Singapore positioned in the epicenter of Asia Pacific plays a prominent role in the region’s energy ecosystem.

For it to continue attracting foreign investments across Asia, opportunities to enhance the nation’s value creation throughout the region must be explored.

As a result, KPMG Global Energy Institute conducted a survey in 2013 with energy stakeholders in Singapore to gain their perspectives on key themes shaping the sector. This piece sets to reevaluate the key themes in 2015.

 

Tax policies

In 2013, our survey respondents ranked tax policies as the crucial factor in setting up operations in Singapore.

Energy and Natural Resources (ENR) executives want the government to continually review tax policies to ensure Singapore sustains this competitive advantage.

Singapore’s implementation of the Global Trader Programme(GTP) in 2001 enhanced its reputation as a global commodity trading hub.

Numerous international commodity trading companies, in return for local investment, established trading offices and benefited from comparatively favorable tax rates.

However, regional competitors emerged and in 2011, the GTP found a close rival in Malaysia’s Global Incentives for Trading (GIFT) program.

The scheme targeted investment from petroleum and liquefied natural gas (LNG) companies complementing mega infrastructure projects like Malaysia’s Refinery and Petrochemical Integrated Development (RAPID) project in Pengarang.

Today, Singapore’s tax competitiveness has been challenged by a wave of international tax regulations.

The implications of Base Erosion and Profit Shifting (BEPS) could be far reaching for both Singapore and the trading companies that have or planned to set up here.

Singapore must watch these developments closely and ensure that incentives are in place to encourage the sector to build their trading teams in Singapore.

 

Energy commodity storage capacity

In 2013, over 60% of ENR executives perceived Singapore’s commodity storage capacity as a critical factor in determining the country’s strategic value.

Supported by its strategic location and world-class infrastructure, Singapore ranks second behind Switzerland for physical metals and mineral trade, plus handles approximately 15% of the world’s physical crude oil trading.

The little red dot has been innovative in unlocking new methods of crude storage to enhance the country’s energy security and trading activities.

In September 2014, Singapore completed the first two of its underground oil storage caverns in Jurong Island, with another three due to be ready by 2016. The five caverns will have total storage capacity of 1.47 Mcm of liquid hydrocarbons.

Moreover, to bolster its ambition of becoming ASEAN’s premier LNG hub, Singapore evolved its LNG infrastructure by constructing a fourth storage tank to increase capacity from 6-11 MTPA.

At 260,000 m3, the new fourth LNG storage tank will be the largest in the world and aims to be completed by 2018.

 

LNG pricing mechanism

The sheer demand growth for LNG over the last decade combined with the flurry of new supply that is due to come online by 2016 has contributed to the gradual transitioning of natural gas from a regional to global commodity.

In 2013, Asian buyers of LNG were paying up to five times that of US Henry prices and three times that of the UK National Balancing Point (NBP).

This is largely because Asian buyers have traditionally used oil indexing for LNG contracts. Although the recent slump in oil price has caused the price differentials to narrow and acute regional differentials remain.

With over 70% of global LNG trade occurring in Asia Pacific, it is little surprise that energy consuming countries are calling for an LNG spot trading market that aligns with the global supply and demand dynamics shaping LNG.

Singapore with its consortium of oil and gas trading capabilities and growing LNG infrastructure remains keen to develop an LNG pricing point.

Yet, there are potential limitations to Singapore’s ambitions. These include a small domestic market and limited supply competition, which acts to restrict liquidity.

 

Talent

The majority of survey respondents rated the maturity level of Singapore’s talent development as only ‘intermediate’.

In light of emerging neighbors, such as Malaysia and Indonesia developing a comparatively cheap and increasingly skilled labor force, the Singaporean government adopted a number of measures to maintain its competitive advantage.

The Singapore Maritime Institute was established by the Maritime Port Authority (MPA), Agency for Science, Technology and Research (ASTAR) and Economic Development Board (EDB) to consult on how Singapore can build domestic research and development (R&D) capabilities across the marine and offshore sectors.

There has also been deeper collaboration between oil and gas businesses and local universities to enhance domestic knowledge capabilities.

For example, in recent years the National University of Singapore (NUS) created a Centre of Offshore Research and Engineering (CORE) and the Institute for Technical Engineering (ITE) developed a course in marine offshore.

Both of which have strong sector backing and may help address Singapore’s technical talent shortage.

 

Research and development

To maintain a central role in the regional offshore industry Singapore is channeling investment into enhancing its offshore, oilfield and petrochemical R&D capabilities.

Academic institutions, government agencies and local companies largely drive Singapore’s R&D centers.

In 2014, DNV GL enhanced its deepwater technology center and Halliburton launched its flagship regional technological center in Singapore.

Such foreign investments align with the country’s gradual pivot from a hardware to software hub, as well as mark another stepping stone towards becoming a land of innovation and technical sophistication.

In response to rising global and regional petrochemical competition, Singapore has shifted its petrochemical focus towards value-added chemicals.

Various R&D science parks have been used to support this evolution, such as the establishment by Mitsui Chemical and BASF SE R&D labs.

Furthermore, the expansion of ExxonMobil’s petrochemical plant, which gives the company the capability to bypass the refining processing steps and process crude directly into petrochemical products is testament to Singapore’s innovative prowess in the oil and gas sector.

 

Energy Financing

When it comes to raising capital many respondents rated Singapore very highly.

Singapore has built a brand synonymous with financial transparency, legal stability and openness to international business.

The capital intensive nature of the commodity sector, alongside Asia’s large appetite for commodities has catalyzed interest in the capital markets of Asia Pacific.

Since 2013, the Singapore Exchange (SGX) introduced rules to foster an attractive IPO environment for Mineral, Oil and Gas (MOG) companies, while simultaneously safeguarding investors’ interests.

In 2013, the total market capitalization of exploration and production companies on SGX quadrupled and in the first quarter of 2014 there were a few high profile listings of offshore service companies.

Nonetheless, whether the local investor market is accustomed with the cyclical nature of the commodity sector remains to be seen. It is still unclear what the long-term impact of the low commodity price environment will be on MOG stocks.

Singapore has also positioned itself to capitalize on the growing pool of Islamic investors in ASEAN. Over the past five years Islamic capital market activities in Singapore have taken off with 31 sukuk issuances.

Supporting the ascendance of Islamic finance is another way Singapore can provide ore financing options for global investors and energy companies.

 

Conclusion

Knowledge is required to enhance the technical and value-added expertise that Singapore has provided the ENR sector.

To harness knowledge, talent must be developed and R&D capabilities must be enhanced. Both are areas that the government and industry have collaborated to address.

To stay ahead of the curve it needs to maintain its proactivity and forward thinking mentality, building on the solid foundation it has developed.

One area that Singapore can gain a first mover advantage is in renewable energy development, namely solar.

Establishing itself as the carbon-smart city of ASEAN aligns with Singapore’s reputation as a land of new ideas, initiatives and leadership.

The article is contributed by Mr Bob Yap, head of deal advisory in the Asia Pacific region and head of forensic at KPMG in Singapore and Tim Rockell, director of KPMG’s Global Energy Institute (GEI) in the Asia Pacific region. The views expressed are their own.