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Homesingapore sustainabilityIN FOCUS: Singapore’s energy and chemicals sector set for change as net-zero...

IN FOCUS: Singapore’s energy and chemicals sector set for change as net-zero transition, competition fuel uncertainties

SINGAPORE: On July 26, 1961, a sprawling industrial complex marked by a maze of steel pipes and towering chimneys was declared open on Pulau Bukom, an island located 5km south of Singapore.

Completed in slightly over a year, the S$30-million oil refinery by European energy firm Shell was Singapore’s first such facility. It was also a much-needed investment for the small island nation that achieved self-governance just two years before and was pursuing rapid industrialisation to create jobs.

“It is a significant landmark in our industrialisation programme,” said then-Finance Minister Goh Keng Swee at the opening attended by officials and company representatives.

More oil and gas companies followed in the footsteps of Shell, setting up refineries on neighbouring small islands that later merged and became Jurong Island, a dedicated energy and chemicals park.

Operating round the clock, these plants, with their flames at times casting an orange glow in the night sky, turned crude oil into gasoline, diesel and other products which were sold to different parts of the world.

Together, they fired up a new sector that grew into a cornerstone of the Singapore economy, as well as cemented the country’s position as one of the world’s top energy and chemicals hubs.

Back in Pulau Bukom, the Shell refinery was expanded in size over the decades, processing as much as 500,000 barrels per day of oil at its peak. The plant also levelled up to manufacture petrochemicals such as ethylene, making it Shell’s only wholly owned refining and petrochemicals facility in Asia.

But the future of this historical facility now appears to be up in the air, as Shell announced in June a strategic review of its assets on Pulau Bukom and a petrochemical facility on Jurong Island.

This comes on the heels of the company’s decision earlier this year to drop two projects on biofuels and base oil production in Singapore, as well as an announcement in 2020 to halve processing capacity and cut jobs at the Pulau Bukom refinery.

Replying to queries from CNA, the energy giant reiterated an earlier statement that the latest review is done in response to the ongoing “high grading journey” of its chemicals and products portfolio, current challenging market conditions and enhanced capital discipline.

“Our strategic review is ongoing and we are exploring several options including divestment,” it said.

Given its history and huge presence in Singapore, Shell’s latest move has “great significance” for the local energy and chemical sector, said Mr Leow Foon Lee, visiting senior research fellow at the National University of Singapore’s (NUS) Energy Studies Institute.

Other players could embark on similar reviews of their local operations, as they contemplate how to maintain profitability in an era of extreme commodity price volatility, looming uncertainties in the global economy, oversupply in the market and the transition to a low-carbon world, industry experts told CNA.

In particular, energy transition forms the biggest pressure on the industry, which is traditionally carbon-intensive, to find ways to reduce their own carbon footprint while remaining economically viable.

Official figures showed the energy and chemicals sector contributed around three per cent of Singapore’s gross domestic product (GDP) and one-fifth of the country’s total manufacturing output in 2020. Overall, the sector employs more than 27,000 people.

On Jurong Island, more than 100 energy, petrochemical and specialty chemicals firms are up and running, operating an integrated mix of refining and petrochemicals production.

Amid the headwinds, what lies ahead for Singapore’s energy and chemicals sector?

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MULTITUDE OF HEADWINDS

Experts said Shell’s decision reflects the confluence of headwinds confronting the oil industry.

One major challenge is the global push for more to be done to fight climate change, which has seen oil and gas companies moving beyond their core business to attempt the risky transition to low-carbon technologies. Many, including Shell, have laid out net-zero ambitions. The transition will require significant investments.

Yet, the oil refining business is seeing thinning margins due to volatile commodity prices, rising production costs and growing surplus in the market largely because of the rise of new mega refineries in China.

At the same time, the call for energy efficiency and greener products, alongside uncertainties in the global economy, is threatening to dampen global demand for oil. Lower demand for traditional gasoline and diesel fuels as people opt for electric vehicles, for example, will hurt the profits of oil refineries, said Mr Leow.

Mr Sushant Gupta, Asia-Pacific research director for refining and oils market at energy research and consultancy Wood Mackenzie, foresees global oil demand peaking in 2032, although the fall in demand for diesel and gasoline will be helped by growing demand for petrochemical products.

Petrochemicals – such as ethylene, propylene and benzene derived from petroleum or natural gas by refining – are used to create materials like plastics, nylons, polyesters which in turn form the building blocks of everyday items in people’s lives.

The International Energy Agency estimates that petrochemicals are set to account for more than a third of the growth in world oil demand to 2030, and nearly half the growth to 2050.

“At a time when refineries are already worrying about margins, they find themselves having to think about how to make their site carbon competitive … and they also have to invest to shift more towards petrochemical production because that’s what the market needs,” said Mr Gupta. 

“Justifying some of these investments under a low-margin environment, that could continue for the future, could become tough for many players.”

He added: “This would entail a strategic review for many sites and it is something which Shell and all the oil majors are doing to review the health of their business and assets.”

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COMPETITION AND CARBON TAX

For Singapore, the rise of export-oriented refineries in China, Malaysia and Brunei is also a cause for concern.

“Despite (being) an oil trading and storage bub, Singapore faces inherent disadvantages to compete with Malaysia in terms of operating and labour costs and intense competition from new refining and petrochemical parks in Malaysia and Brunei,” said Mr San Naing, senior oil and gas analyst at research firm BMI.

For Shell, the six-decade-old refinery on Pulau Bukom is losing competitiveness. High operating costs aside due to local factors such as manpower, Mr Gupta pointed to the lack of feedstock advantage which makes the site no longer within the “top quartile of Shell’s portfolio”.

Feedstock is the raw material that goes into refining and chemical plants, such as crude oil which is then refined into diesel, kerosene or naphtha that are in turn used as feedstocks to manufacture a wide variety of petrochemicals. Singapore has no hydrocarbon resources, and imports crude oil for its refining and petrochemical industries.

During a question-and-answer segment at the company’s capital markets day in June, Shell’s chief executive Wael Sawan said: “The challenge with Singapore for us is that, you don’t have advantaged feedstock coming in. You don’t have advantaged energy costs, utility costs.

“Our current configuration of our plant is towards a more simple product, so it is just fundamentally disadvantaged. Therefore, we are just looking at can it be more valuable for us or for others in a different way.”

STILL SEEING HEALTHY FLOW OF INVESTMENTS: EDB

Efforts by the Singapore authorities to ensure the country stays on top of its game are under way.

Officials have said that while the low-carbon transition has implications for the local economy – such as the energy and chemicals sector at risk of being downsized or even displaced if the transition is done “too hastily” – there are benefits and opportunities to be seized.

For example, the chemicals industry provides silver paste, high-performance plastic films and membranes that are needed to make photovoltaic cells and batteries for electric vehicles, said then-Minister for Trade and Industry Chan Chun Sing in a written parliamentary reply dated April 2021.

Meanwhile, Jurong Island is going to be transformed into a “sustainable energy and chemicals park”. The aim is to quadruple its output of sustainable products from 2019 levels and achieve more than six million tonnes of carbon abatement per annum from low-carbon solutions by 2050.

This shift in focus for Jurong Island will help Singapore to become a more attractive location for green investments, said Singapore Economic Development Board’s (EDB) executive vice-president Damian Chan.

The agency, which leads the planning and execution of Singapore’s economic strategies, is also working with companies to improve the energy efficiency of existing plants, while ensuring that new plants are the “best-in-class”.

At the same time, EDB is in “active conversations” with companies on energy transition projects and opportunities, such as the development of low-carbon technologies, carbon capture, utilisation and storage, as well as low-carbon hydrogen, Mr Chan said.

“We have continued to see a healthy flow of investments from energy and chemicals companies who are keen to expand their global presence, grow new capabilities to capture green growth opportunities in the region, and transform their business to be environmentally sustainable,” he told CNA.

“A transformed and more sustainable energy and chemicals sector will continue to remain an attractive growth sector for Singapore,” said Mr Chan.

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Recent investments into the country include Finnish refiner Neste’s expansion of its biorefinery in Tuas to produce sustainable aviation fuel and the set-up of a bio-factory by French chemicals company Arkema to make high-performance polymers from sustainable materials on Jurong Island.

ExxonMobil is also mulling projects that meet the demand for sustainable solutions and reduce its own carbon emissions.

“We have developed and will update our emission-reduction roadmaps for our operated assets around the world, including our Singapore complex,” said Ms Chin.

The company is also advancing solutions, such as carbon capture and storage, hydrogen and lower-emission fuels such as sustainable aviation fuels and renewable diesel. Specifically on carbon capture and storage, it has announced progress on multiple opportunities around the world so far.

“We are studying the potential for a regional (carbon capture and storage) hub to capture, transport and store carbon dioxide from heavy industrial activity across Southeast Asia, including our operations in Singapore,” Ms Chin said.

“EASIER SAID THAN DONE”

Still, the green transition of an inherently carbon-intensive sector will be “an uphill task”, said Mr Naing.

“Despite the government’s efforts to keep the industry competitive and sustainable, companies are the ones bearing the rising costs of doing business and feel the competitive pressures from other countries,” he added.

“It is easier said than done.”

Echoing a similar view, NUS’ Mr Leow cited the excitement surrounding green hydrogen as an example.

Some experts have said that Singapore can leverage its geographical position and existing expertise in the fossil fuel industry to become a storage, trading and transportation hub for low-carbon hydrogen.

While there is potential, observers like Mr Leow reckoned that there is some way to go before green hydrogen can become economically viable.

Unlike the most common form of hydrogen production, which is a carbon-intensive process called steam methane reformation and yields “grey” hydrogen, the green version relies on renewable energy to split water into hydrogen and oxygen via electrolysis.

Producing green hydrogen remains a costly venture due to the availability of renewable electricity, expenditure on electrolysers and infrastructure such as pipelines and storage sites.

In 2020, green hydrogen constituted just 0.1 per cent of global hydrogen production, according to a report by Wood Mackenzie, noting that the “economics are a challenge”.

In Singapore, the challenge lies in the country’s energy mix which is predominantly fossil fuels. While some tweaks to existing gas pipelines may be done, new storage and distribution infrastructure will likely be needed as hydrogen has different properties from natural gas, experts said.

“It is highly flammable so it’s not easy to keep and handle, especially for long storage and transportation. We will have to explore different ways that can receive this on a commercial scale,” said Mr Leow.

“Hydrogen can help enhance Singapore’s position as an energy hub, but there’s a long journey to go.”

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Experts also noted that the sector’s transformation would inevitably lead to changes in the job market.

Some traditional manufacturing roles could be cut with the closure or downsizing of plants, although this would be buffered by the creation of new roles in environmental compliance and sustainability.

“Let me add a word of caution that this is going to take time and it will create a lot of displacements, so it is very important to have a comprehensive approach in this whole transition, and not just piecemeal efforts,” said Mr Leow, while stressing an “immediate need” for workforce upskilling and retraining.

On that, EDB’s Mr Chan said existing skillsets in the industry can be applicable to the green transition. For example, process engineers and technicians are able to apply their skills to decarbonise manufacturing plants and in the manufacturing of sustainable products.

Nonetheless, initiatives under the industry’s transformation map are helping workers to pick up new skills like sustainable manufacturing and carbon footprint management, he added.

“As the sector upgrades and transforms, we will continue to work closely with the industry to … equip our workers with the relevant skills to address evolving needs,” Mr Chan told CNA.

While the economic impact may be less certain, one thing is for sure – the energy and chemicals sector’s move to adapt to a low-carbon future can yield environmental benefits.

Around one-third of Singapore’s total carbon emissions are direct emissions from the sector, according to a parliamentary reply issued last April.

Pivoting towards more sustainable practices will help to reduce the sector’s carbon footprint and in turn, Singapore’s. On Oct 25 last year, the country announced that it would raise its national climate target to achieve net-zero emissions by 2050.

“You get better air quality for one,” said Mr Leow. “Hopefully, trying out different technologies can also help to solve the big challenge of being more energy efficient, and these low-carbon technologies can be used in other industries.”

Editor’s note: This article has been updated to correct information about Singapore’s net-zero goals. We apologise for the error.

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