(EnergyAsia, November 25 2014, Tuesday) — Singapore’s stretched infrastructure is forcing Asia’s oil traders to tweak a winning formula of over two decades to accommodate a bigger storage and pricing role for neighbouring Malaysia and Indonesia, said the International Energy Agency (IEA) and energy media Platts.
In separate reports, the two organisations point to tiny Singapore’s topped-out influence as it reaches a limit to expansion of its oil storage infrastructure on the island’s roughly 750-sq km of land.
Since the late 1980s, Platts’ team of journalists in Singapore has been reporting deals and determining prices for a variety of crude grades and oil products. In the early 1990s, Platts introduced a real-time service that made its service so successful that it has since remained the main reference for price discovery in Asia.
Following complaints that some traders had reported fictitious deals to influence prices, Platts later demanded that they show proof of ownership or lease of tank space in Singapore for their cargoes so that their contracts could be verified.
This key condition strengthened both Singapore’s independent oil storage industry and trading hub status as Asia desperately needed an impartial source of price discovery and reference. The Platts’ trading window fulfilled that role, muscling out all attempts by other media and even futures exchanges to launch rival pricing systems.
In its October market report, the IEA said Singapore has remained at the forefront of Asian oil trading and storage for the last 20 years by leveraging off its location at the mouth of the Strait of Malacca and the slim channel between Indonesia and Malaysia to serve as the main route for oil tankers voyaging between the Middle East and East Asia.
Having expanded its storage capacity to 73 million barrels, Singapore’s terminal owners today face limited growth prospects despite rising demand brought on by Asia’s increasing oil appetite. The IEA has forecast that developing Asia will need to import an additional 3.6 million b/d of oil over the next five years to 2019 to meet all its new demand.
But Singapore’s role in this additional supply flow will be limited by its land constraint and rising business costs which have held back investors from building more storage terminals.
“Additionally, recent government legislation has reportedly sought to prohibit the allocation of land to new oil terminals while prioritising the construction of high‐value assets such as petrochemical facilities,” said the IEA.
As a result, traders have begun building new tanks and storing oil in neighbouring Malaysia and Indonesia. Their governments have actively encouraged the construction of oil terminals to draw business away from Singapore to the extent that the two countries now have a combined capacity to store 50 million barrels of oil.
According to the IEA, Malaysia’s main push to capture business from Singapore is centred on nearby Johor state which has offered tax incentives and ample waterfront land to encourage investment. The planned Pengerang project in eastern Johor will include a complex of refineries, petrochemical plants and oil terminals capable of taking VLCCs. Johor state has also attracted investors to expand the Tanjung Bin storage facility to the west by 1.4 million barrels to 7.2 million barrels in 2015 while central Tanjung Langsat is slated to expand its storage capacity to 5.1 million barrels.
The IEA said Indonesia is planning to develop a number of projects around its northern islands near Singapore although implementation has not been as smooth sailing as in Malaysia.
In October 2012, Sinopec Kantons Holdings, a subsidiary of China’s Sinopec Group, filed a notice with the Hong Kong Exchange that its 95%-owned PT West Point Terminal had started constructing a terminal on Batam Island to store as much as 16 million barrels of crude and refined fuels. There has been no update on the project which was due to start up in late 2014.
Germany’s Oiltanking and Switzerland’s Gunvor Group expect to start up their jointly owned storage terminal on nearby Karimun Island in the third quarter of next year, with an initial 760,000-cubic metre storage capacity.
“While Singapore’s storage capacity has been growing steadily over the last decade, further growth is hampered by the scarcity of waterfront and lack of land available for new expansions,” said Gunvor in announcing its investment plan in June 2013.
To facilitate the industry’s growth, Platts said it will expand its FOB Singapore price assessments for oil products to include the Indonesian terminals from July 1 2015. The assessment, which have included Johor ports since 2001, will be renamed FOB Straits.
Announcing its plan in August 2014, Platts said it is “actively studying the evolution of the geographical coverage” of its FOB Singapore refined oil products benchmarks to ensure they continue to reflect growth and changes in the Asian oil trade.
“The limited possibility of further expansion of Singapore’s on-land oil storage, coupled with growth plans in nearby Johor and the Riau Islands, means trading of products – and the benchmarks that reflect that activity – will spill beyond Singapore’s traditional boundaries and into new frontiers,” it said.
As a response to industry concerns about land constraints, Singapore inaugurated the first phase of an underground storage project last September. Located on Jurong Island and composed of five rock caverns capable of holding approximately 9.2 million barrels of oil, the US$700 million project was conceived and developed to overcome space shortage aboveground.
In the project’s first phase, state landlord JTC Corp has completed and leased two caverns with a total capacity of three million barrels to petrochemicals producer Jurong Aromatics Corporation. Another three caverns will likely be completed in 2016.