The Think-Tank of Asean

An Emerging Energy Juggernaut

Although Southeast Asia is rapidly emerging as an energy consuming giant, the confounding paradox remains: why does the region's per-capita energy use stand at a relatively paltry level? With a growing population and surging urbanization, the region's energy demand challenge is further compounded because over one fifth of the population - or approximately 134 million people - lack access to electricity. Furthermore, with indigenous production dwindling, the ASEAN states face a nexus of energy uncertainties, but are working in overdrive to tackle the challenge.

In assessing the seismic shifts in global energy demand, Craig McMahon, the lead Asia upstream analyst of consulting specialist Wood Mackenzie, does not mince his words: "The future global energy demand story is heavily focused in Asia Pacific." In the face of colossal energy demand, high oil and gas prices, in addition to rising imports, the ASEAN states are striving to maximize the potential of their hydrocarbon reserves. According to BP's 2013 Statistical Review of World Energy, the ASEAN states hold approximately 17 billion barrels of proven oil reserves and 7.2 trillion cubic meters of natural gas reserves, which equates to the total amount of proven natural gas in North America.

Martin Kobiela, general manager and operations director at the international mooring and installation company InterMoor, explains the region's desire to negate its energy problems. "In Southeast Asia, there is a real hunger for new energy supplies because the region recognizes the scale of the challenge and is extremely focused on the need to establish new energy supplies and infrastructure." To paraphrase the ancient Chinese philosopher Sun Tzu, in chaos comes opportunity, and the energy vitality of the region is certainly generating myriad growth opportunities for oilfield service companies like InterMoor.

To capitalize on the buoyancy of Southeast Asia's oil and gas market, international oil companies (IOCs) are pivoting their strategic eye eastwards. Since 2007, to illustrate the upstream dynamism within the Tiger Community, exploration and appraisal drilling in Southeast Asia comprised of 12,000 wells. Although the low hanging fruit may have gone, the ASEAN region is blessed with an abundance of energy resources, deep offshore potential and with a variety of markets to choose from, oil and gas companies are eager to occupy a square on the ASEAN energy chessboard.

Total, the French IOC, prides itself on its pioneering and sophisticated deepwater capabilities and is certainly striving to spearhead the development of the region's fledgling deep offshore industry. Jean-Marie Guillermou, senior vice president Total E&P Asia Pacific, "Generally Asia Pacific is evolving into a mature upstream area and as such we are increasingly pursuing hydrocarbons in frontier markets." In Myanmar, the French E&P giant recently drilled a deep offshore well in the M-11 Block with its partner PTTEP and acquired an ultra-deepwater (2,500m) block in the Philippines. The company also remains optimistic about discovering deep offshore oil in Brunei despite the initial exploratory results being rather disappointing.

Despite a desperate need to reinvigorate its offshore sector, Indonesia remains a hydrocarbon titan. In 2012, the world's fourth largest amount of hydrocarbons were discovered in Malaysia and with its implementation of an array of fiscally enticing and creative policies, it is arguably the energy poster child of the region. Furthermore, upstream activities in Thailand, Vietnam, and the Philippines are gaining pace. Additionally, Myanmar's opening of its energy doors has generated a buzz of corporate excitement, with NOCs and IOCs extremely keen to take part in its oil and gas growth story.

Singapore's position within this upstream ecosystem has developed into an intriguing and central question for both industry decision makers and Singaporean authorities. Faced with a number of internal challenges, primarily squeezed land space and rising overheads, Singapore is seemingly reinventing its role in the region's oil and gas theater and many offshore and oilfield service companies are adapting their utilization of Singapore.

Rick Shannon, managing director of specialist survey service provider C&C Technologies (Asia Pacific), aptly conveys this trend: "Due to geographic constraints, Singapore wants to become a high dollar per square foot country." Clearly, such an economic transition caters for a significant proportion of Singapore's oil and gas industry. Indeed, Singapore's world-renowned commodity trading, trade finance platform and R&D capabilities require relatively little land usage. Yet Shannon goes on: "As an engineering focused company like C&C Technologies, which has space intensive activities, we have to question whether this approach is compatible to our business model." Such sentiment is echoed by a number of senior executives in Singapore's offshore and oilfield industry.

Changing Operational Tide

It is almost 50 years since Singapore was ousted from its transitory federation with Malaysia and began its startling transformation into a mega-metropolis. Yet, a number of headwinds are engendering business leaders of offshore and oilfield service companies to actively question and debate whether Singapore is the best and most sustainable country to operate from.

Michael Chan, managing director of marine, offshore and engineering consultancy Braemar Offshore, is a longstanding pillar of Singapore's small and compact offshore community. Along with Michael Chia, Marcus Chew and Choo Chiau Beng, he is one of an impressive lineage of Singaporean offshore heavyweights to have passed through Newcastle University's prestigious Naval Architecture conveyer belt. Chan is under no illusions that Singapore's place at the top of the offshore engineering and manufacturing table is under threat. "The sustainability of Singapore's leading regional position is tough to predict," says Chan. "Attracting business is all about money. Unfortunately for Singapore, it has developed into an increasingly expensive country with rising overheads. Cheaper regional competition is emerging, threatening to undercut Singapore's leading offshore hub position and as a result, the rules of the game are changing." Having witnessed first-hand the evolution of Singapore's offshore industry, Chan's insight certainly packs a punch.

Kishore Mahbubani, dean of Lee Kuan Yew School of Public Policy and one of the pre-eminent voices on Asia's road to modernity states, "Arguably, Singapore's greatest existential challenge is that it cannot stop running – it is on a treadmill. As soon as a competitor out-competes Singapore in a particular industry, we need to move on and do other things. Singapore will always be a price taker and never a price maker." Such sentiment reflects the notion that the Little Red Dot's oil and gas industry cannot compete on all fronts in a dynamic and changing world.

Baker Hughes

Building Success on Success

For decades, Baker Hughes has been an oilfield services pioneer in Southeast Asia's upstream arena. In 2009, the global company underwent a step change when its structure was reorganized under a geographic leadership structure known as geomarkets. The Asia Pacific region comprises 17 countries and under geomarkets has been divided into five cultural entities. The geomarkets paradigm is designed to streamline and decentralize the company's operations, enabling Baker Hughes to be more responsive in meeting their client's needs. "Since the establishment of the geomarkets initiative in 2009, our Southeast Asia business has more than doubled its revenue. In Southeast Asia, we now have eight countries under our remit," says Ajit Menon, Baker Hughes' vice president and managing director of Asia Pacific. Clearly, this organization transition has been a central growth factor in driving the company's recent regional expansion.

Baker Hughes' geomarkets structure is increasingly being emulated in Southeast Asia. In what is a politically, economically and culturally vast and diverse region, to coordinate operations effectively and align with national agendas, international companies are seeking to establish a local footprint and content. As the oil and gas environment becomes ever more competitive and mature, Menon believes that understanding national business customs of the ASEAN states is essential. Through the implementation of a local presence, companies believe that they can get an edge over competitors through forging strong partnerships on the ground. Ultimately, in such a region, company's operating with a malleable business model are well poised to adapt to the nuances of the region.

Northward-bound

The transition of Malaysia into an oil and gas powerhouse over the last 15 years has catalyzed a northbound gravitational shift of offshore and oilfield service companies away from Singapore. International service giants such as Technip, Mammoet and Wasco Energy have all chosen Kuala Lumpur as their HQ and operational stomping ground.

Baker Hughes, a top tier oilfield service company, was one of the pioneering companies that moved their regional management from Singapore to Kuala Lumpur. Citing the thought process behind the shift, Baker Hughes' VP & managing director (Southeast Asia), Ajit Menon points out that the company wanted to be where the exploration and production action takes place. "Malaysia is a massive market for oil and gas: that itself draws the industry here. Coupled with impressive infrastructure, Malaysia is an attractive country to do business in." Furthermore, Malaysia, through its Economic Transformation Policy, has worked to mold an increasingly enticing business environment for international companies. The country has developed a muscular infrastructure and, unlike Singapore, has a large skillful talent pool to draw upon. Finally and perhaps most crucially for offshore and oilfield companies, Malaysia's substantial land-space caters for their operations.

Hallvard Hasselknippe, COO subsea & member of the group executive committee for Technip, pinpoints Singapore's diluting offshore service competitive edge: "The fundamental difference between Malaysia and Singapore is cost. Operating an offshore logistics base from Malaysia is far less expensive. Furthermore, Malaysia has a lot more space than Singapore." Technip made one of its biggest investments in recent years with the construction of the Asiaflex Products manufacturing plant at Tanjung Langsat, Malaysia. Ultimately, it would have been difficult to construct such a plant in Singapore due to land constraints.

The Achilles' heel of Singapore as an offshore and oilfield services hub lies in the lack of land space, which in turn has ratcheted up costs. This challenge has become more pronounced as the Little Red Dot has become increasingly crowded and a playground for the world's super rich. Indeed it appears that Singapore is growing its own money tree: a Boston Consulting Group study conservatively estimated that 11.4 percent of Singaporean households are millionaires, the largest proportion in the world.

Backed by top-down initiatives, such as the Global Trader Program (GTP), which subsumed the then Approved Oil Trader Program, fiscal incentives are drawing ‘software' driven companies to the Lion City. In 2012, Singapore lured Trafigura to move its legal trading headquarters from Geneva. The Singaporean authorities launched the Global Trader Program in 2001, which offers a corporate tax rate of 10 percent to traders. Trading houses can qualify for a 5 percent rate if they commit to meeting certain local staff hiring levels and make significant use of Singapore's banking services. Ostensibly, it appears oil and gas executives view Singapore as the perfect location to conduct regional business development and strategy; but its future as a base for manufacturing and storing large physical offshore and oilfield assets, although by no means dead, appears bleak.

On the pulse of this hardware and software dichotomy is Jaap Zwikker, vice president, commercial & business development (APAC), of Heerema Marine Contractors. Seizing the regional offshore momentum, the Dutch heavy lift and float-over company has picked up a number of good projects. The largest, in Australia, is the Ichthys LNG Project for INPEX, in partnership with McDermott. Moreover, with the development of their new build vessel Aegir – a state of the art, multipurpose, deepwater construction vessel – they were able to secure the contract for the installation of Shell Malikai tension leg platform in Malaysia.

For Zwikker, Singapore is no longer the most suitable logistics hub for a business of Heerema's nature. "It was challenging to bring our vessels into port at anchorage because they needed sizeable anchor spread. We found the Maritime and Port Authority of Singapore (MPA) very focused on commercial shipping, which hindered our logistical operations here." Heerema inevitably shifted the logistics arm of their business to Batam, Indonesia, a strategic re-alignment that ultimately has its own unique challenges.

Nonetheless, Heerema, like more than 7,000 multinational companies (MNCs), have chosen Singapore – the smallest country in ASEAN – as their home. More than half of these MNCs are using the island city-state as their regional headquarters.

A Headquarter Playground

Ever since Sir Stamford Raffles navigated the Singapore River and landed at Boat Quay in 1819, Singapore has crafted a reputation as a cradle of commerce. Today, Singapore is a fusion point for western and eastern companies seeking to tap into the region's economic ascent.

James Pang, managing director of commercial and business development at recently listed offshore services company Pacific Radiance, states: "Singapore does have an excellent brand name. In terms of corporate governance, it offers a certain level of comfort and it readily complies with key international standards, which reassures investors." Indeed, it was not a surprise that in 2013 Singapore was ranked by the World Bank as the best country to conduct business in for the seventh consecutive year. As Pang declares, "Singapore business is synonymous with efficiency and predictability, which are crucial traits for a thriving business environment."

Dockwise, a fully-fledged offshore contractor, is yet another example of a North Sea company using Singapore as a springboard into the region. The man responsible for spearheading Dockwise's expansion into the region is area manager Jan Wolter Oosterhuis. "Clearly Singapore has no oil and gas resources, yet all our major clients have a presence here, either through a marketing or operational office, or both. Across the chain, from the platform construction companies like SembCorp and Keppel, to the drilling entities, like Transocean, to the ship brokers and offshore contractors." Oosterhuis' sentiment chimes with the bulk of oil and gas executives across the value chain: Singapore acts as an industry magnet, facilitating business and market intelligence for the region.

"We have regional and global clients and when one thinks of a hub, the value chain network first and foremost has to be there. Singapore, despite having no indigenous energy resources, is the pre-eminent hub for clients because of its infrastructure and well-connected regional platform," emphasises Pek Hak Bin, the head of KPMG's Energy & Natural Resources branch. In 2013, KPMG chose to locate their Global Energy Institute in Singapore. The institute is the first international expansion of the original institute in Houston and is both a clear indication of Asia and Singapore's growing importance in the global energy landscape.

Despite rising overheads, a squeezed landscape and a constrained pipeline of talent, Singapore plays a greater role in the offshore industry than merely being the table of business negotiation. In typically forward thinking Singaporean style, the country has recognised a niche gap in APAC's energy market: R&D.

A Land of Ideas

To maintain a solid footprint in the offshore industry, Singapore is channeling a lot of effort into building its offshore and oilfield R&D capabilities. Singapore's research centers are largely driven by academic institutions, government agencies and local companies such as SembCorp and Keppel. In 2010, Singapore's A-STAR and local universities began to collaborate to develop R&D capabilities in the oil and gas equipment sector to the drilling entities, ship brokers and offshore contractors.

In 2012, DNV established their deepwater technology center in the city-state and a year later Halliburton launched their flagship regional technological center in Singapore. Such foreign investments align with the country's gradual pivot from a ‘hardware' to ‘software' hub and mark another stepping stone towards Singapore becoming a land of innovation, idea generation and technical sophistication.

Swire Oilfield Services, an international leader in providing cargo carrying and innovative modular systems, has capitalized on Southeast Asia's buoyant energy market, doubling growth year on year for the last two years. For the company's director and regional general manager, Troy Brice, Singapore offers the company an array of functions. "Ultimately, Singapore is particularly important to us as a telecommunications safe haven. Some of the functions we have centralized regionally from our operating bases include IT and our server and Dart managing point. Additionally, our local procurement and financial management directives all stem from the Singapore office."

Seemingly, Swire Oilfield Services' use of Singapore exemplifies the country's wide-ranging capabilities. It further uses Singapore as the regional center that supports its manufacturing supply points across Asia and is the distribution hub for equipment and asset transfers between operating companies.

Kongsberg Maritime, a Norwegian technology enterprise within the Kongsberg Gruppen, delivers systems for positioning, surveying, navigation and automation to merchant vessels and offshore installations. Although R&D remains firmly rooted in Norway, its Singapore outlet is taking a more hands-on approach to R&D and focuses on delivering a range of highly technical services to the FPSO, drilling rig, offshore and increasingly PSV and OSV markets. Furthermore, the Singapore branch offers clients a technical training setup. "The Singapore training facility has a simulator, where we are training operators on vessel and deepwater operations," says Trond Brage Jakobsen, managing director of Kongsberg Maritime. The company's presence here is validated by the fact that Singapore is the longstanding, regional hub for FPSO conversion. Indeed, in an effort to be a first mover and gain a competitive advantage, the island city-state selectively targeted a niche market and today occupies approximately 70 percent of the world's FPSO conversion market share.

Ultimately, new ideas and initiatives can drive a first-mover competitive advantage. With the completion of Singapore's first LNG Terminal, the LNG arena appears to be the latest niche market that the Lion City believes it can sink its teeth into.

Pacific Radiance

EnergyBoardroom caught up with James Pang, Managin Director Commercial & Business Development, to discuss how the recently-listed Singaporean offshore services company plans to tap the nascent offshore potential of the APAC region and his views on Singapore's future as a premier offshore hub.

How is Pacific Radiance positioning itself for growth?

To ride strong demand in the sector, we are targeting high-growth and protected markets such as Malaysia, Indonesia, Mexico, Brazil, East Africa and Australia, where we will build up a presence through strategic partnerships. We will be adding more than 20 vessels over the next three years to enable us to meet the requirements of these markets. Also, we are actively acquiring larger and more sophisticated dynamic positioning vessels that will support deepwater exploration and production (E&P) activities.

How do you justify high levels of investment in an industry that is both cyclical and in danger of excess supply?

Globally, there may be a supply risk but our growth is focused on high-growth cabotage protected markets, which will dampen the effect of oversupply, if any. We have already carved out a solid foothold in two high-growth E&P markets – Indonesia and Malaysia – which are both seeing heavy upstream activity. Moreover, clients value our ability as an owner-operator to anticipate their needs by customizing solutions that will allow them to meet their targets as their businesses grow and evolve.

Given rising competition, can Singapore maintain its position as the leading offshore hub in the region?

Perhaps not across the whole offshore spectrum, but for ship repair, Singapore is certainly poised for further growth: that is why we are investing approximately 50 million USD in a ship-repair yard here. Singapore sits at the epicenter of the region's most critical sea lanes, which gives it a huge natural advantage in this market.

Thinking ahead of the Pack

Situated on a 40-hectare plot at the Meranti seafront on Jurong Island, the Singapore LNG terminal is the first LNG terminal in Southeast Asia capable of importing and re-exporting LNG from multiple suppliers. For Singapore, the terminal, completed in May 2013, has a dual strategic importance. Firstly, it reinforces the country's energy security status, diluting the reliance of pipeline gas contracts from neighboring states Indonesia and Malaysia. Secondly, it supplements Singapore's well-established ambition to position itself as the LNG trading hub for the Asia Pacific region.

The Asia Pacific region is the fastest-growing gas market in the world. In 2012, it accounted for nearly 70 percent of global LNG trade. With demand for LNG in Asia Pacific anticipated to increase threefold over the next 20 years, Singapore was far sighted in setting up the unique LNG terminal, although it does have limitations. These include a small domestic market, together with limited LNG supply competition coming into Singapore, restricting liquidity. Most crucially, many global market participants remain wedded to LNG pricing based on oil prices, which will hamper the potential for Singapore to develop as an LNG pricing point.

Eric Simon, CEO of GDF Suez Trading (Singapore) is nonetheless bullish over the country's capability to fulfill its LNG trading ambition. In contrast to Hong Kong and other potential regional LNG trading hubs, Simon asserts: "Singapore possesses a consortium of oil and gas as well as coal trading capabilities. There is a concentration of professionals involved in these activities in Singapore whereas Hong Kong is orientated more as a financial services hub. Frankly speaking, there is nothing I can think of that could be done better to improve the trading environment in Singapore." GDF Suez established their Singaporean integrated trading platform in 2012, and the Little Red Dot has been their regional base from where they serve the entire Asia region.

Singapore's reputation as a business utopia has partly been crafted through constant, open dialogue between authorities and business. One such authority is Singapore's central bank, the Monetary Authority of Singapore (MAS). The MAS ultimately endeavors to support Singapore in its quest to be a global financial center and has fostered Singapore's key competitive advantage in having an established trading and financial infrastructure located in a single location. It has played a central role in the proposal to incrementally transfer regulatory oversight of commodity derivatives under IE Singapore's Commodity Trading Act (CTA) to the MAS (SFA Securities Futures Act). The MAS has paid diligent attention to the views and perspectives of the commodity trading arena and as a result of its consultation efforts, has received praise throughout the trading industry.

A longstanding issue for Asia's economic growth has been the fact that Asian buyers are using oil indexing for LNG contracts because there is no LNG price index in the region. As a result, Asian gas prices in 2013 traded approximately five times the average of US and three times the average of UK. Clearly for the region to remain economically competitive there is a need for spot trading capabilities and Singapore can facilitate that need by providing an LNG pricing mechanism. Hence, it is no surprise that the likes of Shell, Chevron, BP, Conoco, Gazprom and Total are setting up LNG and gas trading arms in Singapore. The country also possesses first mover advantage. The city-state is already the region's leading oil trading hub and SLNG came online earlier than Malaysia's RAPID LNG project. Due to these factors and the Energy Market Authority's proactivity to develop Singapore's LNG infrastructure, Singapore is in a strong position to take a leadership role in establishing itself as the regional LNG pricing hub.