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Tight could prove right for Bahrain

The recent discovery of offshore shale oil and gas deposits could be a welcome energy boost for Bahrain—or remain tantalisingly beyond reach

The small kingdom has the distinction of being the first Gulf state to make an oil discovery—back in 1932. The intervening period has been less exciting in oil terms, only able to pump just below 50,000 barrels a day of its own oil. Most of its 150,000-b/d output is effectively gifted by Saudi Arabia from the Abu Safah field and refined on the island.

Lacking the hydrocarbon heft of its larger Gulf neighbours, the authorities have spent recent months publicly touting the "epoch-making" nature of its shale oil discovery, first announced in early April. Confidence levels seem high. Bahrain has just launched commemorative postage stamp to mark the occasion of the discovery, which could contain more than 81bn barrels of shale oil and 13.7 trillion cubic feet of tight gas.

From Manama's perspective, with finances tight and still awaiting the terms of a new financial bailout from its wealthier Gulf allies, the Khalij al-Bahrain discovery couldn't have come at a better time.

The US Energy Information Administration (EIA) says that Bahrain's onshore oil reserves, at 125m barrels, would be exhausted within seven years at the current rate of production. Abu Safah production has also underperformed of late. According to Bahrain's Economic Development Board, during Q4 2017 and Q1 18, output from Abu Safah averaged 129,720 b/d, some 13.5% below half of the field's daily capacity. Although production rebounded to just under 145,000 b/d in the first half of this year, the more than 200,000 b/d of new production anticipated from the Khalij al-Bahrain basin could have a transformative impact on the island's rickety finances.

Upbeat, downbeat

Ratings agency Moody's has given a cautiously upbeat assessment of the field's potential, suggesting the find—if verified by an international oil consortium as being technically and economically recoverable—could stimulate private investment in the energy sector in the near term. Using a recovery factor of 3% as a plausible assumption, it said that Bahrain's new oil find could eventually yield up to 2.4bn barrels of recoverable oil reserves.

Oilfield services giant Schlumberger described the oilfield as a borderline "conventional- unconventional play", implying lower costs than equivalent unconventional plays. The government is betting that the shallow depths of the Gulf waters will help contain production costs, despite shale developments typically carrying a higher price tag.

Some experts are less convinced that this will turn out to be a much-hyped shale bonanza. In consultancy Wood Mackenzie's view, a tight reservoir means a low recovery factor and only a fraction of the 80bn-plus barrels is likely to be recoverable. The oil looks like being technically challenging and potentially high-cost to develop, its analyst Tom Quinn told Bloomberg.

Sceptics see a link between the timing of the find and the Bahrain's increasingly egregious financial position. A 50% decline in Abu Safah output between December 2017 and February 2018 cost the kingdom some $300m in lost revenues. The International Monetary Fund has warned Manama about its fiscal deficit, which would need a comprehensive package of reforms to reduce. Yet MPs have rejected the government's latest subsidy reform proposals.

Bahrain is running twin fiscal and current account deficits, and FX reserves can only cover a couple of months of imports. Investors are increasingly nervy. In late June, Bahrain's five-year credit default swaps exceeded 600 bps, its highest level on record since the financial crisis.

"Much will depend on the cost of extraction, and in particular, what the price terms over the next four of five years will be," says one Gulf-based finance analyst, who asked not to be named.

From the macro perspective, Bahrain's problems are more near-term in nature, given the amount of debt that is coming up for refinancing, says this analyst. Bahrain will need about $10bn over the next two years for debt servicing and repayment alone: "Oil right now is a grey area for Bahrain. We need more granular detail on the discovery, and what terms will be offered, and the capex required."

All this makes the prospect of doubling oil production even more critical to the island's economic survival. But these are early days and patience will be much prized. "Frankly, nobody's getting too excited by this in Bahrain right now," says the Gulf analyst.

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