Bahrain Review

Dr Bartlett … guardedly optimistic

Dr Bartlett … guardedly optimistic

Right time to execute Bapco modernisation: Dr Bartlett

The Bahrain Petroleum Company had a terrific year operationally and financially in 2015. The company’s earnings were more than two times that we earned in 2014, says Dr PETE BARTLETT, chief executive, Bapco

There couldn’t be a more favourable time for progressing with the large Bapco Modernisation Programme (BMP) than right now. Soft market conditions due to weak oil and other commodity prices have created a cost environment in the oil and gas industry more favourable than we’ve seen in quite a number of years,' says Bapco chief executive Dr Pete Bartlett, an industry veteran with 35 years’ experience across all aspects of the global oil and gas industry and on five continents.

'The BMP investment helps extend the life of the hydrocarbon era in Bahrain by making a core asset of the kingdom more robust and resilient. The investment should help us to almost double our foreign earnings through the export of larger quantities of higher value products,' Dr Bartlett tells OGN in an exclusive interview.

There is no denying that pursuing an engineering mega-project under the current economic environment is fraught with challenges, some foreseen and others unforeseeable. 'Nonetheless, I would like to emphasise and home-in on the many opportunities that also arise from the heightened competition from the contractors and suppliers who want to participate in this investment,' he says.

Some of the components of Bapco’s strategy are based on cost-reductions and savings that it can achieve because of the competitive situation. As many engineering projects in other parts of the world are either being cancelled or shelved, the order books of major engineering consultants, specialist equipment manufacturers and vendors, and construction companies have shrunk considerably. This presents a favourable opportunity to procure equipment and services at very competitive prices, and with delivery dates matching planned construction and erection schedules.

'We think our timing for the BMP couldn’t be better,' Dr Bartlett explains. 'When the world economy is somewhat soft, this is the time to be engaging the contractors and suppliers. We’ve seen a robust and competitive response from the market, for example, in the selection of our engineering, procurement and construction contractors (EPCs) on the A-B Pipeline and more recently in the selection of our project management contractor for the BMP.'

Technip of Italy was appointed in September 2014 to carry out front-end engineering design (Feed), which continued throughout 2015 and will be completed by the end of the first quarter of 2016.

'Bapco Refinery, if we proceed with BMP, will be 40 per cent larger (in capacity) than it is today and produce more high-value products (and less fuel oil),' Dr Bartlett says adding: 'From Feed we will have a much more finely-tuned capital estimate for this project. We are now embarking on developing the strategy for engaging EPC.'

Most recently, in December 2015, Bapco appointed WorleyParsons as project management contractor (PMC) for the BMP. WorleyParsons will assist Bapco to manage, monitor and appraise the activities of the Feed contractor, EPC contractors, and other contractors engaged to execute the work. The project development is expected to be progressed to a final investment decision-making stage during 2016.

'Between now and about the first quarter of 2017, the final investment decision means re-affirming our business case and gaining Board and kingdom support by lining up the finance for the project such as bank loans, credit from export credit agencies (ECA) and equity, a portion of which will be raised from the kingdom’s exchequer, ' he says.

Dr Bartlett elaborates on why Bapco needs to proceed with the BMP: 'We operate an 80-year-old refinery with equipment and units of varying ages. Obviously, major investments and improvements to the facility, as well as to our systems and operations, have been made over these many years to meet market demands and to achieve high reliability, some cost efficiencies and workforce productivity. However, with our current configuration, we are approaching the situation of ‘diminishing returns’ in the gains-versus-efforts equation. The BMP will provide an opportunity to deploy newer, more efficient technology to produce high quality and more profitable products, while improving the cost competitiveness and energy efficiency of the overall complex.'

Refining capacity oversupply and depressed prices have historically presented serious challenges to the survivability of smaller, older, less efficient refineries. 'The primary objective of the BMP is to move away from an inherently less efficient configuration that currently consists of smaller capacity process units, and towards a more cost-efficiently sized configuration that maximises conversion of our feedstock into more valuable products, and to produce them with less energy and in a more environmentally stringent manner,' he says.

Talking about business, he says in 2015, the refining segment of the oil and gas industry generally did well and Bapco mirrored that trend. Bapco’s main income derives from its refining margin, which is the difference between what is realised in the sale of products versus input costs, mainly crude oil as feedstock.

Bapco is maximising crude runs through operational availability of units

Product realisations have held up reasonably well in spite of the steep decline in crude oil prices over the last 20 months. Bapco’s margins have strengthened through much of this period. The downstream industry (refining, marketing and petrochemicals segments) has experienced some product demand softening but has done better overall than the upstream (exploration, production) sectors. Product demand continues to grow at 1-2 per cent per year in spite of general commodity weakness globally, providing some support for margin businesses like refining and marketing.

'Margins are one thing but in order to take advantage of the opportunity, you have to run solid operations and in 2015 Bapco had a record year in terms of stable and safe operations with a high on-stream factor and more predictable and reliable operations. It’s fairly simple really – if you are able to reliably produce what the market demands, you are going to benefit when the arbitrage is open.

'Downstream is the only oil and gas segment that has consistently made money during this period. We’ve been through one of those periods when raw materials supply has significantly exceeded demand and those in the margin business like us have generally benefited. That is what happened to us over the last 18-20 months,' he says.

'We therefore had a terrific year operationally and financially in 2015. We had a good 2014, but 2015 was even better. We capitalised on the favorable market conditions by processing more crude than we have done any year in the last decade. An optimal yield of high value middle distillates was achieved, exceeding the annual target because of well executed hydrocracker operations. The overall liquid recovery was also the highest ever recorded in the history of the unit. Our earnings were nearly twice what we earned the previous year. The refinery also processed an all-time record high of 50,600 barrels per day (bpd) of Bahrain crude, maximising revenue for the kingdom.'

However, Dr Bartlett was quick to point out that Bapco operates in a world where the competitive intensity is increasing, with at least three new facilities commissioned in the region in the last 18 months and more to come.

'Our outlook is that the competitive intensity is going to continue and it will really boil down to what will happen with global supply-demand dynamics. Much of the product that we sell within the GCC will compete with this new capacity streamed in this region,' he says.

Bapco has successfully marketed the Bahrain refinery’s full export production since 1980, consistently achieving premiums above market benchmarks. The refinery is configured to produce middle distillates, including high quality jet fuel and diesel. It also produces and exports LPG, naphtha, gasoline, asphalt, fuel oil, lube base oils and sulphur.

'We are essentially a merchant refiner. Bapco is a global supplier. We serve markets from north-east Asia to Western Europe, and along the east coast of Africa. We also supply base oils to the US.'

'Fortunately most of our customers are East of Suez, where demand has held up quite well. We’ve also benefited from facility closures in Australia and North Asia. So our own outlook is that the supply-demand pressures may be less difficult in the near years ahead. Whether that will translate into margin benefit remains to be seen,' he says.

Dr Bartlett says Bapco is well positioned to serve the market as an export refiner given its geographic location and reputation as a highly reliable player who has been around for decades. The company’s goal is to add facilities that are required to strengthen its commercial interests and at the same time not to invite unwelcome competitive intensity against its own businesses.

'Part of my remit is to help the company become more commercial. There are at least two elements to commerciality – one is to ask yourself whether you are running a cost competitive operation; the second is to check if value is added downstream. We are looking at a number of initiatives that will involve relationships with other companies to help us increase the resilience of our commercial network and we will be quite selective about those opportunities. We will be looking at both product types and relationships to allow us to prepare the business for that larger footprint we are eyeing by 2020-21, when we’ll get about 100,000 barrels of additional clean product per day (bpd) from the BMP,' he says.

Bapco refinery modernisation plan ... making it a world-class refinery

During 2015, Bapco completed a major refinery shut-down on a total of 11 process units with maintenance activities being carried out from February to May 2015. Activities included equipment inspection and repair of over 100 major and 800 smaller assets in refinery process and utility plants. The refinery is also planning a major turnaround in the second half of 2016.

On the safety front, in 2015 Bapco employees and contractors did not suffer a single lost-time injury and attained a remarkable company-wide achievement of working 16.22 million hours of injury-free performance by the end of the year. This is truly a world-class performance, the highest ever achieved by Bapco.

In addition to Bapco’s substantially higher than budgeted financial contribution last year, further support to the national economy throughout the year was provided in the form of sponsorships and training activities, including an Education Exhibition, 'Invest in Bahrain 2015' Forum; Bahrain Training Institute Career’s Week and the Injaz Program, to name but a few.

Associated activities during the annual Environment, Health and Safety (EHS) week included a Bapco exhibition stand in City Centre which attracted over 25,000 people, re-affirming Bapco’s commitment towards corporate social responsibility by raising EHS awareness amongst its staff, contractors and their families, and the community at large.

Furthermore, Bapco’s new Crisis Emergency Response Plan (CERP) is now fully activated. This is a major enhancement in Bapco’s capability to manage major emergencies, crises, and incidents and CERP has steadily been enhanced over the last three years through awareness of roles and responsibilities. Various training exercises were conducted in 2015, primarily at Level 1 response, as well as table top exercises and workshops for the Incident Management and Crisis Management teams.

Looking ahead

Seeking final approval to proceed with the BMP project is Bapco’s key goal for 2016, along with commencing EPC for the A-B Pipeline project, and other related projects. 'We are focusing our attention on preparing the business for the BMP which includes not only EPC preparations, but the activities we need to put in place to prepare the organisation to run a larger and technically more challenging facility in the future,' Dr Bartlett says.

On how Bapco plans to manage the imbalance between new levels of cash generation in a lower-priced environment and its internal and external obligations, he says: 'As a refinery, we are in the margin business and we always endeavor to maximise revenues for our stakeholders by optimising crude runs through operational availability of process units while at the same time meeting our customers’ requirements.'

The modernisation programme and the accompanying organisational development considerations that go with it are the most visible examples of Bapco’s commitment to doing what’s necessary to remain competitive in the challenging industry. 'We strive to remain one of Bahrain’s most important contributors to the economy,' he says.

On the steps being taken by Bapco to reduce fixed and variable costs in all areas, he says the challenges faced by the government of Bahrain due to the decline in oil prices provide sufficient incentive to continuously focus on routine cost control and rationalisation activities.

The detailed operating and capital expense budgets presented to and approved by the Board were drafted against the backdrop of the difficult economic situation faced by Bapco’s stakeholders.

Despite this approved budget and the corresponding business plan being in place, Bapco continues to carry out critical reviews of expenses versus budget on a monthly basis. These reviews together with other stringent measures are adopted to manage and control fixed and variable costs on an ongoing basis throughout the year.

As always, cost reductions and rationalisation are implemented without any adverse impact on safety and reliability of operations, and the health of employees and contractors.

Referring to Bapco Lubricants, Dr Bartlett says since its launch in December 2014, 330,000 litres of lubricants have been distributed in Bahrain with original equipment manufacturer (OEM) approved formulations, some of which use the lube base oils produced by the Bahrain Lube Base Oil Company (BLBOC). Bapco intends to expand its lubricant brand presence in Bahrain and in selected export markets over time.

'For us a significant development in 2015 was the launch of Brand Bapco of which finished lubricant oils are another important product stream,' he says.

The BLBOC facility is within the Bapco refinery, and is a joint venture between nogaholding and Bapco (combined 55 per cent equity) and Neste of Finland (45 per cent equity). While 2015 was another challenging year for the global base oil business and therefore the Joint Venture, margins strengthened modestly in the 2nd half of the year, manufacturing was ‘on spec’ with no delays or excursions throughout the year. 'We topped off the year by installing additional hardware that further increases our pier head loading rate to base oil tankers,' he adds.

With its joint venture with Neste Oil, Bapco produces Group III Lube Base Oil stock for the high-end of the user market. Group III base oil still remains somewhat of a niche market, but one that is competitively challenged by growing supply.

Along with other hydrocarbon products, the market for lube base oils has also been somewhat quiet over the recent past. Several of the US majors are vying for the relatively lucrative European market for Group III sales. With the reduction in oil revenues of some of the other key clients of lube base oil of the past, the demand from them for this high-end product has also declined.

Nonetheless, the experts in this field are predicting a significant upward shift in demand as Spring approaches in the Northern Hemisphere.

During 2015, there were five minor Non-Lost Time Injuries (NLTIs) in the company and these injuries are a stark reminder of the hazards of the workplace and the need to ensure that safe work practices are always used, and that operational excellence tools are fully utilised. The NLTIs were thoroughly investigated and action items progressed to mitigate such events from occurring again.

'A relentless focus on zero injuries and zero incidents remains Bapco’s daily goal and its single-minded preoccupation for the future,' Dr Bartlett concludes.

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