Houston of Asia: The Singapore Petroleum Industry 9789814377966

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HOUSTON OF ASIA

THE SINGAPORE PETROlEUM INDUSTRY

HOUSTON OF ASIA

TILAK DOSHI

Resource Systems Institute East-West Center Honolulu

..

ASEAN Economic Research Unit Institute of Southeast Asian Studies Singapore

I5ER5

INSTITUTE OF SOUTHEAST ASIAN STUDIES, Singapore

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit. The Energy Project undertakes studies on energy demand situation and supply options including trading opportunities of energy resources and evaluates the various energy and oil security policies in the region. The focus of the project is on ASEAN countries, but the issues are examined in a broader regional and international perspective.

.Jv

EAST-WEST CENTER, Honolulu

The East-West Center is a public, nonprofit educational institution established in Hawaii in 1960 by the United States Congress. The Center's mandate is "to promote better relations and understanding among the nations of Asia, the Pacific, and the United States through cooperative study, training, and research." Some 2,000 research fellows, graduate students, and professionals in business and government each year work with the Center's international staff on major Asia-Pacific issues relating to population, resources and development, the environment, culture, and communication. Since 1960, more than 25,000 men and women from the region have participated in the Center's cooperative programs. Principal funding for the Center comes from the U.S. Congress. Support also comes from more than 20 Asian and Pacific governments, as well as private agencies and corporations. The Center has an international board of governors. Victor Hao Li, East-West Center President, came to the Center in 1981 after serving as Shelton Professor of International Legal Studies at Stanford University. The Resource Systems Institute (RSI) undertakes policy studies on issues related to the economic growth and development of the Asia-Pacific region and on the implications that growth holds for U.S. relations with the region. Research conducted by RSI is grouped under five major programs -Development Policy, International Relations, Energy, Minerals Policy, and Special Studies. The Development Policy and International Relations programs analyze the economic performance of developing Asian countries and examine the effectiveness of their development policies in today's ever-changing and interdependent economic and political environments. The vital role of resource development is stressed in the work undertaken by the Energy and Minerals Policy programs. The Special Studies Program comprises research on rural transformation and marine resource policy. Research and related activities are undertaken by RSI project teams consisting of an international research staff, invited scholars and practitioners, and graduate students. These project teams, working in cooperation with regional research groups, help realize the Center's goals of promoting better relations and understanding among the nations of the region through cooperative study, training, and research. The Energy Program primarily studies large-scale energy systems and the changes in the energy market, with the aim of understanding the factors needed for a stable and resilient supply of energy to the nations of the Asia-Pacific region. Research examines different resource issues of this region, including practical issues of access to resources, resource development, and resource management. There are two main areas of research: ( 1) oil and gas, and (2) coal and electricity.

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1989 Institute of Southeast Asian Studies The responsibility for facts and opinions expressed in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data Doshi, Tilak. Houston of Asia : the Singapore petroleum industry. Published jointly with Energy Program, Resource Systems Institute, East-West Center. 1. Petroleum industry and trade-Singapore. 2. Petroleum refineries-Singapore. 3. Power resources-Economic aspects-Singapore. I. Institute of Southeast Asian Studies (Singapore). ASEAN Economic Research Unit. II. East-West Center. Resource Systems Institute. Energy Program. III. Title. HD9576 S6D72 1989 sls89-56594 ISBN 981-3035-29-3 (hard cover) ISBN 981-3035-32-3 (soft cover) Typeset by The Fototype Business Printed in Singapore by South Wind Production Singapore Pte. Ltd.

CONTENTS

List of Tables Preface Acknowledgements Introduction

1

SINGAPORE: A GLOBAL CITY 1.1 1.2 1.3 1.4 1.5

2

The Historical Experience Openness and Export-Oriented Industrialization An International Business Services Centre Rapid Economic Growth The Political Economy of Rapid Growth

IX Xl Xlll

XV

1

1 2 6 9 13

THE ENERGY ECONOMY OF A CITY STATE

19

2.1 2.2

19

2.3 2.4

The Pattern of Domestic Demand An Overview of the Singapore Petroleum Industry The Economic Impact of Energy Imports and Oil Prices Energy Planning and Policy

35 42 48

CONTENTS

viii

3

4

THE DOWNSTREAM PETROLEUM INDUSTRY

59

3.1 3.2 3.3 3.4 3.5

59 63 68 71 75

THE SINGAPORE REFINERS 4.1 4.2 4.3 4.4 4.5 4.6 4. 7 4.8 4.9

5

The Singapore Spot Market and Trading Enclave The Fuel Oil Futures Contract The Largest Bunkering Port of the World Independent Tank Farms The Petrochemical Complex

The Development of Entrepot Refining in Singapore An Economic Profile of the Refining Industry Refinery Ownership, Capacities, and Technical Configuration Crude Imports and Refinery Throughput Output and Exports of Refined Products The Economics of Refining in Singapore Outlook for Contract Processing Demand Growth and Competition in the Regional Market The Future of Singapore Refining

CONCLUDING REMARKS ON THE DOWNSTREAM SECTOR

Appendix 1: Notes on Data Appendix 2: Singapore Domestic Product Specifications Bibliography

81 82 83 88 93 98 104 109 114 118

125 129 135 137

LIST OF TABLES

1.1 1.2 1.3

1.4 1.5 1.6 1.7 2.1 2.2 2.3 2.4 2.5 2.6

Exports and Imports as a Percentage of GDP, 1986 Net Investment Commitments in Manufacturing by Origin (Excluding Petrochemicals), 1975-87 Cumulative Foreign Investment in Manufacturing by Industry Group: Percentage Distribution of Gross Fixed Assets Gross Domestic Product by Industry, 1960-87, at 1985 Market Prices Transport and Communications, 1970-87 Comparative Performance of Economic Growth and Inflation Balance of Payments, 1970-87 Commercial Energy Consumption and Energy Coefficient: Annual Average Percentage Growth Demand for Major Refined Products, 1980-87 Energy Balance, 1986 Power Plant Development Programme for the Last 1\venty-Five Years Electricity Production and Consumption, 1977-87 Town Gas Production and Consumption, 1977-87

3 4

5 7 8 10 12 22 24 25 29 32 34

LIST OF TABLES

X

2.11

Overview of the Petroleum Industry Major Technical and Support Services Companies for the Offshore Hydrocarbons Industry Oil Trade and Total Commodity Trade Values Estimated Share of Domestic Product Consumption, 1974-82 Electricity Prices by Customer Class

3.1

Current Singapore Storage Tank Capacity

4.1

Companies in the Petroleum and Petroleum Products Industry Percentage Contribution of Petroleum Industry to Manufacturing and GDP Capital Expenditure of Manufacturing Sector and Petroleum Industry, 1977-86 Contribution and Rank of Petroleum Industry in the Manufacturing Sector, 1984 and 1986 Refinery Configuration by Firm and Process Capacity Crude Throughput by Source Spot Processing by Origin of Crudes, April to December 1987 Volume Output of Major Products, 1980-87 Domestic Exports by Product and Destination, 1981 and 1987 Growth in Oil Consumption for World and Major Regions

2.7 2.8 2.9 2.10

4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10

36 40 44 45 52 74 84 85 86 87 92 94 97 99 101 114

PREFACE

In February 1988 the Energy Program of the East-West Center in Honolulu and the Institute of Southeast Asian Studies (ISEAS) in Singapore agreed to undertake a joint research project. The goals of the Joint ISEAS and East-West Center Energy Project are to develop a data base and conduct analyses on key aspects of the energy economies of the Asia-Pacific region and its major constituent nations. A further purpose of the Project is to utilize the expertise of the Energy Program at the East-West Center for the development of a research capability within ISEAS with respect to major aspects of energy supply and demand of the region. It is fitting that one of the first outcomes of the Joint Energy Project is the publication of Houston of Asia: The Singapore Petroleum Industry by Tilak Doshi. The "Houston of Asia" is an apt metaphor that captures Singapore's dominating regional role as provider of petroleum refining, blending, and storage services, exporter of petroleum products, port of call for bunker and jet fuels, and spot market for the Asia-Pacific petroleum trade. Singapore, in short, is at the very heart of the web of linkages that constitute the Pacific Basin's oil economy. As the author points out in his introduction to the monograph, the industry has received scant academic attention despite the scale

xii

PREFACE

and importance of its activities. To be sure, the subject is both prominent within and well covered by trade and business journals catering to the "East of Suez" information needs of the world petroleum industry. Yet the Singapore petroleum industry has remained an almost mythical creature, the detailed understanding of which it seems is the special province of an elite of expatriate oilmen "who deal in the stuff" and some senior officials in government. The author, a Singapore national who is sponsored by ISEAS and currently pursuing his research interests with the Energy Program at the East-West Center, is appropriately a young economist associated with neither industry nor government. This study represents the first attempt at a comprehensive survey of the Singapore petroleum industry. It constitutes an initial step in what we hope to be a continuing and independent research interest on one of the region's most strategic industries. Given the serious lack of official data on most aspects of Singapore's energy economy (a state of affairs not shared by most other countries at a comparable stage of development), this monograph is a spirited attempt to fill a gap in both description and analysis. It is hoped that with a wider and more mature understanding of the needs of the Singapore oil industry, a process in which this book may play a modest part, a more open approach to information dissemination will be pursued by both government and industry with regard to the country's energy economy. February 1989

Fereidun Fesharaki Leader Energy Program Resource Systems Institute East-West Center Honolulu

ACKNOWLEDGEMENTS

I am very grateful for all the help I have received in many ways from a large number of people. I am much indebted to Dr Fereidun Fesharaki, Leader of the Energy Program at the East-West Center, whose supervision and incisive comments did much to clarify my approach to the subject. In particular, Dr Fesharaki made available confidential industry sources of information, sources without which this work would not have been possible. I am grateful to Professor K.S. Sandhu, Director of the Institute of Southeast Asian Studies (ISEAS), for having made it possible for me to further my research interests in energy economics, one outcome of which has been the writing of this book. I am also thankful for all the help bestowed upon me by several members of the Energy Program at the East-West Center including Dr David Isaak, Mr David Friedley, Mr Tom Wilson, and especially Dr Lisa Totto. Mr Alan Troner, an oil journalist now based in Singapore, provided a much appreciated source of detailed commentary. The assistance of Dr Shanker Sharma, Co-ordinator of the Joint Energy Project at ISEAS, is much appreciated. I am particularly grateful to several industry officials in Singapore who provided confidential information and who would prefer remaining anonymous. The untirir1g administrative and secretarial help of Gayle Sueda and Jane Smith-Martin is gratefully

xiv

ACKNOWLEDGEMENTS

acknowledged. Finally, my wife Ann, and our children Isba and Subhash, graciously provided distraction, an ingredient that few authors can do without and for which this author is most indebted. None of these individuals are responsible for the errors as well as the views and conclusions expressed in this book.

INTRODUCTION

Singapore may deservedly be called the "Houston of Asia" in that its petroleum-related activities have placed the country at the heart of the Pacific Basin's energy economy. Singapore's refineries collectively constitute the world's third largest refining centre, after Rotterdam and Houston. The country's oil trading links extend from the Persian Gulf across to Northeast Asia, and from Australia to the U.S. West Coast. The Singapore spot market, focal point of oil trade in the Asia-Pacific time zone, has made Singapore-quoted prices the bench-mark for the region's petroleum transactions. In February 1989, the Singapore International Monetary Exchange (SIMEX) will have launched its High Sulphur Fuel Oil contract, the first petroleum futures instrument east of Suez. Singapore, the world's busiest port of call, also ranks as the world's largest fuel oil bunkering centre. It is one of the largest builders of offshore drilling rigs and the region's most comprehensive and competitive base for repair, maintenance, and logistics services for the offshore oil and gas industry. The country's petrochemical complex, although modest in scale by world standards, is an important exporter of ethylene-based products in the region. Other petroleum-related activities include independent petroleum storage and blending, brokerage of shipping services and marine insurance,

xvi

INTRODUCTION

warehousing of equipment and supplies, and the manufacture of parts and components for the petroleum sector. The Singapore petroleum industry has received little academic attention despite its scale and importance with respect to both the domestic and regional economies. To date, there has not been a single comprehensive study published on the subject. The lack of industry-specific data and the confidential nature of many of the details of industry operations are undoubtedly part of the explanation. Description and analysis of various aspects of the Singapore petroleum sector are confined to trade and industry journals and the odd essay by observers in business publications. Consultants' reports and in-house studies conducted by large multinational oil companies and other industry participants, usually the best sources of oil industry data in Singapore, are naturally restricted to clients and proprietary parties. While much of the publically available information is journalistic and piecemeal, official statistics are seriously inadequate and yield only the barest outlines of an industry that is at once complex and undergoing rapid changes. This book is conceived of as an initial step in an ongoing research programme on one of the region's most dynamic and strategic industries. It is hoped that the efforts of this study go some way in filling the research gap on the subject, although the paucity of authoritative data seriously limits the depth and coverage of this study and necessarily makes any analytical contribution a modest one. Considerable effort has been expended in data collection. Much of the data has been estimated on the basis of industry sources, either published in the various specialized trade journals or communicated by Singapore-based industry participants to the Energy Program at the East-West Center. Given the scattered and unco-ordinated nature of the available data, conflicting and inconsistent figures are not uncommon. Hence a certain margin of error is unavoidable and estimated figures should be treated with caution (see Appendix 1). Chapter 1 presents an interpretative look at economic growth and structural change in Singapore with a view to setting the wider context of the Singapore petroleum industry. Chapter 2 surveys the country's energy economy with an overview on four broad aspects,

INTRODUCTION

xvii

namely (i) the growth and configuration of domestic energy demand; (ii) the petroleum industry as producer and supplier of energy and energy-related materials and services; (iii) the impact of falling oil prices on the Singapore economy; and (iv) the government's policies in energy demand and supply. Chapters 3 and 4 focus on the primary concern of this study, the downstream sector of the Singapore petroleum industry. Chapter 3 covers (i) oil trade and the Singapore spot market; (ii) the planned introduction of a petroleum futures contract; (iii) fuel oil bunkering; (iv) the independent storage of crude oil and refined products; and (v) the manufacture of petrochemicals. Chapter 4 follows with a detailed look at refining, the heart of the Singapore petroleum industry. Concluding remarks on the downstream sector of the petroleum industry are presented in Chapter 5.

SINGAPORE: A GLOBAL CITY

The establishment of Singapore as the petroleum centre for the Asia-Pacific is both a reflection and an outcome of the country's development as a "global city" (Lee Soo Ann 1984; Krause 1987a). The phrase is an apt one, given the city-state's extreme openness to the international economy, its modern infrastructure and amenities, and its cosmopolitan character. Classified by the World Bank as an upper middle income economy with a GNP per capita of US$7,410 in 1986 (World Development Report 1988), Singapore's standard of living (as measured by this basic indicator) is next only to Japan's in all of Asia. 1 Since the late 1960s, Singapore has on the average achieved one of the world's best overall economic performances. 2 Singapore's outstanding achievements in economic development are well documented and, for present purposes, only the broader aspects need be delineated. 3 1.1

The Historical Experience

When Stamford Raffles founded Singapore in 1819, an island of 225 sq. miles, it was endowed with a vital natural resource - its location. Situated at the southern tip of the Malay peninsula astride the major gateway between the Indian Ocean and the South China

2

CHAPTER 1

Sea and possessing a superb natural deepwater harbour, Singapore underwent a logical development as port of call and entrepot for the surrounding region (Huff 1987). The development of entrepot activities led to rapid urbanization and the establishmer.t of a strong local banking sector. By the inter-war period, Singapore had developed into a fully fledged port and commercial city. It had also become the region's terminalling and distribution centre for petroleum. When Singapore attained self-rule in 1959, it faced some of the classic problems of underdevelopment: rapid population growth, high unemployment, political instability, and unruly industrial relations. Entrepot trade and its traditional supporting services offered few opportunities for productively absorbing surplus labour. Given the constraints of size, import-substituting industrialization (lSI) based on a common market with Malaya was seen as the only solution to the development problems of Singapore (A Proposed Industrialization Programme (or the State of Singapore). Singapore's merger with the Malaysian Federation in 1963, however, proved unworkable, and the separation of S,ingapore from the Federation in 1965 led the country to adopt its present independent and sovereign republican status. The loss of a common market effectively ruled out lSI as a feasible development path. From 1967 onwards, the government adopted a concerted export-oriented industrialization (EOI) strategy. 1.2 Openness and Export-Oriented Industrialization

Singapore has been hailed as the most open country in the world. The country's merchandise exports and imports as proportions of GDP exceed by far the corresponding ratios for the NICs and Japan (Table 1.1). The country's openness to the international economy is a result of a consistent and highly liberal policy regime governing international trade and foreign investments. By the early 1970s, tariffs were generally low, and the average effective rate of industrial protection was extremely moderate (Tan and Ow 1982; Lloyd and Sandilands 1986). Singapore has never relied on substantial quantitative restrictions or non-tariff barriers. Currently, few specific commodity groups retain protective tariffs, and these are negligible

3

SINGAPORE: A GLOBAL CITY

TABLE 1.1 Exports and Imports as a Percentage of GOP, 1986 Exports/G DP

Imports/GOP

--------

Singapore japan South Korea Hong Kong Taiwan

129.7 10.8 35.4 109.9 51.9

147.0 6.5 32.2 109.7 29.7

Sources: World Development Report 7988; Taiwan Statistical Data Book (Taipei: Council for Economic Planning and Development, 1988).

compared with the tariff coverage of developing countries and most of the developed countries. Besides the incidence of a handful of specific commodity duties, the maximum ad valorem rate is 5 per cent. The government imposes few restrictions on foreign investment. According to Pang and Lim (1985, p. 89), there are no anti-monopoly laws, no approval or licensing processes for foreign or local private investment, no technology transfer controls or required registration of contracts of licences, no import controls establishing required levels of domestic value added, no controls on transfer pricing, and no limitations on profit remittances, technology payments, or repatriation of capital overseas.

Furthermore, there are no restrictions on corporate borrowings from the domestic: capital market and foreign investments - including 100 per cent equity ownership -are allowed in almost all economic sectors. The employment of skilled foreign personnel is subject to minimal regulations. The government's policy towards foreign investments has been guided by an EOI strategy. This was accompanied by the recognition that, given the absence of a nascent class of domestic industrial capitalists, only larg:: multina'Lional firms possessed the requisite technologicJ.l and iYJ.arketing capabilities to successfully penetrate competitive world markets. The precknninc;.nce of foreign over local sources iP manufactt:.ring inv :stmen_s is overwhelming. Japan is

CHAPTER 1

4

the most important source of foreign investment in manufacturing, having displaced the United States to second place since 1986. The European Community, traditionally the most important source, has become less important (Table 1.2). The massive scale of foreign direct investments (FDI) 4 in Singapore has led the city-state to become "one of the few truly internationalized countries in the world" (Mirza 1986, p. 2). In 1975, for instance, almost half of all FDI in Asia was located in Singapore; in 1983, the country received about 32 per cent of FDI destined for Asia, and almost 15 per cent of FDI flowing into all non-oil exporting developing countries (ibid., p. 6). On a per capita basis, this scale of capital inflow is phenomenal. The role of foreign capital is greatest in manufacturing. According to the annual data in the Report on the Census of Industrial Production, foreign-owned manufacturing establishments 5 accounted for 21 per cent of all manufacturing establishments during the decade 1975-84, yet contributed disproportionately to the manufacturing sector's total value added (65 per cent), direct exports (84 per cent), gross output (73 per cent), capital expenditure (67 per cent), and employment (55 TABLE 1.2 Net Investment Commitments in Manufacturing by Origin (Excluding Petrochemicals), 1975-87 (Percentage distribution) 1975

1980

1985

1986

1987

- - - -

Local

19.4

15.9

20.7

17.6

16.9

Foreign United States japan EC Others

80.6 14.9 7.7 51.9 6.1

84.1 35.8 9.6 19.1 19.7

79.3 38.1 21.8 16.1 3.2

82.4 30.7 34.2 14.2 3.4

83.1 31.2 34.5 13.8 3.6

306.3

1,413.5

1,120.4

1,443.0

1,743.0

Total (S$ million)

Note: Net investment commitments refer to gross commitment less projects withdrawn or uncertain as at end 1987. Source: Yearbook of Statistics Singapore (Singapore: Department of Statistics, various years).

5

SINGAPORE: A GLOBAL CITY

per cent) (Koh 1987, p. 24). Singapore's high degree of reliance on FDI sharply distinguishes its economic development experience from that of other developing countries, including the other East Asian NICs. Foreign manufacturing investments in the early years concentrated in petroleum products, non-electrical machinery, and labour-intensive industry such as textiles, food and beverages, leather, wood, and rubber products (Table 1.3). In the decade following 1965, TABLE 1.3 Cumulative Foreign Investment in Manufacturing by Industry Group: Percentage Distribution of Gross Fixed Assets

1965

1970

1975

1980

1985

3.1

3.6 4.6 2.4 0.9 4.7

3.2 2.9 2.0 0.8 3.3 1.4 1.6 2.3

-·--------------

Food, beverages, tobacco Textiles Wearing apparel Leather and rubber Wood and cork products Paper and paper products Industrial chemicals Other chemical products Plastic products Petroleum products Non-metallic mineral products Basic metals Fabricated metal products Machinery except electrical Electrical and electronic machinery Transport equipment Precision equipment Other manufacturing Total Total (5$ million)

-

5.7 4.5 5.1 1.9

3.2 1.9 63.1 1.9

4.5 2.6 1.7 1.8

1.2

1.3

42.2 1.7

42.0 1.7

2.5 0.5 0.5 0.3 1.0 1.9 9.5 3.5 1.0 32.9 2.5

0.8 3.5 7.5

0.6 5.5 7.1

1.2

2.7 2.4

6.1 0.8 55.8 3.1 1.9

12.1

3.4

1.2 2.3 7.4

0.6

8.2

10.5

16.1

24.5

0.0 0.0

5.1 1.7

6.2 4.2 0.7

4.5 4.2 1.0

3.5 1.8 0.7

100.0 (157)

100.0 (995)

100.0 (3,380)

100.0 (7,520)

= Figures subsumed under broader categories.

Source: Annual Report (Singapore: EDB, various years).

100.0 (12,717)

6

CHAPTER 1

transport equipment (largely shipbuilding) underwent rapid expansion. Since the mid-1970s, the trend has been towards technology- and skill-intensive industries with higher value added per worker, such as industrial chemicals and machinery, particularly electronics. According to the EDB's 1985 Annual Report, Singapore had over 150 multinational firms making electronics and electrical products and components. Within the electronics sector, Singapore has shifted from labour-intensive assembly operations towards the more complex and higher value-added manufacture of computer components and peripherals. The proportion of investment commitments in labourintensive and low-skilled industries such as textiles and wearing apparel, leather, rubber, and wood products have been reduced substantially. The gross fixed assets of the petroleum products industry as a proportion of cumulative foreign investment declined continuously from 63 to 33 per cent over 1965-85 despite large investments over the years. 6 Export-oriented manufacturing now constitutes a core component of the economy. Manufacturing increased its contribution to GDP from about 17 per cent in 1960 to 27 per cent in 1987 (Table 1.4). About half of Singapore's foreign exchange earnings is derived from manufactured product exports, and the sector accounts for over 25 per cent of total employment in the country. For continued growth in manufactured exports, the government's policy posture is geared towards providing an efficient and low-cost infrastructure as well as fiscal and other incentives to promote private investments in selective technology- and capital-intensive growth areas (The Singapore Economy: New Directions). 1.3 An International Business Services Centre

Since its origins as a British-ruled entrepot, Singapore's economy has been primarily services-based. Despite the expansion of manufacturing activity, Singapore remains services-oriented in comparison with other upper middle income countries (with the exception of Hong Kong). In 1960 the tertiary sector constituted 73 per cent of GDP, and in 1987, about 63 per cent. The secondary sector expanded from about 24 to 38 per cent of GDP while the primary sector,

Vl

z

C'l )> "'0

0

TABLE 1.4 Gross Domestic Product by Industry, 1960-87, at 1985 Market Prices (Percentage distribution)

7J

m

)>

C'l

5 OJ

)>

Industry

1970

1960

1980

--

--------

~-----·

-----

3.7 0.2 16.9 1.7 5.4 25.1 9.0 14.1 20.2 1.1 4.8

2.2 0.2 24.5 1.9 9.3 21.7 7.2 16.4 15.0 1.3 2.9

1.1 0.2 29.5 2.0 7.1 18.9 12.0 20.3 11.8 4.7 1.7

0.7 0.2 25.1 2.1 8.2 16.7 14.3 28.2 12.2 8.7 1.0

0.5 0.2 27.0 2.2 6.6 17.0 14.3 28.6 11.6 9.0 0.9

100.0 (5,058.5)

100.0 (12, 172.4)

100.0 (28,832.5)

100.0 (39,605.1)

100.0 (43,095.3)

,\gricu ltu re and fishing Quarrying Manufactur1 ng Utilities Construction Commerce Transport and communications Financial and business services Other services Less: Imputed bank service charge Add: Import duties Total Total (S$ million)

1987

1986

r

n

::::j

-
('....

0

'-.. ~ ~

\

.* . . . ~

,........

-·..,OIL TERMINAL Pulau Sebarok

Raffles Lighthouse PAKTANK S'PORE TERMINAL Floating Storage Unit Pulau Busing

FIGURE 2.1 The Singapore Oil Sector

Esso Mobil SRC BP Total

230

200 170 27

943

THE ENERGY ECONOMY OF A CITY STATE

21

energy needs are met entirely by imported fuels, almost exclusively petroleum and its products. As an urbanized island-state without an agricultural sector, Singapore's consumption of non-commercial energy materials is insignificant. Coal, the only other primary energy source utilized, is also insignificant to Singapore's energy requirements. The country's petroleum consumption constitutes, in effect, total primary energy demand. The growth and pattern of energy use in Singapore has been dictated by the specific circumstances of a small, equatorial citystate which has undergone rapid economic growth. Singapore's energy consumption grew rapidly between 1960 and 1980. Consumption in 1980 was over ten times as large as that of 1960 if refinery fuel and loss and international aviation are included. 2 Excluding the two use categories, 1980 consumption was almost seven times that of 1960 (Ang 1987, p. 267). The period 1960-73, when real oil prices steadily declined, marked a rapid and consistent growth in commercial energy consumption in Singapore (Table 2.1). Singapore's average rate of growth of commercial energy consumption including refinery fuel and loss and international aviation (16.7 per cent) was well above the average for the rapidly growing ASEAN economies 3 (9.9 per cent). If fuels for international aviation and petroleum refining- both important categories of energy consumption in Singapore - are excluded, Singapore's energy consumption grew at an annual average of 12.5 per cent (ibid.). This is still remarkable by any standard. Singapore's annual average growth rate in commercial energy consumption fell to lower levels during the period 1974-80. Nevertheless annual energy consumption (excluding aviation and refinery fuel use) grew by 8.2 per cent, reflecting the country's rapid adjustment to the first oil price shock and continued achievements in real economic growth. The energy coefficient, defined as the ratio of the rate of growth in energy consumption to that of GDP, fell from 1.3 in 1960-73 to 1.0 in 1974-80. If refinery and aviation fuels are included, the reduction in the rate of energy consumption growth and in the energy coefficient between the two periods are more pronounced.

""""

TABLE 2.1 Commercial Energy Consumption and Energy Coefficient: Annual Average Percentage Growth Growth in GDP

Growth in Consumption 1960-73

1974-80

1960-73

Singapore (I) Singapore (II) ASEAN

1974-80 ·--

---~·

Energy Coefficient 1960-73

1974-80

··~--·

16.7 12.5

5.9 8.2

10.0 10.0

7.9 7.9

1.7 1.3

0.7 1.0

9.9

8.1

6.5

7.1

1.5

1.1

Note: Energy coefficient is the ratio of growth of energy consumption to growth of GDP. Singapore (I)

includes and Singapore (II) excludes international aviation and refinery use. Source: Ang (1986, p. 24, table 2.3).

n

I

)>

~

m

;Q

N

THE ENERGY ECONOMY OF A CITY STATE

23

Energy Balance and Sectoral Configuration of Demand

Table 2.2 describes energy demand by major petroleum product category 4 from 1980 to 1987. The annual average growth rate over 1980-87 for total domestic demand, excluding refinery fuel and loss and international aviation, was 7.5 per cent. Fuel oil constitutes the largest component of Singapore's domestic product demand through the period. In 1987 fuel oil constituted about 68 per cent of total domestic product consumption. Fuel oil is used primarily for electricity generation, and less so for industry and maritime transport. The next most important fuel category for domestic consumption is diesel. Diesel is used mainly in commercial transport, though it is also utilized in industry to some extent. The use of kerosene in Singapore is insignificant since residential energy requirements are met by electricity, liquefied petroleum gas (LPG), and piped gas. LPG, a small consumption item, is used largely for household cooking as bottled gas, and its high rate of growth in consumption reflects a small initial base. Gasoline (including naphtha) constitutes a relatively small share of total domestic demand, a result of the government's effective policy of discouraging private vehicle ownership and use. In 1987, for instance, gasoline demand as a proportion of total demand for petroleum products amounted to about 11 per cent. Jet fuel for international aviation constitutes an important source of energy consumption in Singapore. Over 24,000 barrels per day (b/d) were supplied to aircrafts calling at Changi Airport in 1987. Table 2.3 gives the energy balance for Singapore in 1986. Total energy imports for the year were 959,700 b/d of oil equivalent, virtually all consisting of crude oil or its products. Reflecting Singapore's entrepot role in petroleum refining and trade, 756,000 b/d or over 78 per cent of energy imports were exported. Marine bunker fuels supplied to vessels calling at port 6 accounted for about 162,000 b/d or 21 per cent of total energy exports. The domestic market's total energy requirements (excluding aviation fuels and marine bunkers) 7 - which amounted to some 220,000 b/d oil equivalent in 1986- are not insignificant, even by the standards of the large Singapore refining industry. Transformation

N ..,.

TABLE 2.2 Demand for Major Refined Products, 1980-87 (In thousand b/d) Domestic ~~-------·~~----·-

LPG

Gasoline

1980 1981 1982 1983 1984 1985 1986 1987

1.5 2.0 2.0 2.3 2.3 2.5 2.8 2.9

6.3 9.0 9.0 8.8 9.4 8.6 9.5 11.2

% changeb

9.6

8.4

Diesel

Fuel Oil

Total

Aviationa

1.0 1.0 0.0 0.3 0.3 0.3 0.2 0.2

11.1 12.0 12.0 12.6 14.3 14.8 14.9 17.4

40.1 34.0 37.0 39.9 45.0 42.6 57.1 67.8

60.0 58.0 60.0 64.0 71.3 68.7 84.5 99.3

16.9 17.0 20.0 21.2 20.9 21.4 24.1 24.5

-20.5

6.6

7.8

7.5

5.5

Kerosene

Note: See Appendix 1.

fuel Annual average percentage change.

a jet b

Source: Industry sources.

()

I

)>

~

m

;;

n Petroleum refineries Electricity generation Other transformationa

-

-0.1

-120.5 -45.9 -1.4

0.9

- 1.7 18.2 -1.9

-122.1 -27.7 -2.5

-

Total final consumption

-

74.7

0.9

14.6

90.2

Industry Chemicalb Transport Road Air Public/commerce Residential Non~energy use

-

29.9 18.9 41.1 16.9 24.2 1.8 1.9

0.0 0.4 0.5 -

7.3 -

37.3 18.9 41.1 16.9 24.2 5.0 4.9 1.9

-

Note: See Appendix 1. Dashes indicate that data are zero or insignificant. Includes returns, transfers, statistical difference, own use, and losses. b Primarily fuel use and feedstocks for the petrochemical complex.

4.6 2.7 -

=i

-


s;l

'""

m

a

Source: World Energy Statistics and Balances 1971-87.

"'

"'

26

CHAPTER 2

losses of the refining sector constitute about half of the country's total energy requirements. 8 Transformatio n losses in electricity generation amounted to 27,700 b/d, and electricity output was equivalent to 18,200 b/d. 900 b/d oil equivalent of piped gas was produced in 1986. 9 Of the 90,200 b/d of energy available for final consumption, over 16 per cent was in the form of electricity, about 1 per cent in the form of piped gas, and the rest as refined petroleum products. Industry consumed 37,300 b/d or over 40 per cent of energy flows available for final consumption in the country. However, if energy consumption of the chemical sector (primarily composed of energy and petroleum-bas ed feedstocks used by Singapore's petrochemical complex) is excluded, the energy input requirement of industry is drastically reduced. Excluding the petrochemical sector, the industry share of final energy consumption is about 20 per cent. Given that industry accounted for a quarter of GDP, energy consumption per unit of value added in industry is relatively low. According to the Report on the Census of Industrial Production 1985, the average energy consumption per unit value added for the manufacturing industry amounted to 55 kg. oil equivalent (KGOE) per 1985 S$1,000 and energy costs as a proportion of total output in the sector amounted to little over 2 per cent. As a country totally lacking in tangible natural resources, industrialization has favoured technology- and skill-intensive enterprises.l 0 Furthermore, the lack of indigenous sources of conventional primary energy puts a comparative disadvantage on production processes that are energy-intensi ve. 11 There are no major smelters, and tinsmelting - at one time a major industry in the country - ceased to be important by the early 1960s. Brickmaking and glass and pottery manufactures are relatively small. Cement production does not include the basic kilning process and uses imported clinker. Steel production involves only the recycle of scrap. Since the mid-1970s the government policy's emphasis on high-technolog y, high-skill, and high-precision industry has encouraged an evolving industrial output-mix which is not energy-intensi ve. Although industry consumed only 7,300 b/d of oil equivalent energy in the form of electricity, the latter constitutes a much larger

THE ENERGY ECONOMY OF A CITY STATE

27

share - about 40 per cent of total energy utilized by industry if the petrochemical sector is excluded. According to estimates of an energy end-use analysis based on 1985 data (Ang 1988),12 the proportion of electricity in total energy use by industry was 45 per cent, an even higher figure. The extremely large share of electricity in the sector's energy utilization is a result of several factors. The nature of production processes in the high value-added sectors emphasizing technology- and precision-intensive products favour electricity as the cleanest and most versatile forms of energy available. Furthermore, the country's equatorial climate and high per capita incomes has led to increasing requirements for air-conditioning at the workplace. Leading growth sectors such as electronics and electrical components, precision tools, and sophisticated equipment necessitate amenable working environments for high labour productivity. A breakdown of electricity end-use in industry for 1985 estimates 55 per cent for production processes, 23 per cent for space-conditioning, and the rest for lighting and other purposes (ibid., pp. 3-4). The transport category in the energy balance (Table 2.3) includes two components, air and road. As a focal point of international aviation routes with one of the busiest and most modern airports in the region, Singapore is Asia's major supplier of jet fuels. International aviation accounted for 24,200 b/d of fuels supplied to aircraft calling at the Changi International Airport. Internal transport is entirely road-based. Its energy requirements amounted to 16,900 b/d. About two-thirds of the sector's energy consumption is for passenger transportation and one-third for freight; 60 per cent of energy consumption is gasoline-based; and the rest (primarily of buses, taxis, and heavy goods vehicles) diesel (ibid., pp. 1-2). The public and commerce sectors consumed 5,000 b/d of oil equivalent energy, primarily in the form of electricity (92 per cent) and the rest in piped gas. These sectors include large commercial buildings (hotels, office blocks, and shopping structures), public buildings (government departments, educational institutions, hospitals, airport, and so forth), and smaller commercial establishments, public lighting, and other non-residential uses not classified elsewhere. End uses for electricity consumed by these sectors are primarily

28

CHAPTER 2

air-conditioning, lighting, elevators and escalators, and office equipment. Piped gas, along with smaller quantities of bottled LPG and diesel is used for cooking and heating water systems. The residential sector accounted for little less than 5,000 b/d, over half of which was in the form of electricity. Given the high income elasticity of demand for air-conditioning, energy consumption for this use has been rising rapidly (ibid., p. 5). Piped gas and bottled LPG are used by households for cooking purposes. Households consume about 55 per cent of gas consumed in the country, the rest being used in the commercial sector.

Electricity and Cas Utilities The Public Utilities Board (PUB) is responsible for the supply of electricity, town gas (piped gas), and water. It is a statutory board that was formed in 1963 under the Public Utilities Act, which provides for the responsibilities, functions, and authority for the Board's activities. Supervision of the PUB rests directly with the Ministry of Trade and Industry. The costs of maintaining and expanding electricity supplies, including fuel acquisition, are the responsibility of the Board. When the PUB was formed, it faced an unprecedented increase in demand for utilities to support Singapore's vigorous industrial and public housing developments of the 1960s and 1970s. Electricity and gas utilities underwent a period of rapid expansion. The PUB's electricity supply is available to all parts of Singapore including the major southern offshore islands. Electricity is generated at four power stations, namely, Pasir Panjang, Jurong, Pulau Seraya, and Senoko. Table 2.4 describes the power plant development programme since 1960. Senoko, with an installed capacity of 1,610 megawatt (MW), is Singapore's largest power station, accounting for about 48 per cent of the PUB's total generating capacity of 3,371 MW in 1987. 1\vo 100-MW generating units will be installed at Senoko Power Station by 1990. By the end of 1987 all three 250-MW generating units which form Stage 1 of Pulau Seraya Power Station had been synchronized and begun operations. Total cost was estimated at S$775 million inclusive of land costs, according to the PUB's Annual Report 1987. The PUB is proceeding with the construction of Pulau Seraya Stage 2

TABLE 2.4 Power Plant Development Programme for the Last Twenty-Five Years Installed Capacity (Steam/Gas Turbines)

Power Station St. james

Pasir Panjang A Pasir Panjang B jurong Stage I jurong State II Senoko Gas Turbines Senoko Stage I Senoko Stage II Senoko Stage Ill Pasir Panjang Jurong Pulau Seraya Stage I

Pulau Seraya Stage II

_"

________ - - -

58 MW gas turbines 6 X 6 MW 2 X 11 MW 125 MW steam turbines 5 X 25 MW 240 MW steam turbines (4 x 60 MW) 240 MW steam turbines (4 x 60 MW) 360 MW steam turbines (3 x 120 MW) 40 MW gas turbines (2 x 20 MW) 360 MW steam turbines (3 x 120 MW) 7 50 MW steam turbines (3 x 250 MW) 500 MW steam turbines (2 x 250 MW) 201 MW gas turbines (96 MW & 105 MW) 210 MW gas turbines (2 x 105 MW) 40 MW gas turbines (2 x 20 MW) 750 MW steam turbines (3 x 250 MW) 750 MW

Source: PUB, Singapore.

Commissioned

Decommissioned

1960-64

1980-83

1962-63

1982

1965-66

1985-87

1969-71 1973-74 1972-73 1976 1978-79 1983 1982-83 1986 1987 1987-88 Planning being finalized, targeted for commissioning on 1992-93

30

CHAPTER 2

comprising three units of 250-MW turbine generators together with associated transmission facilities. Stage 2 will be operational by 1992/93 at a cost of S$1 billion. Total output grew from 2,205 million kilowatt-hour (kWh) to 10,466 million kWh between 1970 and 1986, representing a growth rate of about 10 per cent per annum (Ibrahim 1987). Generating capacity expanded from 644 to 2,821 MW over the same period (ibid.). Thermal efficiency of electricity generation improved from 27 per cent in 1966 to 36 per cent in 1987 (Kadir and Kim 1985; PUB Annual Report 1987). Transmission and distribution losses fell from 7.8 per cent of electricity generated to 4.9 per cent over 196082 (Kadir and Kim 1985). The improvements in efficiency and the reduction of transmission and distribution losses reflect the use of larger and superior equipment. Of the total 2,696-MW capacity in 1983, 1,230 MW consist of 250-MW generating sets (ibid., p. 19). Regular overhaul maintenance and inspection schedules have also resulted in efficiency improvements. Building construction for a new centralized control centre at Ayer Rajah was completed in 1987 at a cost of S$60 million. The Ayer Rajah premises will locate together the Power System Control Centre, Distribution Control Centre, and the Service and Operations Centre. These systems, which will remotely monitor power stations operations and the distribution system and operate a 24hour power failure and breakdown service, will constitute one of the most sophisticated remote-controlled electricity grid in Asia. By early 1989 all streetlights will be covered by the Ripple Control System which allows remote adjustments for flexibility and energy conservation. Electricity is distributed to consumers via five 230-kilovolt (kV), forty-eight 66-kV substations, and 4,000 smaller substations with a network of 22,000 km. of main cables. The major offshore islands are connected to the power grid via submarine cables. Singapore and Malaysia have established a new 200-MW link at a cost of S$41 million. The link consists of two 19-km. 230-kV lines linking Senoko and Johor's Sultan Iskander power stations. This supplements a small 22-kV cable that has linked Singapore and Johor Bahru for the past thirty years. The expanded links allow the two countries

THE ENERGY ECONOMY OF A CITY STATE

31

to share reserve capacity and to draw on each other's supplies in emergencies. Demand for electricity by sector for the decade 1977-87 is given in Table 2.5(a). The number of accounts almost doubled from over 460,000 to 750,860, of which domestic consumers accounted for 86 per cent (Yearbook of Statistics Singapore 1987, p. 122). However, domestic consumption constituted only about 16 per cent of total electricity consumption. Growth of electricity use has been most rapid in manufacturing and other industries, which include the commerce, construction, and services sectors. This reflects vigorous economic growth in the manufacturing and services sectors in Singapore through the last decade. Per capita consumption of electricity was 4,063 kWh in 1987, a tenfold increase over 1963 and second only to Japan among East Asian countries (PUB 25th Anniversary Publication {1963-88}). Table 2.5(b) derives the production and consumption of electricity on a per capita and per dollar GDP basis for the years 1977 to 1987. Consumption and production of electricity grew at an annual average of almost 9 per cent through the decade. Given the low rate of population growth over the period, per capita production and consumption expanded by a high annual average of over 7 per cent. This indicates both economic growth and increased standards of living. Despite increased efficiency in the generation and use of electricity, production and consumption of electricity per dollar GDP increased annually by an average of 1.7 and 1.9 per cent. The Board proposed in 1987 a ten-year expansion and upgrading investment plan estimated to involve over S$6.2 billion (PUB Annual Report 1987). The bulk of funds, about S$5.2 billion, will be channelled into electricity generation and supply to meet increased demands for electric power. Electricity demand is expected to grow at a rate of about 6 per cent over the next decade (Ibrahim 1987). Kadir and Kim (1985) forecast growth in generation capacity to about 5,700 MW by the year 2000. The PUB is also responsible for the production and distribution of piped town gas. Since 1959 the PUB's gas distribution network expanded rapidly along with the government's massive public housing programme. Between 1980 and 1985, however, the PUB ceased

..., 1-.l

TABLE 2.5 Electricity Production and Consumption, 1977-87 (a) In Million kWh Consumption ·--·--·

Year

Production

Total

Domestic

Manufacturing

5,115 5,898 6,483 6,968 7,462 7,883 8,665 9,452 9,917 10,577 11,814

4,506 5,214 5,744 6,198 6,660 7,000 7,698 8,399 8,871 9,476 10,617

779 888 945 1,014 1,093 1,167 1,313 1,336 1,462 1,565 1,729

2,246 2,607 2,803 2,947 3,156 3,218 3,505 3,927 4,019 4,268 4,844

Other Industries

Export

No. of Consumer Accounts

~-·--·~·---------

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

Source: Yearbook of Statistics Singapore 1987.

1,481 1,671 1,902 2,145 2,338 2,564 2,825 3,063 3,340 3,643 4,044

48 93 92 74 52 55 73 50

452,353 498,994 526,669 556,224 575,250 591,416 611,449 670,736 712,450 731,163 750,860 n I

)>

~

m

Al N

TABLE 2.5 (Continue d) (b) Per Capita and per Dollar GDP

Production (million kWh)

Year ---

--~

--

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Annual growth rate(%)

~-~-

~-

Consumption (million kWh) ~-

~---

Population ('000) ----

Real GDP (S$ million)*

Per Capita Production

Per Capita Consumption

Per S$ GDP Production

Per S$ GDP Consumption

(kWh)

(kWh)

(kWh)

(kWh)

-

5,115 5,898 6,483 6,968 7,462 7,883 8,665 9,452 9,917 10,577 11,814

4,506 5,214 5,744 6,198 6,660 7,000 7,698 8,399 8,871 9,476 10,617

2,325 2,354 2,384 2,414 2,443 2,472 2,502 2,529 2,558 2,586 2,613

22,143 24,046 26,285 28,833 31,603 33,772 36,537 39,573 38,924 39,605 43,095

2,200 2,506 2,719 2,886 3,054 3,189 3,463 3,737 3,877 4,090 4,521

1,938 2,215 2,409 2,568 2,726 2,832 3,077 3,321 3,468 3,664 4,063

231 245 247 242 236 233 237 239 255 267 274

203 217 219 215 211 207 211 212 228 239 246

(8.7)

(8.9)

(1.2)

(6.9)

(7.5)

(7.7)

(1.7)

(1.9)

*In 1985 Singapore dollars. Source: As for Table 2.5(a).

CHAPTER 2

34

further development of the piped gas network in order to foster private-sector involvement in the gas supply industry. The industry supplied bottled gas (LPG) to the residential gas market during the years when the residential construction industry boomed. At present the PUB supplies piped gas to an estimated 200,000 consumers, who consume about 40 per cent of the gas used in Singapore. One in three households uses piped gas. The distribution network is fed by gas cracked from naphtha. Production is carried out in six gas units at the Kallang Gas Works and piped to consumers through 1,740 km. of gas mains extending over major areas of the country. Table 2.6 gives figures for gas production and sales by sector from 1977 to 1987. Gas production totalled 623.5 million units in 1987. Overall thermal efficiency was 90.4 per cent and total feedstock consumption (naphtha and LPG) was 51,108 tonnes (PUB Annual Report 1987).

The PUB's present production capacity is 735,000 cubic metres TABLE 2.6 Town Gas Production and Consumption, 1977-87 (In million kWh) Consumption Domestic

Year

Production

Total

Public Housing

Others

NonDomestic

No. of Consumer Accounts

73 73 72 71 67 63 61 61 56 52 49

166 204 221 235 245 250 245 245 233 254 310

151,819 166,011 176,902 187,944 190,509 189,660 190,087 188,445 185,246 186,507 189,610

----

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

488 539 597 614 626 625 605 609 570 577 624

435 490 527 552 561 570 567 573 541 550 604

Source: As for Table 2.5(a).

196 213 234 247 249 258 261 267 252 244 245

THE ENERGY ECONOMY OF A CITY STATE

35

per day (m 3 /d), although demand is about 300,000 m 3 /d. The last plant put on-stream in 1982 added 150,000 m 3 /d capacity to the system. A gas-making plant with a capacity of 150,000 m 3 /d is to be commission ed in 1989. There are three gas holders in use with a combined capacity of 98,000 m 3 . About 7 per cent of the total gas sold by the PUB is piped LPG, supplied from LPG tanks installed in housing districts. Tanker trucks are used to refuel the LPG tanks. The present sectoral consumptio n breakdown is about 54 per cent for household use, 40 per cent for commercia l service users (such as hotels and restaurants) , and less than 10 per cent for industry. The Board's Gas Departmen t is planning to double its customer base over the next five years. It has invited internation al tenders to bid on conducting a comprehen sive study of an expanded piped gas network for Singapore. Current plans are to connect 200,000 residential units to the distribution system between 1986 and 1990 at a total cost of US$19 million. The funds are to come from the department 's own account. 2.2 An Overview of the Singapore Petroleum Industry Table 2.7 gives an overview of the petroleum industry, classifying the major activities under downstream and upstream sectors. 13 The downstream sector consists of the following major activities: petroleum refining, trade and production of petrochemi cals, trade of crude and refined products, fuel oil bunkering, and independen t storage and blending. Upstream sector activities fall in two categories: rigbuilding and rig-repair, and a collective of technical and support services for the offshore hydrocarbo ns industry. Downstream Sector

The downstream sector of the Singapore petroleum industry constitutes the focus of this study and is discussed in detail in Chapters 3 and 4. Chapter 3 covers crude and product trade, fuel oil bunkering, independen t storage and blending, and trade and production of petrochemi cals. Chapter 4 follows with a detailed look at petroleum refining. This section provides a brief introductio n to the downstream sector.

CHAPTER 2

36

TABLE 2.7 Overview of the Petroleum Industry Activity

Agents Involved

Scale of Activity

Wet barrel trading

More than 50 trading entities, composed of refiners, independents, state, and private oil companies

Focus of the Pacific Basin spot market; estimated 1.9 million b/d average for first half of 1988

Paper barrel tradinga

Traders, refiners, large oil companies, regional electrical utilities, brokerage, and finance firms

The first futures market east of Suez"

Bunker fuel oil

Over 30 bunker suppliers, PSA, shipping clients, refiners, independent storage

World's largest bunkering centre; 8.5 million tonnes delivered in 1987

Independent storage/blending

PakTank, Van Ommeren, Oiltanking 6

Region's major independent oil storage centre; over 900,000 m 3 current capacity

Petrochemicals

PCS and downstream plants

Ethylene-based products; capacity of upstream plant: 300,000 tons per year

Refining

5 refinery establishments (Shell, Esso, Mobil, SRC, BP), contract refining clients

World's third largest refining centre; 1.1 million b/d nominal crude capacity

Rigbuilding and rig-repair

FELS, Sembawang Bethlehem

Leading rigbuilders in world marine industry

Other offshore support

Oilfield equipment manufacturers; repair, maintenance, and logistics services companies

Asia-Pacific's base of support services for offshore hydrocarbons industry

Downstream

Upstream

Note: See text. Fuel oil futures contract to be launched by SIMEX in February 1989. hCommitted plans to build 210,000 m 3 storage capacity.

a

THE ENERGY ECONOMY OF A CITY STATE

37

Trade of crude and refined products constitutes a major downstream activity and the Singapore spot market is the focal point of the oil trade in the Asia-Pacific region. It is estimated that the trade averaged 1.9 million b/d over the first half of 1988. There are over fifty traders, ranging from the oil majors and refiners to independents, state oil companies, and Japanese trading houses (see Section 3.1). A futures contract in High Sulphur Fuel Oil (HSFO) was traded on the Singapore International Monetary Exchange (SIMEX) beginning late February 1989. Oil traders, refiners, and major oil companies, large consumers such as the region's electrical utilities, and some of the large finance firms are among the potential participants in the paper barrel trade (see Section 3.2). The delivery of bunker fuels to ships calling at port is an important downstream service industry in its own right. Singapore is the world's largest bunkering port, with a total delivery of 8.5 million tonnes (over 162,000 b/d) in 1987. There are over thirty bunker suppliers operating in Singapore, including most of the major international bunker traders and suppliers. The Port of Singapore Authority (PSA), independent storage and blending operators, oil traders and refiners are among the primary agents involved in the bunkering trade (see Section 3.3). With a combined current capacity of almost 1 million m 3 (or about 6.3 million barrels), Singapore is the region's most important provider of independent storage and blending services for crude and refined product. With its history as an oil terminalling and distribution station since the nineteenth century, Singapore is the logical base of Asian operations of two of the world's largest independent storage operators - Paktank and Van Ommeren. Another storage and blending concern, Oiltanking, has committed plans to build 210,000 m 3 (1.3 million barrels) capacity (see Section 3.4). The Petrochemical Corporation of Singapore (PCS), a joint venture between the government and a Japanese consortium, is a complex of plants with an upstream ethylene capacity of 300,000 tons per year. Downstream plants include the production of low- and highdensity polyethylene, polypropylene, ethylene glycol, and ethylene oxide (see Section 3.5).

38

CHAPTER 2

Petroleum refining, with a nominal primary distillation capacity of over 1 million b/d, is the single most important downstream activity in the Singapore petroleum industry. Measured by capital assets in place and by linkages to other downstream activities, Singapore's refineries constitutes the heart of the petroleum industry. Shell, Esso, Mobil, Singapore Refining Co. (SRC), and BP constitute the five refinery establishments in the country. Upstream Sector

Singapore's marine industry - which includes shipbuilding and ship-repair, rigbuilding and rig-repair, marine engineering, and related activities - is one of the country's largest, accounting for about 11 per cent of value added in the manufacturing sector in 1986 (EDB Annual Report 1986). The industry plays an important role as a supportive and servicing facility to several key industries including shipping and transport, petroleum products, and the offshore hydrocarbons industry. The upstream sector of the Singapore petroleum industry developed as a result of three major factors: (i) strategic location with respect to the considerable hydrocarbons potential of the continental shelf under the South China Sea and surrounding waters; (ii) excellent transport and communications infrastructure including a deepwater port and the service facilities of the PSA; and (iii) linkages with key industries including the marine industry and the offshore oil and gas industry dominated by U.S. oil majors. Rigbuilding and rig-repair (including oilfield components) accounted for over a third of the output of the marine industry in 1981. At its peak, Singapore had five rigbuilding yards- Marathon Le Tourneau, Robin Shipyard, Promet, Bethlehem, and Far East Levingston Shipyard (FELS). Singapore was ranked as the world's leading builder of jack-up oil rigs and next only to the United States in total oil rig construction in 1981 (Seow 1984). The oilfield and gasfield machinery and equipment industry surveyed by the Report on the Census of Industrial Production 1986 consisted of thirty-eight establishments employing over 3,000 workers. The industry registered sales of almost S$500 million of which over 85 per cent was exported (ibid.). Its output consisted of oil drilling

THE ENERGY ECONOMY OF A CITY STATE

39

and oil well equipment, oil well and gas processing equipment, oil rigs, production platforms, storage and pressure vessels, supply vessels and barges, and the repair of oil and gas production structures. Some of the manufacturing concerns in the industry have become lead plants for components and subsystems in the world market while others have assumed a regional role (EDB Yearbook 1987188).

There are more than 250 manufacturing and services companies which support the offshore hydrocarbons industry. Table 2.8 gives a list of Singapore-based major international companies offering technical and support services to the offshore petroleum industry. The services include offshore platform elevating systems, warehousing and repair of oilfield equipment, core analysis and seismic data acquisition and analysis, design engineering, well testing and measurement, and testing laboratories for offshore equipment. These companies are mainly subsidiaries of U.S. multinational firms and specialize in advanced technologies and products. Establishing an operational presence in Singapore has been a logical development for these subsidiaries, given Singapore's infrastructural facilities and the large involvement of U.S. oil majors in East Asian offshore oil and gas exploration and development. Much like rig building, the slump in offshore oil and gas operations has reduced the demand for technical support services offered by Singapore-based firms. Rigbuilding has been affected most adversely with the considerable decline of oil and gas exploration in the Asia-Pacific from the vigorous pace prior to the post-1981 erosion in oil prices. By 1987 only two rigbuilding yards, Bethlehem and FELS, maintained a presence. In 1988 Sembawang Holdings, a diversified Singapore-based marine group acquired the assets of the U.S. rigbuilder Bethlehem Steel; the new company called Sembawang Bethlehem is wholly owned by Sembawang and will be FELS' only remaining competitor. Both remaining rigbuilders in Singapore have recently won major international rig construction projects against stiff international competition. FELS is one of the world's foremost builders of mobile offshore drilling rigs and its subsidiaries provide a full range of consultancy, design engineering, and construction services, and manufacturing and supply of specialized materials to the upstream

"" 0

TABLE 2.8 Major Technical and Support Services Companies for the Offshore Hydrocarbons Industry Parent Company

Singapore Company

Services

---------

Baker Marine (U.S.)

Baker Marine Pte. Ltd.

Offshore platform elevating systems

Combustion Engineering (U.S.)

Gray Services Co.

Warehousing and repair of oilfield equipment

Core Laboratories (U.S.)

Core Laboratories Int. Ltd.

Well logging and core analysis

Det Norske Veritas (Norway)

Det Norske Veritas S'pore (Pte.) Ltd.

Engineering and structural analysis

Dow Chemical (U.S.)

Dowell Schlumberger Int. Inc.*

Core analysis; drill-stem testing; cementing simulation

Geosource (U.S.)

Geosource Petty-Ray Data Processing Centre

Seismic data acquisition and processing

Halliburton (U.S.)

Brown & Root (S'pore) Pte. Ltd.

Design engineering

Litton Industries (U.S.)

Western Geophysical Co. of America

Seismic data acquisition and processing

n I

>

~ m :;

~

m

;;c N

High-tension non-industrial

All units

13.47

Maximum demand charge: $9.00 per kW per month Minimum charge: $700 per month Declared demand charge: $3.00 per chargeable declared kW per month

1987

Above 2,000

15.51 20.51

Non-domestic

All units

15.51

High tension

All units (peak period)a

Domestic

1-2,000

All units (off-peak period)b

9.51 8.51

-1

I

m m

zm

~

Cl

-< m n 0 z 0 3:: -< 0-n )>

Maximum demand charge: $8.00 per kW per month Declared demand charge: $2.66 per chargeable declared kW per month

n ::::; -< V1

);!

-1

m

Note: Until December 1985, a tax of 10 per cent (of the total bill) was imposed on consumers whose total PUB charges (electricity, gas, and water) exceeded 5$80 per month. aPeak period is from 7 a.m. to 11 p.m. bQff-peak period is from 11 p.m. to 7 a.m. Source: PUB, Singapore.

Ill WoO

54

CHAPTER 2

The primary obstacle to concluding a natural gas supply agreement was the Malaysian claim for a premium to be paid for natural gas over its fuel oil substitution value. This claim for a premium is based on the lower costs of equipment maintenance and pollution abatement associated with utilizing gas. Citing falling oil prices as a factor, Singapore refused to accept the principle of a premium. In the event, Malaysia and Singapore finally concluded the negotiations with the signing of a memorandum of understanding in June 1988. Under the agreement, Malaysia has contracted to supply Singapore with 150 million ft. 3 of natural gas per day (24,640 b/d of oil equivalent) over fifteen years to Singapore. The gas will be supplied to Singapore through pipeline which will run from the northeastern state of Kelantan south through Johor and on to Singapore. The pricing formula is based on gas prices on the spot market and posted prices of Singapore-based oil companies. Singapore is to pay a premium of not more than S$20 million for the first year of supply. The premium will be formulated as a proportion of Singapore's gas requirements. Industry sources estimate that gas prices according to the contract will register a premium of 7 per cent over its fuel oil substitute. The contract, however, was concluded on the basis of a joint agreement for continued water sales by Malaysia to Singapore. Hence, the economic parameters of the natural gas supply contract are not entirely transparent. On the energy demand side, the Singapore Government is particularly well noted for its explicit policy to discourage private motor vehicle ownership and use. Being highly urbanized with limited land space, Singapore has faced serious road congestion problems. The rapid increase in Singapore's car population accompanying increasing per capita income levels has led the Singapore Government to implement a strict and highly effective system of disincentives and traffic management schemes. Among those introduced are high import duties, 21 registration fees, 22 and road taxes, 23 area licensing to restrict entry into the Central Business District during peak hours, computerized area traffic control, and the encouragement of carpooling. An efficient public bus transportation system serves an estimated half of passenger traffic in passenger-kilometres, the rest being carried by private modes (Ang 1988, p. 2).

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It should be noted that the primary rationale motivating the government's adoption of stiff disincentives with respect to private motor vehicle ownership has been the problem of traffic congestion, rather than energy conservation per se. Nevertheless, besides improving traffic flow and reducing time budgets for commuting, Singapore's system of traffic management has led to significant energy savings. The operation of Area Traffic Control and Additional Registration Fee, for instance, has resulted in an estimated 8 to 9 per cent energy savings in road transport (Ang and Oh 1988). The construction of the Mass Rapid Transit (MRT) rail system, as it is progressively brought into full service, will transform the mode of passenger traffic. Being far more efficient than private motoring, the MRT will effect substantial savings in energy use over the long run (Energy in the ESCAP Region: Policies, Issues and the Potential for Regional Cooperation, p. 128). There are several examples of energy conservation measures pursued by the government. To control energy use for air-conditioning in large buildings, the Development and Building Control Division of the Ministry of National Development enforces standards of thermal efficiency in public and government buildings. The PUB, which has been pursuing energy conservation campaigns and educational programmes over a period of some years, carries out energy audits for industrial and commercial buildings through its Energy Conservation Division. In 1987, 161 such audits were performed (PUB Annual Report 1987). Training on technical aspects of energy conservation has also been organized through seminars and workshops.

NOTES 1 The demarcation is an arbitrary one, purely for purposes of exposition. 2 Bunker fuels, as exports supplied to ships calling at port, are excluded. 3 This refers to Malaysia, Indonesia, Philippines, Singapore, and Thailand. Brunei, which became the sixth member state of the Association of Southeast Asian Nations in January 1984, is not included. 4 Non-energy products such as lubricants, solvents, and asphalt constitute small proportions of petroleum product demand. In 1987, for instance, this was 1. 7 per cent.

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5 Refers to all aircraft, irrespective of flag and includes Singapore International Airlines. 6 Refers to all ships irrespective of flag. 7 Total energy requirements as defined here include energy used to transform primary fuel (crude oill into various secondary forms of energy. 8 Transformation losses are defined as the difference between total energy input into refineries and the output of petroleum products. They include refineries' own use of all fuels. 9 LPG is classified as a petroleum product and excluded from the "gas" category. 10 As argued in Chapter 1, Singapore's industrialization has generally been based along the lines of dynamic comparative advantage. 11 Singapore's advantages in location and infrastructure, however, constitute the prerequisites of an energy-intensive industry such as petroleum refining (see Chapter 4j. 12 I wish to thank Dr Ang Beng Wah for allowing me to examine and cite this article in advance of publication. 13 Upstream is defined as all related industries and services involved with the exploration and development of hydrocarbon resources; downstream covers the rest, from transport of crude oil or gas from source to refining and trade of petroleum products. 14 The increase in the total commodity trade deficit was a result of the resumption of economic growth after the 1985-86 recession. 15 Balassa (19811 provides an empirical analysis of the comparative experience in economic performance and policy response of NICs (including Singapore! and other developing countries after the 1973-74 oil price quadrupling. 16 The report does not indicate the components of domestic consumption; presumably, the figure of 236,000 b/d includes marine bunkers, international aviation, and refinery fuel and loss. 17 The estimate assumes a domestic consumption of 236,000 b/d and the average price of petroleum of US$28 per barrel in 1985 and US$15 per barrel in 1986. 18 Singapore official statistics do not cover trade with Indonesia. The estimate is based on Indonesian data on imports from Singapore as reported in the Direction of Trade Statistics of the International Monetary Fund (see Koh 1987, p. 321.

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19 This estimate is based on calculations made by the consultants Phillip and Drew (cited in Repercussions of Falling Oil Prices on the Indonesian, Malaysian and Singapore Economies). 20 The PUB makes annual reviews of demand forecasts for electricity, gas, and water (Kumar 1988). 21 A customs duty of 45 per cent of Open Market Value is levied on imported cars. All cars in Singapore are imported. 22 Since 1983 a registration fee of S$1,000 plus an added fee equivalent to 175 per cent of the Open Market Value is applied. 23 Owners of private motor vehicles with lower engine capacities are charged preferential registration fees and lower road taxes.

THE DOWNSTREAM PETROLEUM INDUSTRY

As noted in Chapter 2, the Singapore petroleum sector encompasses a panoply of downstream industries and services besides refining. These include the trading of crude petroleum and refined products on the spot market, the loading of bunker fuels at port, independent storage facilities for crudes and petroleum products, and the production and trade of ethylene-based petrochemicals. These downstream activities are discussed in this chapter. 3.1

The Singapore Spot Market and Trading Enclave

The petroleum trade generally involves two types of transactions, term and spot transactions. A term or "forward" transaction implicates the buyer and seller in J. long-term contract specifying the basic attributes of ("posted") price, time and place of delivery, and quality and quantity of cargo. These contracts generally covered a period of three years or more, although since the late 1970s there has been greater flexibility in maturities and pricing formulas. Spot transactions refer to agreements for a change in ownership of cargoes on a prompt basis (that is, in the very near or immediate future). Often the cargo is ready for delivery in storage tanks or in tankerat-sea.

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Although the world petroleum industry comprised small producers, refiners, and traders in its origins, it began to display its characteristic oligopolistic industrial organization by the last decades of the nineteenth century (Penrose 1968). The domination exerted by the vertically integrated majors over all aspects of the industry, "from source rock to retail pump" (that is, from exploration and development to production, processing, transport, and sales), led to a tight control over the flow of oil, intra-firm balancing of supply and demand, and the predominance of long-term fixed price contracts. In this environment characterized by a relative stability of prices, there was no motivation for the development of an open spot market for either crude petroleum or its refined products. Despite the formation of OPEC in 1960, it was only with the upheavals associated with the price shocks and the nationalizatio n of the major concessions during the 1970s that the international oil market was structurally transformed from the tight web of large oligopolies into its present relatively diverse and decentralized market with a multiplicity of buyers, sellers, and brokers. These structural changes which contributed to the volatility of oil prices in the mid-1980s have given a powerful impetus to the trading of oil in the spot market. From being an activity relegated to the margins, the spot market emerged as an integral part of the world petroleum industry. Spot and spot-related transactions grew phenomenally in the 1980s, covering less than 15 per cent of internationally traded oil as late as 1982 and rising to account for about 85 per cent in 1986 (Fesharaki and Razavi 1986, p. 1). 1 In the competitive downstream sector of the industry, spot trading has been adopted by market participants as a tool to exploit arbitrage opportunities. Even among the majors, there is a growing consensus that they have to cease the operation of internalized (intra-firm) supply systems and come to terms with a competitive market approach (Robinson 1989). Singapore is the focal point of oil trade in the Asia-Pacific time zone. Indeed, Singapore has been described as the Pacific Basin's largest petroleum trading centre. 2 Around Singapore are located the major markets of the Pacific Basin -Japan, South Korea, Taiwan, Australia, India, and Southeast Asia. The republic is also in proximity

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to Asia's crude producers- Malaysia, Indonesia, China, and Brunei. Singapore's petroleum refining, blending, storage, and shipping capabilities provide the essential complements to its trading nexus. Being neither a producer nor a major consumer, and coupled with a stable policy environment hospitable to private enterprise, the country has the necessary ambience for a free market in petroleum trading. An infrastructure of international standing - which includes excellent port and shipping facilities, an advanced telecommunication and logistics network, a matured legal, accounting, and financial services base, and, not least, a stable socio-political order - supports the role of Singapore as Asia-Pacific's premier oil trading centre. While oil trading has always been an integral part of Singapore's petroleum industry, it was traditionally the preserve of the refining establishments, the volumes involved were small, and transactions were based on long-term contractual relationships. Parallel to the developments in the world petroleum market, trading activity proliferated in Singapore with the upheavals of the 1970s but particularly after the second oil price shock of 1979/80. There are currently over fifty oil trading agents with varying backgrounds located in the country. Besides the major oil companies that have their own trading departments, there are the national oil companies of the oil-producing countries, independent oil traders (primarily American), and the big Japanese trading houses. These trading entities, outside the specialized departments of the refiners, have been motivated to establish an operational presence in Singapore in order to cover the Asia-Pacific time zone from a location that possesses a complementary infrastructure already in place. The Japanese trading houses, which do not derive the time-zone advantage, 3 have set up offices primarily to source products from the Singapore market for their domestic clients. Oil is traded on both spot and term basis. Traders buy and sell both crudes and refined products, and process under third-party arrangements with refiners. The bulk of oil trade is carried out in the spot market 4 which already encompasses a relatively wide range of refined products. It is not possible to value the actual amount of trading activity involved, although it is judged to be high relative to the refining industry's total output (The Singapore Petroleum Industry,

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p. 12). Industry sources estimate an average of 1.9 million b/d traded during the first half of 1988. Tokyo represents the only other major oil trading centre in the Asia-Pacific region. The trading activity based in that city, however, is concentrated on crude sourcing for Japan's large domestic demand requirements and does not deal in the breadth of products traded in the Singapore market. Hong Kong, with its conducive entrepot status and laissez-faire environment, lacks the requisite linkages of refining, storage, and other complementary sectors for an effective oil trading base. Despite the absence of serious competition in hosting an oil trading enclave, Singapore lacks the concentrated hinterland that has provided Rotterdam and New York their basis. The geographical dispersion of the Asia-Pacific markets is a serious constraint to the emergence of Singapore as a trading centre in the same league as the other world trading centres. The impact of geographical dispersion on Asia-Pacific petroleum trade is accentuated by limited market volumes and liquidity relative to the Atlantic time-zone, partly as a consequence of the welter of government regulations imposed by most countries in the region. While petroleum trade in the Pacific Basin has yet to develop the depth that exists in its Atlantic counterpart, there are encouraging signs that this might change in the future. Although deregulation of energy markets in the Asia-Pacific is proceeding at a rather slow pace (albeit with the exceptions of Japan, Australia, and New Zealand). "the overall regional trend towards markets free of constraints and vulnerable to the imperatives of free market demand and supply is of historical significance" (McFadden 1988). It is Japan's cautious liberalization, however, that poses the greatest prospects for increased trading activity in the region. As noted previously, Japanese interests already cast a major influence on the nature of regional trade in refined products. This is in addition to the predominating influence the Japanese agents have traditionally had on the east of Suez naphtha market. The Singapore spot market is expected to mature in scope and depth with the further liberalization of the Japanese domestic petroleum market. In conjunction with its role as the region's premier oil trading centre, the Singapore spot market serves as the pricing bench-mark

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for most petroleum transactions in the regional market. The country's active spot market has made Singapore-quoted prices the key indicators for most supply contracts for crudes and refined products in the Asia-Pacific time zone. For certain products, the Singapore spot market is too thin, so that a large sale or purchase on any particular day may (and does) result in a relatively large price fluctuation. This element of volatility may be smoothed out by taking an average over a longer period (say, fortnightly or monthly) in order to assess the fundamental supply and demand situation. Posted prices set by refiners and adjusted once or twice a month according to spot price movements reflect refiners' assessments of longer-term (that is, beyond the daily horizon) prices. Posted prices are set in order to minimize the transactions costs associated with attempting to base business contracts on volatile daily prices. Spot prices act as leading indicators for posted prices, the former being lower than the latter during a surplus period and vice versa during a deficit period. With an active trading enclave and extensive refining, storage, and shipping facilities, Singapore provides an ideal reference point against which to set prices for transactions in the Asia-Pacific time zone. However, the regional market is "opaque" relative to the Atlantic Basin (Krapels 1988) in that market fundamentals are largely a matter of informed guesses by participants. Current and regularly updated data (weekly and monthly) on stocks, production, refinery throughputs, and so on are non-existent for most countries in the region (including Singapore). 5 In this respect, the function of the Singapore spot market as the region's price indicator is especially crucial. 3.2 The Fuel Oil Futures Contract In the last five years, energy markets have undergone a "revolutionary change" with the rapid growth of trade in energy futures contracts (Petroleum Intelligence Weekly [Special Supplement], 5 September 1988). The emergence of the oil futures markets and their remarkable growth was a natural - some would assert, inevitable - outcome of concurrent trends in the petroleum, financial,

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and commodity markets (Treat and Treat 1989). We have already noted the structural change affecting energy markets since the mid1970s which ultimately resulted in the unravelling of the world oligopolist networks, the intrusion of a diversity of political and economic interests, and the accentuation of price volatility and uncertainty. The emergence of financial futures contracts in the foreign exchange and interest rate markets along with the growth of futures contracts in a variety of commodity markets set the stage for the success of futures instruments in the energy sector. The volatility and loss of confidence in the stability of oil prices has led to the emergence of new market structures and institutions (ibid.). One result of this, the rapid growth of trading activity in the spot market, has been noted above. A further response to price volatility was the development of informal markets for the trading of cargo in forward months at fixed prices. The futures market, essentially an institutionalized spot market with a formal settlement mechanism offering standardized forward contracts, was a logical evolution from the informal forward markets. 6 It serves three primary functions: risk management, price discovery, and speculation. By enabling the application of risk management techniques, it serves as a means to reduce exposure to price risks via a futures contract or "hedging". Unlike the spot market where prices are reported by trade journals which gather information on an informal basis from the market participants themselves, the organized futures market gives an instantaneous coverage of price movements, that is, it promotes "price discovery" or "price transparency". Finally, by yielding opportunities for speculation, it attracts risk capital from outside the industry and thus adds liquidity to the energy markets. Paper trading fundamentally involves arbitrage activity in which positions are determined by the changing differentials between prices of various crudes and products, between markets, and between geographical or time zones. Trading in "paper barrels" 7 has become a crucial price-setting mechanism for crude petroleum and refined products in world oil markets, and spot prices generally move in tandem with the paper markets. Since 1978, when the New York Mercantile Exchange (NYMEX) opened its Heating Oil Futures contract, there has been a mushrooming of trade in a variety of energy futures contracts. NYMEX

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now offers futures contracts in West Texas Intermediate crude, heating oil, leaded and unleaded gasoline, and propane. On the International Petroleum Exchange (IPE) in London, futures contracts are traded in gasoil and Brent crude. In September 1988 the Singapore Government announced its plans to launch the Pacific Basin's first oil futures contract on the Singapore International Monetary Exchange (SIMEX) in January 1989. The futures contract in High Sulphur Fuel Oil (HSFO) will be for 100 metric tonne lots of 4 per cent sulphur, 180 centistokes bunker fuel oil with a contract period of six consecutive months and f.o.b. delivery at seller's ex-shore, ex-ship, or ex-barge facility in Singapore. 8 Bunker storage facilities have been committed by Paktank, Van Ommeren, the Port of Singapore Authority (PSA), and Caltex to provide tankage in excess of 3 million barrels for delivery of the contract. SIMEX enjoys the full commitment of the government to provide a conducive fiscal and regulatory environment. To encourage oil trading activity in the country, the government is considering applications from international oil and finance companies for "approved oil trader" status which entitles significant tax breaks on wet and paper barrel trade profits. The approved oil traders (AOT), as well as Singapore-based oil trading firms that join SIMEX as commercial associate members, will be granted a concessionary tax rate of 10 per cent on profits from oil trading transactions. 9 The choice of a fuel oil contract as opposed to other refined products is apparent. Other major refined products are patently disqualified as candidates for futures contracts in view of the relative thinness of the Singapore market in those commodities. Only fuel oil has sufficient production and trade volumes in Singapore to accommodate futures contracts. As the world's largest bunkering port delivering up to 1 million tonnes of fuel oil each month, Singapore has already developed an active physical bunker oil market. The physical market is estimated to involve an average volume of 2 million tonnes of fuel oil per month (Singh 1988). Besides providing a ready baseload of physical trade, Singapore's large bunkering industry already possesses an infrastructure capable of delivering small parcel sizes crucial to a viable trade in futures contracts. The large number of participants in the fuel oil trade provide a ready clientele for the contract. Traders, the major oil companies, refiners,

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and regional electrical utilities (including Singapore's PUB) constitute potential candidates who would use the opportunity for risk management via the futures market. Interested parties would also include the large financial firms such as J.P. Morgan, Merrill Lynch, and Drexel Burnham Lambert; the "Wall Street refiners" Phibro and Morgan Stanley; the giant brokerage firm Refco; and the major Japanese trading houses such as Nomura, C. Itoh, and Sumitomo, all of which have established offices in Singapore. The rationale for launching an HSFO futures contract extends beyond the specifics of the Singapore fuel oil market. Fuel oil is the most widely traded and consumed product east of Suez. The volume of fuel oil traded in the Pacific Basin exceeds that of either Western Europe or North America. The fuel oil market is also more competitive than that of other petroleum products, and hence requires a higher level of risk management instruments. While it is currently possible to hedge the light and middle ends of the demand barrel, heavy fuel oil is conspicuous by its absence in any of the world's futures exchanges. 1°Furthermore, the gap between the Asia-Pacific time zone and the Atlantic energy futures exchanges of New York or London poses obstacles to the intensive use of futures contracts on the NYMEX or IPE by regional interests. The petroleum industry in the Asia-Pacific already bears sufficient risk exposure to exert a considerable demand for new risk management instruments including energy futures contract (Krapels 1988). Traders and other industry participants have suggested that the Singapore fuel oil market is "ripe" for futures trading. And according to the Working Committee 11 set up to study the feasibility of the futures contract, the Singapore oil industry has an expressed desire for a risk management facility in the Asia-Pacific time zone to limit exposure to volatile oil prices. While the attachment to conventional physical trading among members of the Singapore petroleum trading enclave has been noted by most observers, it is likely that the larger traders, oil companies, and refiners will increasingly perceive the advantages of deriving price transparency and hedging opportunities via the use of futures. A successful Singapore HSFO futures contract would fill the gap that currently exists in oil futures at the heavy end of the product

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barrel and widen the opportunities for hedging, for arbitraging against existing energy markets, and for speculating in the Pacific Basin markets. It would also fill an important time and regional gap in the global energy futures market, and act as a catalyst for boosting the regional market liquidity. Finally, a matured trade in the HSFO contract would add to price transparency. This last function is particularly relevant to the Pacific Basin market which is notably "opaque" relative to its Atlantic counterpart. Given the nature of trade in paper barrels, driven by potentially volatile price expectations, the successful launching of a futures contract is never assured. 12 Achieving an adequate level of liquidity is, of course, crucial. Noting the major losses recently suffered by the sogoshoshas in the paper barrel markets, industry observers suggest that the HSFO contract is likely to receive a cautious approach from the Japanese trading houses. These Japanese interests constitute the biggest players in the "wet barrel" spot market. Smaller entities, both from within and outside the industry, are expected to be among the most reluctant to engage in the market. This contrasts with NYMEX, where a substantial number of small clients- "the doctors and the dentists" -add significantly to the level of activity on daily trades via brokers. A lack of speculative interest would severely constrain liquidity in the paper barrels market. If interest in the contract is restricted to hedging activity, the futures market for HSFO will not attain the required volumes associated with a matured futures trade Oudged to be three or four times larger than the physical market). There are also questions among industry participants as to the adequacy of SIMEX's delivery mechanism. Market participants would need assured delivery if they are to commit themselves to a futures contract. Furthermore, it is not completely assured that the fuel oil trade is in fact large enough for the major players in the market (such as the refiners who hold large fuel oil stocks) not to be able to influence prices (Doshi 1989). The small number of firms that are to be granted AOT status by Singapore's Trade Development Board -expected to be about ten to fifteen, with the oil majors and large financial houses with vast trading networks most likely to fit the Board's application criteria - adds to such a concern.

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Although an outright failure in the Singapore HSFO futures contract seems an unlikely prospect, most observers agree that it will take about three to four years for trade in the futures contract to mature. Along the way SIMEX will have to overcome a number of serious obstacles facing a paper barrel trade in the region. If successful, the Singapore oil industry will have added yet another dimension to regional energy markets. An assessment of the prospects for a successful paper trade in the HSFO futures contract also requires an appreciation of the wider issues involved with Singapore's attempt to establish itself as Asia's premier financial centre. The rapid growth of the financial and banking services sector was an integral part of the government's development strategy in the 1970s. While the country has indeed established itself as a sophisticated offshore banking centre, the high growth performance of the sector has diminished and is entering "a critical period of consolidation and redirection" (The Singapore Economy: New Directions, p. 171). In this respect, SIMEX itself, as part of Singapore's financial services base, is at a crossroads. While it has been asserted by some that the Singapore futures market "appears poised for further growth and diversification" (Lim et al. 1988, p. 354), other more critical observers argue that SIMEX has never completely resolved its problem of lack of liquidity (Elegant 1988). The futures markets of both Singapore and Hong Kong face serious competition from Tokyo, and the rate and extent of deregulation of the Japanese financial market will be a major determinant of Singapore's future as the region's financial services base. 13

3.3 The Largest Bunkering Port of the World The strategic location of the island of Singapore at the juncture of two oceans and the corner of the world's largest land mass has conditioned - indeed, formed the very basis - of the country's economic achievements. The PSA has developed into a major maritime service centre providing a comprehensive array of services ranging from cargo and container handling to ship supplies and repairs. The high level of shipping traffic has led the port to attain

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its status as the world's busiest since 1986. It is also the world's fourth largest container port. In 1987, 33,846 vessels of about 700 shipping lines from eighty countries stopped by the port. Vessels arrive or depart at the rate of about one every eight minutes. The delivery of bunker fuels to ships calling at the port of Singapore has emerged as an important service industry in its own right. Over the period 1977-85, between 4 million and 6 million tonnes of bunkers were delivered annually. 14 Throughout this period, the bunkering industry was dominated by six oil majors. In September 1985 the government removed customs duty on bunker fuel. This provided an impetus to the industry by allowing the forces of competition to lower prices and improve the quality specifications of bunker fuels supplied to ships. The volume of bunkers delivered expanded remarkably, from about 5 million tonnes in 1985 to 8.5 million tonnes in 1987. In that year, Singapore became the world's largest bunkering centre, overtaking Rotterdam's total delivery of slightly less than 8 million tonnes. Singapore's bunker delivery for the first quarter of 1988, at 2.6 million tonnes, increased by 37 per cent over the previous year's corresponding quarter. The number of vessels taking on bunkers increased from 8,755 in 1984 to 11,623 in 1987, representing an increase of 30 per cent; the average intake per vessel increased from 600 to 800 tonnes. Bunkers are supplied to ships either through anchorage facilities or directly via shore pipes to PSA wharves. The anchorage facilities supply bunkers through barges, and have about 80 per cent share of the bunker market. There are currently over thirty bunker suppliers currently operating in Singapore, including almost all the major international bunker traders and suppliers. Besides the geo-strategic location of the natural deepwater Singapore harbour, the factors most directly responsible for Singapore's emergence as the world's premier bunkering port include the effective endowment of port facilities with the requisite infrastructural investments by the PSA. The fiscal liberalization of the bunkering industry in September 1985 has also proved to be a major contribution to the growth of the industry, coinciding as it did with the sharp fall in crude prices and recovery in international shipping. With the major petroleum refining, trading, and storage facilities to complement the bunkering

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industry, Singapore ex-wharf bunker fuel prices compare favourably with the U.S. West Coast, Rotterdam, and Persian Gulf bunkering centres (Kristiansen 1988). The rapidly growing export-oriented economies of East and Southeast Asia are expected to support a large expansion of trade in the Asia-Pacific region over the next decade. The demand for shipping services, and hence bunkering requirements, will increase correspondingly. An annual growth rate of between 6 and 8 per cent in Singapore's bunker sales is expected over the next five years (Seah 1988). There are, however, several supply-side aspects that constrain the industry's ability to exploit the demand prospects for bunkers (Hochstadt 1988; Takamiya 1988). While ex-wharf bunker prices quoted by Singapore suppliers are competitive, supplementary costs associated with barging, pipeline, and overside deliveries escalate total costs to be relatively high with respect to the other major bunkering centres. Furthermore, pilotage requirements and the composite port dues tariff has made it uneconomic for large vessels to call into port solely for taking on bunkers. A policy decision on the part of the port authority to review such charges in order to ensure the competitiveness of delivered bunker price (within reasonable constraints allowed by other objectives such as revenue collection and traffic safety) is required. 15 An improvement in the quality of bunker fuels is also called for,l 6 possibly via quality specification standards enforced by the PSA. The barge fleet of the Singapore bunkering industry is an aged one, with a large number of second-hand coastal vessels. As a result, there is a relatively high frequency of breakdowns and poor performance among the Singapore barges. Loss in efficiency is accentuated by low pumping-rate capacities and small size of the barge fleet. Terminal congestion, relatively low pumping capacity of shore pipelines, and the lack of a pooling system among barge operators have been identified as bottlenecks by industry clients (for instance, Takamiya 1988; Kristiansen 1988). The PSA is certainly aware of these conditions and is reportedly pursuing attempts to formulate standards for efficient bunkering (Seah 1988). The authority has plans to expand existing barging terminals and build new ones to improve the barge dispatch time. A new bunkering terminal

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at the offshore island Pulau Brani is also being consideredY Given the PSA's continued emphasis on investments to improve the efficiency of its facilities and to maintain the port's position as the region's "total shipping centre", the prospects for the Singapore bunkering industry in the 1990s are generally positive. 3.4 Independent Tank Farms

The storage of crude petroleum and refined products constitute an integral part of industry logistics. The function of petroleum tank farms extends beyond storage of crude and refined products awaiting distribution. In refining centres, tankage capacity is required for intermediate products due for further processing. Storage depots also function as centres for client logistics, product blending, and operations management. Storage facilities are a requisite in the breaking of bulk, where long-range shipments of cargoes to major distribution centres are disaggregated into smaller lots for delivery to regional and local receiving points. Access to storage tanks is essential for traders who need to hold cargoes in order to synchronize their transactions with price trends, that is, to hold on to a cargo until "the price recovers". Without access to hired storage, traders are often forced to sell their cargoes at "distress prices" without the option of waiting for an upswing in prices. 18 Thus, a market glut might be accentuated by forced sales caused by the unavailability of tankage. Much of the world's oil storage capacity is owned either by governments or the major oil companies, although in the last decade or so, independent storage has become an increasingly important service industry in its own right. With the fragmentation of the petroleum industry since the mid-1970s, a multiplicity of agents including the smaller oil companies, traders, distributors, and marketers have become reliant on hired storage. The Amsterdam-Rotterdam-Antwerp (ARA) conurbation, with its petroleum distribution network linked to most of Western Europe via barges, pipelines, and shipping, is the capital of the world independent petroleum storage industry. The headquarters of the three largest firms - Paktank, Van Ommeren, and Oiltanking - are located in the ARA area.

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In comparison, the development of the petroleum storage industry in the Asia-Pacific area is at an early stage. Japan, as the region's largest consumer, accounts for over 60 per cent of the Far East's total tankage of 230 million m 3 or 1,441 million barrels (Hough 1988, p. 23). Singapore has a long history as an oil terminalling and distribution centre. Indeed, storage for distribution has been Singapore's main petroleum-related activity since the nineteenth century - until the rapid growth of refining capacity over the last two decades. In addition to the storage facilities of the oil-refining companies, Singapore is the base for the two independent storage majors - Paktank and Van Ommeren. The Paktank terminal is a joint venture between the government and Paktank Europe of the Netherlands. The government interest is represented by the PSA (10 per cent), Jurong Town Corporation (10 per cent), and Temasek Holdings (30 per cent). Paktank Singapore Terminal became fully operational in May 1985 with the conversion of an ultra-large crude carrier onto a floating terminal storage facility moored off Pulau Busing. It has twenty-seven tanks with a total capacity of 300,000 m 3 for product storage. In 1987 Paktank announced its plans to move to a permanent tankyard on the reclaimed Pulau Busing and increase its storage capacity to 500,000 m 3 • This plan, however, posed difficulties in that the large investments involved (approximately US$75 million to US$100 million) conflicted with the government's privatization objectives. In the event, the Paktank relocation plan has been delayed, with the firm embarking on negotiations with other companies for a new joint-venture partnership. The construction of the proposed terminal is expected to start in the last quarter of 1988 and be completed by the end of 1990. Paktank's new partners are the U.S.-based GATX Terminals Corporation and the Chicago Iron and Bridge Co. The Singapore Government has an in-principle agreement to divest its stake when the new tankyard is operational. The Van Ommeren Terminal Singapore, with a total capacity of 600,000 m 3 , was officially opened in 1983. It is based at Pulau Sebarok on 31 hectares of land. VOTS is 51 per cent owned by Van Ommeren of Holland, 26 per cent by the PSA, 10 per cent by Intraco, 8 per cent by Temasek Holdings, and 5 per cent by the DBS.

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The latter four agencies constitute government-owned interests. In 1987 VOTS declared its intention to increase its storage capacity by 20 per cent following a profitable year in 1986. Delivery of the new tanks in late 1988 will have increased capacity by 120,000 m 3 , increasing total capacity to 720,000 m 3 • This includes 30,000 m 3 for storage of chemical products. This expansion will add six floating roof tanks with facilities for storage, handling, and blending of a full range of products at a cost of S$20 million. VOTS has plans to increase its capacity by a further 75,000 m 3 , bringing its total storage to about 800,000 m 3 by 1989. BP, Caltex, Esso, Mobil, Shell, and the PSA have formed a consortium called Common Users Bunkering Installation (CUBI) to handle bunkers in Singapore. This is in keeping with the recent trend in the petroleum industry towards the establishment of joint storage and distribution facilities to allow the sharing of overhead costs and the reaping of economies of scale among common users. CUBI is expected to operate the 106,000-tonne bunker fuel tank farm at Tanjong Pagar now run by Caltex, Shell, and the PSA. Bunker fuels stored at the installation are supplied to vessels calling at the Tanjong Pagar terminal and the Keppel Harbour wharves. In line with the government's current objectives of privatization, the PSA is looking into the feasibility of allowing private oil companies and bunker suppliers to operate the tank farm as a joint venture. Table 3.1 lists existing total tankage capacity in Singapore. The independent tank farms in Singapore face competition from the major refiners who hold the bulk of tankage and have the option of offering storage capacity in the market when logistics allow. Mobil, for instance, commissioned two new tanks in 1987 and is building six more in the expectation of increased regional trading activity over the next few years. Shell is planning to replace its oil storage depot at the Woodlands location with a larger terminal. The new 6-hectare terminal will be completed by 1990. The independents, however, possess an inherent advantage over the storage facilities allied to the refineries. This arises out of the commitment of the independents not to engage in the petroleum trade or be committed to any position in the trading environment. This obviates any possible conflict of interests and inspires confidentiality

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TABLE 3.1 Current Singapore Storage Tank Capacity (In million barrels)

Shell Mobil Esso SRC Caltex BP VOTS Paktank Total

Crude

Products

Total

7.90 4.50 4.50 3.70

11.40 6.50 5.80 4.50 2.00 0.90 4.50 1.90

19.30 11.00 10.30 8.20 2.00 1.35 4.50 1.90

37.50

58.55

0.45

21.05

Sources: Industry sources.

among clients which includes major oil trading interests and even refiners such as Shell and the Singapore Petroleum Co. After the downturn that affected all branches of the oil industry in 1985 and early 1986, the demand for petroleum storage services recovered strongly. At the end of 1987 oil storage facilities in the main centres of Rotterdam, Singapore, and the Carribean were operating at full capacity (Hough 1988, p. 18). The buildup of independent storage facilities in Singapore was originally motivated by the expected large flows of Middle East product exports into the region, flows which did not materialize. The surge of netback processing and the increased spot processing activity by Japanese interests over 1986/87, however, led to high capacity utilization of the independent tank farms. The liberalization of Japan's market for imported refined products has further increased the demand prospects for independent storage facilities. The sustained growth in regional trade in crude and refined products over 1988 and the expected launch of the fuel oil futures contract in Singapore has also increased demand for greater independent storage facilities. Oiltanking Gmbh, a West German company specializing in petroleum storage terminals, has made firm commitments to build a storage terminal with a capacity of

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75

210,000 m 3 at Pulau Seraya. The terminal, expected to be completed by the end of 1989, will store refined products such as jet fuel, naphtha, gasoline, as well as fuel oil bunkers. According to industry sources, Singapore's total storage capacity (that is, owned by refiners and independents) will grow to about 11.5 million m 3 (over 72 million barrels) by 1990 (Oil and Gas News, 24-30 October 1988). 3.5 The Petrochemical Complex

The large excess capacity characterizing the world petrochemical industry since the late 1970s has been rationalized. With improved economic conditions in the latter part of the 1980s, production capacity and demand for olefins and their derivatives have converged to a balance over the last two years. The strong world demand for the basic olefins (ethylene and propylene) is derived from increased consumption requirements for the derivatives high- and low-density polyethylene (HDPE and LDPE respectively), vinyl chloride monomer and polyvinyl chloride (VCM and PVC respectively), ethylene oxide and ethylene glycol, styrene monomer, and polypropylene (PP). Current world plant utilization exceeds 90 per cent and petrochemical producers have experienced increased rates of profitability over the last two years with the firming of prices of olefin-based derivatives (Corbett 1988). The Petrochemicals Corporation of Singapore (PCS) began operations in March 1984. The complex, jointly owned by the Singapore Government (50 per cent), the Japanese Government (10 per cent), and a private consortium of Japanese companies, was built at a cost of S$2 billion (approximately US$1 billion) at Pulau Ayer Merbau, an island to the south of Singapore. The design capacity of the upstream PCS plant is 300,000 tons per year of ethylene-based products utilizing feedstocks of naphtha and LPG. The PCS's downstream plants are the Polyolefin Co. jointly owned by the Singapore Government (30 per cent) and a Japanese consortium (70 per cent) and which produces LDPE and PP; the Phillips Petroleum Singapore Chemicals Co. (Singapore Government, 30 per cent; Phillips Petroleum International Corporation, 60 per

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cent; Sumitomo Chemical Co., 10 per cent), which produces HDPE; Denka Singapore Pte. Ltd. (Singapore Government, 20 per cent; Denki Kagaku Kogyo K.K., 80 per cent), which produces ethylene black; and Ethylene Glycols Singapore (Singapore Government, 50 per cent; Shell Eastern Petroleum Ltd., 20 per cent; a private Japanese consortium, 30 per cent), which began operations in February 1985 and produces ethylene oxide and ethylene glycols. Tetra Chemicals, a downstream plant producing the gasoline additive MTBE with a design capacity of 60,000 tons per year, commenced operations in June 1987 at an estimated S$16.5 million (US$7.5 million). The output destination is expected to be the U.S. West Coast and the Singapore markets. C. Itoh of Japan, a marketer of Singapore's petrochemicals, owns 40 per cent of the company, with the Government of Singapore owning the rest. Another downstream plant, Ethoxylates Manufactures, is in the process of constructing an ethoxylate plant with capacity of 18,000 tons per year. Shell plans to construct a S$84 million petrochemical facility adjacent to its refinery complex. The facility, which will produce 70,000 tons per year of the chemical solvent isopropyl alcohol when it comes on-stream in 1990, is intended to optimize the operations of the planned catalytic cracker. 19 Shell's investment plans for the facility closely follow its bid, made in January 1988, for the Singapore Government's US$500 million share in the US$1 billion petrochemical complex at Pulau Ayer Merbau in order to establish a substantial petrochemical manufacturing presence in the regional market. While the Shell bid fits in with the government's programme of divestment, the Japanese consortium led by Sumitomo Chemical objected to a total withdrawal by its government partner on the grounds that the complex is a "national project" requiring government participation. After protracted negotiations over two years, the Japanese partners have accepted Shell International Chemical Co. as a new partner. Plans have been finalized for the Shell Group to acquire a 30 per cent stake in PCS, leaving the Singapore Government a 20 per cent share in the upstream company. Shell will also purchase all of the Singapore Government's 30 per cent stake in the downstream Polyolefin Co. Since the PCS complex came on-stream in 1984, the enterprise

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77

has been deemed a "white elephant", an outcome of an ill-timed plan to establish a petrochemicals sector in Singapore. The petrochemical establishment suffered losses in the first three years of its operation. 20 However, in 1987 the PCS reported a profit for the first time since it began operations. The gross profit of S$110 million recorded for fiscal 1987 yielded a net profit of S$5.7 million after adjusting for foreign exchange losses on its yen-denominated outstanding loans. The recovery is attributable to the world-wide boom in petrochemical demand. Strong demand and relatively tight supply conditions in the regional market have contributed to higher prices, full capacity utilization, and increased profits. According to the "1988 Annual Petrochemical Report" of the Oil and Gas journal, the current surge in world demand is not likely to spur excessive capacity buildup given the large surplus capacity that afflicted the industry in the recent past. However, despite the relative caution in petrochemical investments, there are a number of countries in East and Southeast Asia which have plans or firm commitments to build major world-scale petrochemical plants. Japan, Taiwan, and South Korea constitute the major consumers in the region. The latter two countries have inadequate production capacity to meet domestic demand and both have announced large ethylene production capacity increases to come on-stream by 1992 (Corbett 1988, p. 39). Japan's large idled ethylene production capacity (estimated at 600,000 metric tonnes per year) will be reactivated within the next two or three years (ibid.). Thailand has announced plans to build a second world-scale plant, in addition to the one which is under construction and expected to come on-stream at the end of 1989. Indonesia and Malaysia have also been reported to be seriously considering major petrochemical investments. The petrochemical industry has been long noted for its propensity to cyclical booms and slumps, and there is no reason to suggest that the PCS will not be adversely affected by international and regional ethylene production-capacity increases. However, the proposed engagement with Shell as a major partner would yield benefits of scale and linkages (with refinery facilities, marketing channels, and so forth) which an oil major can provide.

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NOTES 1 This high figure is partly related to the surge in netback pricing that occurred in 1986. The proportion of spot or spot-related transactions in world oil trade is probably lower after the reintroduction of official prices (though these may be, and often are, based on spot pricing formulas) in early 1987. Rosemary McFadden (1985) estimated that about 40 to 50 per cent of oil sales were spot-related in 1985. 2 Although Singapore has been considered as the world's third largest petroleum trading centre (Krause 1987d, p. 10). the absolute value of the trade is not in the same order of magnitude as the great trading centres of New York and London. 3 Tokyo is only one hour behind Singapore time. 4 There is an informal forward market in naphtha, motivated primarily by Japanese interests. 5 Representatives of the ASEAN group have proposed the regular collection and exchange of data covering energy supply and demand, production, imports and exports, supply commitments, consumption and revenues derived from hydrocarbon processing as part of the overall implementation of the group's petroleum security agreement (Platts Oilgram News, 6 September 1988). 6 A futures contract is a legal agreement between a buyer and seller specifying the quantity, quality, and other characteristics of the commodity and the forward delivery, price, and maturity of the contract. For useful introductions to the fundamentals of the petroleum futures market, see Fesharaki and Razavi (1986). Lymbery (1988). and Banks (1987). 7 Unlike the forward contract, the futures contract is traded in an organized market where sales or purchases of such contracts can be offset or reversed so that traders are not bound to take physical delivery for consummation of the contract. Thus, the futures market is often referred to as the "paper market" which trades in "paper barrels" as opposed to the "wet barrels" traded in the "physical market" (see Banks 1987). 8 Complete specifications of the contract and fuel oil quality are provided in an undated SIMEX publication entitled Oil Futures. 9 This concessionary tax regime similar to that borne by the Asian Currency Units (ACUs) in the banking sector, is in contrast to the 33 per cent corporate tax rate normally levied on companies.

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79

10 It has been reported, however, that both NYMEX and IPE are in the process of developing Low Sulphur Fuel Oil (LSFO) futures contracts. 11 The committee consisted of government and industry representatives, including refiners, traders, major petroleum users, shippers, and SIMEX officials. 12 Both NYMEX and IPE have experienced failed launches of energy futures contracts. 13 It may be argued, however, that Japanese liberalization will expand the size and depth of futures trading in the Asia-Pacific time zone, and that futures trading in Tokyo and Osaka will have positive spillover effects in other markets. 14 The statistics in this section are extracted from the informative keynote address by Herman Hochstadt to the 1988 Singapore International Bunkering Conference (Hochstadt 1988). 15 The PSA announced tariff reductions for wharfage and labour on the supply pipelines at the Tanjong Pagar terminal and Keppel wharves in August 1988. It is not clear, however, whether these reductions have substantially changed the overall cost structure for bunkering in Singapore. 16 In a study of trends in bunker fuel density, carbon residue, asphalt, sulphur, and ash from 1984 to 1987 in Singapore, Rotterdam, and Los Angeles done by the Technological Research Centre of Mitsui (the shipping line), the quality of Singapore bunker fuel was characterized by increasing proportions of impurities and residues (see Takamiya 1988). One reason behind the drop in Singapore's bunker fuel quality has been the emphasis on increasing the yield of lighter refined products via secondary refining processes. Secondary refining processes which extract greater yields of higher-valued lighter products produce heavy fuels which are inferior in quality compared with the residual fuels derived from "straight-run" distillation processes. 17 Shell has been awarded a Consultancy contract for the construction of the Pulau Brani bunkering facility to cater for increased bunker trade in the 1990s. The facility is to be jointly developed by the PSA, Shell, Esso, Caltex, Mobil, BP, and SPC at an expected cost of over US$30 millions. Pulau Brani itself is being developed into a major container port linked to Singapore by a causeway. 18 In 1984/85, for instance, 50 per cent of the business of the Van Ommeren independent storage facility was to handle "distress cargo", that is, cargo which had no immediate destination, being unsuitable for trade due to adverse market conditions.

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19 The petroch emical plant will convert the cracker' s yield of propyle ne to isopropy l alcohol. 20 The losses reported for the three consecu tive years 1984-86 were S$33.6 million, S$66.3 million, and S$18.3 million (Oil and Gas News, 23-29 May 1988).

THE SINGAPORE REFINERS

The world refining industry grew rapidly prior to the 1970s when the end of the concessionary system and the two quantum leaps in oil prices radically altered the environment of downstream operations of the international oil industry (Mohnfeld 1984). World refining capacity expanded by 6.5 per cent in 1940-60 and 7.2 per cent in 1960-73 (Fesharaki and Isaak 1984, p. 7). It trailed behind the even more rapid increase in global consumption of petroleum products which grew by 7 and 7.6 per cent in the two consecutive periods (ibid.). This, in turn, led to high capacity utilization rates. During the infancy of the international oil industry, most refineries were located in crude-producing areas. In the post-1945 era, however, new refineries were increasingly built in consuming as opposed to producing areas. 1 While transportation differentials favouring the movement of bulk crude over smaller parcels of refined products may have played a role in the economics of refinery location,2 the decision by multinational oil companies to avoid placing major capital assets in the less developed countries in an era of rising nationalisms had a major impact. The fact that a refinery tied to a particular crude stream of a given oilfield is bound to be more constrained in its operations than a refinery located in a major consuming area and fed by a range of imported crudes provided

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another reason. Furthermore, developed country governments often encouraged the growth of domestic refining capacity for what were deemed to be "reasons of national security". 4.1

The Development of Entrepot Refining in Singapore

Although the expansion of refining capacity in Singapore paralleled that of the world industry during the boom period of 1960-73, 3 the country's oil industry found its early beginnings in the colonial period when three bulk storage tanks for kerosene were built in Pulau Bukom in 1892. From 1892 to 1960, Singapore served as the storage, transshipment, and distribution centre for the Far East. By the inter-war period, Singapore had become, in the words of one contemporary observer, "a major world centre for the petroleum industry" (King 1939, cited in Huff 1987, p. 307). In 1961 a small Shell refining unit with a capacity of 20,000 b/d began operations. Since then, other major oil companies operating in the region built refining facilities in Singapore, and a period of rapid refinery construction and expansion led Singapore to become the Asia-Pacific's premier entrepot refining centre. Singapore is the region's "swing" refiner, balancing disparities between supply and demand for petroleum products by competitively filling specific product deficits of a large number of countries. Singapore's small volume of domestic demand did not, in itself, justify refinery investments. The refining industry developed in Singapore essentially to supply the petroleum products distribution networks of the majors' regional affiliates. The country's role as an entrep&t refiner essentially derived from four crucial features, two of which historically characterized the refining facilities of the Asia-Pacific region and two which pertain specifically to Singapore. First, there was an overall lack of refining capacity to fulfil regional product demand so that Singapore was surrounded by rapidly growing markets lacking refinery facilities. Secondly, and equally important, there was an incompatibility of the technical configuration of existing refineries with product demand patterns. The region's refineries were simply incapable of producing an output mix that matched the demand composition of petroleum products. Thirdly,

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83

the establishment of a stable socio-political climate hospitable to foreign enterprise by the Singapore Government provided confidence to private entrepreneurial decisions which committed heavy investments in capital-intensive industry. A predictable policy environment is essential to the maintenance of high rates of investment by private capital, particularly in capital-intensive industries involving long amortization horizons. Finally, Singapore's geo-strategic and infrastructural endowments- namely, the country's natural deepwater port and its focal position in the transport and communications network among the rapidly growing economies of East and Southeast Asia - provided the essential prerequisite for entrepot refining. The proximity to Vietnam during the period of U.S. military intervention in Indochina also played an important role in the industry's early expansion.

4.2 An Economic Profile of the Refining Industry Table 4.1 lists the eleven companies which form the "petroleum and petroleum products" industry as classified by the Department of Statistics. 4 Of these, five are refiners which manufacture a range of petroleum products. The rest produce non-energy petroleum products such as asphalt, lubricants, and grease. Table 4.2 indicates the size of the industry in the domestic economy from 1977 to 1987. The contribution of the industry to total manufacturing output was substantial throughout the late 1970s and early 1980s, peaking at over 40 per cent for the years 1977 and 1982. After 1982 the contribution falls monotonically to a low of 16.3 per cent in 1987. The industry's share of GDP attained its peak at 6.3 per cent in 1980 and 1981, thereafter diminishing progressively to just under 2 per cent in 1987. This diminution in the industry's contribution to output and value added reflects the erosion in petroleum prices since 1981. The drastic fall in the industry's share of output from 29 per cent in 1985 to 19 per cent in 1986 is an outcome of the oil price collapse in 1986. Investments in the industry constitute a major proportion of total investments in the manufacturing sector as a whole. Data on the industry's capital expenditures from 1977 to 1986 are provided

...=

TABLE 4.1 Companies in the Petroleum and Petroleum Products Industry

Company

Main Sources of Capital

Products

Number of Workers

BP Refinery Singapore (Pte.) Ltd.

U.K.

Naphtha, jet fuel, diesel, fuel oil, LPG

100-149

Caltex (Asia) Ltd.

u.s.

Lubricating oil

50-99

Castro! (Far East) Pte. Ltd.

U.K.

Lubricating oil

100-149

Elf Petroleum SEA (Pte.) Ltd.

France

Lubricants

500-999

Esso Singapore (Pte.) Ltd.

U.S.

Fuel oil, jet fuel, gasoline, naphtha, LPG, diesel, asphalt, solvents, lubricants, bitumen, sulphur

50-99

Mobil Oil Singapore (Pte.) Ltd.

u.s.

Fuel oil, diesel, kerosene, gasoline, naphtha, jet fuel, LPG, lubricants

200-299

Resource Development Corp. (Pte.) Ltd.

Singapore

Asphalt premix

10-49

Shell Eastern Petroleum (Pte.) Ltd.

U. K./Netherlands

Fuel oil, jet fuel, gasoline, naphtha, LPG, diesel, asphalt, lubricants, kerosene, bitumen, asphalt

1,000-

Shell Lubricants Blending (Pte.) Ltd.

U.K./Netherlands

Lubricants, greases

50-99

Singapore Refining Co. (Pte.) Ltd.

Si ngapore/U. K./U.S.

Fuel oil, jet fuel, gasoline, naphtha, LPG, diesel, asphalt, kerosene

300-499

n I

)>

:::j m ;;o

Source: Singapore Manufacturers and Products Directory 1984.

..,.

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85

TABLE 4.2 Percentage Contribution of Petroleum Industry to Manufacturing and GDP (At factor cost)

Year ----~-

Contribution to Manufacturing Output __ _______

Contribution GDP

,

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987*

40.1 38.1 37.0 36.4 39.3 40.1 35.4 30.3 28.7 18.8 16.3

5.2 4.8 4.8 6.3 6.3 5.4 4.1 2.6 2.5 2.2 1.9

*Provisional figures. Source: Yearbook of Statistics Singapore (Singapore: Department of Statistics, various years).

in Table 4.3. Investments in the petroleum industry as a proportion of total investments in the manufacturing sector ranged between 20 per cent in 1977 to over 28 per cent in 1980. Thereafter the share diminished to just under 7 per cent in 1986. These investments led to the growth in capacity and complexity of the republic's refining industry. According to the annual survey conducted by the Ministry of Trade and Industry, refinery investments totalling S$1. 7 billion were made during 1980-86 primarily to upgrade facilities with computerized control systems, energy conservation equipment, and secondary processing units (Economic Survey of Singapore 1986). The refining industry, despite its relative diminution since 1981, figures prominently in the manufacturing sector. Provisional 1987 figures by the EDB indicate that the petroleum industry, constituting 0.3 per cent of all manufacturing establishments (engaging ten or more workers) and employing 1.2 per cent of the total labour force in the manufacturing sector, contributed 3.9 per cent of labour's total

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86

TABLE 4.3 Capital Expenditure of Manufacturing Sector and Petroleum Industry, 1977-86 (In S$ millions)

Year

Manufacturing Sector

Petroleum Industry

Petroleum as a Percentage of Manufacturing

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

754 824 1,427 1,863 1,970 2,235 2,125 2,185 1,979 1,747

154 161 381 529 376 314 230 146 181 121

20.5 19.6 26.7 28.4 19.1 14.1 10.8 6.7 9.1 6.9

Note: Capital expenditure is defined as all expenditures on fixed assets, including land, buildings, machinery and equipment, vehicles, and office equipment, less sales of fixed assets. Source: Report on the Census of Industrial Production 1986.

remuneration in manufacturing, 16.3 per cent of total manufacturing output, and 5.5 per cent of the sector's value added (Economic Survey of Singapore 1987, p. 113). As a capital-intensive industry, its value added per labourer was almost five times that of the average for the manufacturing sector as a whole, although its ratio of value added to output (11 per cent) is the lowest among all industries, compared with the average (32 per cent) for the manufacturing sector (ibid.). Table 4.4 provides a profile of the petroleum industry with respect to the manufacturing sector for the years 1984 and 1986. While the petroleum industry obviously ranks low in its contribution to employment, it has a leading role in the manufacturing sector in terms of material inputs utilized, output, value added, total sales, direct exports, and capital expenditure, ranking between first and third places among the thirty-one industry divisions analysed by the Report on the Census of Industrial Production for the two years.

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87

TABLE 4.4 Contribution and Rank of Petroleum Industry in the Manufacturing Sector, 1984 and 1986 Percentage Contribution to Manufacturing

Number of establishments Number of workers Material utilization Output Value added Total sales Direct exports Capital expenditure Labour remuneration

Rank (out of 31 Industry Divisions)

1984

1986

1984

1986

0.3

0.3 1.4 25.5 18.8 6.6 19.7 18.6 6.9 3.9

27 17 1 1 3

26 15 2 2 3 2 2 3 8

1.3 39.8 30.3 8.6 29.6 31.6 6.7 3.7

2 3 8

Note: Direct exports excludes resale of goods not manufactured by the manufacturing establishments. Sources: Report on the Census of Industrial Production 1984; Report on the Census of Industrial Production 1986.

Despite the drastic fall in oil prices during 1986, and the correspondingly reduced value of material utilization, output, sales, and exports, the petroleum industry still ranked either second or third in most of the categories listed. Data on government revenue derived from the petroleum industry in the form of corporate and other taxes is unavailable. In the absence of this, it is difficult to measure the fiscal impact of the industry. It is interesting to note, however, that one early study of effective protection and subsidy rates for all industry groups in 1967 found that the petroleum industry had a zero effective protection rate (Tan and Ow 1982, p. 294). Based on data on profit rates, loan structure, and interest payments, the study concluded that the industry received the highest subsidy among all industry groups, at 14 per cent relative to world market value added, "because of its supposed spread effects to ship-repairing (of tankers), its supply of by-products to the chemical industry, and its demand for domestically produced machinery and metal products" (ibid.). The

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government has been reported more recently to have provided fiscal incentives to the refining industry to encourage capital investments in secondary processing facilities (Petromin, June 1987). Quantitative estimates of these investment incentives are unavailable. 4.3 Refinery Ownership, Capacities, and Technical Configurations

As one of Asia's NICs, the economic development of Singapore has been distinguished primarily by the unusually rapid pace of industrialization and growth in the export of manufactures. The nation's growth dynamism, however, has been quite unlike the pattern of the other Asian NICs in that it has involved a primary role for foreign capital in the nation's domestic capital formation (as pointed out in Chapter 1 ). In a capital-intensive industry such as petroleum refining, the predominance of foreign involvement is particularly unexceptional. There are five petroleum refineries operating in Singapore. Shell Eastern Petroleum (Pte.) Ltd., Esso Singapore (Pte.) Ltd., BP Singapore (Pte.) Ltd., and Mobil Oil Singapore (Pte.) Ltd. constitute the private-sector refiners in Singapore. Together with the Singapore Refining Co. (SRC), a part government-owned firm, these establishments constitute Singapore's refining industry. The Shell Group in Singapore is indisputably the market leader of the industry in all respects, from refining capacity to the share of the domestic retail sales of refined products. It includes Shell Eastern Petroleum (Pte.) Ltd. (refining and product trade), Shell Singapore Pte. Ltd. (domestic product sales), Shell Lubricants Blending Singapore Pte. Ltd. (lubes blending, specialty oils blending, and grease production), and Shell Chemical Co. of Singapore (chemical sales). These firms are subsidiaries of Shell International. By 1972 Shell's crude distillation capacity had expanded to 350,000 b/d, and in 1975 a further expansion yielded a total capacity of 460,000 b/d. Mothballed and scrapped crude distillation units have now decreased capacity. In 1976 Shell completed the construction of the thermal cracking unit, and in 1983 its hydrocracking complex. In 1985, reportedly a bad year for Singapore refiners, Shell put

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89

crude distillation unit No. 3 on standby and permanently scrapped unit No. 2. Design capacity was then estimated to be 280,000 b/d. In March 1988 Shell announced its decision to proceed with the construction of a sophisticated catalytic cracker complex with an investment of S$480 million (US$240 million). The new facilities include the 30,000 b/d capacity catcracker, a 400-tonne per day alkylation unit, a 55,000-tonne per year propane/propylene splitter, and a 13-MW on-site power recovery station. The complex is to come on-stream by the first quarter of 1990. With a currently estimated effective crude distillation capacity of 316,000 b/d, the Shell refinery at Pulau Bukom is the largest and most sophisticated in Singapore. Major process units include a thermal cracking unit, two hydrodesulphurizers, a Meroxtreater, platformer, hydrocracking plant, LPG units, a bitumen plant, a sulphur recovery plant, solvents plant, lube oil plant, and a grease plant. It has a single buoy moor for very large crude carriers and its product loading facility at wharf has the capacity to accommodate 100,000 deadweight-ton tankers. Esso's interests in Singapore includes Esso Exploration Inc. (regional technical and logistics support for drilling operations) and Esso Singapore (Pte.) Ltd. (refining, marketing, and distribution of petroleum products and chemicals). Esso recently strengthened its administrative presence in Singapore by making Esso Singapore (Pte.) Ltd. responsible for the major's commercial interests in Hong Kong, China, Guam, and Taiwan in order to improve its regional operations efficiency. Esso began its Singapore refining operations in 1970 with an 80,000 b/d unit that was expanded to 230,000 b/d by 1981. The refinery consists of crude distillation towers, a lube oil plant, an LPG unit, a bitumen plant, a solvents plant, a catalytic reformer, a hydrotreater, and a hydrodesulphurizer. In 1983 Esso commissioned a lubricant additive plant to manufacture the paramins series with a capacity of 80,000 tons per year. It expanded its reforming unit from 14,000 to 19,000 b/d in early 1988. In September 1987 Esso announced its decision to construct a US$150 million visbreaker unit with a capacity of 50,000 b/d. The planned completion date is late 1989.

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Another oil major established in Singapore, Mobil, includes Mobil Oil Singapore (Pte.) Ltd. (manufacturing and marketing of petroleum products), Mobil Far East Ltd. (product supply and trading), Mobil Polymers International Ltd. (regional trade and sales of chemicals and resins), and Mobil Producing Southeast Asia Inc. (logistics and support for exploration and production operations in Indonesia). Mobil began its refinery operations in the mid-1960s. Mobil's plant consists of a distillation unit, a catalytic reformer, a desulphurizer, an LPG unit, a lube blending plant, and a visbreaker unit completed in 1981. In 1985 its distillation unit, originally designed for a Middle East crude slate, was overhauled to allow a Far East crude intake. Current capacity of the Mobil distillation unit is rated at 200,000 b/d. In October 1987 Mobil announced its decision to proceed with the construction of new facilities involving an investment of US$80 million, which include a new 23,000 b/d hydrocracker and a 12,000 b/d isomerization dewaxing unit. This decision closely followed the August 1987 announcement of a US$20 million project to expand the reformer unit's capacity from 14,000 to 19,000 b/d. BP's presence in Singapore includes BP Petroleum Development Ltd. (regional representative office for exploration), BP Singapore (Pte.) Ltd. (product marketing), BP Refinery Singapore Pte. Ltd., and BP South East Asia (responsible for co-ordinating BP's activities throughout Asia). The BP refinery has a crude distillation capacity of 27,000 b/d. Together with a 51,000 b/d crude distillation share in the Singapore Refining Co. (SRC) installation, BP's crude distillation capacity totals 78,000 b/d. BP also holds an 8,500 b/d share in the SRC hydrocracker and an 18,000 b/d share in the SRC vacuum distillation unit. There has been no further expansion of refinery operations by BP, owing largely to limitations of space at its present site. The Singapore Petroleum Co. (SPC) is a joint venture between the government and the private sector, with Amoco International Ltd. owning 31.3 per cent, the DBS, 31.3 per cent, Oceanic Petroleum Corporation, 31.3 per cent, and C. Itoh International Petroleum Co. Ltd., 6 per cent. Besides refining through SRC, SPC's activities include petroleum marketing, distribution, trading, and tanker transportation. SRC is a joint holding company, with BP and Caltex each holding 30 per cent and SPC holding the remaining 40 per cent.

THE SINGAPORE REFINERS

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SRC began operations in 1973 with a crude capacity of 70,000 b/d, which was expanded to 170,000 b/d by 1980. The complex includes a vacuum distillation unit (24,000 b/d), a hydrocracker (17,000 b/d), a hydrogen purification unit (133,000 m 3 /d), an aminetreating unit (45.6 tons of hydrogen sulphide removal per day), and a sulphur recovery unit (47 tons per day). The latest addition to the complex was a second hydrocracking unit (10,500 b/d) that came on-stream in May 1986. SRC's primary distillation facilities are shared by SPC, BP, and Caltex in proportion to their company ownership. This translates into a 68,000 b/d share in crude distillation for SPC, and a 51,000 b/d share each for Caltex and BP. Throughput shares for secondary facilities are owned in proportion to each company's capital investment in that facility, and these shares differ widely from base distillation shares. BP holds an 18,000 b/d share in the vacuum distillation unit, and SPC and Caltex each holds a 3,000 b/d share. The first hydrocracker is owned equally by SPC and Caltex. BP has an 8,500 b/d share in the second hydrocracker and SPC holds the remainder (2,000 b/d). The total nameplate capacity of the Singapore refining industry amounts to some 940,000 b/d. Nameplate capacity, however, is an inaccurate indicator of effective capacity, which is generally regarded to be between 800,000 and 850,000 b/d by industry sources in Singapore. While this discrepancy results partly from the periodic maintenance shut-downs of process facilities, 6 the more important reason for the significantly lower effective capacity, as compared with nominal capacity, is that the latter is premissed upon a crude slate of the heavier Persian Gulf variety. Since the late 1970s, however, Far East sources have emerged as important suppliers of Singapore's crude runs. The generally lighter Far East crudes have prevented refiners from fully utilizing design capacity. 7 An updated abstract of effective refinery capacity obtained from industry sources is presented in Table 4.5. One measure of the technical sophistication of a refining configuration is the cracking-to-distillation ratio. The ratio is an elementary indicator of the refinery's capability in converting lower-valued fuel oil to higher-valued lighter products. It refers to the sum of thermal

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"' TABLE 4.5 Refinery Configuration by Firm and Process Capacity (In thousand b/d)

BP ~~-

Crude capacity Vacuum distillation Catalytic cracking Hydrocracking Reforming Thermal visbreaking Resid desulphurization Isomerization Asphalt Lube oil Hydrogenh

Esso

---

27.0

Mobil ----~------~~---

230.0 49.0

200.0 70.0

-

9.0 50.0"

23.0" 14.0+ 5.0" 45.0 -

Shell Eastern ----

316.0 88.0 25.0" 25.0 20.0 60.0 35.0

SRC ---

Total (Existing)

~~-------~~

--

170.0 59.0

943.0 266.0

27.5' 12.0 28.0

52.5 54.0 133.0 35.0

5.0

13.0 12.4 32.0

12.0" -

4.0 7.0

-

4.0 5.4 18.0

14.0

·'Committed plans. h Units in million cubic feet per day. 'SRC's hydrocracking unit includes 17,000 b/d severe hydrotreater.

Sources: Fesharaki December 1986; industry sources; Oil and Cas journal, December 1987.

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