Moving Away from Oil: How Can Brunei Diversify its Economy?

Posted by Written by James Fox Reading Time: 5 minutes

Brunei is heavily dependent on its hydrocarbon resource wealth, which provides more than half of the nation’s income. The government has highlighted its concerns about the nation’s oil dependence, which leaves it vulnerable to economic shocks. Brunei sees diversification as integral to its economic development and has outlined plans to reduce oil dependency and develop other industries.


Hydrocarbon revenues almost entirely support Brunei’s economy. In fact, the petroleum sector accounts for over half of the country’s gross domestic product (GDP). The Sultanate, which is home to some 444,000 people, produces approximately 127,000 barrels of oil per day (B/D) and 243,000 B/D equivalents of natural gas per day – the vast majority of which is exported. Although relatively small compared to other countries, these figures are sizeable when compared to Brunei’s population. While oil and gas revenues mean Brunei has one of the highest per capita incomes in Asia, its dependency on a single commodity also means that it is subject to market fluctuations.

What is Brunei doing about its resource dependency?

Brunei’s government has attempted to diversify the economy away from hydrocarbons since the late 20th century. This has included policies and initiatives introduced to develop other sectors, such as agriculture, fisheries, tourism, and financial services. However, to date, these initiatives have failed to see Brunei’s economy truly diversify away from oil and gas.

In early 2021, the government released a fresh blueprint for achieving economic growth, primarily through diversification away from oil. The document outlines the path towards more meaningful and high-value employment opportunities while looking at ways to implement the latest technologies. Five priority sectors have been targeted for growth: downstream oil and gas, food, tourism, information & communications technology (ICT), and services.

The non-oil and gas private sector grew 2.6 percent on average since 2010. However, the government is hoping to enhance this growth, calling on Bruneian-owned businesses to be ambitious and drive growth through collaboration and by exploring new market opportunities. The state wants to see indigenous businesses become more internationalized and has outlined measures to help achieve this. Growing businesses should be a vehicle to reduce unemployment. In 2019, the private sector accounted for less than half (49.5 percent) of employment. The public sector accounted for 50.5 percent of employment.

More broadly, the government wants to ensure the Brunei workforce is “future ready”, and the country is attractive to foreign direct investment (FDI), which among other criteria, requires high-quality infrastructure and good governance.

Which industries can enhance Brunei’s diversification agenda?

Certain industries are more likely to deliver greater in-country value. These industries typically employ larger numbers of people, pay greater salaries, and have a considerable number of linkages to the wider economy.  

Tourism

The sector can provide thousands of jobs and bring in capital from abroad. It also creates a sense of cultural exchange between foreigners and citizens. However, the industry is often cyclical in countries where tourism is partially dependent on the weather or seasons. Brunei boasts beautiful beaches and protected rainforests.

Finance

The finance industry creates thousands of high-paying jobs. It can also have broader benefits, including enhancing globalization and increasing local access to finance. The UAE, namely Dubai, has established itself as one of the world’s top financial centers, something that might have been difficult to imagine fifteen years ago. Brunei can follow this blueprint.

High-tech manufacturing

There can be some crossover between manufacturing inputs for oil and gas, and broader high-tech manufacturing operations. High-tech manufacturing operations create well-paying jobs and more broadly, the industry enhances local skills and capabilities. Initiatives, such as free zones, are important to the development of these industries.

Logistics

Brunei could be well-positioned to become a logistics hub, although the region is already home to a reputed few like Singapore and Hong Kong. Brunei has a national carrier airline and significant maritime capabilities. Sitting on one of the busiest waterways in the world, and in a fast-developing part of the world, Brunei could become a trade entrepot or new logistics hub. 

Diversification strategy: Creating linkages and complementary industries

Linkages refer to economic connections between the leading sector, in this case, the hydrocarbon industry, and other parts of the economy. Forward linkages include the processing of hydrocarbons. Downstream operations can deliver more employment opportunities and increase in-country value from the leading sector. Brunei has several downstream operations in-country.

A methanol plant has been operational in Brunei since 2010, while the multi-billion-dollar Pulau Muara Besar (PMB) Refinery and Petrochemical Plant opened at the end of 2019. Phase one of the PMB refinery commenced operations with a crude oil refining capacity of 175,000 B/D.

A fertilizer plant with a production capacity of 1,365,000 MT of urea per year also commenced operations in early 2022. Oil industry by-products are used as a component to make commercial fertilizer. Local media suggest that the plant would employ some 500 people – primarily for local people – while providing greater in-country value. The facility is one of the largest fertilizer plants in the Southeast Asian region.

With regards to backward linkages, i.e., those which relate to the supply of inputs for resource extraction, Brunei, like many oil-rich nations, has introduced its own localization policies. The Local Business Development framework gives preference to indigenous companies in their contracting activities. Equipment or services from overseas must also be supplied through a local agent or distributor.

Industrial capacity and skills associated with oil and gas can aid the development of other industries. For example, the UK’s North Sea oil industry necessitated a highly developed maritime industry, which in turn proved important to the development of Britain’s offshore wind energy sector. However, while it has been suggested that Brunei will develop offshore wind capacity, this is yet to happen. The country has not readily adopted green energies. Brunei intends to increase sustainable energy generation, yet, only 0.05 percent of the power generated came from renewable sources in 2020. The government hopes to meet 30 percent of its overall power generation mix with renewable energy by 2035. Brunei’s green energy journey started in 2011 when the 1.2 MW Tenaga Suria Brunei photovoltaic power plant was opened. It can power 200 houses.

No proven strategy for economic diversification

Many resource-rich nations have attempted to reduce their reliance on hydrocarbon revenues. However, most diversification strategies have failed. In fact, there is no proven method or blueprint for diversifying away from hydrocarbon dependency. The UAE and Saudi Arabia represent two hydrocarbon-rich nations that have invested considerably in diversification efforts. Despite the UAE appearing like a modern and economically diverse state, approximately 30 percent of the nation’s GDP is directly based on its oil and gas output.

While Brunei has made significant progress to diversify its economy, it will require years of investment and policy developments to create a variety of internationally competitive industries, strengthen the economy to external shocks, and provide more high-value employment opportunities.

Further Reading


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