The Role of the Petroleum Industry in Singapore's Economy 9789814376297

This paper examines and evaluates the relationship between Singapore’s oil industry and its economy. It gives a brief ac

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Table of contents :
CONTENTS
LIST OF TABLES
I. INTRODUCfiON
II. THE ECONOMIC STRUCTURE
III. PETROLEUM REFINING
IV. THE OIL INDUSTRY AND THE ECONOMY
V. IMPACT OF LOWER CRUDE PROCESSING ON GOVERNMENT REVENUE
VI. FUTURE OUTLOOK OF CRUDE PROCESSING IN SINGAPORE
VII. POLICY IMPLICATIONS
VIII. CONCLUSIONS
APPENDIX
NOTES
REFERENCES
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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.

Role of the Petro leum Indust ry in Singap ore's Ecoao my

Shankar Sharma

Research Notes and Discussions Paper No. 67 ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

1989

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

Sharma, Shankar. Role of the petroleum industry in Singapore's economy. (Research notes and discussions paper / Institute of Southeast Asian Studies; no. 67) 1. Petroleum industry and trade--Singapore. I. Institute of Southeast Asian Studies (Singapore). II. Title. III. Series. 1989 sls89-69931 DS501 15% no. 67 ISBN 981-3035-34-X ISSN 0129-8828 Printed in Singapore by South Wind Production Singapore Pte Ltd

CONTENTS

List of Tables

v

I

Introduction

1

II

The Economic Structure

2

III

Petroleum Refining

5

IV

The Oil Industry and the Economy

9

V

Impact of Lower Crude Processing on Government Revenue

26

VI

Future Outlook of Crude Processing in Singapore

30

VII Policy Implications

33

VIII Conclusions

35

Appendix

36

Notes

38

References

39

LIST OF TABLES

2.1

Percentage Composition of Manufacturing Value Added by Industry, 1960-87

4

3.1

Crude Imports and Energy Balance, 1980-87

6

Share of Petroleum in Industrial Production, 1975-88 Share of Petroleum in Total Exports, 1975-87 Share of Petroleum in Total Industrial Value Added, 1975-88 Employment and Capital Expenditure in the Oil Industry, 1975-88 Net Investment Commitments in the Oil Industry, 1975-87 Total Requirements per Unit of Final Commodity Output in Terms of Gross Output, 1983 4.7 Total Requirements per Unit of Final Industrial Output in Terms of Value Added as Basic Values, 1983 4.8 Forward and Backward Linkages, 1983 4.9 Share of Petroleum Excise Duty in the Government Revenue, 1975-86 4.10 Cost of Production in the Petroleum Industry, 1975-85 4.11 Estimated Gross Income and Tax Contributions of the Oil Industry, 1975-85 4.12 Estimated Income Tax Assessed on the Petroleum Industry, 1975-85

4.1 4.2 4.3 4.4 4.5 4.6

5.1

5.2

Linear Regression Model with Income per Barrel of Crude Processed as a Dependent Variable and the Value of Output to the Value of Input (RATIO) and Crude Throughput (CRUDE) as Explanatory Variables Expected Gross Income of the Oil Industry and Government Revenue under Different Scenarios

10

12 13 14 15 17 19 20 22 23 24 25

28 29

vi

List of Tables

A.1 Average Annual Growth of Real GDP and Real GOP per Capita, 1965-86 A.2 Percentage Composition of GOP in 1985 Market Prices, 1960-87 A.3 Cost per Unit of Crude Throughput, 1975-85 A.4 Gross Income per Barrel, Crude Throughput, and Ratio of the Value of Output to the Value of Input, 1975-85

36 36 37 37

I

INTRODUCfiON

1 The economy of Singapore is highly dependent on the oil industry. The values of the oil industry output and oil trade both exceed that of any other commodity in the economy.2 Value added in the industry is substantial and government revenue generated by this sector is estimated to be significant. Forward and backward linkages of the oil industry to the rest of the domestic industries are strong. The oil industry in Singapore has some special characteristics. Singapore is the largest refining and trading centre in the region, but the country does not have oil reserves of its own and has to depend upon the international market for all its trading activities. More than two-thirds of the products are exported after processing. The import dependence and export-oriented nature of the industry make Singapore refineries more vulnerable to market changes than other refineries in the region. In recent years, the volume of crude runs has become unstable and is in a declining trend in Singapore. This is mainly because of the disruption in longterm processing contracts. On the other hand, the refiner's margin is declining because of price volatility and higher competition in the product market. The shrinking refiner's margin and declining capacity utilization lower not only the industry's profit; they will also have an adverse impact on the economy. This paper aims to examine and evaluate the relationship between Singapore's oil industry and its economy. A brief account of the country's economy is presented in Chapter II. Chapter III reviews the status of its oil industry. The performance of the industry and trade is also discussed in this chapter. Chapter IV examines the relationship of the industry with various sectors of the economy. The potential economic impact of lower crude processing in Singapore is examined in Chapter V, while Chapter VI examines the future outlook of crude processing in Singapore. Policy implications are discussed in Chapter VII and Chapter VIII provides concluding remarks.

II

TilE ECONOMIC STRUCfURE

Since its self-government in 1959, Singapore has exerted strenuous efforts to promote economic development. The government plans and strategies were able to generate high economic growth and a high per capita GDP. The rates of domestic capital formation as well as productivity growth were very high. The economy was able to maintain a low inflation rate. The economic growth of Singapore has been very impressive. Appendix Table A.1 presents the growth rate of the economy during 1965-88. The average annual growth rate during 1965-73 was 12.7 per cent. This was the result of a basically higher foreign investment. Total foreign investment grew at an average annual rate of 145 per cent per annum during the same period. The unemployment rate declined from 10 per cent in 1965 to less than 5 per cent in 1973. GDP grew at a lower rate of 8.6 per cent during 1973-84 after the first oil crisis of 1973 and world-wide recession. In 1985, it declined by 1.8 per cent as a consequence of increased domestic labour costs, decreased petroleum product exports, and poor global economic conditions. The economy grew by 1.9 and 8.8 per cent in 1986 and 1987 respectively, mainly due to strong external demand and improved international competitiveness of the domestic industries. The structure of the economy has undergone a significant change since 1960. The percentage composition of GDP over time (Appendix Table A2) indicates that trade, transport and communication, and services were the dominating sectors in the economy and together they accounted for over 67.1 per cent in the total output in 1960. By 1980, manufacturing had become one of the major sectors in the economy. The share of trade declined significantly from 24.6 per cent in 1960 to 17.0 per cent in 1987. The importance of transportation and part of the services sector increased significantly during 1960-86. The contribution of transport, communication, and financial and business services in total output increased from 22.7 per cent in 1960 to 42.4 per cent in 1987.

The Economic Structure

3

The development of the manufacturing sector in the 1960s and 1970s was the result of several government policy measures. The share of the manufacturing sector in the economy was 13.2 per cent in 1960. Government efforts were able to attract huge investments mainly because of tax and export incentives, investment allowance schemes, capital assistance schemes, and so on. The share of the manufacturing sector in GDP grew from 15.6 per cent in 1965 to 23.9 per cent in 1980. This share declined slightly after 1980 due to the relatively poor performance of this sector, resulting from the contraction of certain key industries caused by global change in the demand and supply conditions and decline in the cost-competitiveness in the world market. In 1986 and 1987, manufacturing output again expanded by 8.4 and 17.0 per cent, respectively. The output growth can be attributed mainly to the improved cost-competitiveness resulting from continued appreciation of the yen and the new wage policy. The growing demand in most of the OECD countries also helped to boost manufacturing output in Singapore during 1986-87. The manufacturing sector is still one of the major sectors in the economy. More than 50 per cent of foreign exchange earnings are derived from this sector, and approximately 25 per cent of the total work-force are employed in it. The linkages between the manufacturing sector and other service sectors are strong. The structure of the industrial composition of production has also changed significantly since 1960 (Table 2.1). Food and printing industries constituted 48 per cent of all manufacturing value added in 1960. The petroleum industry was almost non-existent. The share of electrical and electronics industries was only 6 per cent. About 90 per cent of the output were consumed in the domestic market. After the initiation of Singapore's industrialization policy in the 1960s the direction of investment shifted more towards the petroleum, electrical and electronics, and metal and engineering industries. These industries accounted for 64 per cent of all manufacturing value added in 1982. The similar figure for 1987 was about 62 per cent. The oil industry in Singapore grew basically because of higher oil demand in the region, the country's strategic location, its well developed internal and external infrastructure, and the favourable government attitude towards foreign investors. The high demand for oil in the Asia-Pacific region and economic incentives was followed by the construction and rapid expansion of refineries in Singapore. The refining industry became one of the largest industries in the country.

4

Chapter II

TABLE2.1 Percentage Composition of Manufacturing Value Added by Industry, 1960-87 Industry Food Printing Metal Wood Transport equipment Electrical and electronics Petroleum Chemicals Others Total"

1960

1970

1980

1985

1986

1987"

31 17 8 7 2 6

12

5

6 15 12 19

4' 2 2 12 33 17

6 6.4' 1.3 2.2 9.7 39.3 8.2

5.0 5.9' 1.2 1.5 7.7 473

5

83

100.0

-·-· 25

29

20

18.6

5.7 6.1' 13 1.8 8.5 44.0 6.6 10.7 15.3

100.0

100.0

100.0

100.0

100.0

-· 7 -·

5.5 11.0 14.9

"Preliminary. "Included in "others". 'Includes paper products. "Numbers may not add exactly due to rounding. SOURCES: Lim and Pang (1986); Ministry of Trade, Singapore, Economic Survey of Singapore, various issues.

III

PETROLEUM REFINING

Petroleum refining in Singapore was started by Shell in 1961 with a refining capacity of 20 mbd (thousand barrels per day). Before that Singapore was only the storage, trans-shipment, and distribution centre for the region. Later Esso, Mobil, British Petroleum, and Singapore Refining Company joined the refining operation in Singapore. Most of the refinery expansion occurred during 196176. At present, the total rated crude distillation capacity of the five refineries is 943 mbd. Singapore refineries were designed mainly for Middle East crude. In 1986, the ratio of Middle East crude to Asian crude imports was 56:44. With the processing of higher volumes of Asian crudes, effective capacity has been reduced to 850 mbd. The Middle East crude imports is estimated to have increased to 66 per cent in 1987. Singapore refineries are somewhat more sophisticated than the refineries in most Asian countries. The ratio of cracking capacity (hydrocracking and thermal cracking) to distillation capacity in Singapore is 19 per cent. The cracking process transforms a portion of heavy fuel oils to lighter products such as gasolines, kerosenes, and diesels. This ratio is therefore a rough indicator of a refinery centre's flexibility in changing the product yield patterns. The ratios for the United States, Europe, and the Persian Gulf are 40, 28, and 16 per cent, respectively. Production, Consumption, and Trade

Table 3.1 provides crude imports as well as the energy balance in Singapore. Crude imports to Singapore declined by 4.7 per cent per annum from 797 mbd in 1981 to 646 mbd in 1985. In 1986, imports rebounded at 706 mbd. Crude imports declined to 683 mbd in 1987. The refiners in Singapore are engaged in three types of processing deals. The first type is called term processing. This is carried out for crude suppliers

6

Chapter III

TABLE3.1 Crude Imports and Energy Balance, 1980-87 (In 1,000 b / d of oil equivalent)

Crude imports Refmery production (estimated) Consumption Product imports Product exports NOTES:

a) b) c) d) e)

1980

1981

1982

1983

1984

1985

1986

1987

674

797

784

794

758

646

706

683

630 165 105 570

757 173 93 677

771 192 172 751

762 187 183 758

686 187 119 618

605 183 167 589

620 232

559

222

281 580

610

260

Refinery loss and own use is about 3 to 4 per cent of crude throughput. Crude runs differ from crude imports mainly due to inventory. Stock has not been taken into consideration due to lack of data. Refinery Production = Product Exports - Product Imports + Consumption. Exports to Indonesia are estimated to be 10 and 8 mbd in 1986 and 1987, respectively. Estimates for crude imports are 70 and 60 mbd for 1986 and 1987, respectively.

SOURCES: Department of Trade and Statistics, Singapore, Singapore Trade Statistics: Imporls and Exports, various issues; Institute of Southeast Asian Studies/East-West Center Energy data flies; Caltex Petroleum Corporation (1987).

and a processing fee is charged. Term processing refers to a contract of at least one year. The second type of processing, own account processing, is for domestic consumption (including bunkering needs and jet fuel) and affiliate sales. In the third type of processing, spot processing, crude is bought in the spot market, processed, and the products are mostly exported. In 1986, about one-third of the total crude processed in Singapore was under term processing contracts. In the early 1980s, Indonesia was processing a large volume of crude in Singapore. However, Singapore lost much of this crude processing business in 1984 because Indonesian refiners were expanded and upgraded in the early eighties. The country's domestic market is small compared to its trading activities. It is estimated that 232 mbd of total products were consumed in Singapore in 1986 (Caltex Petroleum Corporation 1987). These included an estimated 121 mbd of bunker fuel and 24 mbd of jet fuel. The demand for products grew by 3.3 per cent per annum between 1980 and 1984, and declined in 1985 due to a slowdown in production and manufacturing activities. In 1986, consumption rose by almost 27 per cent. It further increased by 28 mbd or 12 per cent in 1987 over the demand in 1986. The rise in demand was due tnainly from increased industrial activities and the higher demand for bunker fuel.

Petroleum Refining

7

Net domestic product exports3 declined at an average annual rate of 6.9 per cent per annum from 1981 to 1985. Total product exports which include reexports increased during 1980-83, but declined in 1984 and 1985. This declining trend in exports was the result of the declining processing business with Indonesia and weaker product demand in the region. Both domestic exports as well as total exports rose in 1986 as the combined result of higher crude oil production. netback deals in crude processing, and declining product prices. Product prices fell sharply due to product glut in the market and more exports were possible. Netback deals in crude processing guaranteed profit margin to the refiners. The year 1987 was not a very good year for the Singapore oil industry. Crude imports declined because of the narrowed price differential between crude oil and refined products particularly in the early part of the year. The price of crude oil increased due to OPEC's fixed price policy in the first quarter of 1987. Product prices were weak and did not support Persian Gulf crude prices. As a consequence, profit margin weakened and the volume of crude throughput declined in Singapore. However, the situation slightly improved in the second half of 1987. Refiners became active due to high and unexpected growth in product demand in some of the countries of the AsiaPacific region and OPEC over-production.4 Indonesia used to be the largest importer of products from Singapore because of the long-term processing deal. However, since the termination of the Indonesian term processing contract in 1985, Japan has become the largest importer of Singapore's refined output. A significant change in Singapore's crude import pattern was observed in 1985 due to Saudi Arabia's attempt to return to official prices and end discounts, the cancellation of term processing with Indonesia, the escalating war between Iran and Iraq, and the emergence of China as a major player in the international oil market. Prior to 1985 Saudi and Indonesian crudes composed the major refinery feedstocks. Between 1984 and 1985, imports of Saudi crude to Singapore declined from 252 mbd in 1984 to 56 mbd, bringing the Saudi import share from 34 to 9 per cent. The share of Indonesian crude fell from 20 to 9 per cent as absolute import volumes contracted from 116 to 56 mbd. Malaysia was refining about 75 mbd under term processing in 1985. Chinese and Iranian crudes dominated the Singapore crude slate in 1985. The former rose from 62 mbd in 1984 to 166 mbd in 1985; a jump from 8 per cent of the crude slate to 26 per cent. Iranian crude tripled in volume between 1984 and 1985, shooting from 34 to 116 mbd, the import share settling at 18 per cent.

8

Chapter III

Figures from 1986 indicate that Kuwait crude composed the majority refining stream in Singapore at 141 mbd or 20 per cent of crude imports. Processing of Iranian and Chinese crudes followed at 19 and 18 per cent, respectively. Crude shares for other major import sources were as follows: Malaysia at 12 per cent; Indonesia at 9 per cent; and Saudi Arabia at 7 per cent. In 1987, crude imports were about 683 mbd. Imports from China, Malaysia, and Saudi Arabia were about 15 per cent each. Imports from Kuwait and Iran declined significantly and their shares were less than 13 per cent each. Qatar, which was a new processor in Singapore in 1987, processed 20-30 mbd under a short-term contract. Iran continued to process 250-300 mbd outside of Iran, but most of the processing was done in the Mediterranean.

IV

THE OIL INDUSTRY AND THE ECONOMY

The oil industry in Singapore affects the economy in a number of ways. It contributes to the manufacturing output, export earnings, investment expenditure, employment, and government revenue. It also indirectly influences the trade and services sectors of the economy. However, the industry itself is affected by the international oil market and the external economic environment. Manufacturing and Oil Industry Output

Table 4.1 presents time series data on the value of industrial output as well as the value of petroleum products from 1975 to 1987. The performance of the manufacturing sector was better during the second half of the 1970s than the first half of the 1980s. The value of output rose by almost 30 per cent per annum between 1975 and 1980; it rose only by 18.7 per cent per annum during 1980-85. In fact, manufacturing profitability declined by 32 per cent between 1980 and 1983 (Ministry of Trade and Industry 1986). The main reason for the output fall in the non-petroleum sector was the increase in labour wages in comparison with productivity growth.5 Another reason was the weaker economic expansion worldwide, especially in 1984. Local demand for industrial output also declined due to reduced construction activities in recent years. Industrial output grew by more than 17 per cent in 1987. This growth was generated mainly by strong external demand. The cost-cutting measures of the government also helped the economic recovery in 1986 and 1987.6 The share of oil in the total industrial output, which was in the range of 35 to 39 per cent during 1975-82, started declining after 1982. This share reached the lowest level of 14.0 per cent in 1988. The decline in the share and value of output between 1983 and 1985 was the result of both weaker profit margin of the industry and the diminishing volume of crude throughput. However, the decline

10

ChapterW

TABLE4.1 Share of Petroleum In Industrial Production, 1975-88 (In millionS$)

Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988*

Total Industrial Output 13,197.4 16,175.0 18,293.5 20,492.3 26,331.0 32,805.8 37,694.0 37,141.1 37,888.3 41,704.1 38,665.5 37,385.5 46,098.3 55,431.1

Petroleum Products 4,753.3 6,118.8 7,022.4 7,498.3 9,308.1 11,520.5 14,453.8 14,641.2 13,163.6 12,448.8 11,031.3 6,990.3 7,491.1 7,765.3

Share of Petroleum

(%) 36.0 37.8 38.4 36.6 35.4 35.1 38.3 39.4 34.7 29.9 28.5 18.8 16.2 14.0

*Preliminary. SOURCE:

Department of Statistics, Singapore, Yearbook of Statistics Singapore, various issues.

in the share in 1986 was the result of lower oil prices. The average price of crude declined from US$28 per barrel in 1985 to less than US$10 in 1986, and the price of product followed the price of crude. In 1987, the share of petroleum further declined because of the lower crude throughput and higher growth in other manufacturing sectors. Oil Trade

Its strategic location and rapid industrial growth have made Singapore a trading centre and an entrep6t. The ratio of exports and imports of merchandise goods to GDP, which reflects the importance of international trade in the economy, was 307 per cent in Singapore in 1987. Trade is dominated by manufacturing goods. The distortion level of the prices of internationally tradable commodities is very low. In general, Singapore's trade performance has remained impressive. Total exports increased by almost 225 per cent from 1975 to 1980 but rose only by 24

The Oil Industry and the Economy

11

per cent during 1980-84. Total exports declined by 2.3 and 0.9 per cent in value terms and volume terms, respectively, in 1985. This was mainly due to poor performance in non-oil exports. In 1986, exports further declined by 2.4 per cent. However, in terms of volume it grew by 17 per cent due to the recovery of domestic exports. The value of total exports declined mainly due to the lower oil price in 1986. Exports rose by 23 per cent in value terms and by 12 per cent in volume terms in 1987. Export expansion was mainly due to strong growth in nonoil domestic exports and re-exports which grew by 35 and 17 per cent, respectively. Oil products dominate exports in terms of both total as well as domestic exports. The share of oil in total exports (Table 4.2) shows that oil constituted 26.7 and 42.9 per cent of Singapore's total and domestic exports, respectively, in 1975. The share of oil in total exports reached a peak of 32.5 per cent in 1982, and started declining thereafter. The share declined to 20.5 per cent in total exports in 1986; again, this was the effect of lower oil prices that year. The share further declined to hit a record low of 15.9 per cent in 1987. A similar trend was observed in the domestic exports during 1975-87. In volume terms, domestic oil exports declined by 14 per cent in 1987. In Singapore, the volume and growth of total exports are highly correlated with the price of oil and the volume of oil exports. In 1985, non-oil exports declined by 4.5 per cent, but the value of oil exports increased by 4.4 per cent, bringing down the overall exports growth to -2.3 per cent. On the other hand, non-oil and oil exports grew and declined by 6.0 and 25.3 per cent, respectively, in 1986. Overall exports declined by 2.4 per cent during the same year because of the higher weight of oil in total exports. In fact, the volume of oil exports declined in 1985 but its value rose due to favourable world oil prices. On the contrary, the volume of oil exports increased by 12.2 per cent but its value declined by 25.3 per cent in 1986. However, both the volume as well as value of oil exports declined in 1987. The amount of foreign exchange earned by the oil industry depends upon international oil prices and the volume of exports. Except for the last few years, the volume of exports increased and the price of product was favourable. The gross foreign exchange earnings from exports of oil increased roughly by 293 per cent during 1975-85. Again, the growth was slower in the first half of the 1980s as compared to the last half of the 1970s. The earnings from product exports increased by almost 50 per cent per annum during 1975-80. On the contrary, the average increment in earnings was only 2.5 per cent per annum during 1980-85.

TABLE 4.2 Share of Petroleum In Total Exports, 1975-87 (In million S$)

Year

Total Exports

Total Domestic Exports

Petroleum Products Exports

Domestic Petroleum Products Exports

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

12,759.9 16,265.9 20,090.3 22,985.5 30,940.1 41,452.3 44,290.8 44,472.8 46,154.9 51,340.0 50,178.8 48,985.5 60,265.7

7,540.4 9,362.4 11,651.8 13,226.2 18,200.4 25,805.2 29,452.0 29,157.8 29,206.4 33,051.2 32,575.5 32,062.4 39,070.6

3,407.6 3,743.7 4,834.6 5,279.1 7,337.2 11,828.0 13,980.6 14,437.3 12,761.9 12,992.3 13,456.1 10,021.8 9,924.6

3,233.1 3,632.2 4,697.2 5,224.7 7,214.8 11,612.2 13,829.6 13,846.5 12,192.7 12,749.5 12,982.1 9,665.2 9,211.5

NOTE: Petroleum products exports comprise refinery exports and re-exports. SOURCE: Same as for Table 4.1.

Share of Petroleum in Total Exports

Share of Domestic Petroleum Exports in Total Domestic Exports

(%)

(%)

26.7 23.0 24.1 23.0 23.7 28.5 31.6 32.5 27.7 25.3 26.8 20.5 15.9

42.9 38.8 40.3 39.5 39.6 45.0 47.0 47.5 41.7 38.6 39.9 30.1 23.6

The Oil Industry and the Economy

13

Value Added

The time series data on the share of petroleum in total industrial value added is presented in Table 4.3. The oil industry value added is more important to the economy than the absolute volume of product output because of the total import independence of raw materials in the industry. The industry has remained one of the largest contributors to the total value added. However, the share of oil in the total industrial value added has declined very rapidly after 1982, but its contribution is still important. It was estimated to be S$779.1 million in 1986. It accounted for 5.5 per cent in the total industrial value added in the country. TABLE 4.3

Share of Petroleum in Total Industrial Value Added, 1975-88 (In million S$)

Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988*

Total Value Added 3,463.8 4,041.1 4,539.6 5,220.0 6,523.9 8,652.8 9,866.9 9,505.8 10,012.4 11,268.9 10,694.6 11,908.0 14,442.9 17,512.2

Petroleum Products

Share of Petroleum

605.0 698.5 774.2 787.0 916.0 1,470.4 1,707.2 1,617.2 1,382.6

17.5 17.3 17.1 15.1 14.0 17.0 17.3 17.0 13.8 8.5 8.2 6.6 5.0 4.2

955.6 873.7 779.9 728.2 743.5

(%)

*Preliminary. SOURCE: Same as for Table 4.1.

Value added per worker has also fallen significantly in recent years. The value added per worker increased from S$182 thousand in 1975 and reached a peak of S$486 thousand in 1981. It started declining from then on and reached S$274 thousand in 1984. It further fell to S$232 thousand in 1986. The value added per worker was S$241.1 thousand in 1987. Lower crude processing is the main reason for the declining value added in the industry. Poorer margins also reduced the value added significantly. In 1986, after the price of crude oil was fixed at US$18 by OPEC, the result of higher

14

Chopter W

prices of crude oil and lower market prices for the refined oil product s led to sharply declining refiner's margins. Employment and Investment Both employment and labour costs in the oil industry are small compar ed to capital investment. The number of workers employed in this industry was 3,331 in 1975. It rose to 3,755 in 1983. However, in 1986 this number went down to 3,411. On the other hand, capital expenditure which covers all expend iture on capital assets incurred grew at an average annual rate of 5.2 per cent between 1975 and 1980. The amount of capital expenditure rose to 529.3 million in 1980 from 99.0 million 1975. From 1980, the capital expenditure in this industry has been declining at an average annual rate of 18 per cent. It reached 145.6 million in 1984. Both employment as well as capital expenditure in the industry are moving more or less in a similar direction. The detailed data on employ ment and capital expenditure from 1975-88 are presented in Table 4.4. TABLE4 .4 Employment and Capital Expendit ure In the Oil Industry , 1975-88

Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988*

Number of Workers 3,331 3,167 3,094 3,082 3,212 3,342 3,511 3,784 3,755 3,605 3,494 3,367 3,245 3,103

Capital Expendit ure (S$ million) 99.0 983 1543 161.2 381.1 529.3 376.4 314.0 230.1 145.6 181.0 n.a. n.a. n.a.

*Preliminary. SOURCE S: Departm ent of Statistics, Singapore, Report on the Census of Industrial Production and Singapore Trade Statistics: Imports and Exports, various issues.

Similarly, figures on total investment commitments and the share of the oil industry are provided in Table 4.5. The figures include investment commit ments

The Oil Industry and the Economy

15

for new projects, expansion, and upgrading programmes. The initiation or expansion and upgrading of oil industry projects usually require huge investments. Table 4.5 shows that petroleum refining is one of the major sectors in terms of investment. Investment needs are determined basically by the market situation. TABLE4.5 Net Investment Commitments in the Oil Industry, 1975-87 (In million S$) Year

Total Investment

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

306.3 303.3 396.4 812.4 934.6

1,417.9 1,877.4 1,705.0 1,775.8 1,830.4 1,136.2 1,439.1 1,743.0

Petroleum Industry 135.0 16.0 66.2 330.0 224.5 200.0 162.0 387.7 367.1 358.8 190.0 116.0 122.4

Share of Petroleum (%) 44.1 5.3 16.7 40.6 23.8 14.1 8.6 22.7 20.7

19.6 16.7 8.1 7.0

SOURCE: Same as for Table 4.1.

Major expansions of refineries were planned in the first half of the 1970s. In fact, the total refinery capacity almost doubled between 1972 and 1976. The large share of petroleum in total net investment commitments in 1975 is a reflection of the peak period in refinery expansion. After the mid-1970s, investment emphasis shifted to secondary processing and upgrading of the refineries. Several projects were initiated and completed during 1977-79 and 1981-86. Catalytic reforming capacity almost doubled during 1977-79. In the first half of the 1980s about 105 mbd capacity of hydrocrackers and visbreakers were added in the refineries. As a consequence the share of petroleum in total investment increased in 1978, 1979, and 1982-84. In response to the expected change in regional and international oil markets, major upgrading plans were announced again by oil companies in Singapore in 1987 and early 1988. Shell is pumping S$480 million in a long-residue catalytic cracker (LRCC) unit. The plant, to be completed in 1990, will enable the refining company to more efficiently convert low-value fuel oil into more valuable

16

Chapter IV

products like gasoline, kerosene, and diesel. The LRCC plant will have a 29mbd catalytic cracking unit and a 3-mbd alkylation unit. Similarly, ESSO is investing S$150 million more to build a new visbreaker plant with a capacity of 50 mbd. When completed, the plant will enable the company to produce a higher proportion of high value products such as jet fuel, naphtha, and diesel. Mobil, another oil giant, is spending S$210 million in the construction and installation of a hydrocracker with a capacity of 23 mbd and an isomerization dewaxing unit with a capacity of 12 mbd. The company is also expanding its reformer from 14 to 19 mbd. The Oil Industry and Its Linkages with Domestic Industries

The oil industry in Singapore is mainly an export-oriented industry, but it plays an important role in the development of other industries as well. The interdependence of the oil industry with other industries can be evaluated from an input-output framework in a number of ways. Direct and Indirect Input Requirements The production of a unit of output in a petroleum refining industry will further generate production in other sectors of the economy including itself because the production of each unit of output requires direct and indirect outputs from other domestic industries. These subsequently require further inputs supplied by other industries, including the petroleum refining industry itself. Table 4.6 provides the total requirements per unit of final output in terms of gross output for the petroleum refining industry as well as some other selected sectors of the economy. Table 4.6 shows that in the case of petroleum refining, a unit of final output generated 0.034 unit of additional output. This comprised 0.007 unit of output in petroleum refining itself and 0.027 unit in other industries. Corresponding values in other sectors of the economy indicate that compared to the other industries the petroleum refining industry is less dependent on domestic industries for its inputs. This reflects the fact that crude oil, which is 100 per cent imported in Singapore, is the major dominant raw material of the industry. Final Output in Terms of Value Added Value added by industries is more important to the country than the value of industry output. The input-output framework can also be used to determine how the production of 1 unit of an industry could stimulate the value added in the input-supplying industries. Table 4.7 provides the total requirements per unit of

TABLE 4.6

Total Requirements per Unit of Final Commodity Output in Terms of Gross Output, 1983 Industry

Agriculture

Manufacturing

(Petroleum)

Construction

Commerce

Finance and Business Services

Own industry Other industries

1.0876 0.3960

1.0910 0.1017

(1.007) (0.027)

1.0022 0.4527

1.0635 0.4402

1.1752 0.1434

Total

1.4836

1.1927

(1.034)

1.4549

1.5037

1.3186

NOTE: Manufacturing includes petroleum. SOURCE: Department of Statistics, Singapore (1987).

18

Chapter W

final industrial output of selected industries in terms of imports, commo dity taxes, and value added for Singapore in 1983. Table 4.7 shows that for 1 unit of final output in the case of the petrole um refining industry, 0.0704 unit of value added is generated in domestic industries, including 0.0553 unit in the refining industry itself. It requires 0.9292 unit of imports and 0.0004 unit of taxes (includes import duties, excise duties, and commodity taxes). Forward and Backward Linkages

Indices of forward and backward linkages provide the extent of interdep endence among industries. The index of forward linkage is used to measur e the dependency of other domestic industries on the petroleum refining industry. Similarly, the index of backward linkage measures the dependency of the petroleum industry on other domestic industries. The indices of backwa rd and forward linkages for different sectors of the economy are provided in Table 4.8. A forward linkage greater (less) than unity implies that the domest ic industries have above (below) average dependency on the petrole um refining industry. Similarly, a backward linkage less (greater) than unity implies that the industry in question has below (above) average dependency on other domestic industries for its input requirements. Since the petroleum industry is highly dependent on imported crude oil its backward linkage is below average. However, energy being the major input for almost all domestic industri es its forward linkage is very strong. Oil-Related Industries and the Economy Singapore is not only one of the largest refining and trading centres in the world but also one of the largest centres for oil-industry related services. The services sector in Singapore is highly dependent on the oil exploration, refining , and trading activities of the region. For example, in 1986 oil exploration activities in the region declined due to lower oil prices. As a result there was a 20-per cent decline in the value of shipbuilding contracts and a 61-per cent fall for rigbuilding projects in Singapore in 1986. The number of vessels launched decline d by 50 per cent (Petroleum News, June 1987). Oil is the major trading item in Singapore. Trade is also highly interlin ked with other domestic industries. Separate data on the linkages of petrole um trade are not available. However, Table 4.6 shows that an increase in 1 unit of trade may generate 0.5037 unit of additional output including 0.0635 unit of output in

TABLE 4.7 Total Requirements per Unit of Final Industrial Output In Terms of Value Added as Basic Values, 1983

Industry

Own industry Other industries Total value added Imports Commodity tax

Agriculture

Manufacturing

(Petroleum)

Construction

Commerce

F"mance and Business Services

0.5043 0.1558 0.6601 0.3374 0.0025

0.1904 0.0551 0.2455 0.7519 0.0026

(0.0553) (0.0151) (0.0704) (0.9292) (0.0004)

0.4359 0.1636 0.5995 0.3987 0.0018

0.5955 0.2190 0.8145 0.1776 0.0079

0.8038 0.0625 0.8663 0.1323 0.0014

SOURCE: Same as for Table 4.6.

TABLE 4.8 Forward and Backward Unkages, 1983 Industry

Agriculture and Quarrying Manufactur ing

Forward Linkage Backward Linkage

0.8080 1.0670

SOURCE: Same as for Table 4.6.

1.5968 0.8564

(Petroleum Refming)

(3.3472) (0.7302)

Utilities Constructio n

0.8271 1.0949

0.7563 1.0452

Transport and Commerce Communica tions

0.9883 1.0925

1.0104 0.9552

Finance and Business Services

Other Services

1.2240 0.9436

0.7891 0.9452

The Oil Industry and the Economy

21

the trade sector itself. Similarly, 1 unit of final output in this sector will generate 0.8145 unit of value added in domestic industries. Trade is the second largest contributor in terms of value added per unit of final demand in domestic industries after finance and business services. Forward and backward linkages of trade are also strong. The index of forward linkage is 0.9883 and is close to unity. The index of backward linkage which is 1.0925 (and is greater than unity) implies that trade has above average dependency on other domestic industries for its input requirements. The data for Singapore are not available, but globally oil accounts for about 15 per cent of all world trade, and its price and availability have a direct influence on probably another 20 per cent of goods and services traded world-wide (Bonney 1987). Fiscal Contribution

The fiscal contribution of the industry is estimated to be very high because of its leading role in the economy. The fiscal contribution of the oil industry consists of two components excise duties collected on the domestic consumption of petroleum products and the income tax levied on company profit. Table 4.9 presents the trend of excise duties generated by the petroleum industry. Data show that the petroleum revenue accounted for 2-4 per cent in the total consolidated revenue of the country. The tax in this sector increased from S$184 million in 1981 to S$431.8 million 1985. The gains in revenue were mostly from tax increases and to a certain extent from the increased volume of domestic consumption. In 1984, higher duties were levied on petroleum that increased the revenue substantially in that year. In 1985, ad valorem duty was further increased and this resulted in higher government revenue. The lower revenue in 1985 was the result of lower product prices. The revenue generated from duties on domestic consumption is a significant portion in the total revenue, but the company tax of the industry is also very important to the economy. The tax collected on domestic consumption would not be lost even if there were no refining industry in the country. But the company income tax will decrease with lower refining activities and an unfavourable market environment. The share of the petroleum industry in total company tax is expected to be very high. However, actual figures on the profit of the industry or on its contribution to the total consolidated revenue are not available. But the company

22

ChapterW

TABLE 4.9 Share of Petroleum Excise Duty In the Government Revenue, 1975-86

(In million S$)

Year

Total Consolidated Revenue

Revenue Collected by Custom and Excise Department

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

3,092.2 3,131.4 3,411.1 3,675.9 4,339.1 5,491.4 7,146.2 9,008.5 10,510.6 10,267.6 9,397.0 8,333.1

433.0 474.5 535.4 586.5 634.4 716.5 748.4 813.7 913.6 1,046.3 1,022.6 883.1

Duties on Petroleum 121.4 125.8 133.9 143.4 154.4 168.5 184.2 206.1 265.1 381.0 431.8 330.0

Share of Petroleum in Total Consolidated Revenue

(%) 3.9 4.0 3.9 3.9 3.6 3.1 2.6 2.3 2.5 3.7 4.6 4.0

SOURCE: Same as for Table 4.1. 7 tax can be roughly estimated from the gross income of the industry. Detailed data on the manufacturing sector are available through the annual industrial census which is conducted using a standard questionnaire. The results are tabulated by industrial activity. The census provides broad information on capital structure, employment, remuneration, materials used, electricity, water and fuel, other costs of production and disbursements, total input, gross output, value added, sales, and so on.8 Gross income, calculated as the difference between the values of output and production costs, becomes the basis for tax assessment in our analysis. The production cost figures for the petroleum industry are shown in Table 4.10. Total cost of production is divided into three components - labour, materials and fuel costs, and other costs. Labour cost comprises wages and salaries and all other benefits to the employees. Materials cost refers to the total cost of crude oil, chemicals, and packaging materials. Other costs of production include expenditure on repair and maintenance, depreciation costs, rent, and other miscellaneous expenditure, for example legal fees, stationery, etc. The materials cost is the major cost of production. It includes crude cost, packaging, and fuel costs. On the average, crude cost alone accounts for more than 90 per cent of the total materials cost.

TABLE 4.10 Cost or Production in the Petroleum Industry, 1975-85 (In million S$)

Year

Total Cost

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

4,415.9 5,682.2 6,554.7 7,028.8 8,639.4 10,521.9 13,327.5 13,687.9 12,514.9 12,233.8 10,870.7

SOURCE:

Labour Cost 66.1 67.2 67.0 73.5 87.1 99.7 114.7 138.6 148.0 151.4 154.6

Materials and Fuel Cost 4,148.3 5,420.3 6,247.2 6,711.3 8,264.6 10,050.0 12,746.6 13,023.4 11,780.9 11,493.2 10,154.5

Other Costs 201.5 194.7 240.5 244.0 287.7 372.2 466.2 525.9 586.0

589.2 561.6

Department of Statistics, Singapore, Report on the Census of Industrial Production, various issues.

24

ChapterW

The labour cost also affects profit directly. However, oil refining is largely a capital-intensive industry; the labour-capital ratio is small compared to other industries. The number of workers cannot be reduced very easily with the reduction of crude throughput. Appendix Table A.3 shows that labour cost per unit of crude processed is increasing. This could be the result of the rapid increase in the wage rate and declining volume of crude runs. Other costs also increased in the study period reflecting the rising rental value, depreciation costs, and repair and maintenance costs. Per unit of these costs increased even higher due to lower crude throughput in the industry in recent years. Table 4.11 shows that gross income of the industry increased from S$337.4 million in 1975 to S$1,126.3 million in 1981. It started declining from 1981 and is estimated to be S$160.2 million in 1985. Table 4.11 also provides the estimated share of the oil industry company tax under the assumption that (i) the gross income is the taxable income and (ii) the tax rate is 40 per cent of the gross income. The figures show that the expected income tax assessed on the petroleum industry declined from S$450.5 million in 1981 to S$64.2 million in 1985. Both shares of petroleum on company tax as well as total tax which were on an increasing trend (Table 4.12) declined after 1981 indicating that the growth TABLE4.11 Estimated Gross Income and Tax Contributions of the Oil Industry, 1975-85 (In million S$) Year 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Gross Income• 337.4 436.6 467.7 469.5 668.7 998.6 1,12fj.3 953.3 648.7 215.0 160.6

Tax Assessed• 135.0 174.6 187.1 187.8 2fj7.5 399.4 450.5 381.3 259.3 86.0 64.2

•aross Income = Value of Output - Total Cost. •40 per cent of gross income. SOURCES: Tables 4.1 and 4.10.

The Oil Industry and the Economy

25

of the non-oil sector exceeded the growth of the oil sector in the economy. In 1985, the share of the petroleum industry increased strictly due to a higher volume of crude processing and some improvement in the profit margin.

TABLE 4.12

Estimated Income Tax Assessed on the Petroleum Industry, 1975-85 (In millionS$)

Year

Total Corporate Tax

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

642.5 897.2 984.6 1,053.0 1,223.3 1,466.2 2,068.4 2,409.6 2,577.5 2,964.5 2,015.7

Share of Petroleum on Corporate Tax

Share of Petroleum on Total Tax

(%)

(%)

21.0 19.5 19.0 19.1 21.9 27.2 21.8 15.8 10.1 2.9 3.2

4.4 5.6

5.5 5.1 6.2 7.3 6.3 4.2 2.5 0.8 0.8

SOURCES: Department of Statistics, Singapore, YearlJook of Statistics, various issues; Tables 4.9 and 4.11.

V

IMPACT OF WWER CRUDE PROCESSING ON GOVERNMENT REVENUE

It was observed that the share of the petroleum industry declined in the total

manufacturing output as well as in foreign exchange earnings. The loss of revenue from this sector was also estimated to be substantial. The main reasons for the declining income of the industry were both the increasing competition in the product market and declining crude runs. The increasing competition in the product market can be visualized from the declining ratio of the value of output to the value of materials and fuel inputs (Appendix Table A4). In 1975-83, the ratio which reflects the difference between crude and product prices ranged from 1.12 to 1.15. It declined to 1.08 and 1.09 in 1985 and 1986, respectively. The declining volume of crude throughput affects the tax revenue first, through the total profit of the industry. Second, labour and capital costs per unit of crude processed are observed to be inversely related with the volume of crude throughput (Appendix Table A3). As a result, the profit per unit of oil processed declines also with the decline in the volume of crude processed (Appendix Table A4). Further decline in crude throughput and higher competition in the product market may further reduce the profit of the industry. A regression analysis was carried out to measure the impact of lower crude processing on the gross income of the industry and government revenue. Because of the unavailability of data, gross income per barrel of crude processed in the industry is taken as the endogeneous variable. The gross income of the industry depends upon the price of products and raw materials and other costs of the industry. The major cost of the industry is the materials (crude) cost. To capture prices of crudes and products the ratio of the value of output to the value of input (RATIO) is taken as the first explanatory variable. The declining ratio indicates that the rate of growth (decline) of crude price is higher (lower) than the rate of growth of product

Impact of Lower Crude Processing on Government Revenue

27

prices. The declining profit margin in Singapore could be the result of higher competition in the product market from the new refineries in the region and the export refineries in the Middle East. Petroleum product prices also weakened during 1984-85. In 1986, crude prices collapsed but product prices remained relatively strong. The processing fee also declined due to competition. For example, the processing fee that was US$1.70 per barrel in February 1986 dropped to US$1.00 per barrel in the first quarter of 1988. The RATIO can be used to examine the impact of the international oil market on the income of the industry. The other explanatory variable taken is the crude throughput (CRUDE). This variable is very important for the industry because part of the industry costs does not vary with output. These costs neither increase very much with a higher production level nor can they be greatly reduced even if nothing is produced. Usually these costs consist of depreciation costs, repair and maintenance costs, rent, and other miscellaneous costs like legal fees, etc. Hence, the lower the refining capacity utilization, the higher will be the cost per unit of oil processed. Both linear as well as log-linear models were fitted. Elasticities obtained from the linear regression model were not different from the elasticities obtained from the log-linear one. However, the linear regression model provided better statistical results in terms of the coefficient of determination, R 2• Thus the functional form, y

=a

+ B1RATIO + B:zCRUDE +



where y is the gross income per barrel of crude processed, a, 81, and B:z are the parameters of the equation, and € is the error term, is used for the analysis. Our testable hypothesis is that the higher the ratio of the value of output to the value of input, or the higher the crude throughput, the higher will be the income per barrel of crude processed. The results of the multiple regression are reported in Table 5.1. The results reported in Table 5.1 show that both RATIO as well as CRUDE have positive significant effects on the gross income of the oil industry. The elasticities indicate that other things remaining constant, income per barrel of crude processed will increase by 24.4 per cent for every 1-per cent RATIO increase. Similarly, if CRUDE is increased by 1 per cent, the income per barrel of crude processed will increase by 1.4 per cent. The elasticity for the variable RATIO is extremely high and implies that the

28

Chapter V

TABLE 5.1 Linear Regression Model with Income per Barrel of Crude Processed as a Dependent Variable and the Value or Output to the Value or Input (RATIO) and Crude Throughput (CRUDE) as Explanatory Variables

Explanatory Variable

Coefficient

Elasticity

-59.570 52.310 0.005

24.4 1.4

Intercept RATIO CRUDE R 2 = 0.84

t-ratio -6.27* 6.44* 3.65*

F = 21.48

*Significant at 1 per cent level. SOURCE: Appendix Table A.4.

dependent variable is very sensitive to the value of RATIO. In the longer run the RATIO is largely affected by increased competition in the product market. However, in the shorter run it could be due to non-parallel movements of crude and product prices. For example, to a certain extent weak petroleum prices were also responsible for the lower RATIO in 1984-85. The increase in the value of RATIO was affected by relatively strong product prices and the collapse of crude prices in 1986. Hence the coefficients should be interpreted with caution.9 The F-test here enables us to test the hypothesis that the multiplicative coefficients for RATIO and CRUDE are zero. We reject the hypothesis at 1 per cent level of significance and conclude that the variables RATIO and CRUDE are significant determinants of income per barrel of crude processed. R 2 indicates that 84 per cent of variation in the dependent variable is explained by the independent variables used in this model. Under the present framework, Table 5.2 provides the expected gross income of the industry and the expected government revenue (company tax) from the oil industry under two scenarios. The first scenario assumes that the RATIO will remain at 1.12. In other words, the ratio of the value of output and the value of input is assumed to take the median value (which is also the mode in this case). Under this scenario refineries can make profit even if the crude throughput is 400 mbd. The second and more likely scenario assumes a RATIO of 1.08. The competition in the market is expected to increase due to new refineries in the region and the new export refineries in the Middle East. The increasing

Impact of Lower Crude Processing on Government Revenue

29

TABLE5.2 Expected Gross Income of the Oil Industry and Government Revenue under Different Scenarios

CRUDE

900

RATIO

1.(18

Income per Barrel of Crude Processed (S$)

Expected Industry Income (S$ million)

468

Expected Government Revenue* (S$ million)

1.12

1.4248 3.5172

1,155

154 381

800

1.08 1.12

0.9248 3.0172

270 881

89 291

700

1.08 1.12

0.4248 2.5172

109 643

36 212

600

1.08 1.12

-0.0752 2.0172

-17 442

146

1.08 1.12

-0.5752 1.5172

-105 277

91

1.08 1.12

-1.0752 1.0172

-157 149

49

500

400

*33 per cent of expected industry income.

competition could result in a lower profit margin to the refineries. This can also be observed in the declining trend of the RATIO. Under this scenario, cateris paribus, the industry cannot make any profit if the crude throughput is less than 615 mbd. Thus it is clear from the analysis that the future volume of crude processing in Singapore is a crucial issue for the refiners.

VI

FUTURE OUTLOOK OF CRUDE PROCESSING IN SINGAPORE

It is difficult to predict the future patterns of crude processing in Singapore due

to price volatility and the unpredictable nature of the international oil market. There are some opportunities available to Singapore. However, in the mean time the industry is also being challenged by a number of factors. In the corning decade, oil consumption in the Asia-Pacific region will most likely surpass European consumption. But the demand pattern of petroleum products is expected to shift further. Gasolines and naphthas, which comprised 19 and 8 per cent, respectively, of refined product demand in the region in 1987, are estimated to increase by 3 per cent per year in 1987-1992/93. The expected growth rate for middle distillates over this period is 4 per cent per annum. Current shares for kerosene (including jet fuel) and diesels are 13 and 24 per cent, respectively. The demand for fuel oil has fallen significantly in the region as a result of the substitution of coal and natural gas for power generation and the increasing use of nuclear energy in many countries in the region. Though the consumption of heavy fuel oil accounted for 35 per cent of product demand in 1987, it is forecast to decline by 0.8 per cent per year over 1987-1992/93. The stress on the supply networks for the region will be to meet the demand for middle distillates particularly that for diesel. Expected increase in the demand for products in the region may provide opportunities to process more crude in Singapore. But at the same time, higher demand for lighter products and middle distillates and lower demand for fuel oil may require more investment in the cracking process. The recent liberalization effort by the Japanese and the Australians could open up additional export opportunities for Singapore refiners. The Japanese demand for naphtha and fuel oil has long been one of the mainstays of Singapore's refining industry. Except for naphtha and fuel oil, imports of other products were allowed only through occasional permits (quota) to bridge supply demand gaps. However, import restrictions on product exports are slowly being

Future Outlook of Crude Processing in Singapore

31

lifted. As a result, products like jet fuel, premium gasoline, and kerosene were also exported to Japan in 1986 and 1987. Japan's import of oil products increased by 14 per cent in 1985, 30 per cent in 1986, and 42 per cent in 1987. The Japanese liberalization policy has become a boon for Singapore. Figures show that exports to Japan increased by more than 13 per cent in 1987. In the next four to five years, the Japanese Government is expected to phase out its intervention in the domestic oil market and these changes will generate additional export opportunities for Singapore. Similarly, the Australian liberalization policy on oil refining and trading activities may help Singapore refineries to expand business in Australia in the near future. However, there is also some possibility that deregulation of the oil industries could create additional competition in third party processing and product export. Singapore is also benefiting from higher demand for oil in other parts of the region. For example, exports to Thailand, South Korea, and Guam increased by 62.0, 72.5, and 115.5 per cent, respectively, in 1987. The expansion of domestic refinery capacity in the region is expected to reduce term processing volumes in Singapore. Malaysia is also constructing a 100-mbd refinery in Malacca. Malaysian processing in Singapore is expected to continue at slightly higher levels until 1991 and then drop off by 20-30 mbd when additional capacity comes on line. The Chinese are also planning expansion of their refineries, but Chinese processing in Singapore is expected to be continued beyond 1990 because the country will not be able to expand and upgrade its refinery industry fast enough for China to become self-sufficient in petroleum products. The expansion of refining capacities in the Asia-Pacific region and in the Middle East might bring in more competition in the former's product market. Singapore refineries, in the near future, may face competition in the export market from Indonesia. The total name plate refinery capacity of that country is around 905 mbd and the crude runs in 1986 were 639 mbd. The Indonesian refineries are more sophisticated than Singapore's refineries. Thus, the potential for product exports from Indonesia exists. So far, the Indonesians have not fully utilized their refining capacity. The country is expected to utilize the unused capacity in the near future and output will be exported. A recent report indicates that Pertarnina, Indonesia's state-owned oil company has agreed to refine Malaysian crude of about 10-20 mbd. In addition, Indonesia is planning to build another 180-mbd oil refinery in Java. The output of this new refinery will be exported. Last year, Malaysia agreed to process 10 mbd with the Philippine National Oil Company. Malaysia had until then refined crude only in Singapore.

32

Chapter VI

The Persian Gulf export refineries are expected to introduce an additional 850-950 mbd of products in the international market by 1990/91 as a result of new construction and upgrading of their export refineries. About one-third of this amount is forecast to penetrate the Asia-Pacific market. Kuwait and Saudi Arabia will start producing about 475 mbd more, probably before 1989. This new development is expected to place further strains on the Singapore refineries.

VII POLICY IMPLICATIONS

The export-oriented nature of Singapore refineries have made them more efficient, flexible, and competitive. Singapore's developed economic environment, strategic location, advanced infrastructure, and its government's encouragement provide enough incentives for refiners and traders to expand their business activities. Earlier overall assessments regarding the future processing needs in Singapore were not very optimistic (Fesharaki 1987 and Sharma 1988). However, the higher growth in oil demand in the region and liberalization of the oil market (especially in Japan) have enabled Singapore to process a larger volume of crude oil. These factors are expected to help Singapore in the future. But, the refiners should be cautious; things change very quickly because of the unpredictable nature of the oil market. The international oil market is very volatile and is affected by OPEC production, political turmoils especially in the Middle East, refinery activities, technological breakthroughs, new energy discoveries, nuclear accidents like that of Chemobyl in 1986, and so on. The volatile nature of the market makes a longterm forecast almost impossible. In Singapore, after the termination of the Indonesian processing contract in 1985, crude throughput grew because of netback deals in 1986, OPEC overproduction, and unexpected demand growth in some of the oil-importing countries in the region in 1987. But crude runs are in a declining trend. Increasing processing cost per barrel of oil due to lower capital utilization and international competition in the product market may result in lower income for the industry. The declining volume of crude runs and profit margins may have ci significantly adverse impact on the economy; gross income of the industry as wdl as the revenue to the government will decline significantly. At least three 'Jolicy implications for the longer run can be drawn from the analysis. First, capacity rationalization could be one of the alternatives to the

34

Chapter VII

problem of declining profit margins. This measure may significantly reduce the fixed cost incurred per unit of crude processed and may result in higher profit to the industry. However, the downturn in demand could be temporary and the industry might want to wait for a while before closing some of the plants permanently. Therefore, further evaluation of the downturn in crude runs are required before implementing this alternative. Second, the value added in the industry and profitability can be increased by upgrading the refineries. Conservation efforts and substitution of oil with coal, gas, and nuclear energy has resulted in lower demand for fuel oil. The trend is expected to continue in the future, resulting in further lightening of the demand barrel. A careful analysis is required before investing in one of the upgrading facilities because different processes such as catalytic cracking and hydrocracking carry differences in costs, flexibility, and product profile. Third, marketing strategy is the key for any industry. Singapore refineries should improve the quality of their marketing efforts even further in the future to maintain their competitive edge. The economic and technological feasibility of alternate supply options for different crudes should be assessed and a stronger marketing research programme to help expand Singapore's market share should be implemented. In this way Singapore refineries can continue to set regional product prices; other export refineries would have to at least match Singapore's price in order to gain significant entry into the Asia-Pacific market.

VIII CONCLUSIONS

The oil industry and trade are vital sectors of Singapore's economy. The contribution of this industry to other sectors of the economy is also significant. However, in recent years the role of the oil industry in the economy has declined. The non-oil manufacturing sector is growing faster than the oil sector. Both crude throughput as well as exports of refined products are in a declining trend. As a consequence, the contribution of the industry to industrial output, government revenue, trade, and foreign exchange earnings has declined. The poor performance of the industry has had an adverse effect on the industrial value added in the economy. The future of crude processing in Singapore depends on the international and regional oil markets, but in general, the future should be viewed with caution. However, it is important to remember that if crude processing declines sharply, the cost per unit of crude processing increases and the profit of the industry as well as the revenue it generates to the government may decline significantly. Capacity rationalization, upgrading of refineries, and improved marketing efforts are some of the policy alternatives for the industry. But a further evaluation of the oil market is required before choosing which alternatives to adopt. These efforts will help Singapore refineries to become more efficient, flexible, and competitive.

APPENDIX

APPENDIX TABLE A.1 Average Annual Growth of Real GDP and Real GDP per Capita, 1965-86 (In percentage) 1%5-73

12.7 GDP GDP per capita 10.7

1973-79

1979-84

8.7 5.8

8.6 7.3

1985

-1.8 -3.4

1986

1987

1988*

1.9 0.6

8.8 7.7

11.0

n.a.

*Preliminary. SOURCES: Krause, Tee, and Lee (1987); Ministry of Trade and Industry, Singapore, Economic Survey of Singapore, various issues. APPENDIX TABLE A.2 Percentage Composition of GDP in 1985 Market Prices, 1960-87

Agriculture, fishing, and quarrying Manufacturing Utilities Construction Commerce Transport and communications Financial and business services Other services Inputted bank service charge Import duties Total*

1960

1970

1980

1985

1986

1987

3.8 16.6 1.7 5.3 24.6 8.8 13.9 19.8

1.3 29.5 2.0 7.1 18.9 12.0 20.3 11.8 -4.7 1.7

1.1

4.7

2.4 24.8 1.9 9.5 22.0 7.3 16.7 15.2 -1.3 2.9

23.6 2.0 10.7 17.0 13.5 27.1 12.4 -8.2 1.2

0.9 25.2 2.1 8.2 16.7 14.3 28.2 12.2 -8.7 1.0

0.8 27.0 2.1 6.7 17.0 14.3 28.1 11.7 -8.6 0.9

100.0

100.0

100.0

100.0

100.0

100.0

-1.1

*Numbers may not add exactly due to rounding. SOURCE: Ministry of Trade and Industry, Singapore, Economic Survey of Singapore, various issues.

Appendix

37

APPENDIX TABLE A.3 Cost per Unit of Crude Throughput, 1975-85

Year

Volume of Crude Throughput" (mbd)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Labour (S$/barrel)

429.3 473.9 575.6 672.5 697.9 674.0 797.0 784.0 794.0 758.0 646.0

Total Capital" (S$/barrel)

1.29

0.42 0.39 0.32 0.30 0.34 0.41 0.39 0.48 0.51 0.55 0.66

1.13

1.14 0.99 1.13 1.51 1.60 1.84 2.02 2.13 2.38

"Crude imports. "Total capital costs include all costs other than labour and materials costs. SOURCES: Derived from Department of Statistics, Singapore, Report on the Census of Industrial Production and Singapore Trade Statistics: Imports and Exports, various issues.

APPENDIX TABLE A.4 Gross Income per Barrel, Crude Throughput, and Ratio of the Value of Output to the Value of Input, 1975-85

Year

Gross Income per Barrel of Crude Processed (S$)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

2.15 2.53 2.25

1.90 2.63 4.05 3.89 3.33 2.25 0.78 0.68

*Crude imports. SOURCE: Same as for Appendix Table A.3.

Ratio of the Value of Output to the Value of Materials Input

1.15

1.13 1.12 1.12 1.12 1.15 1.13 1.12 1.12 1.08 1.09

Crude Throughput* (mbd)

429 474 576 673 698 674 797 784 794 758 646

NOTES

1 2

3

4 5

6 7

8 9

The words "oil" and "petroleum" carry the same meaning in this paper and are therefore used interchangeably. The value of the oil industry output exceeded that of any other commodity in the economy during the study period (1975-86), except for 1986. The output value of electronics products and components exceeded the value of the oil industry due to the oil price collapse in 1986. Domestic export is defined as "the primary commodities grown or produced in Singapore and goods which have been transformed, that is, manufactured, assembled or processed in Singapore including those with imported materials or parts". For details about the Singapore oil industry, see Doshi (1988), Fesharaki (1987, 1986, 1985, and 1984), and Sharma (1988). The labour cost exceeded productivity growth by 9 per cent per annum during 1979-84. The similar figure for 1979-81 was 3 per cent. For details, see Ministry of Trade and Industry (1986). There was no wage increase in Singapore in 1986. The employer's Central Provident Fund contribution was also reduced by 60 per cent. These measures were used to regain Singapore's competitiveness. Company taxes were charged a flat rate of 40 per cent of income with usual allowances. The rate was reduced to 33 per cent from 1987. Special tax exemptions and liberal depreciation allowances are provided to pioneer companies. Therefore, it is difficult to estimate the company tax accurately. For details, see Report on the Censw of Industrial Production, various issues. Another alternative is to defme RATIO as ·(Value of Output - Value of Input)I (Value of Input) instead of (Value of Output) I (Value of Input). This might provide better regression results in terms of sensitiveness of the dependent variable to the value of RATIO. However, the basic results will remain the same.

REFERENCES

Bonney, J. D. "Overview of the International Oil Market". Paper presented at the 3rd International Asia-Pacific Petroleum Conference, Singapore, 1987. Caltex Petroleum Corporation. "Consumption Trends: Fourth Quarter, 1986". Dallas, Texas, 1987. Departme nt of Statistics, Singapore. Report on the Census of Industiral Production, various issues. Singapore Input-Output Tables, 1983. Singapore, 1987. Singapore Trade Statistics: Imports and Exports, various issues. Yearbook of Statistics Singapore, various issues.

Doshi, T. Singapore: An Energy Sector Study. Resource Systems Institute (RSI), EastWest Center. Honolulu, 1988. Fesharaki, Fereidun. "Singapore as an Oil Center in a Turbulent Market". PLATT'S OILGRAM NEWS 65, no. 96-A (19 May 1987). _____ _. "The Outlook for Crude Processing in Singapore: 1986-1991". RSI, EastWest Center. Honolulu, 1986.

----=== -=· "Oil Trading Center in the Asia-Pacific Basin: The Role of Singapore as

an Oil Trading Center". The keynote address to the First International Conference on Oil Trading Opportunities in the Asia-Pacific Basin, Singapore, 1985.

---;:::-:=-=-· "The Singapore Story: A Refinery Center in a Transitory Oil Market". RSI, East-West Center. Honolulu, 1984.

Fesharaki, F. and D. Isaak. "OPEC and Asia: Factors Affecting the Emerging Product Trade". In OPEC and Asia: The Changing Structure of the Oil Market, edited by K.

40

References

Smith and F. Fesharaki. New York: Pergamon Press, 1986. Fesharaki, F., D. Isaak, and T. Wilson. "The Changing Structure of the World Refining Industry: Implications for the United States and Other Major Consuming Regions". RSI, East-West Center. Honolulu, 1985. Gatey, D. "The Prospects for Oil Prices, Revisited". Annual Review of Energy 11 (1986). Hitchcock, J. "China Cuts Oil-Product Imports, Moves to Simplify Crude Policy". The Asian Wall Street Journal, 10 February 1987. Krause, L.B., Koh Ai Tee, and Lee (Tsao) Y. The Singapore Economy Reconsidered. Singapore: Institute of Southeast Asian Studies, 1987. Lim, Linda and Pang Eng Fong. Trade, Employment, and Industrialisation in Singapore. Geneva: International Labour Office, International Labour Organization, 1986 Lim, R. "Oil Refiners Caught in the Middle Cut Output". Straits Times, 10 March 1987. Ministry of Trade and Industry, Singapore. The Singapore Economy: New Directions. Singapore, 1986. _ _ _ _ _. Economic Survey of Singapore, various issues.

Ogawa, Y. "Imports and Exports of Petroleum Products in the Asian/Pacific Region: Present Situations and Potentials". Energy in Japan, Bimonthly Report No. 79. Speight, J. G. "Upgrading Heavy Feedstocks". Annual Review of Energy 11 (1986). Sharma, Shankar. "The Changing Structure of the Oil Market and Its Implications for Singapore's Oil Industry". ASEAN Economic Bulletin 4, no. 3 (March 1988). Toichi, T. "Energy Outlook for Asian-Pacific Countries Over the Next Five Years". Paper presented at the 2nd International Asia-Pacific Petroleum Conference, Singapore, 1986.

---=-=---= -· "OPEC Export Refineries and the Implications for Japan's Petroleum Policy". Supplement to Energy in Japan, No. 74. 1985.

You Poh Seng and Lim Chong, eds. Singapore: Twenty-Five Years of Development. Singapore: Nan Yang Xing Zhou Lianhe Zaobao, 1984.

THE AUTHOR

Shankar Sharma, Ph.D. in economics, is Co-ordinator of the Energy Project of the ASEAN Economic Research Unit, Institute of Southeast Asian Studies and coeditor of the ASEAN Economic Bulletin. His main field of interest is energy economics and has written several papers on the subject. The more recent ones include "The Changing Structure of the Oil Market and Its Implications for Singapore's Oil Industry" (1988), "ASEAN Oil Movements and Factors Mfecting Intra-ASEAN Oil Trade" (1988), and "Determinants of Oil Trade Flows among ASEAN Countries" (1988).