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Singapore’s Chemical Cluster Makes Comeback in First Half 2021

ASPRI2122_ED01-Pix01A major energy hub, Singapore felt the sharp end of the industry’s pain through the Covid-19 pandemic in 2020. The weak market was compounded by problems at foreign workers’ dormitories. As infections amongst foreign workers rose, dormitories were shuttered to contain the virus spread. Across the industry production slowed until the virus transmission in dormitories was brought under control.

Singapore Economic Development Board (EDB) statistics underscored the industry’s difficulties. Overall Singapore’s chemical cluster registered a 27.8% drop in manufacturing output to S$63.3 billion in 2020, a level not seen since 2009. Petroleum suffered the biggest blow with a 43% fall to S$21.8 billion, followed by petrochemicals, which fell 23% to S$24.6 billion. Specialty chemicals and others, including organic and inorganic chemicals, were more resilient, slipping by just over 2% to S$11.8 billion (18.7%) and S$5 billion (8%), respectively.

However, value added (VA) largely rose, with overall VA for the cluster increasing 6.2% to S$12.6 billion, boosted by a sharp 87% jump in petroleum VA to S$1.5 billion. Petrochemicals and specialties also edged up by 1.9% and 3.7% respectively, while others fell 9%. VA per worker also rose by 6.2% to S$489.2 million.

Given the grave uncertainties faced by the industry, net asset investment during the year slipped 15.9% to S$4.1 billion.

Rationalisation is the order of the day as companies seek to right-size their operations in response to the changed environment.

On 11 Nov 2020, Shell Singapore announced 500 job cuts at its largest refinery on Pulau Bukom. Stretched over three years, the cuts account for 38% of the refinery’s 1,300 workforce. In a statement, Shell said Pulau Bukom would pivot from a crude-oil, fuels-based product slate towards new, low-carbon value chains as part of its drive to be a net-zero emissions energy business by 2050.

It said: “The changes that will have to take place in our businesses will have a corresponding effect on our staff numbers. As Bukom transforms and becomes smaller and smarter, the resizing of operations will result in fewer jobs, but more highly skilled jobs as digitalisation and automation progress.”

Shortly after, Chevron confirmed plans to trim at least 10% of its Singapore staff as part of company’s global retrenchment exercise to cut operating costs and streamline the organisation.

And in March 2021, ExxonMobil retrenched 300 or about 7% of its 4,000-strong workforce as part of its effort to trim its global workforce by 15% by the end of 2022. “This is a difficult but necessary step to improve our company’s competitiveness and strengthen the foundation of our business for future success,” said Ms Geraldine Chin, who took over as chairman and managing director of ExxonMobil Asia Pacific in January.

Singapore is home to ExxonMobil’s largest integrated refining and petrochemical complex globally and its Asia Pacific hub for its downstream, chemical, and liquefied natural gas (LNG) businesses.

After a dismal 2020, Singapore’s chemical cluster made a comeback in line with the broader industry worldwide. Manufacturing output rose 13.3% in the first six months of 2021 on improved performance in petrochemicals and specialties.

With better business sentiments, further improvements were expected as manufacturing output had strengthened through the first half of the year. For the month of June, the latest figures available before publication showed that output by the chemical cluster jumped 30.6% compared to a year ago with increases recorded in all segments, with specialties leading the way with 53.6%, followed by others 46.2%, petroleum 32.3% and petrochemicals 21.3%.


Challenging 2020 for big oil, better 2021
2020 was one of the worst years for big oil. Weighed down by low demand and equally low prices, companies were forced to scale down their operations, cut expenses, write-down assets and retrench staff.

While the top four players, China Petroleum & Chemical Co (Sinopec), PetroChina, Royal Dutch Shell and Saudi Aramco, stayed in the black, their earnings were sharply lower.

Sinopec, the world’s largest oil refining gas and petrochemical conglomerate, posted a net profit of 33.1 billion yuan (US$5.04 billion), 42.9% below 2019, on 28.8% decline in revenue to 2.11 trillion yuan. Compatriot PetroChina saw its net profit drop 58.4% to 19 billion yuan following a 35% dip in revenue to 1.93 trillion yuan.

Saudi Aramco’s net profit eased 44% to US$49 billion in 2020 on a 30% reduction in revenue to US$229.9 billion, while Shell’s profits slumped 71% to US$4.8 billion, its lowest in at least two decades, on a 48% drop in revenue to US$183.2 billion.

Both ExxonMobil and Chevron suffered losses. For ExxonMobil it was its first annual loss since the 1999 merger between Exxon and Mobil. The company posted a net loss of US$22.4 billion for 2020 following a record write-down in the value of its assets, on 31.5% decline in revenue to US$181 billion.

As for Chevron, it reported a full-year 2020 loss of US$5.5 billion, compared with earnings of US$2.9 billion in 2019, on sales and other operating revenues of US$94.5 billion, a 32% decline over 2019.

After a tough year, the industry bounced back on firmer oil prices to post better-than-expected results in 2021. Gains were made across the board.

For the first half 2021, Saudi Aramco’s net income jumped 103% to US$47.2 billion on strong rebound in energy demand Commenting on the company’s second quarter results, Aramco President & CEO Amin H. Nasser, said:

“Our second quarter results reflect a strong rebound in worldwide energy demand and we are heading into the second half of 2021 more resilient and more flexible, as the global recovery gains momentum. While there is still some uncertainty around the challenges posed by Covid-19 variants, we have shown that we can adapt swiftly and effectively to changing market conditions.”

For the first half 2021, Shell’s adjusted earnings jumped 151% to US$8.8 billion boosted by higher oil and LNG prices, ExxonMobil reported earnings of US$7.4 billion on improved prices and margins as well cost reduction against a loss of US$1.7 billion in H1 2020, while Chevron reported earnings of US$4.4 billion against a loss of US$4.7 billion in H1 2020.

Oil prices stage a comeback in 2021
By mid 2021, oil prices had rebounded from a dismal 2020 on economic recovery, government stimulus and steady easing of coronavirus related restrictions as vaccine roll out gathered pace. Brent crossed the US$70 per barrel on June 1, 2021, well above the prices in 2020 when Covid-19 hit an already over-supplied energy market sending prices tumbling.

Prices remained firm with international benchmark Brent crude closing in the US$80 mark on a few occasions, levels not seen in years, as the Organisation of Petroleum Exporting Countries (OPEC) reclaimed its grip on the industry. US shale oil producers which once challenged OPEC’s dominance tempered output putting profits before growth, after a pandemic-induced oil demand collapse forced more than 40 shale exploration and production companies to file for bankruptcy.

Firmer prices had spurred talks of a super-cycle, which could see crude oil top US$100 a barrel. At the Robin Hood Investors Conference on June 17, 2021, Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman weighed in: “A supercycle in oil prices could be seen on the back of the absence of new investments in exploration. I think it’s my job, and others’ jobs, to make sure this super-cycle doesn’t happen.”

The minister has reasons to be concerned even though the Saudis as the world’s largest producer will benefit most should oil continue to head upwards. As Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc. noted in Rigzone.com, “Because it will cause market entry by players outside of the OPEC+ universe, and probably cause U.S. production to accelerate.”

Just over a month later, OPEC+, which comprises the 13 OPEC members and 10 of the world’s major non-OPEC oil exporting countries, reached a deal to boost oil supply to cool prices. The group said that from August until December 2021 they would increase supply by a further 2 million bpd or 0.4 million bpd a month. By September 2022, production cuts that were brought in in 2020 would be phased out.

OPEC and its partners cut production by a record 10 million bpd in 2020 to stem price collapse following pandemic-induced slump in demand.

Brighter outlook for oil and gas demand
Industry outlook has taken on a brighter hue as economies steadily open with extensive vaccination. The International Energy Agency (IEA) revised its forecast upwards as the year progressed.

In its June Oil Market Report, the Paris-based energy watchdog forecast that global oil demand will reach pre-pandemic levels by end 2022. It expects demand to rise 5.36 million bpd in 2021 and a further 3.07 million bpd in 2022, to reach 100.6 million bpd.

“The recovery will be uneven not only amongst regions but across sectors and products. While the end of the pandemic is in sight in advanced economies, slow vaccine distribution could still jeopardise the recovery in non-OECD countries,” the agency said.

As for natural gas, which suffered a smaller demand drop in 2020, the IEA expects global gas demand to recover most of its losses in 2021. In its Q3 2021 Gas Market Report, the IEA forecast demand for gas, the cleanest fossil fuel, will increase by 3.6% in 2021 before easing to an average growth rate of 1.7% over the next three years. By 2024, gas demand is forecast to strengthen by 7% from 2019’s pre-Covid levels, with the Asia Pacific accounting for almost half of the increase.

“Natural gas demand growth in 2021 mostly reflects economic recovery from the Covid-19 crisis, but it’s set to be driven in the following years in equal proportions by economic activity and by gas replacing other more polluting fuels such as coal and oil in sectors such as electricity generation, industry and transport,” the IEA noted

Liquefied natural gas (LNG) is proving to be the most resilient as it is finding new usage beyond power in the industrial, petrochemical and transportation sectors. S&P Global Platts Analytics expects that global LNG demand will edge up by 3% in 2021 following a 2% rise in 2020 to around 362 million metric tonnes. However, the increase is well below the 11% market growth it enjoyed in 2019.

For Singapore, LNG will continue to play a vital role in its energy strategy even as it adopts other alternative energy sources such as solar energy. In November 2020, Temasek-owned Pavilion Energy signed a 10-year sale and purchase agreement with the world’s largest LNG producer Qatar Petroleum to make annual purchases of up to 1.8 million tonnes from 2023. Each cargo delivered to Singapore under the agreement will come with a statement of greenhouse gas emissions from wellhead to discharge port.

Speaking at the signing of the agreement, Second Minister for Trade and Industry Tan See Leng noted, “LNG is especially attractive for countries which face constraints in deploying renewables due to limitations in geography, size, and alternative energy sources.”

Singapore has also strengthened its value proposition as an LNG trading hub, developing its LNG infrastructure and supporting commercial developments, Dr Tan added.

Glowing prospects for petrochemicals
As for petrochemicals, a material of choice in many commercial applications, the prospects are good. Precedence Research expects the global petrochemical market will grow at a compound annual growth rate of 5.1% from US$452.9 billion in 2020 to around US$729 billion by the end of 2030.

Petrochemicals is flexible enough to respond to changes in the market environment, Precedence Research noted. “While the pandemic drove down demand for petrochemical products from construction, manufacturing and textile industries, it stimulated a significant surge in demand for plastics used in medicine, hygiene and food packaging.”

Among all the products, ethylene, propylene, toluene, methanol and benzene are the most widely used, with ethylene being the most dominant. Used in various industries including transportation, construction and packaging, ethylene accounts for over a quarter of petrochemicals’ revenue. Asia is the largest source of both demand and supply, a dominance which is likely to continue.

The research also noted that over the forecast period, polypropylene, which is applied in paints, paper, detergent, electronics and adhesive industries, is expected to post some of the strongest gains.

Petrochemical processing will help to shore up the demand for oil as demand for fuels for transportation dips with the steady switch to hybrid or electrical vehicles to lower carbon emissions.

Demand shifts expected to cut refining utilisation
Demand for refined products is beginning to shift. In its report ‘Global downstream outlook to 2035’, McKinsey & Company predicts that even in the case of a delayed energy transition, demand for light products, which largely drives refining utilisation, will plateau by the mid-2020s. Light products refers to gasoline, diesel/gasoil, jet fuel, kerosene and even biofuels.

By 2035, it expects demand to fall from between 2.8 million bpd and 11.7 million bpd from 2019 levels, depending on the pace of energy transition.

The decline will vary across various regions. It expects light product demand in North America and Europe to fall most sharply leading to permanent closure of refineries.

McKinsey noted that underpinning this prediction are six major shifts that affect long-term global energy demand: uptake of electric vehicles, efficiency gains and uptake of low-emission fuels for aviation and marine, increased demand reduction and recycling of plastics, cost reductions for renewables and storage, electrification of residential heat and electrification of European Union industry low and medium temperature heat.

While the refining industry is set to contract in some regions, demand for refined products will remain fairly significant even if the energy transition is accelerated. Worldwide, McKinsey estimates there could be refining capacity of 94 million bpd of liquids in 2035.

Said Tim Fitzgibbon, senior expert at McKinsey: “The downstream world is changing rapidly, and refiners must adapt to build in resilience. First in core refining and retail operations – by embracing digitalisation, and potentially investing in decarbonisation and better integrating into petrochemicals – and then within the wider portfolio.

“Many refiners can capture pockets of growth by directing investments both into emerging markets and further down the value chain. They should also consider placing big bets on emerging value pools including new energy services, new mobility and advanced fuels. These shifts are essential to achieving every penny of potential profitability as the product and geographical market mix shifts beyond recognition.”

According to a study by data and analytics company, GlobalData, China will lead Asia’s refinery hydrocracking unit capacity additions, accounting for 56% of the regions’ total additions between 2021 and 2025. It expects China to develop new-build refineries with a total hydrocracking unit capacity of 803 thousand barrels per day (mbd) by 2025, while its expansion projects will account for the rest with 237 mbd.

Teja Pappoppula, oil and gas analyst at GlobalData, comments: “In China, eight new-build hydrocracking unit refineries are likely to start operations by 2025 while the rest are expansion projects. The planned Jieyang and Lianyungang I are the largest new-build refineries with hydrocracking unit capacities of 165mbd and 142mbd respectively. Among the expansion projects, Zhenhai refinery is the largest upcoming one with 80mbd of capacity, closely followed by Dayushan Island with 76 mbd.”

GlobalData expects India to be the second highest contributor to the Asia’s refinery hydrocracking unit capacity additions by 2025 with a total refining capacity of 465 mbd by 2025, followed by Thailand with 197mbd.

Strong surge in chemical mergers and acquisitions after haitus
With progress on the vaccine front, chemical mergers and acquisitions (M&A) are poised for a major rebound.

“We see strategic buyers not hesitating to buy and sell, and financial sponsors flush with cash and looking for deals. The market is open and debt financing markets are very strong,” Leland Harrs, managing director at investment bank Houlihan Lokey told Independent Commodity Intelligence Services (ICIS) in December 2020.

“Some deals that were put on pause will go to market in the new year. There is a much more optimistic tone than four to five months ago as people are now looking beyond Covid. All systems are go and we should be in for an active 2021,” he added.

Robert Clarke, vice-president of Wood Mackenzie’s Upstream Research, predicted there will be a blockbuster deal in 2021 that will send shockwaves through the industry. “Absent a very volatile crude market, two big names will get together. Maybe even three, as some of the recent deal filings have indicated. We don’t think it goes as far as the Permian eventually only having five meaningful operators, as some have suggested. But we are confident a storied name (or three) will be retired in 2021.”

Global chemicals M&A activity took a nosedive in 2020. According to Statista, it tumbled 51% from US$139 billion in 2019 to US$68 billion in 2020, the lowest since 2013.

Transitioning to a low carbon future
Despite resistance in some quarters, the world is transitioning to a low carbon future to avert the worst effects of climate change. Over 100 countries have pledged to achieve net zero greenhouse gas emissions by 2050.

More companies have also declared their commitment. Amongst big oil, Shell, BP and Total pledged to achieve net-zero by 2050 and are developing new business models to reduce their dependence on hydrocarbon.

Convinced that oil demand has peaked, BP announced in August 2020 its intent to cut oil and gas production by 40% by 2030, while increasing annual low-carbon investments like wind energy to US$5 billion.

Unlike BP, Shell is not planning to pivot away from its traditional oil and gas business. It expects its output to decline by 1-2% per year from its oil production peak of about 1.7 million barrels per day in 2019. Instead, it is building its consumer business, focusing on sale of low-carbon electricity, biofuels and hydrogen directly to households and electric vehicle owners.

Likewise for Chevron. “In our view, oil and natural gas are going to be critically needed for some time to come. The energy transition under way will take some time, to not only develop the new energy sources, but also to figure out the technical challenges that we all face,” Jay Johnson, the company’s executive vice president of upstream, told weekly oil and gas newspaper, Upstream.

The company is seeking to lower the carbon intensity in its operations. Having exceeded its 2023 target three years of schedule, Chevron has now set its sights on reducing its carbon intensity by 35% by 2028 and eliminating routine flaring by 2030.

As for ExxonMobil, the group aims to reduce greenhouse gas intensity of upstream operations by 15-20% compared to 2016 levels under its new emissions reduction plan for 2025, and cut methane intensity by 40-50% and flaring intensity by 35-45%.

An industry leader in carbon capture and storage (CCS), the company has set up a new business, ExxonMobil Low Carbon Solutions to commercialise its extensive low-carbon technology portfolio building on the work of its Carbon Capture and Storage venture established in 2018.

“The business will initially concentrate on CCS, advancing plans for over 20 opportunities around the world to enable large-scale emission reductions. It will also leverage ExxonMobil’s significant experience in hydrogen production and add other technology focus areas, such as advanced biofuels, as they mature to commercialisation,” said Mr Woods.

The IEA estimates that the oil and gas industry as a whole will increase climate-friendly investments to at least 4% of its capital spending in 2021, up from just 1% in 2020.

“Much greater resources have to be mobilised and directed to clean energy technologies to put the world on track to reach net-zero emissions by 2002,” said Faith Birol, IEA’s executive director. “The rebound in energy investment is a welcome sign, and I’m encouraged to see more of it flowing toward renewables.”

Given the gravity of climate change efforts by big oil are seen as being grossly insufficient in some quarters, on May 26, 2021, ExxonMobil, Chevron and Shell felt the heat from shareholders and lawmakers.

ExxonMobil was forced to make changes to its board after activist fund Engine No. 1, which was critical of the company’s approach to the environment, managed to marshal the support of big shareholders to secure three seats on the company’s board. At Chevron, shareholders backed a call from the Dutch environmental group Follow This to reduce its carbon emissions.

As for Shell, Netherlands’ largest company, the country’s court ordered it to lower its carbon emissions by 45% by 2030 from 2019 levels, much faster than the company’s timeline. Shell’s target was to cut the carbon intensity of its products by at least by 20% by 2030, 45% by 2035 and 100% by 2050 from 2016 levels.

As the ruling took immediate effect, Shell’s CEO Ben van Beurden said the company would take “bold but measured steps” to accelerate its energy transition strategy and deepen carbon emissions cuts while taking steps to appeal against the decision. Analysts expect this will lead to a sharp reduction in Shell’s energy output.

But given the sheer size of the industry, the shift away from oil and gas is not expected to be immediate. “Directionally, it is clear that the world is going towards lower carbon, but I think the scale of it is not fully understood. In 2019, we had a US$87 to US$88 trillion world economy that depended upon fossil fuels for 80% of its energy. You don’t just change that overnight,” said Daniel Yergin, vice chairman of IHS Markit.

“So, I think there is a transition, it just takes time. I think oil and gas are going to end up being an important part of it for a long time,” he added.

Global oil demand has doubled over the past 50 years, reaching around 100 million barrels per day in 2019, equivalent to an annual energy consumption of 192 exajoules (EJ).

National oil companies (NOCs) such as Saudi Aramco, Abu Dhabi National Oil and Qatar Petroleum, which are owned primarily by governments and are not subjected to shareholders’ pressure, will probably emerge as buyers of the oil and gas assets divested by big oil. Rystad Energy expects that by 2050 NOC’s share of worldwide oil supply will increase to 65% from just over half today.

Singapore signs up to global effort
Pint-sized Singapore has joined the global effort in reducing emissions. As Mr Teo Chee Hean, who chairs the Inter-Ministerial Committee on Climate Change, noted, “Our impact on global emissions is small, but on the other hand, the effect of climate change on us is disproportionately large and existential”, pointing to the impact of sea level rise on low-lying Singapore.

By 2050, Singapore wants to halve the level of emissions it produces from its 2030 peak, with the aim of achieving net-zero emissions “as soon as viable in the second half of the century”.

It’s a challenging target for Singapore given its sizeable chemical cluster. The country has one of the world’s biggest refining and petrochemical complexes, the biggest bunkering hub, and is also Asia’s largest hub for oil trading. It has been suggested that for Singapore to achieve its target, it would have to transition away from chemicals as it is a major carbon emitter contributing some three-quarters of industries’ emissions.

That may be a step too far given Singapore’s abiding interest in the industry which goes back over 1891 when M. Samuel & Co (later Shell) built a depot to import and distribute kerosene from Russia. Today, Jurong Island, an amalgam of seven islands including Pulau Bukom, is home to over 100 companies in petroleum, petrochemical, specialty chemicals and auxiliary services.

As economists Dr Tilak Doshi and Professor Euston Quah noted in their commentary, ‘Can Singapore really transition to a post-oil economy?’, in Singapore’s national accounts, the ‘chemical’ industrial cluster (which includes petroleum refining, petrochemicals, speciality chemicals and others) contributed 9.3% of value added to total manufacturing in 2018. The marine and offshore engineering segment (primarily drilling rigs and offshore oil and gas equipment) accounted for a further 11.3%. Together, these two industries accounted for over a fifth of manufacturing gross domestic product.

“Comparing the value-added contribution of these two industries against those of electric vehicles, battery storage, green buildings and solar power ignores the issues of legacy, scale and inertia.”

But for Singapore to achieve its target, it would have to make the chemical cluster greener. As Magzhan Sovetbek and Melissa Low, researchers at the National University of Singapore’s Energy Studies Institute, observed, “a green economy does not preclude the petrochemical and refining industry”. Companies can adopt technologies for carbon capture, storage and utilisation, which can cut carbon emissions of the petroleum refining and chemical industries without significantly affecting economic output, though the technology’s cost and energy efficiency would have to be improved first.

Singapore is fully cognisant of this. One of the goals under the Singapore Green Plan 2030, the country’s blueprint for sustainable development, is to make Jurong Island a sustainable energy and chemicals park by 2030.

Addressing Parliament during the Committee of Supply 2021 – Joint Segment on Sustainability on 4 March, Minister Chan Chun Sing said, “Our Energy and Chemicals (E&C) sector is becoming more vital in accelerating our charge towards environmental sustainability. It will continue to enable many other parts of our economy and it will continue to produce for the world. But it will do so more sustainably. To get there, we are taking active steps to transform the sector.”

Singapore is stepping up decarbonisation and resource optimisation efforts at both the plants and systems levels, to transform Jurong Island into a sustainable energy and chemicals park. “We are partnering companies that are developing cleaner products and decarbonisation solutions,” said Mr Chan.

“We are enhancing the Investment Allowance for Emissions Reduction (IA-ER) scheme (previously known as the Investment Allowance for Energy Efficiency Scheme). Apart from improving energy efficiency, the IA-ER will also support projects that result in direct reduction of greenhouse gas emissions,” he added.

Singapore’s refining sector, the fifth largest in the world, is already making the transition. This has as much to do with economics as with companies’ shift to a greener future. Refining margins are feeling the squeeze from refining overcapacity across Asia.

As Dr Kang Wu, head of global demand and Asia analytics at S&P Global Platts told The Business Times in March 2021: “Cracking refining margins in Asia/Singapore have been under pressure since the outbreak of Covid-19 last year, plunging to an average of negative US$3.3/barrel in April 2020. The margins have since recovered to minus US$0.5/barrel in February 2021 before getting a lot worse again so far in March.

“S&P Global Platts Analytics does see the margins to improve to zero in Q3, but coming months are challenging with rising crude prices, surplus capacities and higher runs so the margins are likely to slide further.”

Shell, which built the nation’s first refinery in 1961, has announced plans to half its refining capacity on Pulau Bukom as part of a group-wide revamp of its energy portfolio. While Pulau Bukom will remain one of its Shell’s six energy and chemicals parks, it will be reconfigured to refine cleaner fuels.

While refining capacity are being scaled down it will remain an intrinsic part of the chemical cluster as most of the refineries are supported by deep integration with petrochemicals.