By Arabian Petroleum Investments Corporation (APICORP)
The Kingdom of Bahrain is constructing a permanent LNG import terminal due for commissioning in 2019. The 4.1 billion cubic meters per year (bcma) facility is a microcosm of the shifting trends in gas demand-supply dynamics, particularly in the Middle East - demonstrating the region’s commitment to tackle energy security at a time when supplies are struggling to keep pace with growing demand. Consisting of a floating storage unit (FSU), it offers the kingdom the flexibility to cater to seasonal demand and the option to re-export to regional demand centres. Bahrain LNG is to be developed on a public-private-partnership (PPP) basis, including a combination of equity and debt through a consortium of regional and international banks, representing a shift away from traditional government funding methods.
Natural gas balance is uncertain
Bahrain’s relatively low oil and gas reserves have led the country to become one of the most diversified economies in the GCC. But at 77 per cent, petroleum exports in 2014 still constituted a large portion of the country’s total goods exports. The kingdom has developed its services sector and its industrial base, putting a strain on gas demand.
Demand for natural gas is concentrated between industry, power and gas reinjection. Industry accounts for the majority of gas needs. It represented 41 per cent of demand in 2015, with Aluminium Bahrain (Alba) accounting for nearly half. The aluminium smelter is one of the largest in the world with its own 2GW gas-fired plant meeting all its electricity requirements. An existing expansion project due for completion by 2019 will increase demand for gas by more than 40 per cent. The Bapco refinery, whilst not on the same scale as Alba, is also a large consumer of gas, and demand for natural gas is expected to more than double within the medium term horizon following the refinery expansion.
Bahrain’s power sector is completely dependent on natural gas for electricity generation. Current capacity stands at 4.2GW, but demand over the medium term is expected to increase by nearly 6per cent per annum requiring an additional 1.4GW of capacity by 2021.
In the long run, demand growth will be underpinned by gas subsidies, despite some reform in early 2015. Bahrain raised the price of natural gas to industries in April 2015, to $2.50/mmbtu from $2.25/mmbtu. The last increase to that tariff was a 50per cent hike in 2012. The Bahraini government also introduced a multi-phased adjustment programme for gas prices, which would have seen the price of natural gas increase by $0.25/mmbtu each year to top $4/mmbtu in the beginning of 2022.
Gas output in Bahrain is around 19.5bcma and is primarily sourced from the Khuff gas reservoirs – accounting for nearly 80per cent of gas supplies. The remaining 2.6bcma comes from residue gas production from the Bahrain National Gas company (Banagas). Supplies are expected to increase marginally over the next five years due to the Deep Gas resource from the Bahrain onshore field, only to plateau to a little under 23bcm by 2024. Although current demand is adequately met by existing levels of output, natural gas demand is expected to continue rising where by 2019 the country will experience a gas deficit of around 1.9bcm.
LNG imports to meet deficit
Given the uncertain demand and supply outlook, LNG imports will likely fill the country’s natural gas shortages and ensure security of supply over the long term. In our base case scenario, the country will experience a deficit of 1.9bcm in 2019, although it could be as low as 0.8bcm under a lower case scenario. The deficit is anticipated to rise rapidly between 2019 and 2023 as expansions of Alba and Bapco refinery warrant significant natural gas. By 2027, the deficit could have risen to as much as 7.4bcm.
Bahrain LNG will construct an offshore import facility boasting an initial capacity of 4.1bcma with the potential to expand to 8.2bcma. This would present the kingdom with adequate capacity to cover the deficit up to 2027 at the very least. The plan is to seek agreements with LNG sellers for the supply of spot and short-term cargoes and pursue long-term purchases once there is clarity about demand.
Industry will be the main driver behind demand between 2016 and 2027, growing nearly 60per cent. But the greatest uncertainty will come from growth in demand for power, which will range from 36per cent in the lower case scenario to 62per cent in the base case scenario for the same period. Assumptions for demand for gas re-injection in the oil sector remain the same under all scenarios and will therefore have little impact on natural gas balances over the next 10 years.
Given the demand gap, the import terminal should be able to secure the country’s needs over the projected period - following the expansion - but will struggle beyond 2027. Bahrain will therefore need to find additional sources of natural gas supplies, or more likely increase import capacity to cater for additional demand growth beyond our projected period.
Flexibility is important
The LNG terminal has presented the Kingdom with several challenges, amongst those the design specification. LNG infrastructure is capital intensive and with low energy prices, investing in a long-term LNG facility in an energy-exporting country becomes unattractive. Over the past three years, the credit worthiness of MENA economies has deteriorated, with Bahrain downgraded by S&P from BBB investment grade in 2013 to BB- today.
Bahrain’s population is relatively small, meaning that the construction of a permanent LNG terminal may prove cost ineffective, certainly in the medium term given the small volume of demand. Second, the country is still self-sufficient and therefore uncertainties lie around the outlook for demand growth against future gas output. Thus, even if the country becomes a net importer, in the short to medium term, their needs will be low, seasonal, and will be governed predominantly by demand for power year-on-year.
Therefore, the model they have adopted is to construct an offshore LNG terminal with an FSU. The configuration will include an LNG vessel serving as an FSU, with on jetty regasification. This will enable the kingdom to optimise the utilisation of the FSU, by re-deploying it to trade as an LNG carrier when imports are not required. Meanwhile the country can devise a strategy that could see it transform into a regional gas distribution hub with capabilities to process several billion cubic meters a year, import from a variety of countries and positioned to service large demand centres such as Saudi Arabia.
Overcoming financing hurdles
The estimated total cost to develop and finance the project is approximately $990m. It will be financed through a combination of equity and senior debt on a 75:25 debt to equity ratio. Compared to other permanent LNG facilities, the cost of the project is at the lower end. Historically and prior to the oil price crash in 2014, governments in the GCC would fund energy projects themselves. But given low revenues and budget constraints, particularly in Bahrain where the country does not hold the foreign reserves enjoyed by its GCC peers, there has been a greater shift towards private finance. Thus, funding this project on a public-private-partnership (PPP) basis proved to be the most economically viable option. First, because it reduces the burden on government budgets allowing funds to be allocated to other sectors of the economy. Second, and more importantly, given the unique design of the facility, it allowed the government to draw on the expertise of multiple parties.
Bahrain LNG WLL is to be developed on a Build, Own, Operate, Transfer (BOOT) basis. The National Oil & Gas Authority (NOGA) through its investment arm Nogaholding issued a competitive tender in 2014 to select a project developer. The selected consortium included Teekay LNG Partners (30per cent), Gulf Investment Corporation (24per cent), Samsung C&T (16per cent), with Nogaholding owning the remaining 30per cent. The partnership allows the kingdom to draw on the experience and benefits of all the project parties. Teekay LNG - the third largest independent owner of LNG carriers - will supply the FSU and operate the terminal. Samsung C&T is the longest established and leading trading company in South Korea with a strong track record of LNG developments in the Gulf including Oman and Qatar. Gulf Investment Company is an experienced regional PPP investor; equally owned by the six GCC states and one of the largest international investors in Bahrain. The $670m Engineering, Procurement and Construction (EPC) contract was awarded to GS Engineering & Construction, a South Korean conglomerate with a successful record of similar ventures including a range of LNG terminal projects in South Korea, South East Asia and the Middle East.
The flexibility of the LNG terminal means that Bahrain can cater to seasonal demand but also utilise the FSU for re-export. In effect, the country – despite its relatively small economy - can become a regional hub for LNG trade with potential to double existing capacity and in the short to medium-term serve neighbouring countries including Saudi Arabia.
Despite its unique design, the project overcame several difficulties in turn due to the combined expertise and track-record of the individual shareholders. The presence of two Korean shareholders with a background in similar developments in the region meant that the project was able to secure a reputable contractor for the EPC.
Bahrain LNG ensured low tariffs over the long run even after a downgrade in the kingdoms credit rating in the midst of structuring the deal. Thanks to K-Sure, the ECA was able to provide cover for 80per cent of the financing by attracting a syndicate of nine international and regional banks to participate and drive financing costs to a mere 15per cent of the total project costs. The pathfinder bank helped in structuring the overall deal but also in providing the necessary advice and support to ensure risks were mitigated particularly in connection with supply and demand uncertainty, FSU re-deployment and insurance cover.
Bahrain’s LNG terminal, only the second of its kind, thus marks a pivotal point for the region’s growing import needs. This is testament to the shifting trends in gas demand-supply dynamics with MENA countries committing to tackle energy security. The facility also represents a shift away from traditional government funding, and more towards securing private finance, reducing the burden on governments to overcome financing hurdles. Poor planning and delays have been the downfall of many energy schemes in Bahrain. But as a PPP, sponsors will be focused strongly on the project’s schedule as delays will incur significant penalties.