BRUNEI KEEPS THE OIL TAPS WIDE OPEN

C O N F I D E N T I A L BANDAR SERI BEGAWAN 000630

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/13/2016
TAGS: ECON EPET BX
SUBJECT: BRUNEI KEEPS THE OIL TAPS WIDE OPEN

REF: BANDAR SERI BEGAWAN 195

Classified By: Ambassador Emil Skodon, Reasons 1.4 (b) and (d)


1. (C) SUMMARY: Brunei's oil production and exports look
set to reach their highest annual levels in 25 years in 2006,
due to technical advances in offshore fields and a policy
decision by the Government of Brunei (GOB) to maintain
production at the maximum sustainable rate. The GOB has no
pressing need for the resulting financial windfall, since it
already had been earning more than it can spend and is
running healthy current account and budget surpluses. It
apparently decided on a high-production policy in order to
help bring market prices down from the levels seen earlier in
the year and buoy continued economic growth in oil consuming
countries. The GOB probably also foresees lower oil prices
in the future and so has wanted to take advantage of this
year's high price levels while it could. END SUMMARY.


2. (SBU) Brunei's oil production and exports look set to
reach their highest annual levels in 25 years in 2006.
Preliminary data from the GOB Department of Statistics
indicate that production averaged 219 thousand barrels per
day (BPD) in the first half of 2007, and exports 207 thousand
BPD. This represents a nine percent rise in production and
seven percent rise in exports over 2005. Natural gas
production and exports of liquefied natural gas (LNG) also
increased in the first half, but at a lower rate. Gas
production was up five percent to 1.2 billion cubic feet per
day, and LNG exports 3.5 percent to 1.01 billion BTU's per
day. These figures imply that in 2006 Brunei will be the EAP
region's fifth largest exporter of oil and fourth largest
exporter of gas.


3. (C) Technical factors provide part of the explanation for
the increase in oil production. The country's main oil
producer, Brunei Shell Petroleum (BSP),completed several
long-term repair and upgrade projects in 2006, and its
hi-tech Champion West Phase III offshore field, which employs
"smart drilling" technologies such as downhole temperature
sensors and fiber optic cables, began running at full
production of 16.7 thousand BPD. However, the record
production was ultimately driven by GOB policy decisions.
Embassy learned that earlier this year the BSP Managing
Director met with Energy Minister Pehin Yahya to brief him on
the high rate of production and ask if the GOB wanted BSP to
throttle back. Yahya reportedly told BSP to keep pumping oil
at the maximum sustainable rate.


4. (C) The decision to keep the taps open, combined with high
oil price levels in the second and third quarters of the
year, will provide the GOB with a financial windfall.
According to GOB statistics, the average export price for a
barrel of Bruneian oil in the first half of 2006 was USDOLS
71.05, as compared to an annual average of USDOLS 57.72 in

2005. This implies oil export revenues of USDOLS 2.7 billion
in just the first half of 2006 -- two thirds as much as
Brunei earned from oil exports in the entire year of 2005.
Even with the decline in the market price of oil in the
fourth quarter of 2006, overall revenues should remain
strong. The long-term contracts under which Bruneian LNG is
sold typically include pricing formulas that incorporate oil
prices with a three month lag, meaning that the higher oil
prices in the middle of 2006 will have led to higher prices
for Bruneian LNG in the second half of the year.


5. (C) Comment: Brunei is a "low absorber" that does not
need this extra revenue. According to the most recent IMF
statistics, Brunei ran a current account surplus of 56
percent of GDP in 2005 and is set to go over 60 percent in
2006, and the GOB's primary budget surplus was over 20
percent of GDP in 2005, in part because expenditures reached
only 90 percent of target levels due to an inability to
execute infrastructure projects as rapidly as planned. The
only apparent explanations why the GOB decided to make 2006 a
record year for oil production are that it wanted to do its
part to bring market prices down from the high levels seen
earlier in the year in order to help support continued growth
in consumer economies, and/or it foresaw lower prices in the
future and so wanted to take advantage of this year's higher
price levels while it could.
SKODON