U.S. INVESTMENTS IN BRUNEI: ONE STILL ON THE LINE,

C O N F I D E N T I A L SECTION 01 OF 02 BANDAR SERI BEGAWAN 000044

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/31/2018
TAGS: EINV ECON EPET BX
SUBJECT: U.S. INVESTMENTS IN BRUNEI: ONE STILL ON THE LINE,
ONE GETS AWAY


Classified By: Ambassador Emil Skodon, reasons 1.4 (b) & (d)

--------------
SUMMARY
--------------


1. (C) Alcoa remains bullish on Brunei as a site for a large
aluminum smelter that will help meet growing Asian demand.
The project's ultimate fate will depend on whether Brunei and
Malaysia can reach a resolution of an offshore boundary
dispute that would allow development of new gas reserves to
provide power for the smelter. Brunei is out of the running
for another major U.S. investment, establishment of a Google
data service center. Although Google's requirements could
have been met, the reluctance of risk-averse Bruneian
officials to provide written commitments to Google sunk the
project, which may go to neighboring Malaysia. END SUMMARY.

--------------
ALUMINUM SMELTER PROJECT STILL ALIVE
--------------


2. (U) U.S. company Alcoa and the Brunei Economic
Development board (BEDB) signed a one-year Memorandum of
Understanding on January 30 to facilitate detailed studies on
establishment of an aluminum smelter in Brunei. This MOU is
the successor to two previous MOU's signed in 2003 and 2005
that gave Alcoa exclusive rights to develop the smelter
project. Alcoa and BEDB also signed a separate MOU to
support a youth and small business development project at the
Youth Development Center operated by the Ministry of Culture,
Youth, and Sports, a measure designed to help build a wider
supplier base for the proposed smelter as well as to raise
Alcoa's visibility and public standing in Brunei. Jon Erik
Reinhardsen, President of Alcoa's Global Primary Products
business unit, represented the company at both signing
ceremonies.


3. (U) Phase one of the smelter MOU envisions a study to
determine, inter alia, the optimum scope and dimensions of
the proposed smelter, a power-delivery strategy, and
associated port and infrastructure requirements. Following
phase one, the parties to the MOU will decide whether to move
forward with a full environmental and social impact
assessment and basic engineering design work. The company
envisages a smelter with production capacity of 360 thousand
metric tons per year with the potential for an eventual
increase to 600-700 thousand metric tons.

-------------- --
RESOLUTION OF OFFSHORE BOUNDARY DISPUTE CRUCIAL
-------------- --


4. (C) Ambassador attended the MOU signing and subsequent
lunch. BEDB officials told Ambassador privately that the
fate of the smelter project ultimately depends on resolution
of Brunei's offshore boundary dispute with Malaysia, which
will determine Brunei's scope for developing potentially very
large offshore gas deposits. That is because the Sultan has
decided that only one trillion cubic feet (TCF) of current
gas reserves will be allocated to industrial development
projects sponsored by the BEDB, with the remainder reserved
for liquefied natural gas (LNG) exports. Approximately one
half of that one TCF is already dedicated to the methanol
project to be constructed by Mitsubishi, and the remainder
will not be enough to meet the needs of a power-hungry
smelter. Unless sufficient alternative energy sources other
than gas can be identified, which does not appear likely,
BEDB access to the additional gas thought to lie in the
offshore disputed zone will be the make-or-break factor for
the smelter.


5. (C) Alcoa officials who spoke with Ambassador agreed with
the view that resolution of the offshore dispute with
Malaysia would be a key factor in their ultimate decision
whether to move ahead with the smelter. Despite this
uncertainty, and the difficulty of dealing with the slow pace
and opaqueness of Bruneian decision-making, Alcoa remains
committed to the project. The company envisions global
demand for aluminum doubling by the year 2020, with much of
that growth coming from China and India. It believes that
Brunei's location, roughly equidistant from those two markets
and the western Australian source of Alcoa's alumina inputs,
make it an attractive site for a major smelter investment.


6. (C) Both Alcoa and Bruneian officials are relatively
optimistic that the long-running offshore boundary dispute
may be settled this year, based on reports that confidential
negotiations between the two ASEAN members are going well.
Bruneian officials told Ambassador that they did not expect
any announcement of a resolution until after Malaysian
elections, but that they hoped such an announcement could be

BANDAR SER 00000044 002 OF 002


made later this year.

-------------- --
GOOGLE INVESTMENT LOST DUE TO BRUNEIAN TIMIDITY
-------------- --


7. (C) The optimism of Bruneian officials over eventual
resolution of the offshore dispute with Malaysia contrasted
with their discouragement over another investment-related
issue involving the Malaysians: establishment of a southeast
Asian data center by U.S. internet giant Google. Referring
to Malaysian Science and Technology Minister Jamaludin's
remarks at the World Economic Forum in Davos to the effect
that Malaysia had a good chance of winning this investment,
BEDB officials told Ambassador that in fact Malaysia had only
made Google's short list, and the company still needed to
make a final decision on the data center site. They went on
to explain ruefully that the reason they knew this
information was that Brunei had failed to make that short
list despite extensive BEDB efforts.


8. (C) According to BEDB, the problem was that Bruneian
officials refused to provide written commitments that they
could guarantee the supply and price range for electricity
required by the data center. In fact, there was no doubt
that Brunei, with its large oil and gas reserves, good
infrastructure, and subsidized prices, could meet the
requirements; the obstacle was that the relevant officials
were afraid to put such a commitment to paper unless it was
first explicitly approved by the Sultan, and no inter-agency
mechanism existed for BEDB to force them to do so. Their
timidity ultimately resulted in Brunei falling out of the
running for an investment that would have been worth several
million U.S. dollars and created 100-200 well-paying jobs in
a high-tech industry.
SKODON