WITH A strategic location at the heart of the Gulf, Bahrain has pursued a policy of value-added diversification since the 1970s.

New political and social initiatives have created a renewed and focused sense of optimism in the economy in general, and the physical merger of key state oil concerns Bahrain Petroleum Company (Bapco) and Bahrain National Oil Company (Banoco), the country's oil industry appears is now beating a more modern, cost-efficient path.

Despite Bahrain's relatively modest hydrocarbon resources, oil prices still have both direct (in the form of revenues), and indirect (due to banking and export links to neighbouring Gulf states) on the economy. Approximately 55 per cent of Bahrain's state income is from oil.

However, the country has proven itself robust when oil prices are low, while being able to capitalise on improved economic opportunity in times of buoyant oil prices.

Oil revenues hit a ten year high last year, totalling BD1.5 billion ($3.98 billion), a rise of 56 per cent compared to 1999 on the back of high oil prices. Oil income is projected to reach BD365 million this year, up 43 per cent on projected oil income in the 2000 budget.

Finance and National Economy Minister Abdullah Saif said Bahrain was also projecting a similar oil income next year based on a crude price of $15 to $18 per barrel.

Bahrain's crude oil is currently fetching around $23 per barrel.

Oil reserves, estimated at 148 million barrels in the ageing onshore Awali field, are falling. The field was first discovered in 1932, the first to be developed in the Gulf.

Production is approximately 35,000 barrels per day (bpd) from the Awali field, though Bahrain's total production is approximately 145,000 bpd, the balance being made up from the offshore Abu Sa'afa field shared with Saudi Arabia.

Plans are in progress to boost oil reserves and production, with both Chevron and Texaco involved in exploration.

Bahrain does, however, have substantial gas reserves - put at approximately 263 billion cu m, sufficient for 60 years' production, which are helping the establishment of higher value industries.

Since 1979 Bahrain has been making full use of its gas reserves, with production and processing handled by Bahrain National Gas Company (Banagas).

It is the downstream sector which provides Bahrain with crucial revenues.

The 250,000 bpd Bapco refinery, which produces diesel, aviation jet fuel, gasoline and naphtha, is now being comprehensively modernised under an $800 million strategic investment programme. The result, say officials, will be a more efficient plant more able to meet the flexible demands of the global refined products market.

A proposed $600 million financing package for the project is, according to sources, likely to be announced by this summer.

The biggest part of the project, the $600 million low sulphur diesel project, is driven by new sulphur emission standards being enforced throughout the world, including Bapco's core markets of India and the Far East.

Other projects to be undertaken at the refinery include the $31 million modernisation of instrumentation equipment for the low sulphur fuel oil (LSFO) and fluid catalytic cracker unit (FCCU), a $27 million kerosene-merox project, the replacement of wet gas compressors, enhancement of product yield from the Vacuum Distillation Unit (VDU), and Bunkering facilities.

A $66 million in-line blending project and $7 million unleaded gasoline project were completed last year.

The Bapco revamp, which will take place until 2004, is clearly good news for contractors, both international and local, with several packages still to be awarded.

The refinery project has already brought good news for environmentalists in Bahrain, with the start up last year of unleaded gasoline units.

Fuel stations started selling the new fuel last summer.

Bahrain has long maintained a policy of environmental protection. In 1979 Banagas pioneered the processing of associated natural gas to produce propane, butane and naphtha, thereby minimising flared gas.

Cost rationalisation and enhanced productivity were cited as reasons behind record profits for Gulf Petrochemical Industries Company (GPIC).

''All the efforts put in over the years to enhance reliability and profitability in our operations are now bearing fruit,'' he was quoted as saying.

Profits soared to $40 million last year, up from $9 million last year.

Al Sayed said that the record net profit was achieved thanks to a favourable market situation, particularly the high price of urea.

Daily production of the ammonia plant reached 1,275 metric tonnes and that of the urea plant 1,770 metric tonnes, while, according to Al Sayed, safety and security standards were maintained at the highest level.

''The plants achieved 3.5 million accident-free manhours during the year 2000.

''All these factors jointly of contributed to enhancing the company's financial position and increasing its productivity as a successful symbol of Gulf cooperation.''

GPIC was also awarded the Silver Safety Award by the Royal Society for the Prevention of Accidents, UK, for the eighth consecutive time.

GPIC is also a pioneer in the provision of environmentally-friendly products and operations.

The company operates both a fish farm and vegetable garden at its Sitra site to demonstrate its commitment to green causes.

GPIC is an equal joint venture between the governments of Bahrain, Kuwait (through Petrochemical Industries Company) and Saudi Arabia (through Saudi Basic Industries Corporation - Sabic).

Bahrain has positioned itself successfully to service the regional oil and gas industry. With one of the world's freest economies and a well-established financial infrastructure in place, neighbouring states are able to look to Bahrain-based product and service providers to provide a competitive edge.

In particular, Bahrain is located close to the world's largest oil province, in Saudi Arabia's Eastern province, and many companies have chosen Bahrain as a base with which to do business in the Kingdom.

Shipping operators also take advantage of Bahrain's strategic location to service and repair vessels.

Last year, Arab Shipbuilding and Repair Yard (ASRY) reported a huge increase in business from very large and ultra large crude carriers, up by 300 per cent in the final quarter.

The company is also poised to enter the conversion market for major offshore oil and gas fields, while its attempts to diversify its range of services has seen it pre-qualify with some of the world's leading FPSO and FSO operators, a specialist market which again is set to be a focus for the company.