On 4 April, Bahrain’s (B1 negative) oil minister Sheikh Mohammed bin Khalifa Al Khalifa announced the discovery of hydrocarbon deposits containing at least 80 billion barrels of tight oil and 10-20 trillion cubic feet of deep natural gas in a new offshore field off the west coast of Bahrain.
The find, if verified by an international oil consortium as being technically and economically recoverable, could stimulate private investment in the country's energy sector in the near term, and in the medium term could increase government oil- and gas-related revenue and reduce the country's fiscal and current account deficit, according to Moody’s.
Bahrain is the Gulf Cooperation Council's (GCC) oldest oil producer, having started oil production in the early 1930s. However, its hydrocarbon endowment is relatively small, with an output of less than 200 thousand barrels per day (bpd), of which around 150,000 bpd comes from an offshore field that it shares with Saudi Arabia (A1 stable).
Bahrain's onshore oil reserves, which the US Energy Information Administration (EIA) estimates at 125 million barrels, are all located in the Awali oil field and at the current rate of production, they will last less than seven years.
As such, a significant oil and gas discovery could improve Bahrain's economic and fiscal strength by allowing the kingdom to boost its rate of hydrocarbon production (and hence gross domestic product) and/or to extend its current rate of production for a number of additional years.
Despite Bahrain's low oil and gas endowment relative to its GCC peers, hydrocarbon-related revenue still accounted for 75 per cent of government revenue in 2017, down from a recent high of 87 per cent in 2013. A large increase in Bahrain's oil production, and associated fiscal revenue, could therefore materially reduce Bahrain's budget deficit, which was as high as 17.8 per cent of GDP in 2016.
Bahrain's current account would also benefit. Oil exports accounted for 55 per cent of total goods exports in 2017. When oil prices declined after mid-2014, the dollar value of Bahrain's oil exports dropped significantly and the country's current account swung from surpluses averaging eight per cent of GDP in 2012-13 to deficits averaging 3.7 per cent of GDP in 2015-17.
Bahrain's current account deterioration has driven the large erosion of foreign exchange reserves from a peak of $5.8 billion at the end of 2014 to a low of $1.3 billion in July 2017. The reserves have since recovered somewhat on the back of large sovereign external bond issuances, including $3 billion in international bonds in September 2017 and $1 billion in international sukuk in April 2018. But with foreign reserves of $2.8 billion at the end of November covering only 1.4 months of imports of goods and services and less than 10 per cent of Bahrain's short-term external debt, pressure on Bahrain's pegged exchange rate regime is now at its highest since the formal peg of the riyal to the dollar was introduced in 2001.
Over time, if production from the new oil field were to substantially increase Bahrain's oil production and exports, Bahrain's external vulnerability—and with it, pressure on the currency peg—would decrease, supported by improvements in the current account and rebuilding of foreign exchange buffers. Nevertheless, at this stage we do not know how much of the discovered oil and gas resource is technically recoverable and at what cost.
Typically, only a small fraction of any reservoir's “oil in place”—which is what the 80 billion barrels in the official announcement refers to—can be recovered using available technologies and at a cost that would be economical given the prevailing market conditions and prices. And only resources that are technically and economically recoverable with a high degree of certainty can be considered proved reserves, which is the measure of oil reserves that we use when assessing the underlying economic strength of an oil exporter. Based on EIA research, the average recovery factor for tight oil deposits ranges between three per cent and six per cent of the initial oil in place.
This factor, which governs technical recoverability of an oil reservoir, could be closer to the lower end of the range in the case of Bahrain because the new discovery is located offshore, below the seabed and hence its recoverability is likely to be technically more challenging and more costly. Using a recovery factor of three per cent as a plausible assumption, Bahrain’s new oil find could eventually yield up to 2.4 billion barrels of recoverable oil reserves—a little less than half of Oman's proved reserves.
While this is significantly less than the headline number of oil in place, it is nearly 20 times more than Bahrain’s current onshore proved reserves and would allow Bahrain to double its current total crude oil production for the next 33 years, provided the cost of recovery is also determined to be economical. However, such determination—necessary before any investment can start—may take several years of geological and engineering work, and so there remains an additional layer of uncertainty as to how quickly Bahrain could ramp up its oil production.
Therefore, we would not expect new oil production to impact Bahrain's economic and fiscal metrics for at least another five years. In the meantime, the kingdom's credit profile will remain the weakest among GCC peers and the most vulnerable, fiscally and externally, to potential declines in oil prices. This vulnerability is captured by the highest combination of fiscal and external breakeven oil prices in the region.
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