfd gas production (MEES, 27 February). Bapco, which is 100% owned by nogaholding, plans to expand the capacity of its Sitra refinery from the current 265,000 b/d, possibly to as much as 450,000 b/d (MEES, 11 June). Bahrain intends to import LNG and is in the process of narrowing the list of companies bidding to build a terminal (MEES, page 20). Bapco is also working on the front end engineering and design (FEED) for a new Bahrain-Saudi Arabia crude pipeline of around 120km to replace the old ones and increase throughput to 350,000 b/d from the current 230,000 b/d.

Nogaholding – Operating Companies

Source: Compiled from nogaholding data. NB: The company spells its name with a lower case ‘n.’

On the downstream side a new lube oil plant was commissioned in 4Q11, and an expansion of both Gulf Petrochemical Industries Company (GPIC) and Banagas are under consideration. The latter would be based on gas associated with the increased oil production, which at current rates of 45,000 b/d is up sharply from the 33,000 b/d level seen in 2010 when Tatweer began its $15bn drive to hike production capacity. The GPIC expansion would be aimed at increasing urea production, although there is debate over whether methanol would be a better choice, said Shaikh Mohamed. Even though it commands lower premiums than urea it would allow the company to push further downstream and develop more value added products.

In order to expand the downstream operations, and provide fuel for its power stations, which would enable further industrial expansion, Bahrain needs more gas. “There is a good story from NOGA on the deep gas initiative, and it gives us an indication of costs, so we’re quite comfortable with that,” said Shaikh Mohamed, but he notes “availability is another matter.” Tatweer’s exploration for commercially viable gas deposits in the deep pre-Khuff formation are aimed at boosting supplies. However, a decision on the LNG terminal construction – its size and whether to opt for floating or fixed – has to be made before the company knows whether the pre-Khuff contains commercial volumes of gas. A final investment decision on pre-Khuff development is not expected until 2014. Like the GCC, which is gas-short apart from Qatar, Bahrain is a “gas consumer rather than supplier,” stresses Shaikh Mohamed. But recent developments help consumers, he said. “Gas is going on a different tangent to oil, which is encouraging to consumers,” he comments, referring to breakthroughs in exploiting shale gas, which have seen the US emerge as a possible exporter, with other countries hoping to follow suit and develop their own shale gas deposits.

Bahrain And Beyond

After “brownfield expansions” nogaholding’s focus will turn togreenfield projects in Bahrain. These will take time to study and review, but after examining what fits its investment targets the company is leaning towards storage tanks and shipping projects. Nogaholding is also building the new oil and gas headquarters for NOGA and its own operations on a plot of government-owned waterfront land adjacent to Bahrain Financial Harbor. “The view is that in the short to medium term we focus on internal investments, in Bahrain, but eventually we will diversify our assets and we need to develop that capability,” said Shaikh Mohamed. It is difficult to put a time-line on when this would take place, he explained, suggesting that nogaholding needs to complete domestic projects before it ventures further afield. For foreign oil and gas investments the company plans to seek international partners, said Shaikh Mohamed, noting that it is not equipped to set up greenfield projects outside Bahrain “from scratch.”

Funding Plans

Despite Bahrain’s ambitious expansion plans, and the current problems in the international banking sector which are affecting capital flows to the region, Shaikh Mohamed does not envisage difficulties in securing financing. “Hydrocarbon-based projects are quite safe because demand for energy and energy-related materials is on the rise,” he explained. His experience working on the financing for Al Dur’s independent water and power project (IWPP) was instructive. He recalls that even after Lehman Brothers collapsed in September 2008 sending global markets into turmoil, the Al Dur financing was completed albeit with a mini-perm (shorter tenor – MEES, 6 July 2009). “We’re confident. I’ve found the markets even in the most difficult of times to be OK if you have the right project.” While many European banks have pulled back because they no longer have access to long term dollars as a result of the ongoing crisis, projects are still getting financed. Export credit agencies (ECAs), especially from South Korea and Japan, are acting as the “champions,” he said. Bonds also provide an alternative, but this route is “not as smooth” as using bank loans because project sponsors have to go through ratings and road shows, he adds.

Mega-Project Finance Bank

While high quality projects will attract finance, the payback period of the debt could become an issue given the new Basel III regulations. “There is a lot of pressure on maintaining the 15-plus years tenor which was the basis for a lot of projects in the region,” said Shaikh Mohamed. Regional banks have short term liquidity but this raises the issues of a liabilities-assets mismatch for long term project finance loans, which has been an ongoing problem in the region. But other options are being considered. “People have been talking about the business case for a mega-project finance bank that would take that long term risk. So they could take, if they’re heavily capitalized, the regional banks’ short term liquidity, borrow it over a long term and manage the refinancing risk,” he said, noting that for industrial projects this type of risk is low. To work, this must be a sovereign institution, heavily capitalized, not necessarily in cash but in terms of commitments. Its staff must also have the expertise to scrutinize project risk, he explained. Meanwhile APICORP, based in Dammam, Saudi Arabia, and Manama and owned by the 10 members of the Organization of Arab Petroleum Exporting Countries (OAPEC), has already revealed that it has teamed up with NOGA to help finance the company’s projects, and this could involve provision of debt, equity and advisory services (MEES, 4 June).

© Copyright MEES 2012.