Image courtesy of Chevron Oronite

Ever since Shell announced a “strategic review” of its Singaporean assets last year, many questions were laid open over what may happen to the Pulau Bukom refinery and 1.1 million tons ethylene cracker that supplies ethylene oxide, ethoxylates, styrene monomers, and propylene oxide to chemical companies on Jurong Island. The review concluded with the announcement this year that Shell will be selling the complex to CAPGC, a JV between Indonesian leader Chandra Asri, as a majority owner, and giant Swiss trader Glencore. Shell’s departure created an opportunity for two new entrees - with Chandra Asri gaining a foothold in the region’s largest oil refining and trading centers, as well as access to naphtha feedstock for its Indonesian cracker, while Glencore makes Singapore, already one of its main marketing hubs, the only country where it has physical refinery assets, besides South Africa. 

Once the transaction is complete by the end of this year, the refinery will likely continue processing sour crude to make transport fuels (60%) and chemicals (14%), at least in the short term, depending on the discussions between the new JV partners. It is possible they may decide to shift more into chemicals in the future. Companies on Jurong Island that depend on Shell’s feedstock supply can rest assured for now, but the clarifications over the sale did not stifle bigger, more existential questions around the meaning of Singapore’s losing one of its largest and first investors, even as it gains two other large players to the island. Is Singapore still attractive as an investment destination, especially for refining and petrochemicals? In fact, there is controversy around these questions. Of course it does. Probably more so today than ever before, because it is evolving into an increasingly more sophisticated hub and pushing innovation boundaries. But one must understand why the mooted review created so much anxiety. 

First, the final decision was prefaced by a long period of uncertainty, which began back in 2020 when Shell decided to halve refining capacity at Bukom to 237,000 barrels per day (bpd), and three years later it proceeded to cancel two planned projects for biofuel and base oil production in Singapore. These actions sent the message that Singapore is not only less competitive in the refining business, but it does not fit the bill either for Shell’s lower-carbon businesses. Besides the three to four years of extended uncertainty, which typically makes investors nervous and invites speculation, the other reason why Singapore is taking Shell’s divestment to heart is the symbolic role this plays, for the Bukom refinery is the country’s oldest of its three (together with ExxonMobil and Singapore Refining Company), inaugurated back in 1961; it represented the first vote of confidence to establish the Singaporean oil refining and petrochemical sector, now among the largest in the world. For that, a transaction reported in the range of S$1.3 is more than a change of ownership between leading players; it cuts deep into Singapore’s own standing as an energy hub. 

Singapore can nod to Shell’s quoted reasons for the divestiture – a focus on lower-carbon, higher-value, and more profitable products, as part of its wider value-over-volume current global strategy, because this is where Singapore is heading as well. But it does beg the pointed question of how Singapore can reinvent itself into a sustainable, green nation without alienating its CO2-heavy petrochemical industry, or if being both green and heavily entrenched in the oil and gas business may not be mutually exclusive. 

Exacerbating concerns over Singapore’s competitiveness are two main policy changes, one outside of Singapore’s control and the other driven from within. The first is the Global Minimum Tax (GMT) of 15% minimum rate applied to all multinationals, to which 140 countries agreed to. Singapore, whose attractive fiscal incentives have been at the core of attracting MNCs to its shores, will have less room to play on tax advantages beginning next year when the rule becomes effective; however, Singapore has already prepareda new program, called Refundable Investment Credit (RIC) in Budget 2024, offering up to 50% support on each qualifying expenditure category (including R&D, new production facilities, decarbonization projects, and other) for up to 10 years.

The second taxation that is feared might dent Singapore’s attractiveness is the carbon tax applied to all facilities emitting more than 25,000 tons of GHG/year, which has grown from S$5/ton in 2023 to S$25/ton this year, and is planned to gradually expand to up to S$80/ton by 2030. According to an article by Channel News Asia, a refinery complex of the profile of Shell’s would mean a carbon tax impact of up to S$2 per barrel. Singapore is the first country in Asia to implement a carbon tax, putting itself at a cost disadvantage compared to its peers. 

Fortunately, Singapore does not want to play in a price game that it cannot win. High utilities, rental, and labor costs do not let Singapore compete on a cost-base with its neighbors. If we look at the unit business cost index of manufacturing for Singapore, this has remained relatively stable in the last 10 years (at 91.5 in 2023, according to data from Statista); meaning that Singapore has not become more expensive. But other countries have become cheaper. Investments in the Middle East, China, and the US, which benefit from cheaper feedstocks, indirectly erode Singapore’s competitiveness, with no feedstocks to call its own. 

“Historically, Singapore positioned itself as the refining hub for Asia, but a lot has changed since,” commented John Hong, APAC sales director and Singapore country head at Infineum, a lubricant additives producer in Singapore. 

Hong explained that China’s heavy investments in both large-scale and “teapot” refineries with capacities in the 300,000-400,000 bpd range, pushed everyone to invest in integrated complexes, leaving Singapore without sufficient export outlets. But, as Hong was quick to add: “Singapore has formidable skills in R&D and business-friendly policies, and excels in the development of smaller-volume, higher-value products further up the value chain.”

These qualities are what investors in Singapore are paying for. Recently, Siemens announced the construction of a high-tech factory in Singapore, which will create approximately 400 new jobs. When looking for the right location for the investment, Siemens considered multiple locations but chose Singapore. “In the totality of things, time, such as the efficiency of customs clearance, is also a cost,” said Andreas Kappler, head of chemical & pharma for Siemens ASEAN, “ and Singapore stood out as the best all-round destination for many reasons, including a transparent, pro-business environment with a high level of governance; excellent infrastructure in the context of communication, power, and logistics, crucial for a hub location (...) Other aspects, such as a highly skilled labor force, not to mention the appeal of the place to attract new talent, speak to Singapore’s favor.”

Singapore remains the third largest oil trading hub after ARA (Amsterdam, Rotterdam, and Antwerp) and Houston, as well as a major petrochemical hub, serving as a natural entrepot between the Straits of Malacca and the South China Sea, but its ecosystem is now also becoming more relevant in the high-tech, renewable and circular value chains. For example, Singapore is already home to the world’s largest sustainable aviation fuel (SAF) production facility and is projected to see the biggest capacity increases in SAF, alongside the US and China, according to Global Data. 

Spelling out Singapore’s long-term vision are multiple government programs. Singapore plans to see the value-add of its manufacturing sector going up by 50% between 2020 and 2030. Manufacturing, trade, and connectivity are some of the key pillars within Singapore’s national Research, Innovation and Enterprise 2025 Plan, a fifth such plan that saw gradual budget increases over the years, S$25 billion being set aside for the current one – or 1% of the country’s GDP, according to official sources.

With its notorious sticks-and-carrots approach, Singapore gives large emitters no option but to seek to decarbonize or pay for the GHG they let out, channeling the proceeds from the carbon tax to fund decarbonization projects, but it also offers them the tools to run expensive decarbonization projects. “We are sensitive to the fact we are an export-oriented country. For that reason, we introduced a carbon tax transition framework to help large emitters and export-oriented emitters adapt to the changes. We also have a scheme called Resource Efficiency Grant for Emissions available for industrial facilities undertaking projects that will reduce their emissions,” said Josephine Moh, VP & head, Chemicals & Materials, at the Singapore Economic Development Board (EDB). 

So far, the Energy Efficiency Grant (EEG) introduced in 2022 has been useed by 2,000 companies, and the budget was ramped up this year. In term of R&D for energy transition projects, Singapore has put aside S$55 million, later topped up with another S$129 million, within its Low-Carbon Energy Research (LCER) funding initiative, supporting hydrogen and CCS projects. The A*STAR-led Carbon Capture and Utilization Translational Testbed, in conjunction with the EDB, as well as Singapore’s Institute of Food and Biotechnology Innovation (SIFBI), are part of the broader innovation ecosystem that the city-state has built. 

The chemical sector falls under the banner of Singapore’s Sustainable Jurong Island vision, which seeks to see the output of sustainable products growing 1.5 times from 2019 levels, as well as realizing 2 million tons of carbon capture, by 2030. These objectives become even more ambitions against a 2050 deadline. The latest stride has been the formation of an S-Hub consortium with Shell and ExxonMobil to develop a cross-border carbon capture and sequestration (CCS) project. In the same way that Singapore succeeded in amalgamating seven islands to create the Jurong cluster, home to a third of the country’s manufacturing output, Singapore’s ultimate goal is to potentially use stored CO2 from Jurong Island, where half of the country’s emissions concentrate, and turn it into a feedstock to make new products. This is a far-off dream, but possible for a country that has already done the near impossible by turning itself into an energy hub despite having no natural resources. 

Singapore has always sought to differentiate by doing things that cannot be easily copied. The garden city, where tropical trees cover almost half of the country’s land, is aware of the pressures it puts on companies with carbon taxation, yet it does it anyway. Rather than being a crowd-follower and potentially a price taker, it prefers to be a leader and a first mover, making sure it will also be the price maker once innovative high-risk technologies become commercial. Rather than being taken by surprise, it leads change from within. Its stern stance on carbon may lead to some tectonic changes along the way, perhaps even other multi-billion-dollar divestitures. 

Investors are aboard with Singapore’s vision

The hard evidence that speaks of Singapore’s continuous attractiveness are recent investments. Singapore remains the top FDI choice for ASEAN greenfield investment, absorbing a record net inflow of US$224 billion in 2022. Last year, Singapore attracted $13 billion (S$12.7 billion) in fixed asset investments, with the energy and chemical sector leading the way (35.6%), according to the Economic Development Board (EDB). 

Accounting for 15.9% of the manufacturing sector’s nominal value-added (VA), the chemical cluster is central to Singapore, petroleum and petrochemicals accounting for the largest share within the cluster (63.7% in nominal VA). After seven consecutive quarters of decline between Q1 2022 and Q3 of 2023, the chemical cluster returned to growth since Q4 of last year, according to data from the Ministry of Trade and Industry. The change is driven mostly by Singapore’s specialty chemical sector, with output rising by 29.1% versus 1.7% in the petroleum-based sector on a year-on-year basis, based on ICIS. 

Big investments in Singapore in recent years were from both existing players consolidating their presence in the region as well as the arrival of new companies. Singapore’s hub role and the qualities underpinning it, from unparalleled logistics to high levels of governance, lack of corruption, political stability, and its strengths as the fourth largest financial hub, second only to Hong Kong in Asia (according to the Global Financial Center Index or GEFI), apply equally to traditional petrochemicals and more advanced manufacturing value chains that the city is successfully building. 

Many investments target Singapore’s lively chemicals, energy, and ingredients scene, but the common thread is the focus on building capabilities, whether in manufacturing or research, for innovative and differentiated products, thus resulting in the creation of new value chains, especially lower-carbon value chains. These are likely to co-exist with traditional ones.