As a small country with a large endowment of oil and gas, Brunei Darussalam has naturally developed a mostly export-oriented energy sector. Through long relationships with top multinationals, the Sultanate has an established record of applying leading technologies in the exploration, development and processing of its natural resources. The country is today primarily an exporter of liquefied natural gas (LNG), which is shipped to Japan, South Korea and Malaysia, and is a significant oil supplier to the Asia-Pacific region. Most current production is in shallow offshore waters, although hopes for the future rest mainly on deepwater exploration, which has already led to more than one discovery. Considerable efforts are also being made to squeeze as much output as possible out of shallow offshore and onshore areas, but output has been declining since 2006 as the giant fields that have been the industry’s mainstay for decades have passed their peaks.
The government is confident the recent decline in output will be reversed and optimistic that deepwater offshore exploration will bring about a new golden era for Brunei Darussalam’s oil and gas industry. At the same time, the government is hedging its bets with plans to invest in oil exploration internationally, targeting a total of 650,000 barrels of oil equivalent per day (boepd) of domestic and international production by 2035. The Sultanate is also strongly promoting development of a petrochemicals industry, aiming both to add value to the country’s hydrocarbons exports and to position itself as a hub for processing Gulf oil. The government has attracted Chinese polyester giant Zhejiang Hengyi, which is planning to invest $10bn over the next decade in a large oil processing and petrochemicals complex.
Brunei Darussalam’s domestic energy consumption is high for the country’s size, mainly due to the energy sector’s own use, high incomes and a policy of supplying power domestically well below international prices. Although the government plans to maintain that policy, it is increasingly seeking to mitigate the impacts with efforts to promote conservation. The country is also investing in high-tech upgrades of its gas-fired power plants in order to boost their efficiency.
The Three Giants
Brunei Darussalam’s oil and gas industry developed around the discoveries of three giant fields, which continue to account for the vast majority of output. The oldest, an onshore oil field known as Seria, was the first commercial oil discovery in the country, made in 1929 by the British Malayan Petroleum Company, a subsidiary of Royal Dutch Shell. Stretching for 13 km along a 2.5-km-wide strip on the Sultanate’s western coastline, the Seria field produced its billionth barrel of oil in 1991. Though long ago eclipsed by offshore fields, Seria continues to account for about one-sixth of oil output.
In 1957 Shell registered a new subsidiary local company, Brunei Shell Petroleum (BSP), which took over Shell’s operations in the country. Today BSP is a 50:50 joint venture with the government and remains the country’s dominant producer, accounting for around 90% of oil and gas output. BSP made its first offshore discovery in 1963 with the giant South West Ampa field, located in 10-40 metres of water about 13 km offshore of Kuala Belait in western Brunei Darussalam. Still the Sultanate’s largest field, South West Ampa accounts for about half of gas output. As the Bruneian government treats reserves data as sensitive trade secrets, accurate reserve estimates are not available.
Oil production from South West Ampa began in 1965, but about 60% of the field’s resources are gas, for which there were not enough customers within reach of the pipeline in the 1960s to make development worthwhile. The solution was LNG technology, which had just found its first major application in shipping Algerian gas to the UK. Seeing a similar opportunity to export to industrialising Japan, Shell brought in Mitsubishi as partner and built Asia’s first LNG plant at Lumut, which is located east of Seria. Called Brunei LNG, the plant began operating in 1972 and has since undergone two major upgrades to reach a capacity of 7.2m tonnes per year. The plant is today a joint venture between the Bruneian government (50%), Shell (25%) and Mitsubishi (25%). The same partners also own LNG tankers through two similar joint ventures, Brunei Gas Carriers (BGC) and Brunei Shell Tankers. BGC is also owned by the government (80%), Shell (10%) and Mitsubishi (10%), while Brunei Shell Tankers is 50% government owned, with Shell and Mitsubishi each holding 25% stakes in the firm. Offshore drilling proliferated and in 1970 another major discovery was made: the Champion field. Located 40 km offshore of central Brunei Darussalam in 10-45 metres of water, Champion began producing in 1972 and accounts for more than half of oil output. Champion is a large and complex field, with depths below the sea floor ranging from less than 600m to more than 3 km.
Many Smaller Fields
Besides the three giants, BSP has discovered many mid-sized and smaller fields in Brunei Darussalam’s shallow offshore shelf, which together are responsible for a large portion of output. These include Fairley-Baram, Magpie, Gannet, Egret, Iron Duke, Enggang and Bugan, for which reserve data is not available. BSP also discovered another onshore field west of Seria, called Rasau in 1979.
BSP also jointly operates two fields straddling the country’s western border with Malaysian state oil and gas company Petroliam Nasional (Petronas). The offshore Fairley-Baram field, discovered in 1973, is extracted by BSP and delivered to market through Petronas’ infrastructure in Malaysia, while the onshore Asam Paya field, discovered by Petronas in 1989, is extracted by Petronas and delivered to market through BSP’s infrastructure in the Sultanate. Other straddling fields include the Maharaja Lela North Field, which is operated by Total in Brunei Darussalam and Kinabalu West NAG in Malaysia. Several other international oil companies have explored in the country, but so far only France’s Total has discovered and developed a commercial field. In 1986 Total’s predecessor Elf acquired operating stakes in licences covering a large part of the Sultanate’s shallow offshore shelf. Elf discovered a commercial field, which was named Maharaja Lela/Jamalulalam in 1990 and began producing in 1997. Total holds a 37.5% stake in the project, while Shell holds 35% and the Brunei National Petroleum Company (PetroleumBRUNEI) 27.5%.
Today the country’s oil and gas industry faces a more difficult exploration and development climate. Hj Awang Hj Ali, executive chairman of marine logistics firm Belait Shipping and managing director of oilfield services firm QESS Energy Support Services, told OBG, “The reality is there is no more easy oil anywhere. All that is left is difficult production, and as such expensive oil. In our region that means in deepwater or deep under the sea floor.”
With most of the shallow offshore shelf already mapped and explored, most recent developments have been of fields that were discovered a decade or longer ago but were then considered too small and/or difficult to develop. Advancing technology and higher oil prices have allowed BSP to turn these prospects into commercial fields. The successful development of the highly complex Champion West satellite field, discovered in 1975 but not put into production until 2005, helped lift Brunei Darussalam’s output in 2006 to a high of around 400,000 boepd. That was followed by the Mampak field (discovered in 1997, producing from 2009), Selangkir (discovered in 1995, producing from 2011) and Danau-Bubut (discovered in 1969, producing from 2012). BSP has also been using advanced drilling technology to develop previously untapped corners and satellites of the onshore Seria field. But new developments have not been enough to offset the accelerating decline of BSP’s older giant fields, leading to a substantial drop in output since 2006. According to the US Energy Information Agency (EIA), which counts marketable volumes, there was a decline from 450,000 boepd in 2006 to 340,000 boepd in 2013. However, government estimates put the figure higher at around 372,000 boepd for 2013.
Turning The Tide
Two other areas under development and a major investment in the Champion field should help to further reverse the downward trend. The larger of is a set of deep reservoir panels located within Total’s Maharaja Lela/Jamalulalam field called MLJ South. Although at least one of the panels was intended to be included in development plans for the Maharaja Lela/Jamalulalam field as early as 1997, technical complexities and high costs delayed exploration. Drilling of the deep panels situated on the southern flank of the field effectively started in 2008, with new panels discovered in 2010 and 2011.
Unlike some of the other panels closer to the existing platform, MLJ South is more challenging and costly, with gas and condensate between 4 km and 5.8 km below the shallow-water sea floor and under extremely high pressure and temperature. The area will require a new phase of development, the ML South Project, in order to realise production, which should see an increase to a new plateau of 5 mega standard cu metres per day. Total awarded contracts for the field’s platform and other infrastructure in early 2014 and is aiming to start production in 2015.
Meanwhile, BSP is developing another field, known as Osprey, which was discovered in 1975 and is set to begin production in 2014-15. Also under way is a major investment by BSP in new technologies to maximise output from the ageing Champion field, called the Champion Water Flood Project, due to be completed in four phases, the first of which started in 2010. The third phase is currently scheduled to begin in 2017, with plans for the last phase yet to be confirmed. BSP has said the project is expected to significantly boost oil recovery from the field.
Oil and gas export data for the first five months of 2014 remained weak, but the government is confident that production will bounce back. The Energy Department at the Prime Minister’s Office (EDPMO) told OBG that output is expected to stabilise at around 400,000 boepd over the next five years, and then gradually increase again in the long run. Hopefully deepwater will produce more than what is estimated at the moment – in fact there could be enough to surpass the 650,000-boepd target, but the point of that ceiling is the ultimate aim of sustaining production over the long run. There is also some flexibility in the target, as production volumes can also be booked abroad.
High Hopes For Deepwater
Brunei Darussalam’s hopes for the future are largely pinned on its deep offshore shelf, most of which was relatively recently opened to exploration after a marine border dispute with Malaysia was settled in 2009. Two large blocks, each of 5000 sq km, were awarded in 2010 to two different international consortiums, led respectively by Total and Petronas. Also, BSP began drilling in 2009 in a smaller deepwater area that was part of a previously awarded, largely shallow-water block.
The country’s deep offshore shelf is in the range of 1-1.5 km deep, and even 2.5 km in some cases. Although costly and challenging, Brunei Darussalam has the advantage that the nearby, geologically similar Malaysian shelf has already yielded deep offshore discoveries, some of which are already producing. Especially encouraging was the Malaysian offshore field of Gumusut-Kakap, operated by Shell, a major field discovered in 2003-04 and located just east of the country’s eastern marine border. Indeed, in 2011 BSP announced it had found a “major hydrocarbon discovery” near Gumusut-Kakap in Bruneian waters: the Geronggong field, which BSP said “could contain several hundred million barrels of oil”.
Keeping Up Exploration
Petronas also made a “commercially viable” discovery in its exploration block further west, according to an announcement in December 2013 by Malaysian Prime Minister Najib Razak. As of August 2014 the scale of that find remained unknown as Petronas had yet to make another announcement. Meanwhile, Total made only a small discovery in its initial drilling programme, called Jagus East. However, the firm said it was continuing studies that should result in a new exploration strategy.
The complexity of deepwater fields means that none of those discoveries is likely to developed quickly. Additionally, as these finds cross border and therefore require a unified approach. With the support of the Bruneian and Malaysian governments, stakeholders in the Geronggong/Jagus East fields (Brunei Darussalam) and the Gumusut/Kakap fields (Malaysia) signed an agreement in December 2013, under which both countries have agreed to a framework for provisional joint development of these fields, with the objective of facilitating a potential unitisation agreement.
These estimates of high-standard “proved reserves” imply that Brunei Darussalam’s reserves are in the range of 20-28 times current annual production. By comparison, the EDPMO gave a more optimistic indirect indication of reserves in its “Energy White Paper”, a policy document published in March 2014. According to the paper, if no further development work were done, natural production from producing fields would drop to 200,000 boepd by 2035. That implies that Brunei Darussalam has reserves roughly in the range of 30-35 times current annual production. In either case, the country will need to accelerate the pace at which it has been booking new reserves. According to the EDPMO, there has already been a big improvement and “the reserve replacement ratio (RRR) … has been in the range of 0.3 to 0.7 over the last decade. Recent RRR has been higher; above 1 in the last five years”.
That fits with the faster pace of discoveries and developments since 2009 after a relative lull during the previous 10 years. However, maintaining an RRR greater than 1 over an extended period will require either many discoveries or at least one new giant field. At 360,000 boepd, Brunei Darussalam would need to book more than 130m barrels of reserves each year – resources almost as big as MLJ South. The EDPMO’s strategy to support a higher RRR, outlined in the “Energy White Paper”, will be to more strongly promote enhanced oil recovery in older fields, require operators of new finds to commit to lifetime production plans that include advanced recovery techniques, more development of smaller fields through infrastructuresharing and re-awarding of undeveloped small fields.
The “Energy White Paper” also stresses the government’s plans to invest in oil production at the international level, an avenue that Brunei Darussalam has only recently begun to explore. For this project the Brunei National Petroleum Company (PetroleumBRUNEI) is being re-profiled as an international investor and operator. The government is targeting 100,000 boepd of foreign-produced oil and gas by 2035. PetroleumBRUNEI made a first step towards that goal by winning a tender for a small onshore block in Myanmar. The EP-1 block is in the Kyaukkyi-Mindon valley, which is a neighbour to Yenangyaung, where oil has traditionally been produced as far back as the 18th century. The project is largely an opportunity for the company to cut its teeth as an operator in a field that is technically somewhat similar to conditions in Bruneian onshore. In early September 2014 a production sharing contract was signed.
Softening Price Forecasts
Oil and Asian gas prices have for years defied forecasts of imminent price declines, but price weakness in the summer of 2014 suggested the long-predicted softening could finally be materialising. August 2014 was the weakest August for oil prices since 2010, with Brent crude hovering just over $100 a barrel. The IMF is forecasting a soft but near-term slide. In July 2014 it forecast that Brunei Darussalam’s average realised oil price would drop from $115.90 in 2014 to $108.60 in 2015 and $103.30 in 2016. The country produces a light, sweet crude that commands a premium over the Brent benchmark, averaging $5.93 per barrel in 2012.
For the Sultanate’s LNG the IMF predicted that prices would decline only very slightly to $16.70 per million British thermal units (mBtu) in 2015-16 from $16.80 per mBtu in 2014. However, it was LNG markets that suffered the biggest weakness in summer 2014, with Asian spot LNG prices tumbling below $11 per mBtu, their lowest since 2011, amid reports that major buyers were increasingly reluctant to commit to long-term contracts. LNG prices are under pressure from several fronts, including the slowdown of China’s construction boom, a major source of demand for gas.
Large LNG projects are coming to completion in Australia, Papua New Guinea, Russia and the US. Japan is slowly moving towards reviving some of its nuclear power plants which were shut down after the 2011 Fukushima disaster. Finally, a large number of long-term US, Canadian and Russian gas export projects have encouraged buyers to eschew long-term contracts and press producers to lower prices.
Although Brunei Darussalam sells its LNG through long-term contracts reportedly linked to oil prices, the country could still be affected by weak LNG spot prices as most such contracts give buyers some flexibility on volumes. The summer 2014 price collapse was reportedly driven by big buyers reducing their purchases under long-term contracts to the minimums allowed, thus forcing sellers to dump LNG on the spot market.
Buying Into North American LNG
One measure Asian producers including Brunei Darussalam are taking to further secure their positions against North American LNG exporters is to buy them out. The Canadian LNG project considered most likely to begin exporting first is owned by Petronas, with a 3% stake taken by PetroleumBRUNEI in a deal announced in December 2013. Petronas paid $6bn in 2012 to acquire Progress Energy, developer of a Canadian shale gas field, after winning permission from the Canadian government by promising to rapidly develop LNG exports. The Malaysian company’s apparent strategy is to stake out an early share of the North American LNG export market, hoping that other investors will be hesitant to overcrowd the market, since continued high Asian gas prices are crucial to justify large up-front costs.
PetroleumBRUNEI is pitching in to support Petronas’ strategy, by buying the 3% stake in the Canadian project and committing to buy 3% of its output. Only time will tell how well this strategy works. On one hand, one of two other Canadian LNG export projects under way as of 2014 was on the brink of collapse over the summer as a partner bowed out over high costs. On the other hand, two additional US LNG export projects won final approval from the US government in 2014 and announced they were moving immediately on development to begin producing by 2016.
Big Downstream Ambitions
The $10bn Hengyi oil processing and petrochemicals project, which began preliminary site preparation work in 2013, fulfils a long-held government ambition of recruiting large-scale foreign investment in the downstream segment of Brunei Darussalam’s energy sector. The scale of the project is huge for the country, representing more than half of annual GDP. Although Hengyi plans to spread the investment over two phases stretching into the early 2020s, the project is big enough to drive a substantial acceleration of GDP growth.
The project’s aims are threefold. First, Brunei Darussalam needs to upgrade its oil processing capacity, as domestic consumption has outgrown the country’s existing, ageing oil processing plant. Second, Hengyi needs to secure petrochemicals feedstocks for its polyester plants in China. Third, the Sultanate wants to expand and diversify its economy away from dependence on its own oil and gas output by positioning itself as a hub for processing Gulf oil for the Asian market. The country’s deal with Hengyi calls for only 30% of the plant’s crude supplies to come from Brunei Darussalam, while the remaining 70% will be imported, mostly likely from the Gulf region. The plant will include an oil refinery and a complex of petrochemicals plants, and will require its own power and desalination plant and a bridge from the mainland to its site on the island of Pulau Muara Besar in Brunei Bay. The first, $4.3bn phase is targeted for completion in 2017-18 with a second phase to get under way in about 2019.
The Hengyi projects followed a $600m methanol plant that opened in 2010. The plant is operated by the Brunei Methanol Company, a joint venture between Mitsubishi Gas Chemicals (50%), PetroleumBRUNEI (25%) and Japan’s Itochu (25%). It exports around BN$300m ($235.4m) worth a year of methanol, which represents an alternative, high-value form in which to export gas production. The Hengyi project will go a long way towards meeting an ambitious target set out in the “Energy White Paper” of BN$21bn ($16.48bn) per year of output and BN$5bn ($3.92bn) per year of value added by the downstream segment by 2035. The government is also aiming to attract more large projects. Others that are being studied include processing of natural gas into nitrogenous fertilisers and new methods of producing and shipping hydrogen fuel.
Brunei Darussalam consumes about one-fifth of its gross oil and gas output domestically, according to the International Energy Agency (IEA). Energy consumption per capita, at 9.44 tonnes of oil equivalent per year, is among the highest in the world and more than a third higher than in the US, according to IEA data from 2011. However, that often-cited statistic is distorted by the fact that the country’s export-oriented oil, gas and methanol industries themselves consume a lot of energy. According to IEA data, 59% of domestic energy supply was consumed by “energy industry own use,” “losses” and “industry”, which in Brunei is mostly the energy sector.
Still, it is widely recognised that the government’s policy of supplying energy at prices well below that of international markets, intended as a way to broadly share the country’s resource wealth, has encouraged excessive usage. With gasoline sold for just BN$0.53 ($0.42) per litre, car ownership is nearly universal and SUVs are popular. Per capita consumption of transport fuel, at 1.06 tonnes per year in 2011, is 80% higher than the EU average, although still only 60% of US levels, according to the EIA. Transport fuel accounted for 60% of Brunei Darussalam’s non-industrial energy use, while residential consumption of oil-based fuels and cooking gas, distributed in canisters, made up 6%.
One of the government’s main policies includes the promotion and implementation of energy efficient and conservation initiatives, as well as carrying out studies to this end. The most important steps the government has taken are to invest in increased efficiency of its gas-fired electric power plants. Two projects were under way in 2014: a BN$300m ($235.41m) upgrade of the Lumut plant, and installation of a state-of-the-art, waste-heat recovery systems at the Berakas plant.
Electric power accounted for the other 34% of nonindustrial energy use in 2011. Tariffs are also low, with residential tariffs starting at just BN$0.01 ($0.008) per KWh for the first 600 KWh per month and peaking at BN$0.12 ($0.09) per KWh for extravagant usage above 4000 KWh per month. According to the Department of Economic Planning and Development, average power usage per household in 2012 was 1785 KWh per month. That is about twice the US average, and owes both to Brunei Darussalam’s large average household size (5.8 people) and heavy use of air conditioning. Total electric power generation in 2012 was 3929 GWh, a number that has grown steadily from 3069 GWh in 2008. Households accounted for 39.05% of electric power use in 2012, the commercial sector for 26.7%, government for 17.7% and industry for 16.4%.
The electric power industry is fully state-owned, but split into two units: the Berakas Power Management Company, which operates three power plants including Berakas and supplies major customers such as top government institutions, the military and hospitals, and the Department of Electrical Services, which operates four power plants, including Lumut and supplies the majority of consumers. Brunei Shell Marketing (BSM), a 50:50 joint venture between Shell and the Bruneian government separate from BSP, is the only distributor of oil-based fuels within the country.
Another focus of the EDPMO’s “Energy White Paper” is to press further with the government’s Local Business Development policies, which seek to promote local businesses and greater local employment. The energy sector has been a key focus of these policies, especially Directive 2 issued in 2012 which established a system of minimum quotas for local ownership and employment that companies must meet to win contracts from oil and gas operators.
Harald Gulaker, the project director at oil services firm Aker Solutions, told OBG, “The way to sustainably increase local content among oil and gas companies is to make the work more engaging and interesting to Bruneians. The focus on local human capital development ushered in by the Energy Industry Competency Framework [EICF] has positively impacted this aspect.” The EICF is an initiative developed by the EDPMO and the Ministry of Education that is focused on aligning Bruneian graduate’s skills and industry requirements through targeted training programmes.
The paper introduced some additional, very ambitious targets. Most strikingly, local businesses are targeted to supply 50% of goods and services purchased by the oil and gas industry by 2017 and more than 80% by 2035. At the same time, however, government officials say they understand that much of the increasingly high-tech demands of the oil and gas sector can only be met by foreign oilfield services companies.
The paper also points to a “significant opportunity” to develop local manufacturing of energy equipment. The government also recently attracted one such investment when Japan’s Sumitomo Metal announced in December 2013 it was going to invest BN$32m ($25.11m) to construct a pipe-threading plant with a capacity of 20,000 tonnes per year. Haji Shahrurrizam bin Tuah, the managing director of SC Oilfields and Logistics, told OBG, “Brunei Darussalam’s major oil and gas operators, most notably BSP, are playing a key role in helping local small and medium-sized enterprises in the sector to grow through the provision and extension of contracts to local players of varied sizes.”
Local employment in the sector is targeted to grow to 30,000 employees by 2017 and 50,000 employees by 2035. According to a 2010 census, only 37% of the oil and gas sector’s 29,414 employees at the time were citizens or permanent residents. The EDPMO’s paper also set out a policy of helping local oil and gas services companies to expand into international markets, setting a target of eight local internationalised firms by 2017 and 30 by 2035. Some of Brunei Darussalam’s leading oilfield services firms are already operating internationally, including Belait Shipping. Hj Awang Hj Ali told OBG that Belait’s boats were working in Malaysia, Indonesia, Thailand and India and would soon be heading to Saudi Arabia. Belait’s affiliate QESS is also a partner with Halliburton in a well services facility in Sungai Bera. However, he also said that Bruneian oilfield services firms looking for work abroad “need to have something nobody else has”. Hj Awang Hj Ali said, “This is still a difficult region for a services company to expand internationally. Even with ASEAN, I do not think that is going to change soon. All our neighbours have their own local business development policies.”
Brunei Darussalam’s oil and gas output is likely to stabilise in the near to mid-term as investment has significantly accelerated in exploration and development and refurbishment of more mature fields. In the longer run, the country’s success will largely depend on the size of its deepwater resources and how well the government can rally the high-cost exploration and development of them. Even if deepwater resources prove to be plentiful, the profitability of the country’s oil and gas industry could deteriorate if prices weaken as many are forecasting. The Hengyi project is thus very important in that it promises to diversify the economy away from total reliance on oil and gas resources. Ultimately, the Sultanate’s location and its export-oriented energy sector means Brunei Darussalam has the advantages needs to ensure long-term success.
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