Brunei's Dependence on Oil and Natural Gas

and its Dependence on Oil and Natural Gas
Brunei

Situation Problem Solutions Conclusion
History of Brunei
Pre 1400s:
Chinese Settlement
14th – 16th Century:
Sultanate Ruled
Borneo & South Philippines
Loss of power with
Arrival of Europeans
Bruneian Empire
1888-1984:
British Protectorate

Brunei: A Neo-Traditional State
Hassanal Bolkiah
Sultan of Brunei
Absolute
Monarchy
Prominent Royal Family
with control of natural
resources
The King’s Dilemma
Rely heavily on
lavish welfare
& subsidies
build platform on
religion, tradition,
culture and etc.

Brunei: What is the Problem?
After 22 years,
Oil will run out……
After 30 years,
Natural Gases will run out……
How can a country so reliable on
oil survive in the future?

Possible Solutions
Islamic Financial Hub
Tourisms
Real Estates
Pioneering
Industries
Construct Comprehensive Banking System
Strengthen Financial Reservez
Increase & Improve Human Capital
Attract Foreign Direct Investment
Emphasize Energy-related Services

Solution Plan
01 Attract FDI
02 Strengthen Reserves & Infrastructure
03 Become a Financial Hub
Human Capital
04
Independent Authority
05
Continuous

Attract FDI Financial Reserves Human Capital Authority
Attract Foreign Direct Investment
895,000,000
0
200,000,000
400,000,000
600,000,000
800,000,000
1,000,000,000
1,200,000,000
1,400,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
FDI net inflows (US$)
 Rising Trend, once peak in 2011
Data from the world bank

Current FDI in Brunei
Attract FDI
11
FDI Projects
$6.9
billion
2462
jobs
70%
by locals

Why do we have FDI？
Globalization
Free Flow of Capital
Improvements in
Balance of Payment
Resources Stimulating
Economic Growth
Rise in
Corporate Activities
Rise In
National Income

Barriers to FDI
Corruption
Complex Screening
&
Approval Process
Ineffective Intellectual
Property Law
Restriction on Foreign
Ownership of Land
Transition into Sharia
law- strict punishment,
restrict on human rights

What can Brunei do?
Government
 Provide fiscal incentive
 Provide long term land
lease to foreign investors
 Upgrade its Intellectual
property rights
 Reduce corruption and
encourage transparency
Industry
 Financial & energy-related
service
 Business
 ICT infrastructure
 Lifetime Learning
 Transport & logistics
Infrastructure

Solution Plan
01 Attract FDI
Legal Construction
Continuous

Construct Comprehensive Banking System
Legal Aspect
2004
New Institution
Semi-democracy: higher investment security
Revival of Legislative Council
2011
Monetary Authority
Autoriti Monetari Brunei Darussalam (AMBD)
- Financial Intelligence & Enforcement Division
Now
Future
Establish Competitive reserve requirement, interest
rate ceilings, capital controls and Low Taxation

Solution Plan
01 Attract FDI
Legal Construction
Supporting Banking System
Continuous

Banking System
Basel
I
Basel
III
Effective from 2010
Capital Requirements
Basel
II
Strengthen Capital Requirements
Improve Ability of Absorbing Loss
Short/Long-term Funding
Key Components for Pillar 1
 Common Equity Tier 1 ratios:7%
 Required capital conservation buffer: 2.5%
Leverage Ratio: 5%z
Liquidity Requirements
 LCR: 100% & NSFR:100%

Basel III Requirements – Target by 2019
Achieved Not Achieved
Leverage ratio
Liquidity Requirements
 LCR
 NSFR
 Common equity Tier 1
 Total risk-based capital
 Required capital
conservation buffer

Solution Plan
01 Attract FDI
Legal Construction
Continuous
Investment of Reserves

Improvement of
Human Capital
Construction of
Marketplace
Construction of
Business District
Infrastructure

Solution Plan
01 Attract FDI
Legal Construction
Market for Hedging
Continuous
Hub for Energy-related services

Become a Financial Hub
 Long experience in oil trading
 large number of existing export markets
Volatility in oil prices in past 15 years:
2001
$20/barrel
2009
$30/barrel
2008
$170/barrel
Reasons
Increased demand from China and India
Instability in Middle-East since Arab Spring
Diverging global prices in expenses of East Asian countries competitiveness

Two Major Components
Non-Islamic Hedging Islamic Hedging
Through Brunei Banks
Organized Futures Market
Energy commodities
Speculation through derivatives
Liquidity through offsetting
Minor Marginal Deposits
Risk Management
Maqasid ash-shari-ah
First-mover Advantage
Japan, China, UK

Islamic Hedging
Situation
Risk Dilemma
Gharar Principle
Money Making
Owning Full Contract
& Leasing
Buying contract at
full price & selling
back in instalments
Unbundle & repackage
of risks
Conditions for Hedging
Inevitability
Likelihood of Failure
Causality

Reducing and managing costs for the purchase and
delivery of natural gas, electricity and propane
Monitoring of Cost Reduction Plans
 assure clients are receiving what promised
Providing procurement and auditing services
Reducing transaction costs by data upload services
Investing in U.S. energy sector to help arbitrage prices
Expanding sources, flexibility and enlarge the market

Solution Plan
Improve
Increase
Human Capital
04Continuous
01 Attract FDI
Legal Construction
Market for Hedging

Increase & Improve Human Capital
30.3 28.2 26.2 25.32
66.7 68.6 70.2 70.4
2.9 3.2 3.6 4.28
0
20
40
60
80
100
120
2000 2005 2010 2014
Percentage(%)
Year
Age Distribution in Brunei
65+
15-64
0-14
Total Population(2014): 426,000
Population Growth Rate: 1.34%
Fertility Rate: 2.01%
Adult Literacy Rate: 95.39%
Tertiary Enrolment Rate: 24.34%
Type of School No, Studen
t
Teache
r
Primary Education 200 31179 3258
Secondary School 38 34637 4018
Professional
Technician School
11 3283 597
University 6 6179 654
Problem: Insufficient Labour Force to meet the
demand for expertise required by Brunei’s
development into a financial hub
Complication: Insufficient Labor Force to meet the
demand for expertise required by Brunei’s
development into a financial hub

Develop Plan of Human Capital
Long-term: Improve
Short-term: Increase
 Improve Working
Environment
 Develop own World Class
Human Capital
 Promote Lifetime Learning
 Redefine Labor Relations
 Professions Admission
Scheme
 Welfare for Expertise's
 Studying Aboard Subsidizing
Program
 Increase MNCs

01 03 0402
Professions Admission
Scheme
Prerequisite:
 Age & Education
 Financial ability
 Expertise/
Achievement
 Language
Proficiency
Welfare for Expertise's
 High Salaries
 Allowances
 Free Living
Studying Aboard
Subsidizing Program
 min. of 3-5 working
years after graduation
Increase MNCs
 Bring in foreign
experts
 Attract
professionals
Short-Term: Increase

Long Term: Improve
World-Class
Human Capital
 Branch school of
int’l university
 Int’l School
Redefine
Labor Relations
 Labor Union
 Protection Laws
Improve
Working Environment
 Safety Measures
 Atmosphere & culture
Lifetime
Learning
 On-the-job training
 Education Allowance

Solution Plan
Improve
Increase
Human Capital
04
Independent Authority
05
Position in Islamic Hub
Financial / Energy
services
Monetary / FDI
Continuous
01 Attract FDI
Legal Construction
Market for Hedging

Autoriti Monetari Brunei
Darussalam (AMBD)
Financial
Intelligence and
Enforcement
Division
Energy Investment
Division
Islamic Finance
Monitoring Board
Monitory Authority
Monitor & Regulate
Financial Market
Develop & Regulate
Energy-related Services
Maintain and Develop
Relations with other country

Four-tiered Results
01
Sufficient Financial
Reserve by FDI and
past energy revenues
Complete
Infrastructure &Human
Capital
03 Trading Market
04 Hub for Energy-
related
Services

Brunei's Dependence on Oil and Natural Gas

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