SINGAPORE REFINERS IN MIDST OF HUGE CONSTRUCTION CAMPAIGN

Singapore's downstream capacity continues to mushroom.

Singapore refiners, upbeat about long term prospects for petroleum products demand in the Asia-Pacific region, are pressing plans to boost processing capacity.

Their plans go beyond capacity expansions. They are proceeding with projects to upgrade refineries to emphasize production of higher value products and to further integrate refining capabilities with the region's petrochemical industry.

Planned expansion and upgrading projects at Singapore refineries call for outlays of more than $1 billion to boost total capacity to about 1.1 million b/d in 1993 and 1.27 million b/d by 1995. That would be the highest level since the mid-1980s, when refiners such as Shell Singapore cut capacity amid an oil glut. Singapore refineries currently are running at effective full capacity of 1.04 million b/d.

Meanwhile, Singapore refiners are aggressively courting customers in the Indochina subcontinent, where long isolated centrally planned economies are turning gradually to free markets (OGJ, May 18, p. 19).

In addition, the downstream capacity push is accelerating the boom in transportation and storage projects in Singapore and neighboring countries. The boom results from an increasing number of countries and companies looking to Singapore as the region's hub for increased trade and distribution of crude and products.

Despite its rapid growth in total refining and deep conversion capacities, Singapore's rank as the world's third largest refining center--after Houston and Rotterdam--may be threatened this decade, with Far East neighbors Indonesia, Malaysia, and South Korea mounting strong challenges.

The competition could ultimately contribute to an overbuilt refining sector in years to come, much as has been seen recently in certain areas of Asia's petrochemical industry.

Some industry officials in the region already warn of an impending surplus in refining capacity if all announced plans to add capacity proceed.

DOWNSIZING PUSH

The rationale for Singapore's big downstream push is simple: Most industry estimates point to booming Asia-Pacific demand for refined products and petrochemicals in the 1990s.

Mobil Singapore last year estimated Asia-Pacific regional petroleum products demand growth at 3-3.5%/year in 1990-95. British Petroleum Co. plc estimated that oil demand in 1990 soared in South Korea by 20%, Indonesia 15%, and Malaysia and Thailand each by more than 10%.

Total Asia-Pacific oil demand is projected to climb from less than 14 million b/d at present to 16 million b/d by 1995 and 18.6 million b/d by 2000.

Some analysts see a possible shortfall in Asia-Pacific refining capacity the next 4-5 years. Currently, the region's refining capacity is about 14.5 million b/d. Mobil pegs the likely capacity shortfall in 1995 at about 643,000 b/d.

REFINING'S ATTRACTION

Another motive for investing in Asia-Pacific refining is the prospect for relatively better margins in comparison with a margin squeeze in the near term for U.S. and European refiners created by massive capital and operating outlays to comply with stringent new environmental rules.

U.S. Commerce Department data show the petroleum industry will receive 41% of the $410 million U.S. firms plan to spend in Singapore this year. Petroleum products were Singapore's second largest industry in 1991, after electronics, with production worth about $7 billion, or 16.2% of the nation's gross domestic product.

Singapore refiners have focused on flexibility to maintain buoyant margins. Their strength has been an ability to adapt quickly to changing circumstances, with the current capability of handling 40 crudes in configurations that allow sudden switches in feedstocks. That gives them an edge over regional competitors generally dependent on indigenous crudes.

However, Singapore refiners are bracing for a lean year in 1992. Mild winter weather in Europe and North America in late 1991 added to a demand slide caused by economic recession. The situation was aggravated by South Korean refiners bringing new capacity on line and Japanese refiners restarting mothballed plants in a region brimming with products stocks.

Singapore refining margins in recent months have fallen to $1-1.50/bbl, compared with about $5/bbl early last year during the Persian Gulf crisis.

At the same time, South Korea has stepped up its exports of fuel oil and middle distillates within the Asia-Pacific region, which thus far has been able to absorb them with little market effect.

WHAT'S PLANNED

The focus of much of the work ahead for Singapore refiners the next 3 years is on upgrading.

"That's what you will find generally in the industry," said Mobil Oil Singapore Chairman A.V. Liventals. "There will be some debottlenecking, but the real focus will not be on increasing distillation but on upgrading oil for higher value added petrochemical products."

The idea is to supplement Singapore's expanding role as the top refining center in Asia with an emerging role as a major regional petrochemical supplier. Overall, the island republic wants to integrate petroleum operations more to develop new facilities further downstream and has embarked on ambitious land reclamation projects to expand the island's land mass for new industrial complexes.

Projects on tap include:

Mobil's plans to hike distillation capacity at its 235,000 b/d Singapore refinery by another 10,000 b/d with a revamp of one of the plant's two distillation units. Revamp work is to begin in August.
It's part of $662 million capital investment program to be complete in 1993. that also entails a new 600,000 ton/year chemical grade aromatics complex and more upgrading units that include a new 38,000 b/d continuous catalytic reformer to ensure a captive supply of naphtha feedstock for the aromatics complex.
Mobil let contract to Badger Engineers Inc. for the overall project. Badger let subcontracts to a joint venture of Singapore's Promet Engineering and Australia's Leighton Contractors for $8.7 million in ancillaries and utilities construction work for the aromatics complex. Another $22.5 million in subcontracts is under negotiation. UOP Inc. is providing the aromatics technology.
Mobil hopes to have the project on stream in third quarter 1993. Mobil plans to market the aromatics in East Asia and Southeast Asia, where demand growth recently has been 5-10%/year.
Mobil Singapore in September 1990 started up $200 million upgrading units at its Jurong complex including a medium pressure hydrocracker to boost gasoline production. With that project on line, Mobil to date has invested $1 billion in Singapore.
BP Singapore's plans to upgrade units at its 30,000 b/d refinery. That announcement came as a surprise to industry watchers because BP previously had considered shutting down the plant, Singapore's oldest and smallest and on prime land near the main city. BP plans to focus on increasing overall production, especially of value added products. BP Singapore's first quarter earnings were well below that of first quarter 1991 but ahead of both quarters in second half 1991. BP Singapore posted a pretax profit of $81 million (U.S.) on revenues of about $1.2 billion in the first quarter.
Esso Singapore's planned capital outlays of $600 million in refinery upgrading and petrochemical ventures, including a jump of 30,000 b/d in distillation capacity from the current 225,000 b/d. The program also involves a joint venture with Amoco Chemical Co. and Taiwan's Chinese Petroleum Corp. to produce 350,000 tons/year of paraxylene. Esso also is studying several proposals to focus more of its future investments in Singapore on value added refined products and petrochemical projects.
Shell Singapore's consideration of a major investment program involving addition of a petrochemical plant to produce industrial grade alcohols and installing upgrading units at its 370,000 b/d refinery. Plans call for spending about $75 million to increase distillation capacity by 40,000 b/d by second half 1993. Shell also recently demothballed an 80,000 b/d distillation unit shut down since the mid-1980s. To date, Shell's investment in Singapore totals more than $2 billion.
Singapore Refining Co. Pte. Ltd.'s (SRC) project to boost capacity by 30,000 b/d from the current 210,000 b/d. It was to be complete by midyear 1992. SRC is a joint venture of Caltex Petroleum Corp., British Petroleum Co. plc, and Singapore Petroleum Co. Ltd. (SPC). Tentative plans also call for installation of a resid catalytic cracker, with a decision likely soon. Prospects for that project won a boost after SPC disclosed its 1991 retained earnings jumped to about $78 million (U.S.) from $42 million in 1990. SRC also spent more than $1 million (Singapore) ($650,000 U.S.) to train workers, with an emphasis on advanced technology and equipment.

SINGAPORE-INDOCHINA

Singapore is pressing to boost its share in what many industry officials see as the next new growth market: Indochina.

The first priority is Viet Nam, which is producing about 80,000 b/d of oil from a single offshore field and is expected to be a significant crude exporter in the 1990s. Vietnamese oil flow is expected to climb to more than 110,000 b/d this year. Japan takes all of Viet Nam's crude exports under a long term contract.

Singapore accounted for almost all of Viet Nam's refined products imports in 1991 and is likely to remain the major supplier to Viet Nam the next few years, said Nguyen Manh Tien, deputy director general of Viet Nam National Petroleum Export-Import Corp.

Viet Nam imported about 50,000 b/d of gasoline, diesel, kerosine, and fuel oil from Singapore in 1991.

What could disrupt that trade are Hanoi's plans to build the country's first refinery. A feasibility study is under way for a proposed 100,000-120,000 b/d refinery that would cost $1.2-1.4 billion and involve foreign joint venture partners.

Meantime, Esso Singapore is eyeing growing markets in Kampuchea and Myanmar as well as Guam and Hong Kong. It currently supplies asphalt and lube oil to Myanmar.

SINGAPORE'S CHALLENGES

Singapore's refineries face sufficiently significant competitive challenges from neighboring countries to warrant a warning from the government about not being complacent.

That harkens back to oil price spikes of the 1970s and early 1980s that led some of the regional crude exporters to convert a sudden influx of extra cash into a more diversified industrial base.

Indonesia dealt Singapore refiners a severe blow in the early 1980s by terminating contracts with them and expanding its own processing capacity. Indonesia had been refining about 220,000 b/d of its crude under processing deals with Singapore refineries.

In addition, Singapore refiners face the same soaring construction costs being experienced by other refiners and petrochemical producers in the region, spurred in part by a construction boom in the Middle East that has tightened Asia's engineering/construction capabilities. Projects in Thailand, Malaysia, and Indonesia have encountered cost overruns, in some cases resulting in withdrawals by project participants or projects being shelved.

COMPETITORS PLANS

The biggest concern for Singapore refiners centers on plans by Malaysia to add world scale grassroots refining capacity.

Singapore currently is the biggest market for Malaysian crude, refining 23.7% of the country's crude production in 1991 compared with 28.7% in 1990, Malaysia's state owned Petronas recently renewed 1 year contracts that expired in June with Mobil and Shell to process crude at their Singapore refineries. Petronas had wanted 2-3 year terms, but the refiners refused to commit for that long.

Malaysia's government approved plans by Ste. Nationale Elf Aquitaine to build a 120,000 b/d export refinery at Lumut, Perak state, at a cost of about $1.5 billion.

In addition, BHP Petroleum Pty. Ltd. and Taiwan's Chinese Petroleum Corp. (CPC) are participating with Petronas in a proposed 150,000 b/d refinery at a cost of $800 million at Bintulu, Sarawak. Agreements are expected to be completed in September.

Unlike the Elf project, in which Petronas is not involved, the Bintulu project will include interests for Petronas and the Sarawak state government.

Petronas also is building a 100,000 b/d sweet crude refinery at Malacca on the Strait of Malacca. It plans a second train for sour crude at the Malacca refinery in a joint venture with South Korea's Samsung Group and possibly other foreign partners. CPC and Pacific Resources Inc., Honolulu, pulled out of the sour crude project (OGJ, Sept. 2, 1991, Newsletter). Estimates of project cost for both phases run as high as $2.5 billion.

Meanwhile, Esso Malaysia Bhd. plans to spend $56.25 million to build a crude distillation tower and five or six auxiliary vessels to replace the existing 28 year old unit at its 47,500 b/d Port Dickson, Malaysia, refinery. Design work is to be complete by yearend, with the project scheduled to start up by early 1995. It's part of an overall upgrading program Esso has under way at the plant.

In addition, Esso is modernizing and upgrading its terminals and service stations in Malaysia.

Malaysia currently has four refineries--two owned by Shell, one by Esso, and one by Petronas--with a combined capacity of almost 220,000 b/d. They are designed mainly to meet domestic demand. But the new refineries would be geared mainly to products exports. If all the refinery projects reach fruition, Malaysia's refining capacity would jump to 690,000 b/d. Malaysia produces about 650,000 b/d of crude.

Malaysia, where products demand growth currently averages 7%/year, is a net products importer. The Lumut and Bintulu refineries would be required to export 80% of their production.

ELF PROJECT

Elf recently let contract to France's Technip for a feasibility study of its Lumut refinery (OGJ, June 15, p. 30).

Technip is conducting the study in cooperation with Technip Geoproduction Malaysia.

In January, Malaysia granted Elf a license to build and operate the refinery, which would process sweet and sour crudes and target the Indian market. Elf said the project could be developed in partnership with other companies seeking to market petroleum products in the region.

Regional analysts see the Lumut project as Elf's belated attempt to gain a foothold in the Asian market, where it has limited interests. The Lumut refinery would be Elf's first industrial venture of its kind outside Europe.

Analysts in Singapore and Malaysia contend Elf reportedly intended to secure Japanese participation but ran into problems because of japan's economic slowdown. Elf is said to want Japanese parties to take a 20% interest in the project and Malaysians 10%.

One prospective Malaysian investor in the project, Tongkah Holding, said any decision to participate will be subject to results of the feasibility study. Other potential Malaysian investors in the Elf project are Renong Bhd. and Antah Holdings.

Elf hired Petrokonsult Sdn. Bhd., a private Malaysian company, as consultant for the project. Petrokonsult said the project is proceeding according to plan and that Elf aims for groundbreaking by yearend.

SOUTH KOREA'S ROLE

South Korea, having displaced Singapore as the second biggest Asian refiner after Japan, is poised to play a key role in supplying the Asian market with products during the next 5-10 years.

Emerging rapprochement with North Korea has raised hopes among South Korean refiners that they will be able to sell products to their northern neighbor. The two Koreas, technically still at war, have gradually been increasing diplomatic and business contacts within the past year.

South Korean refiners look beyond North Korea as a potential market to eastern Russia and China, once North Korea's infrastructure is brought up to modem standards.

Seoul has not promoted South Korean products exports, keeping its focus on maintaining reliable domestic supplies at low prices.

In January, South Korea and China signed a most favored nation trade agreement, raising hopes of increased export of South Korean products to China, notably high sulfur products that are not used domestically. However, developing trade with China typically is likely to be a protracted affair compared with Russian trade prospects.

China's economy still relies heavily on coal, and Singapore supplies its southern provinces with petroleum products. South Korean refiners have proposed buying more Chinese crude to process in their plants and selling the Chinese more diesel and fuel oil, chronically in short supply in China. South Korea imported 20,000 b/d of crude from China and exported 2,000 b/d of products to China in 1991. South Korean products exports to China jumped to 5,000 b/d this year.

Beijing has more cash to spare than Russia does, but the latter could sell gas to South Korea in barter deals for refined products, which it needs desperately.

INDONESIA'S ROLE

Indonesia is pressing its campaign to become a significant products exporter to the Asia-Pacific region but first must accommodate domestic demand.

Indonesian refined products demand growth in 1990-91 soared at a rate of 11-13%/year.

Projecting average growth of 6%/year, state oil company Pertamina estimated Indonesia's products demand could reach about 1.1 million b/d in 1996-97. For domestic refiners to meet that demand, Indonesian refining capacity would have to at least double from the current 550,000 b/d. Considering Indonesia's current crude-product conversion rate, a more likely increase would be about 820,000 b/d, to 1.5 million b/d, Pertamina said at the Asia-Pacific Petroleum Conference (Appec) in Singapore last year.

Middle distillates, mainly diesel, will account for most of that growth, considering growth rates of 15.%/year in fiscal 1990-91 and 12.4%/year in fiscal 1991-92.

At the same time, Pertamina expects Indonesia's rapid growth in petrochemical product demand, which slowed briefly in 1991-92, to return in the years ahead.

And the company wants to increase use of its gas reserves.

INDONESIA'S PROJECTS

Indonesia's master plan to accommodate all of this calls for increasing refining capacity, improving efficiencies at existing refineries, expanding the petrochemical industry within the refining sector, and projects to use gas for increased liquefied natural gas exports and as petrochemical feedstocks.

Projects under the master plan are:

Upgrades, revamps, and debottlenecking of the 300,000 b/d Cilacap refinery that would boost capacity by 50,000-75,000 b/d and broaden the slate to take in a wider range of Middle East crudes.
An upgrade of the fluid catalytic cracking unit at the 145,000 b/d Musi refinery that would boost FCCU capacity to 20,000 b/d from 14,000 b/d, plus construction of the Musi crude and products pipeline system.
Construction of the 135,000 b/d EXOR 1 export oriented refinery at Balongan, currently under way.
A proposed 135,000 b/d EXOR H refinery at Sorong to be fed by Middle East crudes.
A proposed 120,000 b/d EXOR III refinery at Tanjung Uban fed by domestic and Middle East crudes.
A proposed 140,000 b/d EXOR IV refinery at Dumai fed by domestic crudes.
A proposed 140,000 b/d refinery for domestic products markets, PKDN 1, in East Java.
A proposed PKDN II refinery in West or Central Java, either as an EXOR I adjunct at Balongan or at Cilacap or Merak.
A proposed PKDN III refinery in North Sumatra or an expansion at Musi after completion of the Musi pipeline, plus construction of the Musi crude and products pipeline system.
A 370,000 metric ton/year paraxylene plant at Arun.
An upgrade at Musi to expand polypropylene capacity to 40,000 tons/year from 20,000 tons/Year.
A 60,000 b/d resid catalytic cracker at Cilacap to boost production of petrochemical feedstocks.
Construction of LNG train F at Bontang.
A liquefied petroleum gas project at Musi.
A methanol/methyl tertiary butyl ether project at Sengkang, Sulawesi.

The Indonesian government approved nine of the projects but later deferred some due to concern about excessive levels of foreign debt financing. It is uncertain which of the proposed projects will proceed or when.

Pertamina expects the new and existing refineries to process about 1.2 million b/d of Indonesian crude, with the balance using Middle East crudes. Accordingly, the company says it's necessary to include Middle East crude suppliers in some of the projects to guarantee long term crude supplies.

OVERBUILT CAPACITY

The race among Asia-Pacific refiners to expand capacity to meet growing regional product demand has some industry officials warning about the growing likelihood of too much refining capacity in the region.

Hugh E. Norton, chairman of BP Asia Pacific & Middle East, noted "the temptation to invest vigorously and continuously to raise refined product supply and add value domestically may be great" in the Asia-Pacific region.

He made the comments at Appec.

Citing the rapid expansion of western nations' refining capacity in the early 1970s that led to painful rationalization, including BP's effort to cut its number of European refineries to five from 16 and slash straight run capacity 55% during 1981-90, Norton said there are a number of things a country must consider before committing large sums to new refinery projects.

"If it is a producer country, the driving consideration may be the wish to add value to what would otherwise be exported as crude oil, in which case a new kind of customer must be identified," Norton said.

"If a consumer country, a degree of substitution for either--how much imported crude should be planned for and in what grades? What environmental pressures on product quality need to be met?

"If predominantly export oriented, even for part of its lifespan, is a location available that is topographically competitive? Is it wise to depend totally on imported crude if the investor has no equity crude of his own? Is there scope for commercial optimization by integrating with the yield structures of existing refineries or supply systems?"

Sometimes, said Norton, it makes more sense to upgrade existing refineries for their built in economic advantage or at least to integrate new development with existing refining infrastructures, although others might prefer the phased approach.

PRIORITIES

Norton cites three questions that take priority:

Is the regional supply/demand equation in refining capacity correctly balanced to justify the decision to invest?
Will a new refinery have to compete with debottlenecking or expansion options in existing sites?
Where will the financing come from?

He said, "Management of the refinery building program in the region over the coming years must succeed in avoiding a series of poor choices, leading to an unbalanced regional refining industry full of stresses and conflicts.

"There is no single recipe or mechanism to avoid this, nor should there be. Individual, commercially motivated investors, or groups of investors, will continue to be the driving force. But I must conclude that creating timely and fundable new capacity across the region as a whole--not just country by country--is the new challenge to governments, state oil companies ... and the private sector oil industry.

"This calls for collaboration among these three sectors. The winners will be those who can best seize the opportunities to create strategic collaborations."