Complex Made Simple

With oil exploration delayed, Bahrain to double VAT, seek debt financing

In the weeks and months to come, it is likely we will see Bahrain tap local and international debt markets to finance its budget needs

Bahrain remains on pace to bring online its offshore shale reserves by around 2023 Bahrain has approximately 124.6 million barrels of proven oil reserves Bahrain is considering doubling VAT, which it introduced in 2019, to 10%

In the weeks and months to come, it is likely we will see Bahrain tap local and international debt markets to finance its budget needs.  

Bahrain remains on pace to bring online its offshore shale reserves by around 2023, according to an Oct. 19 statement by Bahraini oil and gas minister Sheikh Mohammed bin Khalifa al-Khalifa.

In 2018, Bahrain stunned the world by revealing it discovered the extensive Khalij al-Bahrain reservoir off its west coast, which it said could contain some 80 billion barrels of oil.

But since then, not having moved beyond the test drilling phase, and with a final investment decision still pending, outside investor interest has been shy.

Khalifa said test results are still too preliminary to determine a potential maximum production rate.

“Initially when we started in 2018, we said five years, so we should be ready by then,” he said on a webinar hosted by the Arab Gulf States Institute in Washington. “What we need to prove first is the geological and technical viability. Once we get there, hopefully, we will have investors.”

The ministry said it aims to produce an additional 200,000 bpd which would double Bahrain’s current crude output, which averaged 180,000 bpd in September, according to S&P Global Platts’ survey of OPEC+ production.

In 2019, Bahrain also signed a memorandum of understanding with Chevron to conduct an assessment of unconventional offshore oil and gas potential in the Gulf of Bahrain.

Industry investment appetite for complex reservoirs (in this case, shale oil) has been impaired by COVID-19 and a push from regulators and shareholders of western IOCs to green their energy portfolios.

Khalifa pointed that the resources should be attractive for investors, as its production will be consumed locally by the Bapco refinery, with no need to build additional infrastructure for exports or processing.

The 267,000 bpd refinery, which imports the bulk of its feedstock from neighboring Saudi Arabia, is in the middle of a $6 billion modernization program that will see its capacity expand to 380,000 bpd.

Production from the new fields will displace the Saudi imports, allowing Bahrain to reduce its import bill, Khalifa said.

Bahrain has approximately 124.6 million barrels of proven oil reserves,  with oil revenues generated from two fields: the onshore Bahrain field and the offshore Abu Safah field, which is shared with Saudi. 

Also in 2018, Bahrain announced the discovery of 10-20 trillion cubic feet in onshore deep gas reserves beneath the legacy Bahrain field.

GCC support for Bahrain

Saudi, Kuwait, and the UAE reiterated their support for Bahrain’s plans to balance its budget, helping the country’s ability to secure debt capital markets despite delays in plans to fix its heavily indebted finances.

The three Gulf allies extended a $10 bn aid package to Bahrain in 2018 to help it avoid a credit crunch but tied it to pledged fiscal reforms.

In September, Bahrain blamed COVID-19 for postponing the target year for a balanced budget to 2024, a two-year delay, and announced plans to hike its value-added tax (VAT).

“The ministers welcomed the efforts made by the government of Bahrain in implementing the Fiscal Balance Program, and the progress made by the government despite the challenges posed by the COVID-19 pandemic,” the three countries said in a recent joint statement.

Bahrain’s public debt climbed to 133% of GDP in 2020 from 102% in 2019, according to the International Monetary Fund (IMF).

S&P forecasts Bahrain’s budget deficit, which was 16.8% of GDP last year, to average 5% between 2021 and 2024, excluding the impact of a possible hike in VAT.

Bahrain’s debt is expected to decline to 82% in 2022 with the reforms, according to a report by Fitch Ratings this year.

Bahrain’s economy is estimated to have shrunk 5.4% in 2020 but is expected to expand 3.3% this year owing to its quick policy response to minimize the effects of the pandemic on its economy and its people, the IMF said earlier this year. The country’s non-oil economy will grow 3.9% in 2021 with stronger economic activity, according to the IMF.

VAT to double?

Bahrain is considering doubling VAT, which it introduced in 2019, to 10% to boost state revenues and reduce its budget deficit, a Bahraini parliamentary source and a source close to the government told Reuters.

Parliament must approve such a change in the law, the source added, saying the government was trying to find ways to protect people with low incomes should the change be made.