A vision of the future

O&G. In your time at Bapco, what have been the significant milestones?

Abdulkarim Al-Sayed. I am deeply honored to be leading The Bahrain Petroleum Company (Bapco) through probably one of the most exciting and challenging times in the Company’s history. My whole career of over 42 years has been spent with Bapco, and the strength and commitment to training that the company has demonstrated over many decades has made me what I am today. I have witnessed numerous milestones in the company’s history and have seen the refinery grow first hand into its latest configuration, which is brimming with leading-edge technology.

Bapco was formed in 1929 and has been a cornerstone of the Kingdom of Bahrain’s economic development since that time. It currently employs about 3200 people and is one of the largest employers in the Kingdom of Bahrain. It exports 95% of its refined products, with the main customers based in the Middle East, India, the Far East, South East Asia and Africa. An exciting opportunity at the moment is the possibility of expanding the customer base to Western Europe and the US.

In 1997 the Government of Bahrain took 100% ownership of all refining facilities, and in 2000 the process was started of merging the upstream and downstream business units. This was a major event and has resulted in a vertically integrated company, engaged in the oil and gas industry, including exploration and prospecting for oil and gas, drilling, production, refining, distribution of petroleum products and natural gas as well as sales and export of crude oil and refined products. Bapco is now a much more efficient organization, with the main aim of increasing revenues for the Kingdom of Bahrain.

Last year Bapco’s 75 years of discovery of oil was celebrated, in the pursuit of excellence in the oil and gas industry. Bapco’s Board Committee is chaired by H.E. Dr. Abdul Hussain bin Ali Mirza, Minister of Oil and Gas Affairs and Chairman of the National Oil & Gas Authority (NOGA). The support and guidance given by NOGA has been instrumental in encouraging me, my management team and my workforce in turning the Company’s mission and objectives into reality and creating wealth for the nation in order to enhance welfare of its people.

2007 was a year of major achievements in Bapco. The vacant plot of land south of the old refinery now houses the pride and joy of Bapco – its Low Sulphur Diesel Production complex (LSDP) that came on stream last year. With a capacity of 60,000 barrels per day, the Hydrocracker unit of the LSDP is one of the largest. The complex constitutes a major part of the one billion-plus dollar strategic investment plan that I am proud to say, I was asked to lead.

A few days ago, on May 28, Bapco started loading the first cargo of 300,000 barrels of low sulfur diesel with a sulfur content of 50 parts per million (ppm) – a significant milestone in the company’s history!

In terms of net cash flow, the company’s contribution to the government of Bahrain was 38% higher than the approved budget for 2007. The company maximized the cost-effective production of oil and gas from its fields. The refinery margins were the highest, and the production of low-value heavy ends was the lowest, s etting an all-time annual record in 2007.

I truly believe that Bapco’s greatest assets are its employees, and hence focusing on employee welfare is one of my top priorities. The generous bonus given for celebrating 75 Years of Oil, Winning the Robert W Campbell Award and the Inauguration of the LSDP Complex, was a great morale booster for the workforce. Bapco’s Skills for the Workplace training program has proven to be very popular and effective. It has trained almost 600 trainees in 22 technical and craft trades in 2007 and 2008. Many of Bapco’s facilities are being renewed and upgraded – a recent example is the old Central Market Service Station, which has undergone a complete makeover and redevelopment. The station reflects the image of the new generation of Bapco service stations. The company is acutely aware of the commitment to preserving and enhancing the environment through rigid pollution controls. A Green Schools Award program has been initiated that nurtures environmental awareness in the younger generation of Bahrain.

Bapco is a vibrant and energetic company; moving into the future on sure footing. I thrive on the challenge and opportunity that has come my way in being the Chief Executive at this momentous juncture in Bapco’s history.

Here I want to emphasize that teamwork is one of the core values of Bapco. None of the successes and the achievements that I have mentioned would have been possible without the foresight of our leaders, the business acumen of our managers and the unstinting support and devotion to duty of our workforce.

Bapco is the proud recipient in 2007 of the US National Safety Council’s Robert W Campbell Award for excellence in environment, health and safety (EHS) and integrating these principles into the company’s core business processes. Bapco is the only non-North American company to receive the coveted award, and Bapco has also engaged the Wharton School of Management of the University of Pennsylvania to develop a Bapco Case Study with the objective of utilizing that in the curricula of management studies of several universities.

O&G. How has the increased need for energy affected Bapco?

Abdulkarim Al-Sayed. The impact of changing social, political and environmental factors on Bapco is no different from that which faces all other National Oil Companies (NOCs) as well as International Oil Companies (IOCs). In medium to long term strategies, Bapco needs to take into account recent and foreseeable future developments in areas such as new fossil-fuel sources, new technologies such as coal-gasification, gas-to-liquid (GTL) processes, significantly enhanced role of LNG, research and commercial viability of non-fossil fuel energy sources, increased role of bio-fuels, emphasis on energy conservation, adoption of mass transit transport systems, adaptability of product slates to meet national and international regulations, global warming, legislations related to green-house gases (GHG), development and adoption of safer nuclear power generation, the demand forecast from major emerging markets of China and India, the recent trend in the increase in refining capacity not only in the Middle East but also in the United States… the list goes on!

From Bahrain’s perspective there have been several significant developments in the region that need to be taken into account in the energy equation. Iran has announced that their first nuclear power plant, which is located just 120km from Bahrain and due to come on line in four months or so. The overall impact of nuclear power on the energy picture in the Middle East was the subject of a recent conference held in Bahrain under the patronage of H.E. Dr. Mirza, Chairman of NOGA.

The growth in demand for “cleaner” fuels has been quite significant worldwide. Likewise, there has been a noteworthy increase in the dependence of industry on availability of cheap gas in the region. In view of Bahrain’s dwindling reserves of on-shore gas, I have been asked to head a national committee involved in studying various options for importing gas from neighboring countries. Our industrial sector such as power generation, aluminium smelting and petrochemical production totally rely on this vital commodity. Qatar and Iran, with their immense surplus of gas, are certainly the front-runners as suppliers for our future.

The increased need for energy has a major impact on the manner in which Bapco looks at the entire supply-demand scenario in the short run, as well as in the long run.

It is quite likely that the current high oil prices are here to stay in the foreseeable future. This drives everyone towards finding new oil and producing more from the known reservoirs. In co-operation with NOGA, we have awarded off-shore exploration blocks to several IOCs and are negotiating with other IOCs with the objective of increasing on-shore production. Even with the high oil prices, it is not a mere cake-walk; the company is acutely aware of the challenges that it faces since it competes with several major producers in the region. For example, its marketing of the crude oil production from the off-shore Abu Safah field is benchmarked against the big exporters of sour crude from this region.

The increased need for energy has not only impacted the production strategy but has an equally significant effect on almost all of Bapco’s activities.

On the supply side, the company is currently in discussions with its Saudi Arabian counterpart for the installation of a new, higher capacity pipeline system (called the AB pipeline where “AB” stands for “Arabia to Bahrain”). The current capacity of the AB line is 230,000 barrels per day; Bapco is seeking an increase in capacity to 350,000. Moreover, several on-shore sections of the line pass through residential areas on the Saudi side and in Bahrain; so a new route has been identified, primarily running south of the island that will minimize potential risk to public.

On the refining side, Bapco is mainly an export refinery; the company exports almost 95% of its products to countries in Asia, Africa, the Far East and Europe. With the implementation of the LSDP, Bapco is in a position to produce up to 100,000 barrels per day of ultra low sulfur diesel (ULSD) – this is ultra clean that has a sulfur content of less than 10 parts per million (10 ppm). This will practically meet the most stringent specifications worldwide; thus enabling Bapco to venture into markets where it has not sold in the past. Incidentally, the company is the first refiner in this region that can produce ULSD on such a large scale.

In seeking the increase in refinery capacity coupled with planned refinery modernization under the refinery master plan (replacement of older crude distillation units with a modern high-capacity unit), Bapco is acutely aware of additional refining capacity that is likely to come on stream soon. The Saudis have reported struck a deal with Total for the installation of a refinery that can produce 400,000 barrels per day. Kuwaitis are in the process of planning a new refinery of over 600,000 barrels per day. And likewise, Reliance in India is working on Phase Two of their refineries that will add a further 580,000 barrels per day to the capacity in the region. Nonetheless, Bapco is fairly upbeat on this – I believe demand in the region and worldwide will still outstrip this enhanced capacity.

The unprecedented abundance of petrodollars has opened up the floodgate of new opportunities. There is a need to apply this wealth towards sustainable growth of the region. This can only be achieved through using equal measures of conventional wisdom and “out of the box” thinking. And to cap it all, it will require extensive co-operation and collaboration amongst member countries in the oil- as well as the non-oil sectors. Bapco has initiated the creation of a new division whose aim will be to identify new vistas of business development, seek new opportunities for investment and identify ways in which new technologies could be implemented or exploited towards meeting corporate objectives.

As a part of diversification efforts, Bapco is participating in a joint venture for building and operating a storage terminal in Bahrain. This terminal involves an estimated investment cost of US$100 million; would have an initial capacity of three million barrels; 14 tanks and associated infrastructure for the receipt, storage and shipment of gasoline, jet fuel and diesel components and finished products.

One area that has been dear to my heart even from my early career in Bapco is my sensitivity to environmental affairs. Prior to taking on the leadership role of Bapco’s Strategic Investment Plan, I was the Chairman of Bapco’s Environmental Affairs Committee. The company is currently implementing a US$140 million project aimed at desulfurization of all refinery process gases. This will reduce atmospheric emissions to meet the most stringent regulations and industry best practices. Likewise, a wastewater treatment plant is planned at an estimated cost of over US$120 million to meet effluent quality standards. There is now on stream a US$38 million Sandvik-technology based sulfur solidification and handling plant that produces hard “pastilles” of sulfur thus minimizing the dust hazard. None of these could be termed as “profit” projects under the conventional meaning of the word. But I regard these as extremely profitable and essential in terms of our corporate social responsibility and our commitment to the welfare of the residents of Bahrain.

O&G. What are the biggest challenges facing BAPCO in terms of exploration and production in the region?

Abdulkarim Al-Sayed. Bapco and NOGA initiated a new exploration cycle in the offshore area. Bahrain Bid Round 2007 was launched on 12th March 2007 at the Middle East Oil Show and Conference, Bahrain by His Excellency Dr. Mirza. The bid round included four offshore exploration blocks covering almost the entire 7,400 sqkm offshore acreage of the island. Block 1, which is 2,858 sqkm, is to the north of Bahrain and neighbors Iran and Qatar, both of which have some of the world’s largest gas reserves. Block 2, which is 2,228 sqkm, is also to north of the island but closer to Saudi Arabia. Block 3, which is 1,088 sqkm, is to the east of the island bordering Qatar, while Block 4 is to the south and southeast of the island. The bid round was executed in a very transparent process that received praise from the International Oil Companies (IOCs) and the legislative houses in the Kingdom. As a result, Blocks 3 and 4 were awarded to Occidental Petroleum and Block 2 to PTTEP of Thailand. And very recently, the Cabinet has approved award of Block 1 to Occidental.

Bapco, in conjunction with NOGA, is finalizing negotiations with three international oil companies to enter into an incremental development production sharing agreement (IDPSA) aimed at increasing oil and gas production from the Bahrain Field. By aligning with a reputed IOC, Bapco expects to boost oil production to a level significantly higher than the existing production of around 34,000 BPOD (barrels per operating day). Furthermore, Bapco anticipates ultimate recoverable reserves to increase significantly. The additional increment in production and reserves will be achieved via implementing Enhanced Oil Recovery (EOR) as well as Improved Oil Recovery (IOR) schemes, which necessitate massive development plans. New EOR techniques will be introduced to the major producing reservoirs, underdeveloped reservoirs and the undeveloped reservoirs including heavy oil. Likewise, it is planned to increase gas production from the Khuff reservoir by 500 MMSCFD (million standard cubic feet per day) by drilling eight additional wells at an estimated cost of US$200 million starting late this year. This gas development plan is aimed at meeting the increasing gas demand especially by the power generation sector of the Kingdom of Bahrain. A joint venture with a reputed partner, once formed, is expected to increase gas deliverability and reserves via additional drilling and compression at a later stage.

Facing Challenges

“In summary, the challenges, apart from the skilled manpower shortage, are the uncertainty of oil and gas prices on the medium to long time range, and decisions on big investments may face difficulties if the current high prices do not hold.

• Innovative solutions must be developed to maximize the recovery factors from the current 20 to 40% range to 40-70% range or even higher.

• Most of the large geological structures have been identified and drilled. Exploration in the coming years will be focused on stratigraphic traps, subtle structures traps and hydro-dynamically trapped oil. Obviously, such undertakings will require innovative solutions that will require use of state-of-the-art technology.

• The oil industry at large will be required to pose a more environmentally friendly position. The increased use of fossil energy will make this rather challenging.

• Business environment is likely to change the relationship between IOCs and NOCs. Legal frameworks will need to be developed to manage this change.”

O&G. You have attended a number of conferences and summits regarding energy in the Middle East. What are the main issues that are raised by your peers?

Abdulkarim Al-Sayed. Like most others, Bapco is trying to anticipate what is going to happen in the future. Currently the refining business is doing very well. But we all know that the business is cyclic, and hence we can expect margins to drop. How far, and when, are the major concerns. The change in status of Reliance Industries is one of the issues facing Bapco, and others, this year. A few years ago, they changed the whole dynamics of India from being a net importer of diesel to a net exporter. And now Reliance’s latest refinery expansion is about to come on-stream. It is not clear what will happen, but Bapco is preparing for a down-turn in profitability as more refined products are introduced into the market. But from Bapco’s point of view, the company is much better placed to deal with any changes and challenges, now that our LSDP project is commissioned, than it would have been a few years ago.

Bapco’s goal at the moment is to prepare itself for the future, to prevent a big fall and to stay ahead of the game. Consequently planning is already underway for how to position the company for the future. Bapco is now looking at the refinery configuration beyond 2015. A process has been started to determine the optimum refinery configuration, which will further enhance the company’s profitability and competitiveness. Bapco is looking at capability to better position itself to capture the opportunities that future market environments may offer. This initiative is called the Bapco Master Plan Project.

Regardless of the many differences that exist amongst various NOCs in the region – differences in terms of sizes of the operations, product slates, social and political factors and resources mix, there are many of the challenges and problems faced by the NOCs in the region that have a thread of commonality. The biggest one of course is the skilled manpower crunch that faces everyone. In addition to that, a significant part of mutual discussions relates to what short term and long term strategies each company intends to adopt and the underlying assumptions that each NOC is making in devising their strategic plans.

Whenever there is an opportunity to meet my counterparts in the NOCs of this region, one of my tasks is to sound them out on the basic assumptions they make in their strategic planning.

Looking Ahead

Abdulkarim Al-Sayed. From a strategic standpoint, Bapco believes that:

• World growth will continue to be led by China, India and USA. Future world economic growth will be in the range of 3.0 to 3.5% per annum.

• Alternative energy sources have so far failed to significantly alter the energy balance. Hence it is expected that refinery product demand will continue to be dominated by gasoline and middle distillates.

• Most of the US gasoline requirement will be supplied through imports from Europe. Any surplus from Asia will also be directed towards the US market.

• Diesel will likewise be short, mostly in Europe, and has a demand growth forecasted to be much higher than gasoline. Bapco is well positioned to meet all future expected diesel specifications. Hence the company’s focus is now on other products.

• Worldwide fuel oil demand is expected to shrink, resulting in surplus volume. Bapco still produces a comparatively high fuel oil yield, and most of it is sold as bunker. However, while bunker fuel oil market may grow with the growth in international trade, the forecasted worldwide surplus remains a threat to Bapco’s fuel oil market. This is why Bapco is actively considering several options aimed at processing the “bottom of the barrel” to high-value products.

• The world is definitely moving towards cleaner products, with lower sulphur content. Fuel oil quality is likewise moving towards lower sulphur, especially inland fuel oil. Europe, USA and Japan are the forerunners for low sulphur fuel oil.

• New capacity is coming on-stream in our region and India, and this will compete with Bapco’s exports. Hence the company’s plan is to be ahead of the game, providing a better product.

O&G. Asia, Europe and the US are all facing an engineering and skilled workforce capacity crunch. Why do you think this is?

Abdulkarim Al-Sayed. As I have mentioned earlier, in the Middle East the oil industry is witnessing an unprecedented boom. Driven by mix of rising international oil demand and geopolitical uncertainties about supplies, crude prices and refining margins have surged in the past four years, providing fortunes to government and oil companies alike.

This liquidity and positive outlook on world oil demand have triggered a wave of new investments aimed at boosting oil production and producing higher value products which can also meet the more stringent environmental specifications.

The petrodollar was also aimed at new projects to enhance the countries’ infrastructure that suffered the long recessions of the 1980s and the 1990s.

To draw a scale, the total value of active and planned projects in the Gulf Region was estimated at over US$1.8 trillion for the period 2006 to 2012. The value of projects at Saudi Aramco alone, the world’s largest oil exporter and reserves holder, was estimated at around $500 billion. According to MEED June 2006, the value of projects at Saudi Aramco was estimated at US$70 billion in 2007 requiring a workforce of about 23,000 engineers in 2007.

In an ideal world, the government agencies responsible for development and the industry aiming at its specific needs are able to invest time and money in training an army of local engineers, skilled manpower and other professionals.

But this is far from an ideal world. Training engineers and professionals for example takes time, and with the US$1.8 trillion worth of projects planned or under way in the Gulf Region alone, time is the one asset that the region’s clients and contractors do not have.

So, the only immediate solution is to look overseas, to Europe, the US and Asia. But those regions are also facing an engineering and skilled workforce capacity crunch. Coupled with the still common misperception outside the region, that the Middle East is a dangerous place to work, it is somewhat difficult to attract foreign professionals to the region. The inevitable result is that employers in the region are going to have to pay inflated prices to attract the necessary resources, driving up the cost of projects and further restricting the development of indigenous talent.

To learn from the past, the present crisis goes back to the oil price collapse in the early 1980s through the 1990s when the oil process industries experienced a tidal wave of re-engineering and down-sizing in an effort to mitigate the tide of rising costs. Tens and possibly hundreds of thousands engineers were laid off worldwide. Recruitment in the global oil industry slowed and students, turned off by the bleak job outlook in the sector, opted for other disciplines. Training and development programs targeted at the indigenous workforce suffered. All of this caught us unguarded against the current surge.

One of the most worrying aspects of the current skills shortage in the Gulf Region is the likelihood that the response to the problem will repeat the mistakes of the past, which led to the crisis in the first place. With the Asian regions, traditionally supplied the needed resources, also facing shortages, we need to give a more serious long term look at depending on our own indigenous talents.

In Bapco, we felt the pinch in many ways. We have lost over 30 Western employees through resignation since January 2006. From a situation where the Eastern employee turnover rate was traditionally very low, Bapco has lost over 40 such employees through resignation since January 2006, mostly engaged in critical jobs. It has become increasingly difficult to attract and retain expatriate design engineers, geo-scientists, production, drilling and refinery process specialists.

India, which was Bapco’s most effective source of such recruits for professional jobs, is now in similar need for engineers and skilled manpower to meet its ambitious industry development needs.

A “Quick Hit” committee consisting of all the senior management members was immediately put in place to address short and long term solutions. The “Quick Hit” committee introduced a number of measures to address difficulties facing attracting and retaining both Bahraini and expatriate workforce in the face of rising expectations.

Bapco, however successfully completed a number of projects on its strategic investment program. As mentioned earlier, the Low Sulphur Diesel Production (LSDP), at a cost of US$725 million, is one of the most complex projects undertaken in the history of Bapco and it was successfully commissioned in 2007. The project used many innovative ways to alleviate risks through sharing manpower shortage problems with the E, P & C contractor by selecting a fitting contracting strategy.

The present shortage of skilled manpower for the oil and gas sector is felt equally by the IOCs and the NOCs. They were all unprepared for the over US$100 per barrel of crude price which brought about this flurry of major investment projects requiring professional manpower.

In the West, for almost two decades now, engineering colleges and universities have suffered from a lack of interest on the part of indigenous school leavers in joining these institutions. Many engineering departments faced closure due to this – they only survived by throwing open their doors to foreign students (mainly from the Asian sub-continent).

The present shortage of qualified manpower is not the result of any normal supply-demand internal adjustment between various branches of science and engineering. The cut in the supply side is far deeper and is the result of no new candidates entering for a long period of time.

The demand, on the other hand, has increased tremendously over the past two years. A major US oil company has declared that all their current projects will build-in a manpower cost escalation of 20-30% per annum to cater for the higher wages that will have to be given to engineers and technical staff in the years to come. In some cases the situation is rather comical when the client company, the EPC contractor and the technology licensor all try to lure away each other’s staff working on the same project!

Bahrain: the additional geopolitical challenges

• Bahrain is an island remote from Major Engineering firms and resources.

• Because of its geographic size and limited area to build many basic industries, Bahrain is also remote from sources of basic raw and manufactured material such as cement, sand, aggregate etc.

• Bahrain projects / activities / demands are small relative to the neighboring countries. Therefore, almost all relevant contractor firms are located outside Bahrain. Attempts, for example to attract and sign long term agreements with engineering and construction firms stationed in the other GCC countries have not been successful due to:

• No guaranteed availability of adequate number of good size projects.

• Having to deal mostly with large number of uninteresting miscellaneous and minor projects

O&G. What problems does the Middle East face above these other regions in trying to attract outside talent?

Abdulkarim Al-Sayed. The skilled manpower crunch in the oil and gas sector this time is not a short-term phenomenon. The supply-side might be able to mount a concerted effort and we could see some improvement in the situation in about five years time. The NOCs in the Middle East employ Western expatriates and Eastern expatriates in their organizations.

Western expatriates

For most of the NOC’s in the Middle East, the English-language trained pool of expatriates is the only one that presents workable options. Even in the face of dwindling supplies, the western expatriate can provide good value for money. In addition to a tremendous rise in demand in their home countries, the demand for western expatriates has also grown from some new and unexpected regions: Russia, oil-rich former Russian states, China, Africa, Pacific Rim and even India. This factor, along with some real and imaginary personal security concerns, has made it difficult for NOCs’ HR departments to attract the requisite number of western expatriates (who have the technical / managerial skills to deliver value for money).

As far as pay packages are concerned, there have been many salary surveys conducted by professional institutions and several other non-government organizations from time to time; a well qualified (PhD level) geologist with good working experience earns considerably more than what the NOCs are currently prepared to pay.

First thing to get their attention is an attractive salary. Like it or not, the whole Middle East is seen as a dangerous place from the North American perspective. If they do not see a significant financial benefit to working in what they perceive as a risky area, there will be little interest. We can assume that a 10-15 year experienced engineer in the oil industry in North American will earn a yearly base salary of US$80,000 – 100,000. From this perspective, why would they leave the relative safety and comfort of North America to move to the NOCs and earn less? On top of the base salary which they can earn in North America they would probably be looking at a premium of 30-40% to be an expatriate in this part of the world.

Once you have their attention with an attractive salary offer, then the other items such as fringe benefits, living conditions and other social activities should also be stressed or considered.

The NOCs, especially those in the GCC countries, must launch serious awareness campaigns aimed at the headhunters and the potential western expatriates to highlight the fact that many places in this part of the world, for example Dubai and Bahrain, are fast becoming better options to live from the standpoint of a western life style (climate, housing, standard of living, amenities, entertainment, sports, schooling, domestic help and servants, low crime rate…). Construction of luxury villas and plush apartment complexes is at its peak. These are aimed at not only the currently working high-income professionals, but also to lure rich expatriate retirees to make a home-away-from-home in this part of the world.

Eastern expatriates
India is the primary country that currently has a pool of English-speaking technical and managerial professionals that is large enough to supply the immediate need of the NOCs. It would take Poland and Czechoslovakia at least ten years to introduce English into their technical and engineering colleges to the extent that they would have surplus manpower in this category to meet the needs of NOCs (currently the trend is migration to the UK). But this pool of technical and engineering manpower resources (like India) is also drying up rapidly. The oil and gas sector in India is giving serious consideration to the problem created for them by the sudden, en masse flight of their experienced personnel to pastures greener.

In the recent past the eastern expatriates started moving within Middle East due to considerable difference in the pay packets. The NOCs need to implement some kind of a “no poaching” code of conduct to prevent luring away of each other’s expatriate staff.

The Western Draw

It has become especially difficult for the NOCs to attract and retain qualified and experienced western expatriates. There are several reasons for this.

• Demand in home countries has increased tremendously.

• The IOC’s have launched a recruitment blitz that has sucked up the supply pool.

• Demand by the non-oil sector has mushroomed.

• The perception about the security situation in NOC countries has worsened.

• Spouses have become more demanding; many of them are professionals in their own right and wish to pursue job careers. This facility is generally not available in NOC countries.