Brunei Darussalam was a pioneer in the liquefied natural gas (LNG) sector during the 1970s, building a large-scale liquefaction plant and developing long-standing export ties to key markets in Japan and South Korea, leading to robust industry expansion and a substantial augmentation of its petroleum revenue base. However, both production and export of LNG has fallen in recent years, as ongoing maintenance at key production bases, an increasingly competitive export market, rising domestic demand and declining global prices weigh on the sector.
At the same time, ongoing partnerships with Royal Dutch Shell and Total will help maintain production and output, while long-term sales contracts signed with new and existing partners in 2013 should assist the country in maintaining its export market share. Fleet upgrades to enable fast and efficient transportation will further enable the Sultanate to capitalise on rising LNG demand within ASEAN, paving the way for successful, sustainable development.
Long History
Following the first discovery of substantial gas reserves during the 1960s, Brunei Darussalam has benefitted from a long history of stable export relationships in the LNG sector, partnering with Royal Dutch Shell to form Brunei LNG, Brunei Gas Carriers (BGC), Brunei Shell Tankers (BST) and Brunei Shell Marketing, which oversee the production, processing, shipping and marketing of natural gas in Brunei Darussalam. France’s Total has also been involved in exploration and production since 1986, producing gas commercially for the first time in 1990 and spearheading development of the Maharaja Lela deepwater offshore gas field.
The government also invested significantly in the region’s first LNG processing facility during the formative years of the LNG sector, benefitting from Japan’s post-Second World War industrialisation. Although the Sultanate’s distance from potential markets had limited the size and scope of dry gas exports to that point, gas liquefaction, which was still in its infancy, proved critically important to the industry.
Lumut Liquefaction
Situated in Lumut, in the Belait District, Brunei Darussalam’s Lumut LNG liquefaction plant stretches across a coastal plot and 4.5-km jetty facing north towards the South China Sea. The five-train plant offers maximum production capacity of 48,300 cu metres per day, with a series of upgrades over the years bolstering total production to 7.2m tonnes per annum of LNG, of which roughly 6.7m tonnes are exported. The plant was commissioned in 1972 as a joint venture between the Sultanate, which holds a 50% stake, Japan’s Mitsubishi Corporation, which holds a 25% stake, and the Shell Overseas Holdings, which acted as technical advisor for the project and also holds a 25% stake.
The project’s success was a banner moment for the LNG industry, establishing natural gas as a viable global energy source capable of large-scale liquefaction and transportation. Today the Sultanate counts Japan as its largest LNG customer, with Japan accounting for 74% of LNG exports in 2014, according to the “Brunei Darussalam Statistical Yearbook 2014”, followed by South Korea, at 11.5%, Taiwan at 10%, Malaysia at 3.5% and China at 1%.
Production & Exports
The US Energy Information Administration (EIA) reported that Brunei Darussalam produced roughly 419bn cu feet of dry natural gas in 2014, a 4.8% decline from 440bn cu feet in 2013, and sourced mainly from the South West Ampa, Champion and associated oilfields. Recent data released in the statistical yearbook, showed that total natural gas production fell from 243,700 barrels of oil equivalent per day (boepd) in 2012 to 237,240 boepd in 2013, and by a further 2.3% to 231,710 boepd in 2014. Although Brunei Darussalam’s LNG exports rose by 1% to hit 981.1m British thermal units (Btu) in 2013, from 971.4m Btu in 2012, according to the statistical yearbook, they fell by nearly 10% to 886.4m Btu in 2014. The statistical yearbook attributed the export decline in 2014 to maintenance work required at offshore gas fields, including the centralised facilities of the Champion field, Champion Complex 7A, which was shut for 40 days that year after a power failure. The department reported that gas from offshore wells comprised 93% of total production in 2014, or 214,420 boepd, compared to 17,300 boepd of onshore production. The EIA reported that the Sultanate exports roughly three-quarters of production on average, although rising domestic consumption and declining production has put a dent in exports in recent years. According to the agency, Brunei Darussalam exported about 317bn cu feet of gas in 2015 – a marked improvement over the 11% drop to 300bn cu feet of exports recorded between 2013 and 2014, though still not enough to offset the impact of contract changes and rising domestic demand.
Domestic Demand
Unlike the EIA, the statistical yearbook 2014 reported that only 10.2% of produced natural gas is consumed domestically, although domestic power consumption has risen sharply in recent years, also reporting that electricity consumption rose by 5%, 5.5% and 2.3% in 2010, 2012 and 2014, respectively. A 2014 report published by researchers at the University of Brunei Darussalam estimated that domestic consumption rose by an average of between 7% and 10% during the 2000s, making reduction of domestic consumption a priority for the government. To this end, the government’s 2014 “Energy White Paper” envisions development of new renewable energy projects to offset rising domestic LNG consumption, in addition to reducing energy intensity in the years to 2035.
Shifting Dynamics
Although new production and investment in a modern fleet will certainly help the Sultanate maintain and increase exports in the coming years, the LNG market of 2016 is far more dynamic than in previous years – new production from Australia and the US is increasing competition, while export revenues have been further challenged by declining LNG gas prices, which followed oil’s 21-month tumble between June 2014 and February 2016. LNG spot prices in Japan fell nearly 60% between March 2014 and December 2015, according to Reuters, from $18.30 per million Btu to $7.50 per million Btu. Although new long-term contracts signed in 2013 have provided a modicum of insulation against these price shocks, these contracts were for shorter terms and lower volumes, leading Brunei LNG to sell to other buyers, seek short-term contracts and sell more of its supply through spot cargo sales.
Upgrades & New Production
Although shifting contracts and falling prices have dampened near-term export revenue growth forecasts, ongoing upgrades and new investment in both the upstream and downstream natural gas industries, in addition to deals with new Asian partners, will enable the country to meet rising regional demand. In July 2015, for example, BGC, a majority state-owned enterprise in which Shell Gas and Diamond Gas Carriers each hold a 10% stake, took delivery of a 154,800-cu-metre LNG transport vessel, the Amadi. The Amadi joins sister vessel the Amani as the second tanker to join BGC’s five-strong fleet since November 2014, and the last in an upgrade to class-A vessels, which replaced the older class-B fleet owned by BST. Both were constructed by South Korea’s Hyundai Heavy Industries as part of a $350m contract. Production is also set to regain traction in 2016 after the successful development of the Maharaja Lela deepwater offshore oilfield, which saw its third deepwater well begin production in August 2015.
New Partners
With the LNG market expected to become increasingly splintered and competitive in the coming years, deals with new regional also offer Brunei Darussalam the opportunity to maintain exports as production from the Maharaja Lela field comes on-line. In 2013 Brunei Darussalam signed a 10-year contract with Malaysia’s national oil company, Petronas, moving in the same year to take a 3% stake in Petronas’ Canadian shale gas assets and its proposed Northwest LNG facility, as well as a 3% share of the facility’s LNG production for a minimum of 20 years. In the same year Brunei LNG began sending spot cargoes to other Asian consumers including India, China and Taiwan. Adding customers to its export base will likely become increasingly critical for Brunei Darussalam in the coming years, particularly as Japan continues diversifying its LNG supply in a bid to reduce concentration risk, according to a 2015 report by Risco Energy. The same report found that by 2035, 50% of global gas net imports would be to Asia, meaning the continent will trump Europe as the world’s primary gas importer during the 2020s, while analysts from EY forecast in September 2015 that ASEAN LNG demand will grow five-fold over the next decade. This leaves the Sultanate well-positioned to capitalise on its geographic proximity, deep history and expertise in LNG development and rising domestic output.
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