BAPCO refinery upgrade deal awarded
Thursday, Dec 14, 2017
State-owned Bahrain Petroleum Co. (BAPCO) has awarded the main contract on the flagship project to expand and upgrade the kingdom’s refinery. The move fulfils a pledge to proceed by year-end with the long-planned scheme made by the country’s oil minister two months earlier.

The challenge now will be for the fiscally-struggling government – which was subjected to a further credit ratings downgrade at the start of the month – to raise international debt finance for the multi-billion-dollar project.

Movement on the refinery modernisation seems increasingly likely to trigger progress on an associated petrochemicals venture at the site – following a regional trend towards downstream integration and attracting investment from wealthier Gulf Co-operation Council (GCC) counterpart Kuwait.

A consortium of France’s TechnipFMC, South Korea’s Samsung Engineering and Spain’s Tecnicas Reunidas was announced on December 4 as the winner of the US$4.2 billion lump sum turnkey engineering, procurement, construction and commissioning (EPCC) contract to expand BAPCO’s 79-year-old refinery at Sitra, in the kingdom’s north-east. The contract will see capacity increase from 267,000 bpd to 360,000 bpd and units will be added enabling the production of cleaner, lighter, higher-value fuels predominantly for export.

Four teams submitted bids for the deal in December last year, with the team led by TechnipFMC – which also carried out the front-end engineering and design (FEED) contract – reported to have offered the lowest price.

Facilities to be added under the so-called BAPCO Modernisation Programme (BMP) include residue hydrocracking, hydrocracking, hydro-desulphurisation, crude and vacuum distillation, hydrogen production, hydrogen and sulphur recovery, tail gas treatment, sour water stripping, amine recovery, bulk acid gas removal and amine recovery units and facilities for the recovery, solidification and handling of sulphur. Completion is scheduled for 2022.

TechnipFMC’s press release described the scheme’s aims as being to add value to heavy ‘bottom of the barrel’ components of the crude, to broaden the product slate, and to increase energy efficiency. Some of the refinery’s units date back to the 1930s.

The upgrade spent many years on the drawing board as debates over scope and financial concerns dragged out the decision-making process.

However, execution accelerated in 2015, when Australia’s WorleyParsons was awarded the project management consultancy (PMC) contract. Perhaps more importantly, the main engineering, procurement and construction (EPC) packages were also apportioned on a similarly long-awaited scheme to replace and expand from 230,000 bpd to 350,000 bpd the pipeline supplying the refinery with Saudi Arabian crude feedstock from the Abqaiq processing hub in the Eastern Province. Completion is due in 2018.

The remainder of the plant’s crude input is provided by indigenous production of 48,000 bpd.

A team of BNP Paribas and HSBC was selected back in 2013 as BAPCO’s financial adviser on the BMP – reprising a role fulfilled on the previous major upgrade project completed last decade to add a low-sulphur diesel production (LSDP) unit, on which the financing proved a long and tortuous process.

The heavyweight banks’ experience will be valuable as Manama seeks to raise potentially up to US$4 billion against a backdrop of deteriorating state finances. Days before the contract award announcement, Standard & Poor’s (S&P) subjected the sovereign to a one-notch ratings downgrade to B+ – the latest in a series of negative ratings actions taking the kingdom’s credit further into ‘junk’ territory.

The agency cited “risks related to the low levels and heightened volatility of international reserves at the central bank, should Bahrain experience a sharp deterioration in its access to external liquidity”. However, although S&P noted that no such difficulty in raising international funding had been experienced thus far while also expressing confidence that better-endowed GCC counterparts would step in with support should the reserves position become critical.

BAPCO’s owner, the government’s Oil & Gas Holding Co. (nogaholding), has successfully debuted in international bank and bond markets over the past two years while regular sovereign Eurobond issues have continued to receive a strong response.
 
Foreign financiers

As was the case for the LSDP financing, a multi-tranche debt package is anticipated – with export credits expected to play a key role.

Samsung’s presence in the winning consortium is likely to attract support from the South Korean agencies – which provided commercial and political risk coverage of some 80% of a US$741 million loan raised earlier this year to fund the development of the kingdom’s LNG import terminal, and which have been active in downstream projects elsewhere in the region, notably in Kuwait.

BAPCO has long mooted adding aromatics capacity at the Sitra plant using the refinery’s naphtha as feedstock and signed a deal in late 2014 with Kuwait’s Petrochemical Industries Co. (PIC), a subsidiary of state oil conglomerate Kuwait Petroleum Corp. (KPC), to proceed with a feasibility study on such a project.

The two firms finally moved to sign a memorandum of understanding (MoU) late last year and both sides have subsequently sounded increasingly committed to the plan – with early indications suggesting a 1.4 million tonne-per-year plant costing US$1.5 billion is envisaged.

TechnipFMC has conducted FEED studies and US-based UOP has been selected for technology provision. PIC counterpart Kuwait Petroleum International (KPI) demonstrated the willingness of KPC to invest regionally downstream late last year by stepping in to rescue Muscat’s flagship project to develop a greenfield refinery at Duqm by acquiring a 50% stake.

PIC meanwhile has been engaged in a broader international expansion drive with recent investments in South Korea, the US and Canada.

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