Oil & Gas: IOCs allowed to own 100% of oil and gas drilling activities in Bahrain

In the latest of a series of moves designed to incentivise and facilitate current and future foreign investment by oil and gas companies, the Government of Bahrain has announced that it will now allow foreign companies to own 100% of oil and gas drilling activities in Bahrain. The announcement comes on the back of other incentivisation schemes, following the large discovery in the shallow waters of the Khalij Al-Bahrain Basin last year.

Introduction

In early April of last year, the Government of Bahrain announced the country’s largest discovery of hydrocarbon deposits since 1932. The deposits are in the shallow waters of the Khalij Al-Bahrain Basin and have been independently assessed to be around 80 billion barrels of shale (or tight) oil and 10 to 20 trillion cubic feet of natural gas, on a P50 basis. Although further appraisal is yet to be completed, the discovery has been seen as a significant boost to the country’s economic outlook (including security of supply and export capability) and a significant opportunity for oil and gas companies to invest in the region.

Attracting Foreign Investment in the Sector

Bahrain has not traditionally been possessed of the oil and gas wealth of its immediate neighbours. The discovery has thrown into sharp relief the need to offer an attractive commercial proposition to foreign investors.

In the latest of a series of moves designed to incentivise and facilitate current and future investment by oil and gas companies, on 2 June this year His Royal Highness Prime Minister Prince Khalifa bin Salman Al Khalifa issued Edict 10/2019, Article One of which provides:

“…the foreign capital companies are allowed to own 100% of the oil and gas drilling activities in the Kingdom of Bahrain, providing that the Parent Company have signed or in the process of sealing an agreement on the exploration and production of oil and natural gas with the government of the Kingdom of Bahrain”.

Previous incentivisation schemes include the approval by the Bahrani cabinet on 29 October last year for foreign investors to own 100% of companies operating offering oil spill treatment services to the oil and gas industry in Bahrain.

In addition, following the Khalij Al-Bahrain Basin discovery, the Government launched an energy fund which seeks to raise USD 1 billion from local, regional and international investors to develop Bahrain’s assets. The fund will invest in a range of energy projects across the upstream, mid-stream and downstream sectors, including the developments of newly discovered oil and gas fields.

It is thought that allowing 100% foreign ownership of such operators is part of a campaign to attract international companies that are focused on shale oil production and to facilitate the progression of projects into the production phase. Bahrain has been looking to major US and independent oil companies in recent months, with the experience and operating capability in respect of shale deposits.

‘Watch This Space’

Although the recent announcements will facilitate the approach to be taken by foreign investors to country-entry and questions of corporate structure, there remain a number of matters still to be considered.

For example, the Oil Minister, Sheikh Mohammed bin Khalifa al-Khalifa, has made clear that Edict 10/2019 is designed to facilitate country-entry and other procedures for foreign companies. The state’s ownership over the hydrocarbon resources will remain unaffected. Foreign companies will continue to see their returns under the terms of the Exploration and Product Sharing Agreement (“EPSA”).

Edict 10/2019 is limited to questions of corporate ownership, it does not alter the position on any requirement for local content (e.g. the transfer of know-how and technology, the use of local suppliers, employment of local personnel and/or the placing local personnel in senior positions), which continue to be obligations under the terms of the EPSA. In addition, the Edict is limited to drilling operations, which may implicitly exclude production stage activities.

Bahrain has been known to have a somewhat tougher fiscal regime by international standards and so, as part of any incentivisation package, a more attractive regime may need to be prepared. Indeed, the Oil Minster has been clear that this is the intention.

With its free trade agreement with the United States, new incentivisation drive for foreign investment and its proximity to other Gulf Nations, Bahrain will certainly be a jurisdiction of interest and opportunity for the oil and gas sector going forward. It may also be of particular interest to large IOCs with their own “drilling services” subsidiaries, e.g. Arabian Drilling Company (TAQA) and potentially towards the larger well services providers that have been looking at equity and/or so-called “quasi equity” stakes in oil and gas projects, e.g. Schlumberger and Baker Hughes GE.