Bapco To Firm Up Refinery Expansion Plans By Year-End

Bapco To Firm Up Refinery Expansion Plans By Year-End

Bahrain Petroleum Company (Bapco) is planning to firm up the configuration of its planned Sitra refinery expansion by the end of the year, the company’s Chief Executive Gordon Smith, told MEES. The plan, which could cost over $8bn and hike capacity by up to 70% to 450,000 b/d, is the flagship in a series of projects Bapco and sister companies are implementing to boost production of oil, gas and associated products. Melanie Lovatt reports from Bahrain.

Bapco’s board of directors have given the green light for the Sitra refinery to reach a maximum of 450,000 b/d but it could be “another 100,000 b/d or close to 200,000 b/d or anything in between,” said Mr Smith. Nevertheless, local crude production is expected to climb to 100,000 b/d by the end of the decade and a new crude pipeline from Saudi Arabia is being built to handle imports of 350,000 b/d, versus the old pipelines’ 230,000 b/d level, so it would not be surprising if Bahrain opted for the higher capacity.

The cost is dependent on design and has been estimated at roughly $5-8bn. The refinery, currently operating at about 272,000 b/d, compared with the original 265,000 b/d nameplate capacity, will be updated, with old units – some dating back to 1936 – being replaced. However, newer units such as a low sulfur diesel plant, and steam turbine generator and wastewater treatment plants, costing $140mn apiece, will be part of the new configuration. This will also include the recently commissioned 400,000 tons/year lube operation, which is a joint venture with Finland’s Neste Oil.

While the other units that will form the new refinery are still under discussion, the goal is to minimize producing fuel oil, which currently accounts for around 18% of output, and instead maximize production of middle distillates such as kerosene and diesel, and possibly gasoline, said Mr Smith. “We’re getting out of the fuel oil business so the units we will include must get rid of that bottom of the barrel,” he said, noting that it will therefore be necessary to include a hydrogen plant, although a final decision has not been made on the type of technology to use. While Bapco is reducing fuel oil production, Mr Smith does not see it as a defunct market, given the strong demand from Saudi Arabia for use in power plants, particularly in the summer when air conditioning use spikes. However, he explains that tightening legislation, including in the shipping industry, demands 3.5% sulfur fuel oil or less. To reach these specifications, Bapco would need to hydro-desulfurize the fuel oil.

Costs can be kept down if some production is outsourced, such as the hydrogen plant, which is needed to produce gasoline and diesel with lower sulfur levels. “Whatever processes we do, we’ll need hydrogen and we’ll be looking for someone else to build and operate a hydrogen plant for us,” said Mr Smith, noting that this could be implemented on a build-own-transfer (BOT) basis. Located over the fence from Sitra, sister company Gulf Petrochemical Industries Company (GPIC) is looking to expand and will also need hydrogen. The two could therefore share a hydrogen plant, or a common provider could build two plants, said Mr Smith. Bapco and GPIC’s parent company is Nogaholding, the investment arm of Bahrain’s National Oil and Gas Authority (NOGA). It holds 100% of Bapco and one-third of GPIC (Saudi Arabia’s SABIC and Kuwait’s Petrochemical Industries Company (PIC) also own one-third of shares). 

Bapco Seeks Refinery Partner – Only Heavyweights Need Apply

Even if some units are outsourced, the expansion costs are considerable, so Bapco is seeking a partner to help implement its plans (MEES, 27 February). It has not yet asked for proposals, but has already received offers from interested parties, said Mr Smith. As of yet, there are no front-runners, and while the partner could be a Gulf company, an international oil company, an engineering contractor or trading company, it must be a “heavyweight,” he adds. “They have to bring technical expertise and project management skills,” he explains, noting that the partner would be expected to stay “for the long haul” and so should “bring with them an offtake agreement.” Contracting companies, particularly from South Korea and Japan, have the added bonus of offering financing support from either pension funds or their export credit agencies (ECAs), he points out.

While Bapco should be in a position by year-end to firm up its plans on the units and technology needed for the refinery expansion, the financing is expected to take another 18 months, so will not be wrapped up until the end of 2013. A financial adviser has yet to be appointed, although France’s BNP Paribas provided initial advisory services on the expansion. Obtaining financing “is more difficult than it would have been a year ago,” said Mr Smith, referring to the Eurozone sovereign debt crisis, which has cut bank funding from this region to the Gulf. Bapco will therefore look at all possibilities, including ECAs, bonds and sukuk. “We need to make ourselves open to the local banking community as well,” he said, suggesting that they should not be shut out of domestic projects due to their relatively small balance sheets.

Discussions are being held between Bapco, its parent Nogaholding and Bahrain’s Ministry of Finance about developing a system where domestic and Gulf banks could come under the umbrella of a big project finance bank. This would help address the asset-liabilities mismatch which has tended to restrict their supplying of funds to the region’s projects. Local conventional and Islamic banks typically boast considerable short term liquidity in the form of deposits, but this is incompatible with project finance which, due to the cost of investments, requires a 15-year plus payback period. Currently Saudi banks have considerable liquidity, and it is also possible that Bahrain will seek to tap this for its expansion projects, MEES understands. Saudi banks have increasingly been lending across-border, and took big tickets on Qatar’s $10bn Barzan 1.4bn cfd gas/NGL project, which signed an agreement to receive financing in December last year (MEES, 19 December 2011).

Other Bapco projects are progressing. Australia’s WorleyParsons is working on the front end engineering and design (FEED) for the new crude pipeline connecting Bahrain to Saudi Arabia. Estimated to cost over $360mn and spanning around 120km, it will replace two existing pipelines. These are old and pass in proximity to homes and businesses so the route is being changed. Bapco is exploring offshore in the hopes of increasing reserves and these activities will be wrapped up by year-end. Three offshore wells were drilled by Occidental, and now Thailand’s PTTE has sunk a fourth off the north coast at a horizon of 8,000ft. Assessment of the results continue, and it is too early to give an indication of reserves, said Mr Smith. But he notes that part of the analysis includes revisiting old data, some of which goes back 20-30 years. “You can bring it up to date so you get a more modern interpretation. It’s like taking an old black and white grainy film and using modern techniques to enhance it,” he explained.

Copyright MEES 2012.