Bahrain’s oil find a stroke of luck, but the benefits may have to wait
The discovery of the new shale field off Bahrain’s western coast might considerably increase its oil and gas reserves and contribute to the kingdom’s economic and political stability in the long run, but the short-term risks remain high.
Bahrain’s oil minister Sheikh Mohammed bin Khalifa al-Khalifa announced on 1 April the discovery of a large oil and gas shale field off the kingdom’s western coast. Manama claims that the new field contains around 80 billion barrels of oil and 13 trillion cubic feet (tcf) of natural gas. Considering the country’s relatively modest proven reserves estimated at around 124 million barrels of oil, and 92 billion cubic meters of gas (bcm), the new discovery might bring a new breath of life for the country’s oil and gas industry.
The exact benefits arising from the new field are still largely unknown, however. The ministry revealed relatively little information so far, while Schlumberger and Halliburton, the oil technology companies involved in the field’s discovery, are still assessing the drilling data that would give more answers about the fields exact potential and development costs. Furthermore, considering the field’s complexity, it might take several years at best before oil and gas start to flow to the global markets.
The most interesting detail however is the shale character of the newly found field. While the fracking technology transformed the North American oil industry over the past decade, the extraction of oil and gas from rock deposits is still relatively novel in the MENA region apart from rare attempts to develop non-conventional oil resources. The field’s development might therefore pose a considerable challenge for any developer both in terms of its price and recoverable oil reserves. The extraction of shale oil and gas deposits is generally more expensive than the conventional production. While the cost of oil production in the Middle East averages $10 per barrel, drilling a barrel of fracked oil in US shale oil fields is still around five times more expensive. Furthermore, offshore production might additionally increase costs, forcing Manama to offer more generous terms to attract potential investors, reducing the fiscal benefits for its treasury.
Should Bahrain succeed in overcoming these initial drawbacks, the fiscal benefits will be substantial, and considerably ease Manama’s dire financial position. Due to a prolonged period of low oil prices, Bahrain’s hard currency reserves have plummeted by 75% since 2014. Its public debt nearly doubled from 44% of GDP in 2014 to 84% in 2017. The government introduced a set of austerity measures as a result. In November 2017, it asked its wealthier Gulf neighbors, Saudi Arabia, UAE and Kuwait for financial aid in order to prevent the collapse of its US dollar-pegged currency.
While the likelihood of support via the Gulf financial package has temporarily averted the worst economic scenario, fiscal risks are still looming large over Manama with potential wider political consequences. In 2011, Bahrain was one of the Middle Eastern countries directly affected by the Arab Spring. At the time, Saudi Arabia was forced to militarily intervene to quash widespread protests of the kingdom’s underprivileged majority Shia population against the ruling Sunni al-Khalifa dynasty and its leader king Hamad. Over the past seven years, the kingdom managed to preserve the semblance of political stability. Yet if the government adopts stricter austerity measures to avert economic crunch, it could experience a new wave of political volatility, and, amidst heightened tensions in the region, become the next battlefield in the ongoing Shia-Sunni sectarian conflict that has been besetting the region for years. In this context, the recent discovery could not only be a potential windfall for the country’s battered finances, but, should also contribute to its political stability if the government plays its cards right.
