The extraordinary wealth of Brunei, the world’s fifth richest nation, has largely been derived from the country’s oil and gas industry. But with oil production slowing, and questions over the size of the remaining reserves unanswered, Brunei is seeking to reduce its reliance on fossil fuels and develop a more diverse economy.

Brunei has big ambitions. Under its ‘Wa­wasan Brunei 2035’, or National Vision programme, it plans to transform itself, over the next two decades, from a country almost wholly dependent on the oil and gas sector to a regional trading and financial hub – a mini Singapore with an enterpris­ing, knowledge-based economy. “We seek to diversify our economy by promoting in­vestment, increasing food self-sufficiency, encouraging opportunities for women and maintaining high standards of governance in public and private sectors,” says Sultan Haji Hassanal Bolkiah, king and prime minister of Brunei.

Just how realistic that vision is and how far Brunei is along the path to achieving its goals is open to question. A quick look at Brunei’s economic statistics would seem to indicate that the outlook for this small South-East Asian nation on the coast of the island of Bor­neo is rosy. The oil and gas industry has put the country and its 400,000 citizens among the world’s richest nations (fifth according to surveys by the IMF and Forbes), with average GDP per capita of around $48,000.

Economic growth has been steady, if not spectacular, with a 2.6 percent rise in GDP in 2011 and a similar rise predicted for 2012. On top of this, Brunei has plentiful foreign exchange reserves, the Brunei dol­lar – pegged to the Singapore dollar – is sta­ble, inflation is low and, perhaps most envi­able of all, there is no personal income tax.

Despite the relative strength of Brunei’s financial position, the economy is not with­out its problems.

Reliable and up-to-date figures are not always obtainable, but the latest data indi­cates oil and gas together account for more than 60 percent of Brunei’s economy and about 95 percent of exports in revenue terms. Meanwhile, almost all manufactured goods – and more than 90 percent of the country’s food needs – are imported.

The economy is dependent on the vaga-ries of the international oil and gas market and has see-sawed with the ups and downs of the world economy. Following the global financial crisis of 2008/09, Brunei’s GDP fell by 1.9 percent in 2008 and 1.8 in 2009, before bouncing back to expand by 4.1 per­cent in 2010.

To some extent, the country has but­tressed itself against the more extreme downturns in global energy demand by forging long-term supply contracts with various countries and industrial entities. It has long-term Liquefied Natural Gas (LNG) agreements with Japan and South Korea, with a continuous stream of LNG giant tankers circling between Brunei and its trading partners to the north. Other LNG supply contracts could be signed with Tai­wan, India and China. Japan, which shut down the majority of its nuclear power plants in the wake of the March 2011 tsu­nami, has expressed a desire to up its LNG imports from Brunei. The bulk of Brunei’s oil exports also go to countries in the Asia region.

An over-dependence on the oil and gas sector is not considered healthy in the long run. “Brunei’s long-term challenge is to make the economy less dependent on oil and gas,” said a recent report by the Asian Development Bank. So far, efforts to diver­sify have met with only limited success. As with many oil-rich economies, there is often little incentive to nurture home-grown products and industries when there are plenty of funds being generated by the energy sector to pay for imports. A bloated bureaucracy – the public sector is esti­mated to account for at least 60 percent of employment in Brunei – is largely blamed for inefficiencies in the system and for dis­couraging enterprise and local and foreign investment.

Diversification is not only about safe­guarding Brunei’s economic future. While the government does not issue overall unemployment statistics, it stresses the urgent need for more native Bruneians to be actively employed in various areas, in­cluding the energy industry – traditionally dominated by the Anglo-Dutch Shell con­glomerate and large numbers of expatriate workers. However, the domestic skills base is still inadequate and the uptake of tech­nology lags well behind many of Brunei’s fellow ASEAN members. At present, only a small percentage of the local workforce is directly employed in the energy sector.

There have been some notable achieve­ments, however. A number of large petro­chemical and industrial projects are either being implemented or considered, with the aim of adding value to the energy sector. And recently there’s been some progress in cutting red tape and making Brunei more open to foreign enterprises and investment.

The government is also cutting back state control in some areas, and a number of subsidies have been reduced. Parts of the economy, including the telecoms sec­tor, have been privatised. The Brunei In­ternational Financial Centre, established in 2000, is slowly making headway, in spite of stiff regional competition. Over recent years, a garment industry has been developed, though local participation has been minimal, with almost all components of the sector, including a large part of the workforce, imported.

In the late 1990s, Brunei’s sovereign wealth fund, the Brunei Investment Agency (BIA), became embroiled in a scandal af­ter its then head, Prince Jefri – the younger brother of the sultan – was accused of mis­appropriating an estimated $15 billion worth of state funds. The BIA – seen as key to safeguarding the benefits of energy revenues for future generations – has since been re­organised and is now believed to have ap­proximately $40 billion under its control, with investments in projects throughout the world. Among such ventures is a cattle farm in Australia that covers an area bigger than Brunei itself, though it’s unclear whether the farm – as with several other Brunei invest­ments abroad – is part of the BIA portfolio or is directly held by the sultan himself.

A particular objective of the sultan is greater food self-sufficiency, especially with regards to rice production. The aim of an agricultural plan announced in 2009 is to derive 60 percent of its rice needs by 2015 through rapidly expanding lands under cul­tivation. The target is unlikely to be met, however, as the majority of Brunei’s land surface is taken up by tropical rainforest and there is only limited land suitable for growing crops. Also, there are few workers available to till the soil: recent years have seen large numbers of people moving out of rural areas – nearly 80 percent of Brunei’s population now lives in urban centres.

Perhaps the biggest question hanging over Brunei’s economic future is how long its fos­sil fuel reserves will last. While no official figures are available, oil production, which at present stands at about 160,000 barrels per day, has been falling in recent years. The gov­ernment, while clearly indicating that it wants to lessen economic dependence on the energy sector, is nonetheless bullishly pressing ahead with expansion plans, possibly encouraged by the 2009 settlement of a long-running off­shore territorial dispute with Malaysia, which could lead to more areas being opened for exploration. A long-awaited Energy White Paper issued late last year revealed plans to more than triple energy production over the next two decades, creating what it says will be thousands of jobs in both upstream and down­stream activities.

“Brunei’s economic policy is being tugged in two directions,” says a Singapore-based economist. “It clearly sees the need to diver­sify and lessen its dependence on the fossil fuel sector, for all sorts of economic and so­cial reasons. But then with oil and gas prices looking as though they’re on a more or less permanent upward trajectory, you have to be very determined to change direction.”