Green Horizons: Unraveling the Transformational Effects on Singapore's Petroleum Industry
Wu Hong Feng (William), Research Executive
1.0 Introduction
The transition to new energy sources has gradually entered the public's consciousness. Perhaps, in the next half-century, we will no longer witness vehicles powered by internal combustion engines on our roads, nor hear the roaring sound of Lamborghinis. Even when massive cargo ships weighing hundreds of tons dock at ports, they will glide in as silently and smoothly as the latest Tesla Model X. This marks the dawn of a new era. However, have you ever considered the fate of petroleum energy and its related industries that our human civilization has relied upon since the Second Industrial Revolution? Where are they headed in the landscape of future green transformation, and what kind of impact will they face?
However, that is the essence of the significance of this report. The research is conducted to assess how the transition to a green economy may affect the petroleum industry in Singapore. This will be processed by analyzing government policy and technology sides, and based on the analysis, to develop, and provide corresponding potential solutions that relate to adaptation and sustainability within the industry. The essential goal is to help identify opportunities for the Singaporean petroleum industry to lessen, and if ideally, avoid unnecessary losses and negative impacts, during the continuous green transformation.
1.1 Background
The Paris agreement-which is the first legally binding international treaty on climate change was adopted by 196 Parties at the UN Climate Change Conference in 2015 and came to force on 4 November 2016. (UNFCCC, 2022) The agreement was established due to the globally common concerns on detrimental impacts that have been brought by climate change, including more frequent and severe droughts, heatwaves, and rainfall compared to previous century.
For responding to the UN’s 2030 Sustainable Development Agenda and Paris Agreement, the Singapore government has posted “Singapore Green Plan 2030”, which is a national-wide movement to support Singapore in its long-term sustainable transformation, more specifically, to achieve net zero emissions aspiration by 2050. (Isomer, 2023)The green plan comprises “green economy” and “energy reset” as two main pillars. As one of the major traditional energy sources, petroleum is claimed by UN as the main contributor to the climate change as it has been accounting for over 75 per cent of global greenhouse gas emissions and nearly 90 per cent of all carbon dioxide emissions. (UN, 2020)However, the petroleum and relevant industries are expected to face a challenge in the upcoming green transition.
1.1.1 Brief overview of the Singapore petroleum industry
The petroleum industry is one of Singapore’s most significant industries. According to the Ministry of commerce of China, Singapore is the world's third-largest refining centers and a key hub for petroleum trading. (ECOECS, 2018) It is also Asia's pricing center for petroleum products. Although Singapore doesn't domestically produce petroleum, it holds significant interests in this sector. The nation plays a vital role as a major global center for refining and petrochemicals. It contributes to 1.5 million barrels per day, equivalent to 1.5 percent of the global refining volume, and 25 million tons per year, accounting for 1.2 percent of the global petrochemical capacity. (Gupta, 2021) In 2019, the refining petroleum industry had a production value of 38 billion Singapore dollars, which accounting for 11.8% of the total manufacturing output. (Tekchandani, 2018) Additionally, Singapore boasts a thriving shipping industry and serves as one of the world's primary bunkering stations for shipping due to its strategic location.
2.0 Potential Impacts on the Singapore Petroleum Industry
2.1 Carbon Emission Restrictions
Singapore is implementing stringent carbon emissions restrictions as a significant component of its green transformation efforts. It is the first country in southeast Asia to introduce a carbon tax. (argus, 2022)
Under the local Carbon Pricing Act, Singaporean industrial facilities that emit more than 2,000 metric tons of greenhouse gases annually are required to report their emissions to the National Environment Agency. If their direct greenhouse gas emissions exceed 25,000 metric tons, they are also obligated to pay a carbon tax. (NEA, 2023) Moreover, the government announced this year that there will be a phased increase in carbon taxes starting in 2024, with the goal of raising the tax rate from the current SGD 5 per metric ton of emissions to SGD 50 to SGD 80 per metric ton by 2030. (NEA, 2023)
According to the National Climate Change Secretariat (NCCS) of Singapore. The refining and petrochemical sector is a large source of carbon emissions in Singapore, with the industrial sector contributing about 45 percent of total primary emissions. As a result, the increase in carbon tax will affect the petroleum industry largely.
2.1.1 Export side
The export sector of the petroleum industry will be profoundly impacted. As the refining and petrochemical sector is one of the largest part of the petroleum industry in Singapore, and refined oil is the most significant export goods in Singapore. (Tekchandani, 2018) In 2021, Singapore exported $40.8B in Refined Petroleum, making it the 6th largest exporter of Refined Petroleum in the world. At the same year, refined petroleum was the 2nd most exported product in Singapore. (OEC, 2022)
The increase in carbon tax on petroleum industry can directly increase the costs of production of businesses in refining and petrochemical sector. To offset these increased costs, businesses will raise their prices to maintain profitability. Recently, Singapore petroleum industry has already started to increase the export price of refined oil and crude oil for dealing with pressures from carbon tax. (Connects, 2023) It is observed that from the beginning of May to late July, the price of refined oil has seen a 26.9% increase. (Russell, 2023) As a result, when prices rise, foreign consumers may find the products less affordable, leading to a decrease in the quantity of refined oil exports. This can lead to a loss of market share for the exporting market of Singapore.
Notably, in the short-term, due to the inelasticity of demand for refined oil and lack of substitutes in the short-term, the profitability of export in Singapore hasn’t been impacted. (Murray, 2023) However, with the gradual increase of future carbon taxes, and simultaneously, Asia's competitors, including China, India, and South Korea, are constructing large-scale refineries, those increased substitutes and higher production cost will lessen Singapore’s leading position of petroleum products. (ITA, 2022) Although Singapore's three major refineries- Royal Dutch, SPC and ExxonMobil, are enhancing their petrochemical facilities to gain a competitive edge in the increasingly fierce competition, the continuously rising carbon tax and carbon emissions restrictions have hindered their expansion and development. (ITA, 2022)
As a result, the rise in carbon tax is expected to have a long-term impact on the profitability of Singapore's petroleum industry's export sector.
2.1.2 Investment side
The outlook of the increase in tax can impact investor confidence. Especially, the current investment on petroleum is not optimistic. Due to the green transition and the emergence of new energy sources, investments in the petroleum industry have slowed down in recent years. The future growth momentum is diminishing, with anticipated investments in the petroleum industry even expected to be slightly lower than this year. (SRD, 2022)
As the increase of carbon tax will lessen the profitability and investment returns, it could lead investment to further diminish.
Moreover, it is noted that the Singaporean government gradually shifting its development focus towards natural gas. Minister for Trade and Industry, Mr. Chan Chun Sing has stated: “We will continue to rely on natural gas for the next 50 years for a substantial part of our energy needs.” (Tan, 2020) It is estimated that the investment in gas will reach $171 billion with a 31.3% increase from the current. (SRD, 2022) Besides, Singapore has just initialized the expansion project of the existing liquefied natural gas (LNG) receiving terminal, with an investment exceeding 500 million US dollars, is currently underway, as Singapore aims to become the future hub for natural gas trade and transit in Asia. (Gupta, 2021)
With the reduction in investment momentum, the development and expansion of Singapore's petroleum industry will be constrained. Meanwhile, In the absence of a significant increase in the Singaporean government's budget for energy development, an increase in investment in natural gas could result in resource imbalance, thereby reducing the financial support available to the petroleum industry from the government. (Fernando, 2023) This will not only impact the overall profitability of the petroleum industry but also hinder the industry's path toward more environmentally friendly and energy-efficient production methods.
As a result, the investment side impact caused by emission restrictions policy on petroleum industry is negative and long-lasting.
2.2 Technology advancement and sustainable investment
The green transition drives governments to implement carbon taxes and emission limits, which increase the production and usage costs. This pushes petroleum companies to innovate technologically or adopt emerging low-carbon technologies, such as carbon capture and storage, to reduce carbon emissions in the production process. (Connects, 2023) This helps in cost control, ensuring profitability and competitiveness while reducing societal pressure. Notably, petroleum companies need to align with societal expectations by adopting more environmentally friendly and socially responsible practices to garner more consumer and societal support. (bp, 2023)
Moreover, while encountering more restrictions, some oil companies and energy giants have started to invest in renewable energy and clean technologies to reduce their carbon footprint and participate in new energy markets. (McKinsey, 2023) Due to the uncertainty in the investment outlook and returns in the petroleum industry caused by the green transition, diversifying energy investments, such as investing in renewable resources like solar and wind energy, provides a degree of risk mitigation for potential investment risks in the petroleum industry. (McKinsey, 2023) While in recent years, major renewables sources investment is in a continuously increasing trend. (Annex, 2023) In the meantime, they can also expand their businesses into clean energy and low-carbon industries. This is not only a response to societal trends and government policies but also lays the foundation for the future transformation of the petroleum industry. (TABETA, 2023)
For example, British Petroleum (BP) has invested in a joint venture with Light source. Eni Group recently commenced operations at a 31MW solar power plant in Italy and has similar projects in Australia, Tunisia, Pakistan, and Kazakhstan. Shell also owns five solar projects and plans to construct a 120MW solar power plant in Australia, which will help them reduce 300,000 tons of carbon emissions annually. (Gupta, 2021)
3.0 Solutions
3.1 Digitalization of Petroleum industry
The current petroleum industry faces increased pressure from carbon emissions restrictions and rising carbon taxes, necessitating innovative solutions to enhance competitiveness. Digitalization stands out as a key strategy to achieve both environmental and economic objectives. As per the KPMG CIO survey, digitalization offers the petroleum industry new opportunities during the energy transition. (CIO, 2022)
Digitalization is a catalyst for reducing costs, enhancing operational efficiency, and optimizing resource allocation. (Evans, 2022) It enables the integration of technologies like big data analysis and artificial intelligence to streamline production processes and reduce resource wastage, resulting in lower operational costs and increased production capacity (Aramco, 2023).
Furthermore, digitalization initiatives contribute to energy efficiency, cost reduction, and environmental compliance. (McKinsey, 2023)These enhancements not only boost the economic performance of petroleum companies but also align with societal and governmental expectations for sustainable business practices.
3.2 Application of Carbon Capture and Storage
The adoption of Carbon Capture and Storage (CCS) in the petroleum industry offers a viable strategy for economic and environmental gains. CCS involves capturing carbon emissions during production processes and securely storing them underground (Casey, 2023). This approach helps companies' lower emissions while aligning with government policies and societal trends.
Notably, the growth of large-scale CCS facilities globally, from 51 in 2019 to 194 by the end of 2022, highlights the economic viability of this technology (Casey, 2023). CCS not only reduces emissions but also paves the way for a gradual transition towards clean energy sources, allowing petroleum companies to adapt to changing energy landscapes while maintaining profitability. (LSE, 2023)
Singapore's government commitment to CCS technology, demonstrated through initiatives on Jurong Island and plans for significant carbon capture potential by 2030, showcases the alignment of economic interests with environmental responsibility (Reuters, 2021). This commitment enhances the economic viability and long-term competitiveness of the petroleum industry in Singapore.
4.0 Conclusion
In summary, the green transition has led the government to impose restrictions on carbon emissions and apply carbon taxes, negatively impacting the profitability, competitiveness, and growth prospects of Singapore's petroleum industry, both in terms of exports and investments. Simultaneously, policy constraints and rising production costs are driving companies within the petroleum industry to innovate technologically, with a focus on reducing carbon emissions and increasing productivity. They are also diversifying their investments into various other energy sources like clean energy to mitigate the unknown risks associated with the future of the petroleum industry and prepare for the transition.
Feasible solutions include embarking on digital transformation to enhance operational efficiency and productivity, thereby reducing carbon emissions and optimizing resource allocation. Another solution involves adopting CCS (Carbon Capture and Storage) technology to reduce carbon emissions, laying the foundation for the petroleum industry's transition toward green and low-carbon energy sources, and stabilizing its short-term profitability and competitiveness.
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