Bahrain: Refinery Upgrade

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Bahrain is planning to consolidate its place at the centre of the Gulf region's oil refining industry, unveiling a series of large investments to boost production capacity and the flow of crude into the country.

On November 19, Abdulhussain bin Ali Mirza, Bahrain's oil and gas minister and head of the National Authority for Oil and Petroleum (NOGA)National Authority for Oil and Petroleum (NOGA), announced that authorities were looking at a number of new investment projects to strengthen state-oil producer BapcoBapco. These include the construction of a second pipeline from Saudi Arabia to increase supplies and the replacing of some of the older units of the company's refinery.

Currently, Bahrain's sole refinery has a capacity to process 250,000 barrels per day (bpd), though less than 20% of this comes from the kingdom's own fields, with the vast majority of crude coming from nearby Saudi Arabia through a single 54 km long pipeline.

Though Bahrain has already invested in a number of projects to boost output from its existing wells and to develop new fields to increase domestic production to around 70,000 bpd by next year, any major upgrade of BapcoBapco's refining capacity will need to be fed by imports, with Saudi Arabia the logical supplier.

The announcement of the new programme is the last in a series of expansion projects that are nearing completion, and carrying a total estimated value of $1.2bn. These include an increase in storage capacity as well as infrastructure upgrades at the country's refinery to bring it into line with new environmental requirements.

It is not just BapcoBapco's normal refining capacity that will be getting a major boost though. The company is branching out into low sulphur diesel production (LSDP). A new $725m LSDP refining plant is due to come on line on December 4, and is one of the keystones of BapcoBapco's strategic investment programme to maintain the company's position at the forefront of the region's refining industry.

The new plant, which is projected to generate revenue of $300m a year, is designed to meet the growing demand for low sulphur diesel. Till now, BapcoBapco's diesel products had contained a high sulphur content, increasingly unpopular on international markets with the rising awareness of polluting emissions.

Current sulphur content in BapcoBapco's diesel fuel averages 0.65%, though this will be slashed to just 0.001% at the new facility, which will have a production capacity of 100,000 bpd. According to a statement issued by the company on November 19, the LSDP refinery will keep BapcoBapco competitive and profitable as a major international export refiner.

In an interview with a local paper on November 8, Mirza said BapcoBapco's new LSDP facility would meet the increasingly stringent quality requirements coming into force.

"The company implemented the programme in view of the rise in global environmental awareness that made the world's governments create different laws [...] calling for the use of cleaner fuel products," he said.

However, BapcoBapco's modernisation and expansion programme is not only being driven by environmental concerns, though these have been important. According to Mustafa Al Sayed, the company's chief executive, new refining capacity is required if the Gulf is to meet the Asian market's increasing demands for energy.

Both NOGANOGA and BapcoBapco were keen to ensure that they could compete in this lucrative market, Al Sayed told a conference of storage terminal operators in Manama on November 19.

Notwithstanding the current expansion drive, the kingdom is limited by its reserves and its reliance on Saudi crude. A number of exploratory licenses were issued recently in a bid to find new fields.

However, BapcoBapco could lose its monopoly position in Bahrain's refining industry if new reserves are located. On November 13, Mirza said that while BapcoBapco did not need to build a new refinery nor could not afford to fund such a massive project at the moment, a second refinery could be constructed if new finds justified the expense.

Any new plant, which Mirza said would cost of between $6bn and $8bn, would be operated by the private sector, rather than the state.

Although the kingdom's reserves are dwindling, with estimates putting existing stocks at around 125m barrels, and with daily output sufficient to meet domestic demand of 23,000 bpd with some left over for export, a number of new exploration leases have been granted this year, with plans to sink up to 700 new wells over the next 15 years.

Bahrain's refinery was the first in the Middle East, starting operations in 1935. Since then, it has undergone many changes and upgrades as technology improved and demand grew. Now one of the largest refineries in the region, BapcoBapco is still setting the pace and with its new environmentally friendly processing facilities and cleaner products, it has positioned itself to hold onto its market share and even build on it.

© Oxford Business Group 2007