Shell exits Singapore refining: The end of an era?
AS MOST readers know by now, on May 8 oil giant Shell announced that it had agreed to sell its Bukom refinery in Singapore to a joint venture of Indonesian chemicals firm Chandra Asri and global trading house Glencore, culminating a process that began last year.
Shell’s jewel in the crown Bukom refinery complex includes a total processing capacity of 237,000 barrels per day (bpd) and a 1 million-tonne-per-year steam cracker. Its Jurong Island facility has other derivative petrochemical units making products such as ethylene glycol and styrene, which are key feedstocks for the polyester and plastic industries.
This announcement was important for two reasons – one symbolic and one with real economic ramifications. In symbolic terms, it means that an iconic multinational central to Singapore’s modern rise will soon be leaving the local historical stage. Shell has maintained, however, that its commitment to Singapore “remains steadfast and that its importance as a regional hub for our marketing and trading business remains important”.
Still, the announcement might be the harbinger of the end of an economic era for Singapore – a period in which the island nation embraced industry and served as one of the world’s largest oil-refining and trading centres.
Pioneer status
By the early 1980s, Singapore, long involved in the oil business, had cemented its status as the “Houston of Asia”, the region’s hub for oil refining, petrochemicals manufacturing and refined products trading.
It supported a range of related economic activities, including physical and derivatives oil trading, bunkering, insurance, brokerage, banking and risk management. It had also consolidated its role as the “East of Suez” oil price discovery centre, comparable to New York and London in their respective time zones.
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As South-east Asia’s historical entrepot, Singapore was an integral part of the early growth of the international petroleum trade since the late 19th century. Singapore’s association with oil dates to 1891 when Shell, in its competition against Standard Oil of the United States, built facilities on an island off Singapore to store bulk kerosene.
The first bulk oil cargo headed East of Suez was loaded onto the storage tanks on Pulau Bukom in 1892; the vessel Murex had brought the cargo from an oil port in the Black Sea via the Suez Canal, which had recently opened to oil traffic.
The demand for fuel oil, primarily for shipping bunkers, was the other major oil product traded in the early years of Singapore’s growth as an oil centre for the region. The company’s operations in Singapore continued to expand through the late colonial period and, after the war, expansion resumed.
In 1961, Shell became the first foreign investor to receive Singapore’s Pioneer Certificate, for its investment decision to build an oil refinery on Pulau Bukom that year. At the time, Singapore was casting about for activities upon which to boost and indeed, anchor growth, and it made sense for the government to court a giant multinational in one of the world’s most important industries.
Similarly, it made sense for Shell to develop refining capacity at its Pulau Bukom site with its existing tanks and jetties, and a functioning head office for the South-east Asian hinterland.
While the tax benefits of pioneer status must have been welcome, it seems unlikely that a tax break would have been the primary criterion for the final investment decision.
The new People’s Action Party government’s ability to credibly commit to a stable and hospitable investment environment for long-lived capital assets – in an era of decolonisation, growing nationalism and trade protectionism – must have mattered critically in the perceptions of political risk by Shell’s management. As it turned out, it was in game theory terms a classic “win-win”.
It has been over six decades since the Economic Development Board’s (EDB) grant of Pioneer Certificate No 1 to Shell. In that time, the island has progressed from a poor, disease-ridden, developing country backwater with labour strife and communist-infiltrated trade unions to one of the world’s richest and most cosmopolitan city-states.
According to International Monetary Fund estimates for 2024, Singapore enjoys the world’s fifth-highest nominal gross domestic product per capita, after Luxembourg, Ireland, Switzerland and Norway.
In recent times, though, concerns over rising carbon emissions and anthropogenic global warming have taken centre stage in the international arena, including in development debates, culminating in the 2015 Paris Agreement. The pact was widely hailed as the “first truly global climate deal”, committing both rich and poor nations to reining in rising emissions blamed for global warming.
It should be noted that the level of “commitment” determined by each country is not binding as a matter of international law. There are no agreed systems of measurement, reporting and verification, no mechanisms to compel a country to set a commitment target by a specific date, and no enforcement potential if a set target is not met.
Singapore ratified the Paris Agreement with pledges to reduce emissions intensity by 36 per cent lower than 2005 levels by 2030, and to stabilise emissions with the aim of “peaking” by around 2030.
In February 2017, Singapore became the first South-east Asian country to announce a carbon tax. The tax was set at S$5/tCO2e (tonnes of carbon dioxide-equivalent) from 2019 to 2023 as a transition period, to give the industry time to adjust to its impact.
To support the government’s net-zero target, the carbon tax will be raised to S$25/tCO2e in 2024 and 2025, and S$45/tCO2e in 2026 and 2027, with a view to reaching S$50 to S$80/tCO2e by 2030.
Is Singapore de-industrialising?
At the outset, the critical policy question in the adoption of the carbon tax concerned the impact on the operating costs of energy-intensive export-oriented industries, such as oil refineries and petrochemical manufacturers. Will Singapore’s role as Asia’s premier oil business hub be compromised by its carbon tax?
According to the EDB, oil refining and petrochemicals manufacturing contribute to 25 per cent of the country’s total manufacturing output. It is highly unlikely that “green” industries such as solar power and electric vehicles – with supply chains largely located in China – can be substitutes to replace the value added in the oil refining and petrochemicals sector.
Singapore’s oil-refining and petrochemicals industry competes directly with other companies in the industry from around the world. India’s export-oriented Reliance oil-refining complex in Jamnagar, Gujarat, for example, is a single company with an over 1.2 million bpd capacity. It is a leading competitor in the Asian (and global) refined products markets.
Other major Asian players in the East of Suez region include national oil companies such as Thailand’s PTT, Malaysia’s Petronas as well as South Korea’s and China’s oil conglomerates. The Middle East national oil companies – with their export-oriented, state-of-the-art oil refining and petrochemical complexes – constitute yet another set of keen regional competitors.
For Singapore’s oil and petrochemicals sector to survive, its competitors would need to operate under similar carbon pricing policies. Without a level playing field, Singapore’s pioneering oil and chemicals businesses would simply migrate to jurisdictions where carbon pricing is either absent or applied at permissive levels.
Much like Germany and the UK are undergoing a process of de-industrialisation caused by their onerous net-zero climate change policies including carbon taxes, Singapore could follow suit.
Shell’s exit from Singapore’s refining and petrochemicals sector does not mean that the assets which the company was operating will cease to exist. They will continue to be operated by its new owners, albeit at higher operating costs due to the carbon tax. Whether these new owners have a lower rate of return on their investments compared to Shell’s depends on whether they can bring new advantages to their operations not available to Shell.
For Shell as a refiner/manufacturer in Singapore, then, it is RIP (rest in peace). Only time will tell whether the green transition that facilitated Shell’s departure from the scene will also lead to a process of de-industrialisation here, similar to the developments taking place in Europe.
Peter A Coclanis is Albert R Newsome Distinguished Professor of History and director of the Global Research Institute at the University of North Carolina-Chapel Hill (USA). Dr Tilak K Doshi is a consultant in energy economics, a Forbes contributor and author of the book Houston of Asia: The Singapore Petroleum Industry published by the ISEAS – Yusof Ishak Institute.
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