Bahrain recently announced a large discovery of 80 billion barrels of tight oil in place and 10-20 tcf of deep gas off the west coast of the Kingdom. Estimates put Bahrain’s proven oil reserves at 124.6m bbl. However, with further appraisal wells still needing to be drilled and more information needed to determine how much of the find is likely to be commercially recoverable reserves, an element of caution is warranted. Analysts and commentators have already been voicing caution about the potentially challenging geology, likely low recovery factor and likely higher production costs. Officials in Bahrain are hopeful that the production can begin within 5 years given that it is located close to a fully operational field.
Clearly, if this results in a sizeable commercially viable project it would be positive as Bahrain’s economy has been under significant pressure since mid-2014 as a lower oil price environment hurt oil-related revenues. Bahrain’s 2018 fiscal breakeven oil price is high at $95.2/bbl (IMF estimate) and the Kingdom is running fiscal and current account deficits: Moody’s estimate Bahrain’s 2018 fiscal deficit at 10.2% of GDP and the current account deficit at 3% using a USD60 oil price.
Bahrain’s general government debt levels were already high versus its GCC peers at 44.4% of GDP in 2014 but are forecast (by Moody’s) to rise above 90% of GDP by the end of 2018. Plus, the Kingdom is in a weaker position from a sovereign asset/wealth fund and reserve position: the central bank’s foreign exchange assets are reported to have fallen to USD1.6bn in February. That said, there is an expectation that Bahrain will receive GCC support if needed: ‘In Fitch's view, further material support from the GCC would be forthcoming in case of extreme political, financial, or fiscal instability, given Bahrain's small size and strategic importance. The expectation of such support has supported Bahrain's market access and US dollar peg despite extremely low foreign exchange reserves, which fell to an estimated one month of current external payments at end-2017.’ Bahrain raised USD1bn from a sukuk last month.
Bahrain’s weakening credit fundamentals have resulted in a number of ratings downgrades; the sovereign is now rated B1/B+/BB-by Moody’s/S&P/Fitch respectively. We do not hold Bahrain as its fundamentals remain weak and it does not screen attractively on our models.