The energy economy of Singapore is unique. The country possesses no conventional energy resources and its primary energy needs are met entirely by imports, almost exclusively petroleum-based. Yet, Singapore has deservedly been called the “Houston of Asia” as its petroleum industry has placed the nation at the heart of the Pacific Basin's energy markets (Fesharaki 1984, 1986; Doshi 1989a). Singapore ranks as the world's largest fuel oil bunkering centre. Its refineries collectively constitute the world's third largest refining centre, and its spot market is the focal point of oil trade in the Asian-Pacific time zone. In February 1989, the Singapore International Monetary Exchange (SIMEX) launched a High Sulphur Fuel Oil contract, the first petroleum futures instrument east of Suez.

The first section of this chapter attempts an interpretative look at economic growth and structural change in Singapore with a view to setting the wider context of the country's distinctive energy economy. Section two, directed towards the domestic aspects of the energy economy, summarizes salient attributes of the growth and configuration of domestic energy demand. The third section surveys the Singapore petroleum industry which provides a wide range of petroleum-related products and services largely for export markets. The impact of the oil price shifts on the Singapore economy is examined in the fourth section. The fifth section provides a discussion of energy policy in Singapore. The chapter concludes with some remarks on the linkages between public policy, economic development, and the energy sector.

ECONOMIC GROWTH AND STRUCTURAL CHANGE

Classified by the World Bank as a high-income developing economy with a GNP per capita of US$7,940 in 1987 (IBRD 1989), Singapore's standard of living (as measured by this basic indicator) is next only to Japan's in all of Asia. Since the late 1960s, Singapore has on the average achieved one of the world's best overall economic performance. It boasts one of the highest average growth rates among all countries of the world.

Indonesia proclaimed its independence in 1945, and after several armed clashes with the Dutch obtained international recognition in 1950. But it was only after the 1965 attempted coup d’état and a political and economic stabilization programme that Indonesia in 1969 embarked on planned economic development. Energy was already an important part of the first five-year development plan, or the first REPELITA, covering the period 1969-73.

THE FOUR REPELITAS

During the early 1960s Indonesia had already prepared to consolidate the fledgling domestic oil industry, set up in the aftermath of a series of acts of nationalization on assets of several foreign oil companies during the latter part of the 1950s. Following the turmoil of 1965-66, the Indonesian economy was opened to foreign investors, and one of the first groups of investors consisted of a few small, independent oil companies. When these companies succeeded in finding oil, the large oil companies followed suit. Oil production then steadily increased.

In the meantime, the government launched a stabilization and rehabilitation programme to improve the economy. Inflation was greatly reduced from 500-600 per cent per year during 1965-66 to less than 30 per cent within three years, and the currency was thus stabilized. Concurrently the physical infrastructure was restored and upgraded. The government gave the highest priority to agriculture, especially to food production. The textile industry was also accorded top priority. The most important policy change was on the government's own role of assuming only indirect control of the economy in contrast to the previous “Old Order” practice of direct control: the prices of only a few basic necessities remained under control. The private sector responded in a positive manner.

Investment increased and the economy grew rapidly. The basic needs of the people for food and clothing were met. Trade and industrial activity picked up. The increased oil exploration activity brought results: oil production expanded rapidly, and large reserves of gas were discovered in 1972.

Energy is a vital factor which determines the well-being of a society. This is so because the use of energy such as electricity, along with appropriate devices, for example, electric washing machines, permits a person to be many times more productive than when he does not use such energy. Consequently, it is generally presumed that, everything else being the same, the wealth of a society correlates positively with its per capita energy consumption, the higher the consumption the wealthier the society.

Owing to the critical role that energy plays in a country's economy, it is necessary to have a steady, reliable, and reasonably priced energy supply. Any disruption in supply or sharp increase in energy prices causes serious economic dislocations with attendant sufferings of the people, as experiences during the 1970s and early 1980s have shown. For this reason many governments have evolved energy policies designed to protect their societies against the ills engendered by disruption in energy supply or by unpredictable price spirals. Such policies include the management of energy demand, supply, and prices.

When a sharp increase in energy prices occurs, massive wealth transfer takes place, aggravating the country's balance of payment problem and poverty, particularly in a developing country such as the Philippines.

This chapter sketches the energy supply and demand situation in the Philippines during the 1970-88 period with the objective of identifying important problem areas along with the policies that evolved. In particular the problems implied by the aspiration of national leadership to transform the country into a newly industrializing economy (NIE) by the year 2000 are also examined.

ENERGY DEMAND

Under this heading are presented the aggregate energy consumption in the Philippines during the study period, the energy forms that comprised such aggregate, as well as the sectoral or industry source. The breakdown of consumption by economic sector and industry is also addressed. The interaction between energy consumption and the economy is also presented, together with conservation.

The 1980s ushered in what many analysts refer to as the “Pacific Century”. The region is seen as the emerging centre of gravity for the world economy, and even if economic growth slows during the 1990s, there is wide acceptance of the idea that the region will continue to be one of the fastest-growing in the world. The 1980s witnessed spectacular growth rates in the Asian-Pacific region, the rising economic power of Japan, an unprecedented opening of China's economy, the emergence of the “Four Tigers” or the “Little Dragons” (Singapore, South Korea, Taiwan, and Hong Kong), a rapid growth of exports from the region — in short, remarkable economic success and an increase in entrepreneurialism and the free-market philosophy. Even the United States, which historically has been Atlantic-oriented, sat up and took notice.

While the relationship between economic growth and energy consumption is not necessarily absolute, energy is a required input for economic activity and trade. Energy demand growth in the Asian-Pacific region, accordingly, has been rapid. At this point in history, oil and economic growth are so interrelated that changes in one invariably have major repercussions on the other. During the coming decade, continued economic growth is foreseen for the Asian-Pacific region, coupled with the fastest rate of oil-demand growth of any region on earth. Pressure will come to bear on the regional oil and gas markets, since demand growth will take place concurrently with a decline in the availability of local, low-sulphur crudes. The region will become even more dependent on imports of Middle Eastern crude, which will result in a higher-sulphur crude slate. Moreover, we anticipate that the existing and planned refinery complex will lack the capacity and the flexibility to satisfy fully product demand. The consequence will be a higher level of refined product imports.

The problem facing the regional market is one of both quantity and quality. Petroleum product specifications are tightening significantly, due in part to a rising environmental consciousness.

As noted in Chapter 2, the Singapore petroleum sector encompasses a panoply of downstream industries and services besides refining. These include the trading of crude petroleum and refined products on the spot market, the loading of bunker fuels at port, independent storage facilities for crudes and petroleum products, and the production and trade of ethylene-based petrochemicals. These downstream activities are discussed in this chapter.

The Singapore Spot Market and Trading Enclave

The petroleum trade generally involves two types of transactions, term and spot transactions. A term or “forward” transaction implicates the buyer and seller in a long-term contract specifying the basic attributes of (“posted”) price, time and place of delivery, and quality and quantity of cargo. These contracts generally covered a period of three years or more, although since the late 1970s there has been greater flexibility in maturities and pricing formulas. Spot transactions refer to agreements for a change in ownership of cargoes on a prompt basis (that is, in the very near or immediate future). Often the cargo is ready for delivery in storage tanks or in tanker-at-sea.

Although the world petroleum industry comprised small producers, refiners, and traders in its origins, it began to display its characteristic oligopolistic industrial organization by the last decades of the nineteenth century (Penrose 1968). The domination exerted by the vertically integrated majors over all aspects of the industry, “from source rock to retail pump” (that is, from exploration and development to production, processing, transport, and sales), led to a tight control over the flow of oil, intra-firm balancing of supply and demand, and the predominance of long-term fixed price contracts. In this environment characterized by a relative stability of prices, there was no motivation for the development of an open spot market for either crude petroleum or its refined products. Despite the formation of OPEC in 1960, it was only with the up-heavals associated with the price shocks and the nationalization of the major concessions during the 1970s that the international oil market was structurally transformed from the tight web of large oligopolies into its present relatively diverse and decentralized market with a multiplicity of buyers, sellers, and brokers.

The establishment of Singapore as the petroleum centre for the Asia-Pacific is both a reflection and an outcome of the country's development as a “global city” (Lee Soo Ann 1984; Krause 1987a). The phrase is an apt one, given the city-state's extreme openness to the international economy, its modern infrastructure and amenities, and its cosmopolitan character. Classified by the World Bank as an upper middle income economy with a GNP per capita of US$7,410 in 1986 (World Development Report 1988), Singapore's standard of living (as measured by this basic indicator) is next only to Japan's in all of Asia. 1 Since the late 1960s, Singapore has on the average achieved one of the world's best overall economic performances. Singapore's outstanding achievements in economic development are well documented and, for present purposes, only the broader aspects need be delineated.

The Historical Experience

When Stamford Raffles founded Singapore in 1819, an island of 225 sq. miles, it was endowed with a vital natural resource — its location. Situated at the southern tip of the Malay peninsula astride the major gateway between the Indian Ocean and the South China Sea and possessing a superb natural deepwater harbour, Singapore underwent a logical development as port of call and entrepot for the surrounding region (Huff 1987). The development of entre- pot activities led to rapid urbanization and the establishment of a strong local banking sector. By the inter-war period, Singapore had developed into a fully fledged port and commercial city. It had also become the region's terminalling and distribution centre for petroleum.

When Singapore attained self-rule in 1959, it faced some of the classic problems of underdevelopment: rapid population growth, high unemployment, political instability, and unruly industrial relations. Entrepot trade and its traditional supporting services offered few opportunities for productively absorbing surplus labour. Given the constraints of size, import-substituting industrialization (ISI) based on a common market with Malaya was seen as the only solution to the development problems of Singapore (A Proposed Industrialization Programme for the State of Singapore).

In February 1988 the Energy Program of the East-West Center in Honolulu and the Institute of Southeast Asian Studies (ISEAS) in Singapore agreed to undertake a joint research project. The goals of the Joint ISEAS and East-West Center Energy Project are to develop a data base and conduct analyses on key aspects of the energy economies of the Asia-Pacific region and its major constituent nations. A further purpose of the Project is to utilize the expertise of the Energy Program at the East-West Center for the development of a research capability within ISEAS with respect to major aspects of energy supply and demand of the region.

It is fitting that one of the first outcomes of the Joint Energy Project is the publication of Houston of Asia: The Singapore Petroleum Industry by Tilak Doshi. The “Houston of Asia” is an apt metaphor that captures Singapore's dominating regional role as provider of petroleum refining, blending, and storage services, exporter of petroleum products, port of call for bunker and jet fuels, and spot market for the Asia-Pacific petroleum trade. Singapore, in short, is at the very heart of the web of linkages that constitute the Pacific Basin's oil economy.

As the author points out in his introduction to the monograph, the industry has received scant academic attention despite the scale and importance of its activities. To be sure, the subject is both prominent within and well covered by trade and business journals catering to the “East of Suez” information needs of the world petroleum industry. Yet the Singapore petroleum industry has remained an almost mythical creature, the detailed understanding of which it seems is the special province of an elite of expatriate oilmen “who deal in the stuff” and some senior officials in government. The author, a Singapore national who is sponsored by ISEAS and currently pursuing his research interests with the Energy Program at the East-West Center, is appropriately a young economist associated with neither industry nor government.

The world refining industry grew rapidly prior to the 1970s when the end of the concessionary system and the two quantum leaps in oil prices radically altered the environment of downstream operations of the international oil industry (Mohnfeld 1984). World refining capacity expanded by 6.5 per cent in 1940-60 and 7.2 per cent in 1960-73 (Fesharaki and Isaak 1984, p. 7). It trailed behind the even more rapid increase in global consumption of petroleum products which grew by 7 and 7.6 per cent in the two consecutive periods (ibid.). This, in turn, led to high capacity utilization rates.

During the infancy of the international oil industry, most re-fineries were located in crude-producing areas. In the post-1945 era, however, new refineries were increasingly built in consuming as opposed to producing areas. While transportation differentials favouring the movement of bulk crude over smaller parcels of refined products may have played a role in the economics of refinery location, xthe decision by multinational oil companies to avoid placing major capital assets in the less developed countries in an era of rising nationalisms had a major impact. The fact that a refinery tied to a particular crude stream of a given oilfield is bound to be more constrained in its operations than a refinery located in a major consuming area and fed by a range of imported crudes provided another reason. Furthermore, developed country governments often encouraged the growth of domestic refining capacity for what were deemed to be “reasons of national security”.

The Development of Entrepot Refining in Singapore

Although the expansion of refining capacity in Singapore paralleled that of the world industry during the boom period of 1960-73, 3 the country's oil industry found its early beginnings in the colonial period when three bulk storage tanks for kerosene were built in Pulau Bukom in 1892. From 1892 to 1960, Singapore served as the storage, transshipment, and distribution centre for the Far East.

Singapore may deservedly be called the “Houston of Asia” in that its petroleum-related activities have placed the country at the heart of the Pacific Basin's energy economy. Singapore's refineries collectively constitute the world's third largest refining centre, after Rotterdam and Houston. The country's oil trading links extend from the Persian Gulf across to Northeast Asia, and from Australia to the U.S. West Coast. The Singapore spot market, focal point of oil trade in the Asia-Pacific time zone, has made Singapore-quoted prices the bench-mark for the region's petroleum transactions. In February 1989, the Singapore International Monetary Exchange (SIMEX) will have launched its High Sulphur Fuel Oil contract, the first petroleum futures instrument east of Suez.

Singapore, the world's busiest port of call, also ranks as the world's largest fuel oil bunkering centre. It is one of the largest builders of offshore drilling rigs and the region's most comprehensive and competitive base for repair, maintenance, and logistics services for the offshore oil and gas industry. The country's petrochemical complex, although modest in scale by world standards, is an important exporter of ethylene-based products in the region. Other petroleum-related activities include independent petroleum storage and blending, brokerage of shipping services and marine insurance, warehousing of equipment and supplies, and the manufacture of parts and components for the petroleum sector.

The Singapore petroleum industry has received little academic attention despite its scale and importance with respect to both the domestic and regional economies. To date, there has not been a single comprehensive study published on the subject. The lack of industry-specific data and the confidential nature of many of the details of industry operations are undoubtedly part of the explanation. Description and analysis of various aspects of the Singapore petroleum sector are confined to trade and industry journals and the odd essay by observers in business publications. Consultants' reports and in-house studies conducted by large multinational oil companies and other industry participants, usually the best sources of oil industry data in Singapore, are naturally restricted to clients and proprietary parties.

Singapore has come a long way from its early status as a storage and transshipment centre for kerosene in the colonial Far East. The country now encompasses a gamut of petroleum-related activities, from rigbuilding and rig-repair, the manufacture of oilfield equipment, and the provision of a collective of technical and logistics support services for the offshore hydrocarbons industry on the upstream side, to refining, crude and product trading, storage, marketing, and distribution downstream.

The heart of the industry lies with the country's refineries. Beginning with a small crude distillation unit constructed in 1961, the refining industry was well established in Singapore by the early 1970s. With the recent spate of large investments in sophisticated secondary processing facilities, the refining sector is in the process of substantial upgrading and rationalization. Defying the conventional wisdom of a few years ago which predicted the eventual demise of entrepot refining in Singapore in the face of severe external challenges, the refiners have successfully made the transition to a new era of optimism.

As argued in Chapter 4, several factors considered collectively suggest that the outlook for entrepot refining in Singapore is more positive today than it was just two to five years ago. More generally, the Asia-Pacific region offers prospects for rapid growth in the demand for refined products. Indeed, the recent expansion in the demand for light and middle distillates among the Asian NICs such as Taiwan and South Korea as well as the next-tier NICs such as Thailand has been spectacular. This veritable explosion in regional demand is expected to lead to a worsening balance between demand and supply of specific petroleum products as regional refinery yields fail to match the rapidly evolving product demand configurations. The changing structure of product demand in favour of lighter pro- ducts will place Singapore's upgraded refineries in a better position to continue to competitively fulfil the role of a swing refining centre, balancing out the disparities between supply and demand for specific products in the region.

Data availability and accuracy presented a central problem in the writing of this monograph. Unlike many countries, Singapore does not have a Ministry of Energy or other administrative body dealing specifically with energy affairs. Few aspects of Singapore's energy statistics are covered by official sources. Others are incomplete or completely absent. Published and unpublished unofficial sources use varying definitions, accounting conventions, and conversion factors, adding to the problem of accuracy.

Much of the data presented in this study has been estimated on the basis of industry sources. Besides the specialist trade journals, industry personnel who are based in Singapore and who maintain close contacts with the Energy Program of the East-West Center in Honolulu have constituted the most important sources of information for this study. As noted in the introduction, gaps and inconsistencies in the figures presented are unavoidable, and a margin of error is to be expected. Quantitative data and estimates thus require considerable caution.

Consumption Data

The domestic aggregate energy consumption data presented in Chapter 2 draw heavily from the studies done by Ang (1986, 1987, 1988). The data presented in that work are based on many sources including national and international publications, and unpublished data provided by the utilities and oil companies (see Ang 1986, appendix A). Data on domestic consumption of major petroleum products for 1980-87 (Table 2.2), which exclude bunkers and refinery fuel use and loss, were derived from a Singapore-based affiliate of a major oil company. Figures for gasoline consumption include naphtha.

The energy balance for 1986 (Table 2.3) is from the International Energy Agency's study of energy statistics of non-OECD countries, World Energy Statistics and Balances 1971-87. The energy balances given in this source were prepared in close collaboration with the Asian Development Bank, the Statistical Office of the United Nations and the World Energy Conference. Considerable use was made of the World Energy Survey data base of the United Nations. This was supplemented by materials obtained directly from the countries concerned and through wide contacts with industry sources.