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JALLEH: COUNTRY BRIEF—BAHRAIN: [2008] I.E.L.R. 181 Country Brief Bahrain AMELIA JALLEH* Bahrain; Electricity generation; Natural gas; Offshore exploration; Oil and gas industry; Oil and gas production; Refining; Regulatory bodies Summary The Kingdom of Bahrain is an archipelago of 36 islands located off the eastern coast of Saudi Arabia, with an area of 727 sq km. It has a population of approximately 710,000, of which an estimated 235,000 are non-nationals (foreigners are estimated to comprise 44 per cent of the workforce). Pursuant to its Constitution, Bahrain is a fully sovereign, independent Islamic Arab State with a hereditary constitutional monarchy. King Hamad bin Isa al-Khalifa is the Head of State, and its nominal representative. Executive authority vests in the King together with the Council of Ministers, and judicial rulings are issued in his name. However, as the result of democratic reforms in the late 1990s and the early part of this decade, Bahrain now has a bicameral parliament composed of a lower house of elected representatives and an upper house of appointed legislators. The next elections are scheduled to occur in 2010. The religion of the State is Islam, with Islamic Shariah law described in the Constitution as a principal source for legislation and an estimated 81.2 per cent of the population being Muslim. Energy economy summary Crude oil Bahrain was the first Gulf State to discover oil and, as a result, headed economic development in the region for most of last century. However, when concerns emerged in the late 1960s regarding the ability of Bahrain’s mature oil field to sustain output, Bahrain embarked on an economic diversification program—the first country in the region to do so—with a focus on industry, banking and financial services. However, the extraordinary economic development of other countries in the region (particularly the * BA LLM (Hons) (Flinders University of South Australia), Senior Associate—Baker & McKenzie, Bahrain United Arab Emirates and Qatar) has in recent years challenged Bahrain’s role as the core business centre of the Middle East, resulting in Bahrain overhauling its economy and refocusing on the hydrocarbons sector. All of Bahrain’s proven oil reserves of some 125 million barrels are contained within the Awali field, located onshore in the middle of the country’s largest island. The Awali field had peak crude oil production in the 1970s of more than 75,000 barrels per day, but is now in decline. Nonetheless, although analysts predicted that this field would be depleted by 1997, production has been stabilised at approximately 35,000 barrels per day. In addition to production within its territory, Bahrain shares with Saudi Arabia 300,000 barrels per day of oil production from the offshore Abu Saafa field.1 This field is now Bahrain’s primary source of oil. Experts contend that Bahrain urgently needs additional energy reserves in order to sustain its industrial expansion. In an effort to increase production, and in line with the recent overhaul of Bahrain’s hydrocarbon sector, the Bahraini government is pursuing a two-pronged approach, as follows: • Awali field development—The state-owned Bahrain Petroleum Co (‘‘Bapco’’), which is responsible for the exploration, production, refining, marketing and distribution of Bahrain’s oil for both the domestic and international markets, recently announced plans to double output from the Awali field to 70,000 barrels per day. New technology is 1 This figure is counted in Saudi oil production figures, but net output and revenues are shared equally between the two countries. [2008] I.E.L.R. ISSUE 5 SWEET & MAXWELL LIMITED [AND CONTRIBUTORS] 182 JALLEH: COUNTRY BRIEF—BAHRAIN: [2008] I.E.L.R. to be utilised to facilitate the exploitation of previously non-viable reserves. AP Moller Maersk, ExxonMobil Corp and Occidental Corp are understood to be interested in this development, with a tender expected to be awarded by the end of 2008. • Offshore exploration—In March 2001, the International Court of Justice determined a maritime boundary dispute between Bahrain and Qatar in respect of ownership of islands located between the two countries, ultimately awarding sovereignty over the Hawar Islands to Bahrain. Determination of that dispute has allowed Bahrain to offer concessions located off its south-east coast. Bahrain is presently licensing a total of four offshore exploration blocks which circle its coast, covering the previously untapped potential oil reserves offshore and including the south-east area previously in dispute. Occidental Petroleum and PTT Exploration won contracts to explore offshore in late 2007, and exploratory work is presently under way. However, perhaps more important to Bahrain than crude production is its refining industry. Bahrain, unlike other Gulf States, exports refined petroleum products rather than crude oil and has a refining capacity which far exceeds its domestic production (at some 260,000 barrels per day). As a result, Bahrain imports approximately 225,000 barrels per day of Arab Light crude oil from Saudi Arabia by means of a sub sea pipeline linking the two countries. This crude is refined at the Bapco-owned Sitra facility and exported, mainly by tanker, predominantly to India and other Asian markets. In 2007, Bahrain produced an estimated 49,000 barrels per day of total oil liquids, of which 35,000 barrels per day was crude oil, 11,000 barrels per day natural gas liquids, and 3,000 barrels per day refinery gain. In 2007, Bahrain consumed an estimated 35,000 barrels per day of oil. wells and it has introduced plans for new natural gas production incrementally over the next several years (including improving natural gas recovery rates from existing fields). However, domestic demand coupled with the recent development explosion is expected to result in Bahrain becoming a net natural gas importer in coming years. Accordingly, Bahrain is pursuing natural gas supply arrangements with other countries in the region, particularly Iran and Qatar. LNG While there are a number of significant LNG projects in the region, the author is not aware of any planned for Bahrain. Electricity Bahrain’s electric power consumption is growing at an annual rate of approximately 5 per cent per annum as the result of population growth. Accordingly, the Bahraini government is pursuing a number of avenues to increase the country’s electricity generation capacity, including the following: • a move towards the privatisation of electricity and water production, with Al Ezzal licenced to construct an independent power plant; • the sale of the Hidd power plant to a consortium of British, Japanese and Belgian companies; • the recent expansion of the Hidd power project to add another 630 MW of gas fired capacity; and • efforts to improve Bahrain’s transmission and distribution infrastructure with the award in March 2000 of contracts for upgrade work to several foreign firms including Alstom, ABB, Fuji Electric and Marubeni. Key regulatory components Natural gas According to recent estimates, Bahrain’s proven natural gas reserves stand at 3.25 trillion cubic feet, much of which is associated gas from the Awali oilfield. In 2006, the country produced 390 billion cubic feet of natural gas, all of which was consumed locally in power plants, enhanced oil recovery projects and heavy industry. The largest consumer of natural gas in Bahrain is Aluminium Bahrain (‘‘Alba’’)—operator of one of the biggest aluminium smelters in the world and of a large natural gas-fired power plant. Bahrain National Gas Co (‘‘Banagas’’) is responsible for gas production and processing in Bahrain, operating a gas liquefaction plant that utilises gas piped directly from the country’s oilfield. That plant produces approximately 3,000 bbls/d of propane, 2,700 bbls/d of butane and 4,500 bbls/d of naphtha. The Bahraini government owns 75 per cent of Banagas, with the remaining 25 per cent split equally between the Arab Petroleum Investment Corp and Caltex Bahrain. In an effort to meet Bahrain’s rising domestic and industrial demand, in 2006 Bapco approved plans for a significant investment in 10 new onshore natural gas The Bahraini Constitution provides that all natural wealth and resources are State property—the State is required to safeguard them and exploit them properly. In 2005, as the result of the recent overhaul of Bahrain’s economy and its hydrocarbon sector in particular, the Government created the National Oil and Gas Authority (‘‘NOGA’’).NOGA consolidates control of Bahrain’s oil and natural gas resources within one body, rather than through three government departments as previously. NOGA’s aim is to preserve those resources, and to determine options for their optimum development. NOGA is authorised by Royal Decree to, amongst other actions: • propose and implement the general policy on oil and gas; • oversee the companies and corporations operating in, and associated with, the oil and gas industry; • consider strategic options available to meet Bahrain’s oil and gas requirements; • establish contacts within and outside Bahrain in order to develop its oil and gas resources and meet Bahrain’s oil and gas requirements; and [2008] I.E.L.R. ISSUE 5 SWEET & MAXWELL LIMITED [AND CONTRIBUTORS] JALLEH: COUNTRY BRIEF—BAHRAIN: [2008] I.E.L.R. 183 • establish and approve the establishment of, and the overseeing of companies operating in, the oil and natural gas industry. In addition to the creation of NOGA, in August 2007 a holding company was established under NOGA’s supervision with the aim of consolidating the country’s interests in Bapco, Banagas and other energy companies with State shareholdings. That holding company is authorised to establish new enterprises to participate in projects within and outside Bahrain. now one of the region’s most diversified economies. However, although revenues from oil and natural gas presently comprise only 13.1 per cent of GDP (as compared with, for example, the financial services sector which comprises 24.2 per cent of GDP (2006 estimate)), Bahrain’s economy continues to rely on hydrocarbons, with oil revenue making up almost 75 per cent of government income. In addition, as Bahrain’s budgets are calculated using much higher estimates of oil prices than other countries in the region, Bahrain remains especially vulnerable to oil price fluctuations. Challenges As the result of early fears regarding the depletion of its oil and natural gas reserves, Bahrain was the first country in the Gulf to liberalise its economy and is [2008] I.E.L.R. ISSUE 5 SWEET & MAXWELL LIMITED [AND CONTRIBUTORS]