Bahrain made its largest-ever oil find off the kingdom’s western coast, with Khalij al-Bahrain Basin estimated to contain at least 80 billion barrels of tight oil and 10-20 trillion cubic feet (tcf) of natural gas, officials announced on April 1. The discovery could double the country’s oil production levels, providing a significant economic windfall for the government. Officials did not provide a detailed timeline for development and production of the discovery but noted that they hoped first oil would be brought online in five years. However, that could prove optimistic. It is unclear at this early stage if the discovery is economically viable at current prices to develop now. There are enormous challenges ahead with the technically complex and costly discovery, made even more so because the Khalij al-Bahrain Basin discovery will be the first tight oil development in an offshore reservoir anywhere in the world.

Unlike its energy resource-rich Gulf neighbors, Bahrain is challenged by relatively low oil and gas reserves. Underscoring the importance of the find to Bahrain’s government, the announcement was made by the Higher Committee for Natural Resources and Economic Security chaired by Crown Prince Salman bin Hamad al-Khalifa. Officials emphasized that the new discovery is expected “to provide significant and long-term positive benefits to the Kingdom’s economy.” An increase in oil revenue from new Khalij al-Bahrain production is not expected until 2023 at the earliest, but even the prospect of an increase in the government’s financial fortunes has improved the country’s economic outlook.

Bahrain was the first of the Gulf Arab states to strike oil in 1931, opening the floodgates for the region. Saudi Arabia’s first discovery followed seven years later, with Qatar in 1940, Abu Dhabi and Kuwait in 1958, and Oman in 1962. The country’s initial promise, however, has remained unrealized, with no major discoveries until now. The offshore Khalij al-Bahrain Basin spans some 770 square miles in shallow waters off the west and southwest coast, an area that is more than 2 1/2 times the land size of the small archipelago country.

Independent appraisals of the discovery by U.S.-based consultants DeGolyer and MacNaughton and oilfield services company Halliburton confirmed Bahrain’s find of “highly significant quantities of oil in place,” Oil Minister Mohammed bin Khalifa al-Khalifa said at an April 4 briefing organized by the National Oil and Gas Authority. “Oil in place of 80 billion barrels is based on a P50 resource estimate,” John Hornbrook, a senior vice president with DeGolyer and MacNaughton explained during the briefing. A P50 designation indicates reserves are estimated to have a better than 50 percent chance of being technically and economically produced. The industry typically is only able to extract a small fraction of the initial estimated discovered resources, with extensive effort and time needed to determine the potential rate of recovery from the reservoir. With the initial oil-in-place estimate at 80 billion barrels, even an appraisal that indicates 5 percent of the resources are recoverable implies new reserves of 4 billion barrels, which far surpasses Bahrain’s current estimated proved reserves of just under 130 million barrels. By way of comparison, Saudi Arabia’s Safaniyah field, the world’s largest offshore oil field, is estimated to hold more than 35 billion barrels of proved oil reserves. Using the same 5 percent metric, natural gas reserves would increase by a proportionately much smaller 1-2 tcf from the current 6 tcf estimated proved reserves, according to data from the 2017 BP Statistical Review of World Energy.

Uncharted Waters

While the United States has revolutionized shale oil production, all of the operating fields have been onshore, and exploratory development efforts at offshore fields in the Gulf of Mexico have yet to result in economically viable production. The Khalij al-Bahrain Basin discovery, therefore, would be the first major offshore tight oil development in the world. A more detailed appraisal of the reserves will be an expensive and technically complex process. More extensive analysis of the field’s resources and extraction viability are currently being undertaken, with Halliburton slated to drill two further appraisal wells in 2018, with the first planned for August.

Bahrain is hoping to partner with an international oil company for the exceptionally challenging project. In the current investment climate in which international oil companies are focusing on smaller-scale production projects rather than expensive long-term offshore developments, Bahrain will need to offer very attractive contract terms to secure an experienced foreign partner. Tight oil rock formations have a lower recovery rate than conventional reservoirs and technical expertise will be critical to maximizing the potential of the find. To make tight reservoirs commercially viable requires very low drilling, completion, and production costs, which are harder to achieve offshore than onshore. One major advantage is that the new shallow offshore field is next to existing infrastructure and processing facilities that will provide potential for significant cost optimization, Halliburton noted.

Officials have said it is too early to provide information such as projected production levels. However, Al Ayam quoted the head of the financial and economic committee in the Bahraini Parliament, Abdulrahman Bu Ali, as saying output was expected to reach 200,000 barrels per day (kb/d), which would be 4 times the size of the country’s only onshore field. The field, originally called Awali and renamed the Bahrain Oil Field, started production in 1932 and reached peak output of just below 80 kb/d in 1970 but has since declined to 45 kb/d.

More Attractive Contract Terms Critical to Lure Partners

Plans to increase production at the Bahrain Oil Field to 100 kb/d were undermined by rising costs for enhanced oil recovery and unattractive contract terms for its foreign partners. In July 2016, Abu Dhabi’s Mubadala Petroleum and Occidental exited their partnership with government-controlled Tatweer Petroleum, the joint operating company that managed Bahrain Oil Field operations since 2009, after efforts to renegotiate their 20-year contract for the field’s expansion failed.

The National Oil and Gas Authority will not only need to improve contract terms for its current production sharing in line with international standards but may even need to adopt more profitable long-term concession contracts for international companies similar to what the Abu Dhabi National Oil Company offers joint venture partners.

Bahrain also has a 50 percent share of the Saudi Aramco-managed offshore Abu Safah oil field, which produces about 300 kb/d. The field, however, is totally operated by Aramco so Bahraini oil companies have no offshore experience, despite the fact that income from the Abu Safah field provides around three-quarters of the government’s oil revenue. The management arrangement for Abu Safah was effectively determined when the two countries demarcated their marine boundaries in 1958. At the time, Bahrain ceded its claims to territorial waters in an area of the Gulf north of the island state in return for a Saudi agreement to share the profits from any oil that might be discovered there. Aramco discovered oil in Abu Safah five years later and started first production in 1966, providing all the investment at no cost to Bahrain. For Saudi Arabia, sharing oil income from Abu Safah with Bahrain provides much-needed economic support and political stability for a key neighbor. Bahrain is a longtime ally of Saudi Arabia and the United States and the troika plays a pivotal role in maintaining security in the Gulf. Given Saudi Arabia’s vested interest in seeing Bahrain succeed with its new discovery and its experience in the shared offshore waters, Aramco may decide to play an important role in helping its ally develop its reserves in the Khalij al-Bahrain Basin.

Natural Gas Discoveries

In addition to the recent discovery of natural gas reserves in the Khalij al-Bahrain Basin, the ministry also provided more details on the tight gas reserves that were discovered in 2017 beneath the onshore Bahrain Field in the pre-Khuff gas formation, which are now estimated at about 14 tcf. In January, the minister said the country planned to develop these deep tight natural gas reserves this year and talks were underway with Halliburton and Schlumberger. However, the terms on offer may prove unattractive. Bahrain is asking oil service companies to share the burden of development costs, which is unusual in that contracts normally provide a fixed fee for service companies. Joint venture partners typically only share in the upfront capital costs and development risks in long-term production agreements.

Bahrain currently produces only modest amounts of associated natural gas from the Bahrain Field’s large Khuff gas reservoir. All of the gas is consumed domestically to power electricity generation, water desalination plants, and energy-intensive industries such as petrochemicals, aluminum smelting, and refining, among others. Some of the gas is also used for reinjection into the oil reservoirs to maintain pressure and flow rates. The new onshore and offshore gas supplies will be needed to meet the countries rising demand needs.

In an effort to meet its own growing natural gas needs as well as position itself to be a major hub for gas supplies for the region, Bahrain will launch its new liquefied natural gas import terminal in 2019. The facility will provide gas supplies to Bahrain’s domestic market during peak demand periods as well as enable it to re-export supplies to regional neighbors. The LNG terminal was financed under a public-private partnership that was structured using a combination of equity and debt through a consortium of regional and international banks.

Reversal of Fortunes?

Financially beleaguered Bahrain has long been the energy resource-poor cousin among its Gulf Cooperation Council neighbors. Since the collapse of oil prices in mid-2014, Bahrain has been struggling with a widening budget deficit, which it has been financing through debt capital markets at a time when all three major credit agencies have rated the country below investment grade. The mere prospect of improvement in the country’s financial fortunes is expected to improve the country’s outlook.

There is no question the new oil and gas discoveries in Khalij al-Bahrain Basin hold the promise of increased financial security for Bahrain. However, much more appraisal work on the discovery is needed to determine if it is economically viable at current prices of $60-70 per barrel to develop now. Much more drilling, data gathering, and detailed analysis of the extraction process for the resources are needed to confirm the field’s initial promising results. Moreover, Bahrain has a poor record in providing competitive contract terms for joint venture. It is critical that Bahrain partners with international oil companies that have both the advanced technologies and deep financial resources to develop the reserves. To attract the right companies, the government will need to make its contract terms much more attractive than on offer in existing models.