The country has long had big ambitions for the downstream segment of its energy sector, and 2014 was the year when they finally began to take shape. The $10bn oil processing and petrochemicals complex planned by China’s Zhejiang Hengyi in Brunei Darussalam passed a crucial milestone in February 2014 when Hengyi and the Bruneian government formed a joint venture, Hengyi Industries. The deal gave Hengyi a 70% stake and the government 30%, for which it paid BN$300m ($235.4m) through the Strategic Development Capital Fund, a sovereign wealth fund.

New Priorities

The Hengyi project is the second major downstream investment in Brunei Darussalam after a $600m methanol plant that opened in 2010. The huge project will go a long way towards meeting the government’s ambitious targets for the downstream segment of BN$21.05bn ($16.5bn) of output and BN$5bn ($3.92bn) of value added annually from the energy sector’s downstream segment by 2035, as set out in the “Energy White Paper”, a policy document published in 2014 by the Energy Department at the Prime Minister’s Office (EDPMO). To secure the Hengyi investment, the government also leased a 260-ha greenfield site for the project on Brunei Bay’s largest island, Pulau Muara Besar (PMB), and committed to building a bridge to the island and a power plant. Hengyi began preparing the site in 2013 with dredging and reclamation to reshape the site’s shoreline, as well as land clearing and backfielding to raise the level of the ground and protect the site from flooding.

The $4.3bn first phase of the project will include an oil refinery producing gasoline, kerosene, diesel and jet fuel, with a capacity of 175,000 barrels per day (bpd). It will also include an aromatics cracker complex consisting of a naphtha cracker, a paraxylene plant and a benzene plant. A desalination plant will provide water. Paraxylene and benzene are crucial feedstocks for the manufacture of polyesters, of which Hengyi is one of the world’s largest producers. Michelle Chong Ming Hui, a planning specialist at Hengyi, said, “There was an alignment of interests between what our company wanted and what the Bruneian government wanted. We wanted to back integration in order to be self-sufficient, especially in paraxylene feedstock. Brunei Darussalam wanted to diversify into downstream industries. There were great synergies for both parties.”

Moving Forward

The country’s existing refinery, owned by the Sultanate’s largest producer Brunei Shell Petroleum (BSP), produces about 10,000 bpd, while the Sultanate’s total demand for oil-based fuels is about 15,000 bpd, or less than 10% of the Hengyi refinery’s planned output. Brunei Shell Marketing, the sole distributor of oil-based fuels in the country, plans to also being buying fuel from Hengyi.

The country will supply only 30% of the project’s crude oil, with 70% being imported, probably from the Gulf. In essence, the Sultanate is leveraging its location and its ability to be an anchor oil supplier to attract what will mainly be a processor of imported oil into petrochemicals feedstocks for the Chinese and other Asian markets. By doing so Brunei Darussalam is significantly diversifying its economy away from reliance on its own oil and gas output, a long-held goal.

Chong stressed the advantages of the country’s location, adjacent to the main oil shipping route between the Middle East and China, which runs through the Malacca Strait past Singapore and then turns north-east across the part of the South China Sea that lies between Borneo and Vietnam. “Brunei Darussalam is in a very strategic location,” she said. “We can also export from here to Labuan and the Philippines, and there are other markets close by.”

Support Infrastructure

Hengyi and other Chinese producers dominate global polyester production, but they have struggled to remain profitable as rising prices for paraxylene and other feedstocks have squeezed their margins. Despite that, Chinese companies have had difficulty getting permission to build refineries in China, according to Chong, due to problems with pollution associated with older, state-owned refineries. She said Hengyi’s Bruneian project plans to use cleaner and more efficient modern technology. Honeywell subsidiary UOP announced in 2013 that its aromatics technology had been selected for the Hengyi project. Construction of the plant will not begin until the government finalises its plans for the bridge and power plant, which are being handled by the Brunei Economic Development Board (BEDB) and Berakas Power Management Company (BPMC), respectively.

The BEDB is preparing a tender for the PMB Bridge, which will stretch 2.7 km to connect the island to the mainland near Muara, Brunei Darussalam’s main port. A design consultancy contract was awarded in 2012 to a consortium led by South Korea’s Pyunghwa Engineering Consultants. A tender for construction of the bridge was held in April 2014, however, as of August 2014 it had yet to be awarded.

Major Investment

Besides selling oil products to Brunei Darussalam and producing petrochemicals for its own use, the project also anticipates exporting oil products to the surrounding region. The refinery will produce gasoline to the Euro IV standard, the highest standard currently in use in South-east Asia. The introduction of Euro IV gasoline will significantly improve vehicle emissions compared to the lower-standard fuels produced by BSP’s older refinery.

The second phase, expected to begin around 2019, will expand the refinery to produce olefins, add a monoethylene glycol plant and a second paraxylene plant. Hengyi has said the plant’s annual turnover is estimated to be about $10bn. Of the $4.3bn cost of the project’s first phase, $2.8bn is slated to come from Chinese bank loans. The Chinese government is thought to be strongly supporting the project, largely out of an interest in building up its relationship with the Bruneian government. The Sultanate is seen as maintaining balanced relations with both the US and China in a region where many of its neighbours are strong US allies and have conflicts with China over the South China Sea and its islands and sea floor.

New Opportunities

Meanwhile, the government remains eager to secure additional downstream investments. Another project it is still hoping to complete is a plan to produce nitrogenous fertilisers from natural gas. The government was also looking into the construction of a complex that would produce ammonia and urea, though no further announcements have been made. Mitsubishi is also looking into a new method of producing and shipping hydrogen fuel, a nascent alternative automotive fuel produced from natural gas. Hydrogen-fuelled cars emit only steam and can drive further and refill faster than electric cars, but so far are more expensive. The project would bond hydrogen with toluene to make it liquid and thus allow it to be easily shipped to Japan, which is furthest ahead in producing hydrogen-fuelled cars and filling stations thanks to a national hydrogen-car subsidy programme.

The EDPMO’s “Energy White Paper” also floated several other ideas for downstream investment, for which the government is actively seeking investors. These included production of other petrochemicals, such as those derived from methanol.

Akira Ishiwada, the CEO of the Brunei Methanol Company, told OBG, “Looking to the future, the continued development of other downstream derivatives in Brunei Darussalam would positively contribute to the nation’s aim of downstream diversification.”

The paper said the government would study the possibility of investment in midstream aluminium production – making shaped products from raw aluminium – as a lucrative way to utilise more energy resources.