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How Tiny Singapore Became a Petro-Giant
If you want to watch the video, it is below.
When people talk about an economy moving towards being a “service-oriented economy”, I think they tend to think about Singapore. I recently released a video talking about Hong Kong’s de-industrialization.
I got a few comments citing Singapore as a similar “service economy”. When I read those, this video came to mind.
Singapore’s experience reinforces the importance of specialized, advanced manufacturing within an economy. This tiny little island with not a lot of space has managed to create a massive petrochemical complex within their borders. It provides jobs and it drives the economy forward. I recognize Hong Kong has a lot of mountains. I don’t really see it as an excuse not to pursue advanced manufacturing.
My last trip to Singapore, I remember visiting an information stand about the local economy. At the time, I did not know that much about the economy other than that they did a lot of exports.
So what were they exporting? I was surprised by the data. Singapore's single biggest export category is integrated chips, which makes a lot of sense. But second place really surprised me. Refined petroleum? What on earth?
On the surface, it makes little sense. Singapore has no oil reserves whatsoever. Despite this, Singapore is today one of the world's biggest players in the petroleum industry. And that role has helped the country's rise from poverty to first-world wealth.
In this video we will see how Singapore came to be a hub for almost everything oil-related, without any of their own reserves.
The first full year of Singaporean self-rule, 1960, Singapore GDP per capita was just $1,360 SGD or $428 USD. Much of that value came from a local British military station.
Just ten years later in 1970 that number would double to almost $2,800 SGD per capita or $925 USD. Four years after that, it doubled again to $5,655 SGD or $2,341 USD. This number came on the back of lucrative oil product refined by Shell, BP and Mobil.
Refining and exporting oil for the world's biggest Oil Majors gave the country its first big boost in income and wealth. Which is interesting because Singapore itself is a tiny island, without any petroleum feedstocks and a large domestic market.
Despite this, the country did have a lot of things going for it. It possessed a superb deepwater port, urban infrastructure, a robust supply of cats, a mature banking industry, and of course, a strategic location at the southern tip of the Malaysian peninsula.
However, it was also politically unstable, with a growing population and high unemployment. The Singaporean government, or the “G” as I have amusingly seen it be called, knew that it had to deliver on its job promises or face removal from power. Facing high trade barriers into Malaysia and Indonesia, they turned towards the West and Japan.
The Oil Industry Value Chain
Let us take a pause to discuss petroleum industry dynamics. The industry can be split into three sections: Upstream, midstream and downstream.
The upstream sector has to do with the appraisal, development and production of petroleum and gasoline sources. You have companies that scout for oil, provide services for harvesting that oil, drill for the oil and so on.
The midstream is about transporting the oil and gas from where they were drilled to wherever they need to be refined. These can be natural gas pipelines or tankers.
In other videos, I talked about the container shipping industry in Singapore and Korea. For all the discussion of container ships and their cargo, midstream tanker ships are a far larger segment.
After that, we have the downstream sector. Raw petroleum pulled out of the ground cannot be used as is. It has to be transformed into useful products like plastic, gasoline or jet fuel. This work is done in massive, capital-intensive locations like refineries or petrochemical plants.
Some companies do just a tiny niche within the chain. Others, like the oil majors, are massively integrated up and down the entire chain. And because efficiencies scale up, it makes a lot of financial sense to cluster facilities together.
Oil and Refinery
Singapore had already been a petroleum trading and distribution location long before independence. Oil was one of the Malay archipelago's most valuable commodities after rubber and tin.
In the 1800s, Syme & Company built a small oil refinery on the island of Pulau Bukom, near Singapore just off the Keppel harbor.
Syme would later become a part of Royal Dutch Shell, one of the world's biggest oil companies and as of today the world's fifth largest company.
Considering that Singapore already housed sales and fuel distribution centers, a refinery made a lot of sense. But for the next half century, the big oil companies refrained from building a refinery on Singapore island. The excuses are myriad. The island was too small. Too much unrest. Too many Communists. And so on.
Then the Singaporean government struck a deal with the Japanese. In September 1960, Minister for Finance Goh Keng Swee established an equal joint venture with Maruzen, a predecessor to the Cosmo Oil Company, Japan's third biggest refiner.
The JV aimed to build a refinery to supply oil products to the Japanese home market.
The move shocked the world's oil majors. Royal Dutch Shell quickly responded and struck a handshake deal with Goh to build their first refinery. The $30 million SGD deal was Singapore's largest to date.
Shell's first refinery was built in record time, completed just one year after groundbreaking. The deal was a home run, and the refinery would ascend to be Shell's biggest and perhaps most profitable.
It also had the effect of distracting Shell from completing a previously announced refinery in the Port Dickson area in Malaysia. That plant would not go online until 1963, two years after Singapore's. It gave the tiny island a lasting head start on its regional neighbors in the oil refining space.
Shell would kick off the Singaporean refinery boom of the late 1960s and into the early 1980s. BP in 1962, Mobil in 1966, Shell again in 1967, and finally a major coup, Esso in 1969.
Esso would eventually become the American oil giant Exxon Mobil. They originally wanted to build their refinery on Sentosa. But the Singaporean government intended to turn Sentosa into a recreation location, and suggested another small island off the Singapore mainland.
This growth was fueled by a series of global conflicts. Wars in Indochina and the Middle East led to shortages and price shocks. The island made a killing from selling fuel to the participants. For instance, much the fuel used in the Vietnam War was refined in Singapore.
By 1974, Singapore had five refineries in the area, with total capacity of 1.2 million barrels a day. Oil products accounted for nearly 40% of the country's total exports. The area became East Asia's main refining center.
Diversifying the Industry
As with everything however, success eventually brings competitors. Indonesia Pertamina, the country's state-owned energy company, and other companies in the Middle East began setting up their own refineries. Companies expected future profits to decrease.
Singapore thus knew that it needed to diversify away from mere oil refining and expand its involvement within the entire value chain. The natural next step was to expand into petrochemicals.
Petrochemicals are chemicals made from crude oil and natural gas. They make up about 40% of the entire chemicals market, making up the basis of everyday items like plastic bags, pipes, tubing, bottles, car tires, and whatever have you.
Thus in 1971, the Singaporean government began reaching out to Japanese multinationals about a possible petrochemical joint venture. The goal would be to create a strong oil-processing industry for the country.
Petrochemical Corporation of Singapore
Breaking into the petrochemical space was not easy. At first, the lead taker for the petrochemical complex was Japan's Sumitomo Chemical Company. The company president was a big Singapore backer, believing that Singapore was "the best place to invest in Asia".
Sumitomo and Singapore exchanged letters of intent, with the goal of getting online by 1979. But the project quickly grew in scope. In 1976, Sumitomo added eleven other chemical companies to its side of the consortium. Then the Japanese government committed 3 billion yen of investment through its Overseas Economic Cooperation Fund.
Thus in 1977, the Petrochemical Corporation of Singapore or PCS was established. Its first chairman was J.Y. Pillay, then chairman of the Singapore wealth fund Temasek and significant contributor to Singapore Airlines.
Things went awry however in the late 1970s and early 1980s, with a series of oil crises. The fall of the Shah and the Iran-Iraq war would trigger volatile price swings.
The world economy went into recession, creating an oil glut, and people questioned the wisdom of building a massive petrochemical complex during these difficult times. Analysts predicted hundred million dollar annual losses for the complex.
Regardless, the $2 billion SGD complex was finished in 1984. The complex consisted of a naphtha cracker and a few downstream plants on the island of Ayer Merbau.
Naphtha is a major product of Singapore's refineries, and can be eventually turned into plastics, polymers and such.
Prime Minister Lee Kuan Yew pushed to make the project work. In September 1985, he visited the People's Republic of China and struck a deal with their government to sell them Singaporean petrochemicals at the right price.
That same month, Chinese multinational Sinochem established an overseas office in Singapore. Chinese exports started rapidly growing from there, and by 1987 the entire complex started turning a profit.
The entire petrochemical industry plunged into recession for the next few years thanks to oversupply from Japan and Korea. The complex remained in the black, but revenues declined for nearly a decade.
But by then, the government had begun selling down its interest in the complex. In 1988, the Singaporean government sold 30% of its interest in PCS I to Shell, retaining 20%. In December 1992, it sold off that remaining 20%. A few years later, it embarked on another expansion of the complex - PCS II, completed in 1997.
The Jurong Island Cluster
In 1995, Singapore decided to integrate its refinery and petrochemical industries more closely together. Doing so would help its companies save on storage and logistics - since feedstock is the petrochemical industry's single biggest cost factor.
Thus, the country embarked on a massive land reclamation project linking together seven smaller islands to create one large land area about 2,790 hectares large: Jurong Island. The project was officially opened in 2000 with the completion of a 10-kilometer highway linking the island to the Singaporean mainland.
Now petrochemical companies on Jurong Island can benefit from a variety of unique advantages. They can buy feedstock through pipelines and tap utilities and services from nearby third party providers. The Singapore Government pitches it as a "plug and play" strategy for petrochemicals.
The strategy worked. Over a hundred chemical multinationals work on Jurong Island, including some of the world's largest like Mitsui, Sumitomo, BASF, and DuPont.
The government continued to expand and improve the area's local resources. This includes opening up the $40 million SGD Chemical Process Technology Center or CPTC to improve the hiring pool and various underground storage facilities for storing oil - the Jurong Rock Caverns.
We are pretty much done. But there is one last thing that I thought was interesting. Singapore has long had a strong financial sector, mostly trading finished oil products. Oil itself was traded in Tokyo.
But a series of government policies helped make the country a trading center for the commodity itself, stealing business from Japan.
In 1989, the Singapore government created the Approved Oil Trader or AOT scheme, which gave a concessionary 10% tax rate on oil trading activity. The AIT scheme came a year later, addressing trading in other commodities. Then in 2001, Singapore introduced the GTP, unifying the two.
It encouraged trading companies to come to Singapore. And it worked. Today, the country hosts large trading companies like Vitol, Trafigura, and Hin Leong (well, not anymore).
In 2019, Singapore exported $43 billion of refined petroleum products, the most in Asia. More than China, India, or South Korea. Electronics overtook oil products as Singapore's biggest material export back in the 1980s. The space is no longer a growth industry, but it is still the country's second largest export item.
Singapore's success in the oil refining and petrochemical industries relied on close collaboration, speed to market, technology proficiency, and capital. In an area where nationalizations were not uncommon, this business-friendly attitude was appreciated.
Something that I have noticed about this era of development that is similar to Taiwan's industrial development was the presence of core civil servants with unusually great, but unwritten power.
Civil servants like Goh Keng Swee and J.Y. Pillay helped bring the first oil companies to Singapore. K.T. Li and Sun Yun-suan helped bring Philips and TSMC to Taiwan. These men had unusually centralized powers so to cut red tape, navigate different factions and strike a deal. I am not sure whether such guanxi passes down to the next generation of politicians.
Having such powers can be disruptive to public policy. But when used right, can also spark the creation of a world-leading industry.