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Singapore. An unprecedented expansion of oil infrastructure in southern Malaysia over the next five years is set to create a “Greater Singapore” trading hub that will help the region retain its edge over competitors such as China.

Instead of competing with Singapore, the new infrastructure — including a state-of-the-art petroleum complex and capacity increases to storage — will lead to greater flows of oil and help meet growing demand from traders for more liquidity to feed increasing pricing activity. 

“The new infrastructure should be regarded as part of the ‘Greater Singapore’ oil hub, rather than as competing with the current established order, as it is essentially the same players trading the same markets but in a larger way,” said Richard Yap of GE Consulting.

Singapore is the largest oil trading hub in Asia and the third-largest in the world, where traders regularly engage in pricing activities by taking speculative trading positions to optimize profits. It is also the world’s No. 1 bunkering port.

In the longer term, players see the region becoming an oil trading center similar to the Amsterdam-Rotterdam-Antwerp (ARA) hub in Europe, expanding its boundaries southwards into neighboring Indonesia and northwards deeper into Malaysian territory.

The ARA region is the main gateway for oil flows into Europe, particularly for distillates and fuel oil, which are stored and blended before being redistributed inland. It is also the world’s second-largest bunkering port after Singapore.

“Malaysia is well-placed to complement Singapore in this industry. Together, Malaysia and Singapore could operate to form a hub like Amsterdam-Rotterdam-Antwerp, which complement each other in areas of refining capacity, independent storage and blending capacity as well as access to markets,” said Malaysian think tank Pemandu. 

Malaysia has not seen this kind of expansion before in terms of scale and size. This territorial expansion could occur from as early as the next month, as dredging works along the shallow waterway separating mainland Malaysia from Singapore to accommodate new structures force the displacement of about 2 million metric tons of oil stored on seven floating storages off Pasir Gudang in southern Malaysia.

The alternative locations for these vessels could be in Indonesian waters off the islands of Karimun and Nipah, or further north in Malaysian waters, extending the boundaries of “Greater Singapore,” traders said.  

Keeps competition at bay

Expanding and upgrading the region’s facilities to cater to a bigger market, a process that started four years ago, will also ensure the Singapore-Malaysia region keeps its position as Asia’s primary oil trading and pricing center for all oil products, amid challenges from China and other countries.

“China has been aggressively beefing up in what they lack. With their enormous cash flow, they have been building up infrastructure, including launching new exchanges to handle their internal hedges and promoting their services, leveraging their position as the World’s No. 2 and Asia’s largest consumer of energy,” Yap said.

“But their imports are mainly only crude, while the region’s product flows move elsewhere. And while they may have the state-of-the-art hardware, it will be a while before their software can compare to Singapore.”

An open and transparent pricing system and confidence that there will be little or no government interference in commercial trading matters are some of the factors working in Singapore’s favour, Yap added. 

Landed storage capacity in Singapore has almost doubled since 2007, while floating storage volumes have ballooned by almost 10 times since the first converted Very Large Crude Carriers (VLCCs) began commercial operations in southern Malaysia about 10 years ago.

This latest wave of construction will see an addition of 300,000 barrels-per-day (bpd) of high-end refining capacity and 3 million metric tons-per-year (tpy) of cracking capacity from Petronas’ $20-billion integrated petrochemical complex.

Up to 6 million cubic meters (cu m) of oil storage from two terminals will be added along the southern Johor coast, including Royal Vopak’s terminal that can be expanded up to 5 million cu m, and Vitol’s own storage facility which can be expanded to up to 1 million cu m. 

The new infrastructure will complement the current 1 million bpd of refining capacity in Singapore, from its three plants, about 10 million cu m of oil storage in the city-state and another 700,000 cu m already operational in southern Malaysia. 

Price play 

The increased infrastructure will lead to more volumes being traded for pricing purposes, as witnessed after a wave of construction, mostly in Singapore and some in Malaysia, during 2007-2008.

Pricing volumes — physical cargoes traded during the end-of-day pricing period — for fuel oil, distillates and gasoline, all rose in the three-year period from 2009 till now, versus the 2006-2008 period.

For fuel oil, the monthly average volume for 2009-2011 was about 580,000 metric tons, peaking at 725,000 tons this year, up till August, versus about 420,000 tons in 2006-2008, Reuters data showed.

The trend was the same in the distillates market, with a monthly average of 6.2 million barrels for 2009-2011, peaking at almost 9 million barrels this year, compared with 4.7 million barrels for 2006-2008.

While the outlook is indeed promising for the “Greater Singapore” trading hub, it does not come without a caveat. As boundaries get pushed out, distance to key support infrastructure in Singapore — testing laboratories and cargo survey operators, among others — will also increase.

“Time is the most important factor,” a Singapore-based marine fuels supplier said. “For example, most vessels taking bunkers here don’t have that much time to spare, and the refueling, unloading and testing operations all have to go on simultaneously, with the test results ready by the time the vessel departs.”

“Having to sail all the way up north or down south to deliver the bunkers from Indonesia or Malaysia would easily add at least half a day’s traveling. Over time, these support services could be set up nearer to the new locations, offering expansion possibilities to the support industries as well.”

Reuters