Impact of crude price meltdown on Brunei-

The meltdown of global crude oil prices has brought with it both good and bad news for a number of countries. While net importers of the fuel are saving significant foreign exchange, net exporters are taking a hit and are eagerly awaiting a price correction. Brunei is one such economy:  heavily dependent on oil and gas exports for its economic growth. Southeast Asia Infrastructure analyses the present scenario…

Global crude price meltdown

Simply put, continuous oversupply clubbed with sluggish demand emanating from chief consuming economies has resulted in the southward price trend. On the supply side, a significant increase in crude oil production by the US (once a net importer), owing to the shale oil boom has been a major factor in flooding the global markets with excess oil supplies. The shale boom has been a result of technological advancement that enables the extraction of more oil per well and easy availability of credit to develop oil sources. On the demand side, a slowdown in Europe and China (due to economic slowdown) as well as in Japan (due to efficiency gains, fuel substitution and a declining population) has contributed to keeping prices low. Besides, key producers such as Saudi Arabia have been reluctant to cut down their production in a bid to protect their market share. In January 2016, global oil prices entered a sub-$30 territory for the first time in 12 years. This, with developments such as the lifting of sanctions on Iran yet to unfold, clearly indicates that low oil prices are likely to prevail, at least in the near term.

What does it mean for Brunei?

The role of the oil and gas industry in shaping Brunei’s economic growth cannot be overemphasised. Hydrocarbon resources account for about 60 per cent of the economy’s gross domestic product (GDP) and over 90 per cent of the government’s revenue.

The crude price fall has had a major financial impact on the government’s budget. Between 2013 and early 2016, the government’s revenue fell by about 70 per cent. This also nudged the government to seriously consider massive cuts in public spending. The budget deficit is set to reach $2.65 billion for the fiscal year ending March 2017, which is approximately 17 per cent of GDP.

Efforts to sail through

The Brunei Economic Development Board (BEDB) has played a central role in creating a business environment conducive to new businesses.  BEDB has offered foreign investors a fast-track system for obtaining permits, licences and approvals. It has also offered tax incentives, such as a five-year tax exemption from corporation tax, for non-oil industries such as agribusiness, construction, consumer goods, environmental technologies, transportation, the media and education.

The government has also been able to do its bit on the international strategic platform. It has managed to retain China’s support (by remaining silent about issues pertaining to the South China Sea), as the latter has invested $6 billion for development of an oil refinery and local infrastructure in Pulau Muara Besar.

The facility, for which the construction works are under way, will produce 1.5 million tonnes per annum (tpa) of diesel, 400,000 tpa of gasoline, 1 million tpa of jet kerosene and 1.5 million tpa of naphtha, among several other petroleum products. While the construction works are expected to be wound up by 2018, the plant will commence operations in 2019.

Continuing with its efforts to moderate the impact of the oil price fall, the country, along with its regional partner, Malaysia, has decided to join with the Organization of Petroleum Exporting Countries (OPEC) in reducing the oil output.  The two nations have agreed to cut output by a combined 558,000 barrels per day, starting January 1, 2017. The agreement is the first such between OPEC and non OPEC members in 15 years.

What lies ahead?

The near-$100 per barrel of oil that remained for a long time gave Brunei much to cheer about. However, it struggled to prepare itself for a scenario marked by declining prices. It has thus far witnessed limited success with regard to diversification of the economy into new areas such as manufacturing and Islamic finance. This has been the result of general investor hesitation, coupled with stiff competition and mature markets in the region from economies such as Thailand, Malaysia and Indonesia. Besides, the limits to output growth are also being felt. The country’s oil and gas fields are ageing, and extraction equipment is increasingly becoming costly to maintain. It is also pushing the cost contours of projects, rendering production economically unviable at times.

In this backdrop, bold policy and regulatory steps have become necessary, rather than an option. It is well known that at the current pace of extraction of hydrocarbon resources, Brunei has reserves sufficient for only about 22 years (according to the

BP World Energy Outlook). Exploration in recent years has been extremely limited – in the last 10 years, the country has found only half a barrel of new oil (new discovery) for every one barrel it extracted from

the ground.

Besides, other macroeconomic problems also exist. Its currency, the Brunei dollar, remains pegged one-to-one with the Singapore dollar, causing it to be one of the region’s most expensive countries for business operations. Industry experts opine that maintaining such a costly exchange rate will further exacerbate development difficulties, given the country’s current economic headwinds.

On the finance side, with Chinese funds parked in Brunei, competing Japanese funds have their interest in funding Brunei’s infrastructure projects intact. This could be a good time for Brunei to leverage on this.

Overall, it is time the government charts out a specific action plan to look beyond oil and gas. While the rationale for such a plan is already present in ‘Vision Brunei 2035’ launched about a decade ago, short-term achievement of goals will hold the key to successful execution of the plan. If such planning is not carried out (and executed well), the repercussions will be felt much earlier than 22 years from now, when the country is expected to run out of oil and gas reserves.