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Oil Prices Gain 2% on Tightening Supply

Tiny Oil Kingdom Brunei Moves To Diversify From Oil

Brunei is notorious for its oil riches, which are disproportionately huge for its tiny size of 2,200 square miles (and a population of less than half a million), and for the fact that its sultans are among the world’s wealthiest individuals thanks to these riches. Yet, the latest price rout in oil has forced Brunei, like other major producers, to start thinking about moving away from oil.

To date, Brunei is the fourth-largest producer of crude oil in Asia, pumping 126,000 barrels daily in 2014, with around 90 percent of budget revenues coming from the energy industry. Oil revenues also contribute as much as 60 percent to GDP. With the price of crude on international markets slumping to below US$30 by this January, Brunei has found it increasingly difficult to cope with this dependency.

After decades of low or no taxes, free education and subsidized housing, the locals – the majority of whom are employed by the public sector – will find it equally difficult to adjust to a new era of cheap oil. To avoid angering them, the government has been slow to introduce public spending cuts necessitated by the new oil price environment and the recession that has held Brunei in its grips since 2013.

The time has been ripe for a change and, with a somewhat unexpected foresight on the part of the government, the seeds of this change were sowed eight years back with Brunei’s Vision 2035 plan. The plan places a major focus on infrastructure projects as a driver for GDP, as well as an emphasis on the financial sector.

Brunei is already among the leading issuers of sukuk – the Islamic bonds that are enjoying growing international interest. According to the Oxford Business Group, sukuk is likely to gain further attention in an increasingly uncertain financial world that’s still dealing with the fallout from the 2008 crisis. In such an environment, Brunei could be well placed to make the best of its double focus on finance and infrastructure, seeing as sukuk bonds are often used for infrastructure projects in emerging economies in Asia.

But what about oil? Prices will sooner or later recover, or so say most oil market analysts. Demand will improve, and it will be driven by Asian economies, they say. Would Brunei be able to get its share of this new demand?

Related: The End Of The Petro-State Era

Unfortunately for the kingdom, its oil reserves are nearing depletion. Offshore drilling in the country’s waters is economically unviable for the state. So, for Brunei, a diversification away from oil is even more urgent than for Saudi Arabia or Russia. Since complete independence of the energy industry is impossible, Brunei has turned its eyes to China.

Asia’s largest economy has been pushing for control over the oil and gas of the South China Sea for a while now. It’s been wrangling with its neighbors there (aside from Brunei, these are Vietnam, the Philippines, Malaysia, and Indonesia) and insisting that these disputes are settled directly between the countries involved rather than by an international body such as the UN Permanent Arbitration Court, which is due to rule on one such dispute, with the Philippines, any day now.

Related: Is America’s Vision for Renewal Energy a Mirage? 

Surrounded by what it deems enemies in the South China Sea, Beijing has reached out to Brunei, offering it production-sharing options for the South China Sea plus other economic incentives in exchange for Brunei’s support for its claims. With few alternative options, Brunei has accepted.

If the kingdom stays on the course of diversification, and with China’s backing to count on, it could gain more regional importance over the next few years and beyond as Asia continues to spearhead global economic growth at the expense of Europe and North America. What Brunei will do with this importance remains to be seen.

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By James Burgess of Oilprice.com

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