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Oil (Part One).


It is literally the fuel our economy runs on and the primary source of our collective national wealth, so you would think that we, as a general population, should have a working knowledge of it. But, based on a sample of one (myself), I determined that this is not the case, and a background reading was deemed necessary. I share some of this with you now.

It starts broad, but we will narrow it down to Bahrain as we go on, so keep reading.

Not all crude oil is created equal

The quality of oil is based on two main characteristics, the first of which is sulphur content. If the oil has high levels of sulphur, it’s called sour (because of the smell ugh) and if it doesn’t, it’s called sweet. Sweeter oil is considered higher quality, because sulphur must be removed during the refining process before you can actually use it. Secondly, oil density is also important i.e. whether its light or heavy. The lighter, the better, because those can be refined into gasoline (petrol) more easily –heavier types are instead used to produce things like diesel, which are cheaper and more polluting. So the best types of oil are sweet and light.

I couldn’t find anything about the quality of Bahrain’s oil, but the GCC seems to be generally in the middle, edging up to the sour side, so it would be a safe bet to say we’re somewhere in there.



In terms of pricing, the two major benchmarks that you’ll see in the news or wherever are West Texas Intermediary (WTI) and Brent, which are also highlighted in the chart. These are both light and sweet, with the primary difference being that WTI relates to that oil coming out of the US, and Brent is extracted from the North Sea in Europe. Although they are both international, they therefore have different markets. The oil from the GCC is lower quality and therefore slightly cheaper than Brent.

Where does it come from

Oil is found underground (when I was younger, I learnt that oil was the result of dead dinosaurs buried under more and more layers of earth. Sadly, that is false). If it is under land, it’s called onshore, if its under the sea, it’s called offshore. Straightforward enough. Offshore drilling is more difficult and expensive, especially the further you go out to sea, because there can be a lot of water between you and the ground, so it only makes up 30% of global production.

Global oil production is currently around 80 mmbpd (million barrels per day), with the Organization of the Petroleum Exporting Countries (OPEC) producing about 40% of that. OPEC is a 15-member organization, and members include: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo. From what I can tell, there are 99 countries in the world that have oil. As of last year, the top 10 producers were (the US is producing over 10 million bpd so it might be higher than both Saudi and Russia now):



As you can see, Bahrain is not on that list ☹. Let us compare our production with our neighbors, then:



I think you can kind of maybe see us there. Note that this does not take population size into account, although even on a per capita basis, we are still the lowest. In any case, our oil production is around 45,000 bpd, from the Bahrain / Awali oil field (maybe you can remember going to go see the first oil well in the gulf when you were in school, next to the oil museum). An interesting thing, however, is that our oil output is closer to 200,000 bpd, because of revenues from Abu Saafa. 

Abu Saafa

In 1958, when we were making up all the oceanic boundaries between the gulf states, Bahrain and Saudi agreed that the maritime boundaries would be drawn in a way that the Abu Saafa oil field, which is offshore and north of Bahrain, would be in Saudi Arabian waters. This was subject to signing an agreement that the revenues from production (currently 300,000 bpd) would be split 50-50 between the two countries. As per NOGA's 2017 Annual Report, our output share was 152,913 bpd. That's compared to only  44,234 bpd from the Bahrain field.

This particular point caught my eye, because the field is entirely operated by Aramco – we just receive the funds from the sale of the oil. If you didn’t think we were living precariously enough, well, three quarters of our oil production income comes from outside the country. Here is a nice old map (click on it to zoom) that shows the boundary waters and the location of the oil field based on a US State Department Report from 1970.



Refining

As we mentioned, crude oil needs to be refined into more usable petroleum products e.g. petrol, diesel, naphtha, jet fuel, fuel oil, sulphur, liquefied petroleum gas and asphalt. That’s done by BAPCO (which, as recently as 1997 was 40% owned by the USA’s Caltex), which covers the full scope of operations. We refine both our own oil and import Saudi oil, which we charge for. I’m not going to get into it (because it is way out of my scope) but I just wanted to share this badass photo of camel guards protecting the refinery way back when:



Anyway,

That is pretty much as introductory as you can get, and there are a lot of things I haven’t covered. I am no expert on this stuff. If you want to see a terrifying real-time oil related crisis, read about what is happening in Venezuela – since oil prices collapsed in 2014, their inflation rate has reached 80,000% and they have just devalued their currency by 95%, which is just insane (here's a Vox video, if you want). I hope you found this stuff as interesting as I did (my wife says that there isn't enough here and she'd want to know more, so I might do a part two, but who knows).