BRUNEI REJECTS GAS CARTEL

C O N F I D E N T I A L SECTION 01 OF 02 BANDAR SERI BEGAWAN 000147 SIPDIS DEPARTMENT FOR EAP/MTS E.O. 12958: DECL: 05/13/2018 TAGS: ENRG EPET ECON PREL BX SUBJECT: BRUNEI REJECTS GAS CARTEL Classified By: DCM Justin Friedman, reasons 1.4 (b) & (d) -------------- SUMMARY -------------- ¶1. (C) In the most definitive statement we've heard to date, Minister of Energy Pehin Yahya rejected the idea of a natural gas cartel along the lines of OPEC, although he acknowledged the concept has strong backing from Russia, Iran, and Qatar. Evolving market conditions are pushing natural gas away from longer term contracts, with five year contracts likely to become the norm according to Yahya. Resolution to Brunei's offshore territorial dispute with Malaysia could come as early as August, which in turn could secure Brunei's next 30 years of oil and gas. END SUMMARY. -------------- NO SUPPORT FOR GAS CARTEL -------------- ¶2. (C) On May 8 the Ambassador, accompanied by DCM, paid a farewell call on Pehin Yahya Bakar, Minister of Energy in the Prime Minister's Office. Yahya told us that Brunei had no intention of spoiling its current good relations with its liquefied natural gas (LNG) customers by supporting the creation of an OPEC-like cartel for natural gas. Yahya said that Brunei would participate in meetings proposed by Russia and supported by the other two major players in natural gas, Iran and Qatar, but he could not see what value such a cartel would add for Brunei. While Yahya believes that the three are serious about forming the cartel, other major LNG exporters like Malaysia and Australia are not supporting it. -------------- SHORTER TERMS FOR LNG CONTRACTS -------------- ¶3. (C) Preparing to leave for Japan for meetings with Brunei's LNG customers, Pehin Yahya told us that rising costs for Brunei LNG production will have to be factored in to future contracts. The global rig shortage and the global shortage of engineering talent, combined with Brunei's and other suppliers' needs to go after higher pressure/higher temperature deposits are driving the rise in gas (and oil) prices as much as or more than current supply and demand fundamentals. This, along with the maturation of the LNG market was driving the industry toward shorter term contracts as more volumes are being moved into spot-market-like arrangements. While Yahya does not see a total shift toward spot market sales for LNG, he expects most contracts, including Brunei's next contracts with the Japanese, to be significantly shorter term, i.e. five years versus the typical twenty years of previous contracts. He said Brunei is selling all its LNG cargoes above its contracted volumes on the spot market, with Japanese firms the major buyers. -------------- TOWARDS AN OFFSHORE SETTLEMENT -------------- ¶4. (C) Pehin Yahya told us that he had accompanied Sultan Hassanal Bolkiah on his trip earlier that week to Malaysia. The visit focused on defense and military cooperation and the issue of the dispute over the two nations' rival claims to offshore oil and gas deposits was not discussed. However, Yahya said that the issue would be discussed in meetings scheduled for August of this year and he had high hopes that some form of settlement could be agreed to then. -------------- COMMENT: EITHER WAY, BRUNEI WINS -------------- ¶5. (C) As a relatively small producer and exporter of oil and gas, Brunei is a price taker and not a market maker. If Russia succeeds in its ambitions to create a GAS-PEC, Brunei can stay out and "free ride" on any price rise such a cartel could squeeze out of the market. That said, Brunei will remain strategically significant as a reliable, market-driven, non-cartel exporter of LNG to our key regional allies of Japan and South Korea. In the medium term, Brunei will need to resolve its dispute with Malaysia and begin developing the offshore fields which most industry experts believe contain most of Brunei's next 30 years of potential gas production and, as Murphy Oil is proving from its development of the same deposit in adjacent, undisputed Malaysian waters, significant oil as well. BANDAR SER 00000147 002 OF 002 SKODON