Energy production and usage are sensitive topics amid global warming, net-zero targets, and ongoing reliance on fossil fuels. Nine years after the Paris Agreement, Asean still depends heavily on coal, oil, and natural gas.
In 2015, world leaders pledged to prevent global temperatures from rising by more than 1.5°C.
The Paris Agreement, which saw 193 parties and the European Union agree to cut greenhouse gas emissions, came into force on Nov 4, 2016.
Having ratified the Paris Agreement on Sept 21, 2016, Singapore has also formalised its Nationally Determined Contribution (NDC), which aims to reduce the country’s Emissions Intensity by 36% from 2005 levels by 2030 and stabilise its emissions to peak around 2030.
In February 2021, Singapore introduced the Singapore Green Plan 2030, which aims to achieve net-zero emissions by 2050 by setting concrete targets over the decade and strengthening Singapore’s commitment to the UN’s 2030 Sustainable Development Agenda and Paris Agreement.
Four years after launching the Singapore Green Plan 2030, Singapore’s primary energy source is natural gas.
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Yet, around 85% of cars on the road in the city-state use petrol, which is sourced from oil.
Despite these efforts, Goldman Sachs says in a June report that the world’s demand for oil is expected to grow over the next decade.
Lack-lustre electric vehicle (EV) sales and rising incomes globally are increasing the appetite for energy supplies that will be met primarily with more fossil fuels.
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Peak demand a decade away
“While some prominent forecasters have predicted oil demand will peak by 2030, our researchers expect oil usage will increase through 2034.
That is partly because of demand for oil from emerging markets in Asia and demand for petrochemicals,” says Goldman Sachs.
“We think peak demand is another decade away, and more importantly, after the decade it takes to peak, it plateaus, rather than sharply declines, for another few years,” write Nikhil Bhandari, co-head of Asia-Pacific Natural Resources and Clean Energy Research, and analyst Amber Cai in the Goldman Sachs report.
On the other hand, the International Energy Agency’s (IEA) medium-term market report forecasts that global oil demand, which includes biofuels, averaged just over 102 million barrels per day last year and is expected to taper to around 106 million barrels per day towards the end of this decade.
“In parallel, a surge in global oil production capacity, led by the US and other producers in the Americas, is expected to outstrip demand growth between now and 2030,” reads Oil 2024, the IEA report.
Total supply capacity is forecast to rise to nearly 114 million barrels a day by 2030, or eight million barrels per day above projected global demand, according to the IEA.
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“This would result in levels of spare capacity never seen before other than at the height of the Covid-19 lockdowns in 2020. Spare capacity at such levels could have significant consequences for oil markets — including for producer economies in Opec and beyond, as well as for the US shale industry.”
During Covid-19, demand collapsed as the global economy went into lockdown.
The pandemic saw record-low levels as travel demand effectively ceased, leading to a lack of buyers and oversupply.
The problem was further exacerbated when Saudi Arabia, chair of the Organization of the Petroleum Exporting Countries (Opec), ignited a price war against fellow member Russia.
The price war led to Brent crude futures, the global oil benchmark, plunging by 24% to close at US$33.36 ($44.69) a barrel on March 9, 2020. US oil prices crashed by 34%, settling at a four-year low of US$27.34 a barrel.
Triggered by a dialogue breakdown as both countries disagreed on proposed oil production cuts, the month-long price war concluded in April that year.
Opec and its allies agreed to reduce crude oil production by 9.7 million barrels per day for an initial two-month period beginning May 1, 2020, marking the largest output cut in history.
According to IEA, global oil demand dropped by approximately 8.6 million barrels per day in 2020 compared to the prior year, marking the largest annual decline on record.
The global offshore and marine (O&M) industry, which encompasses offshore drilling, exploration, undersea cable-laying, and oil and gas transportation, was heavily affected by the pandemic due to its heavy reliance on stable and high oil prices to sustain operations and justify capital-intensive projects.
One of the immediate impacts of the low oil prices was a reduction in investment in new offshore projects, as companies scaled back capital expenditures and delayed or cancelled planned projects to preserve cash flow and maintain financial stability.
A 2020 report by independent energy research firm Rystad Energy identified a 30% reduction in global investments in offshore oil and gas projects in 2020 compared to the year before.
Singapore’s role in the oil and gas industry
In Singapore, the O&M industry covers ship repair, shipbuilding, rig-building, offshore engineering, oilfield equipment manufacturing, and the building and chartering of offshore supply vessels. Keppel and Sembcorp Marine (now called Seatrium) were once Singapore’s largest and second-largest producers of offshore drilling rigs.
Their importance in the offshore oil and gas industry gave rise to other players in the supply chain, including companies like Dyna-Mac, which produces topsides; offshore service vessel (OSV) owners; and charterers, of which ASL Marine and Marco Polo Marine 5LY remain but are mere shadows of their former selves.
Today, the global value chain for the offshore oil and gas industry still involves a network of SMEs that support the industry with specialised contract services and manpower.
Mermaid Maritime, a company incorporated in Thailand and listed on the Singapore Exchange S68 (SGX) since October 2007, offers turnkey services to offshore oil and gas companies through its diverse fleet of subsea vessels and divers.
In its FY2020 annual report, chairman Prasert Bunsumpun notes that the market for subsea vessels was highly oversupplied throughout the year, leading to extremely competitive vessel charter rates.
Shares in the company also sank to a five-year low of just 5 cents during the period.
“The most important factor is the Covid-19 pandemic, which has been ongoing since 2019 without a sign of halting.
It has materially impacted the market with a slowdown in business growth and disruptions.”
“At the same time, additional costs to prevent the situation and maintain the operation increased significantly, such as vessel running costs, quarantine costs, and vessel chartering costs due to schedule postponement,” notes Bunsumpun in the report.
In FY2020 ended December 2020, Mermaid recorded net loss widened to US$110 million from a loss of US$24.2 million in FY2019.
Notably, revenue from international oil and gas companies shrank to just 2% or US$1.89 million of the total revenue of US$83.8 million, compared to 19% or US$20.6 million of FY2019’s total revenue of US$106 million.
Similarly, Marco Polo Marine, which offers ship chartering as well as building and repair services, saw its earnings capacity and ability to secure new charter contracts impacted by the pandemic and the drastic fall in oil prices.
The temporary suspension of local construction and infrastructure projects due to Singapore’s circuit breaker period also impeded the company’s utilisation of its tugboats and barges.
At the same time, ship repair activities declined as the volume from international clients dipped from global lockdown measures.
Consequently, Marco Polo sank deeper into the red in FY2020 ended December 2020, recording a net loss of $9.2 million from $3.9 million the year before, while 2HFY2020 saw a net loss of $8.5 million compared to a net profit of $1.0 million in the 2HFY2019.
Like peer Mermaid, Marco Polo’s share price dipped to a five-year low of 1.2 cents in FY2020.
In 2H2020, global oil prices began to rebound from the lows seen in April and March, with Brent crude prices increasing to an average of US$43 a barrel in November before rounding off 2020 to a resurgence of US$51 a barrel.
When 1H2021 arrived, Singapore’s offshore and marine sector had begun to recover.
UOB KayHian Research’s (UOBKH) Adrian Loh, who kept his “market weight” call on the industry, noted in his March 2021 report: “The latest rig utilisation and day rates could indicate that the worst is over for the offshore marine industry.”
Loh adds: “According to Rystad Energy, 592 oil and gas project commitments will take place over the 2021 to 2025 period — this is a 66% in- crease compared with 355 projects in the 2016 to 2020 period and higher than the 478 seen in the 2011 to 2015 period.”
Fast-forward to the present. Brent crude prices closed at US$79.06 on Aug 1, while Mermaid and Marco Polo shares closed at 17 cents and 5.8 cents, respectively.
The increase is a testament to the industry’s thriving recovery from the harrowing effects of the pandemic.
In a July 23 report on the offshore and marine sector, UOBKH’s Loh keeps his “overweight” call, noting that the number of active offshore rigs had declined between 9% and 25% over the past three years as old assets have exited via scrapping, cold-stacked or undergone conversion.
He writes: “The lower supply, together with higher oil and gas prices and robust demand, has led to higher utilisation and day rates across almost all asset classes — from offshore support vessels to the largest drillships.”
“Overall, most of Singapore’s small and mid-cap offshore marine names have seen a lift in their share prices year-to-date versus Seatrium, which, while having won several key contracts, faces various investigations by local authorities,” adds Loh.
Transitioning with natural gas
Natural gas, a transition fuel, is not as emission-free as solar, wind, hydro, or nuclear energy but “cleaner” than oil and coal.
Since the early 2000s, Singapore has relied on imported piped natural gas from Indonesia and Malaysia for power.
On May 2013, Singapore started to further diversify its gas sources by importing liquefied natural gas (LNG). The SLNG Terminal, operated by SLNG Corporation, began operations with a jetty, two storage tanks and a through-put capacity of 3.5 million tonnes per annum (mtpa).
Situated on a 40 ha plot on Jurong Island, the terminal was built for $1.7 billion.
In 2019, then-trade and industry minister Chan Chun Sing said Singapore would harness “four switches” to guide and transform its energy supply: natural gas, solar, regional power grids and emerging low-carbon alterna- tives.
The four switches would be supported by greater efforts in energy efficiency to reduce energy demand.
As Singapore scales up the supply of other fuel sources, natural gas will continue to dominate.
About 95% of the city state’s electricity is generated using natural gas, the cleanest fossil fuel today.
Solar, for example, remains Singapore’s most promising renewable energy source. The Energy Market Authority (EMA) aims to achieve 1.5 gigawatt-peak (GWp) in solar deployment by 2025 and at least 2GWp by 2030.
According to EMA, achieving the 2025 solar target of 1.5GWp is equivalent to meeting the annual electricity needs of around 260,000 households in Singapore, or around 2% of Singapore’s total projected electricity demand in 2025.
As part of the value chain, Singapore companies provide offshore services, including OSVs, floating, production, storage and offloading (FPSO), floating, storage and offloading (FSO) and LNG carriers, to service and transport LNG from Australia’s North-West Shelf.
In gas fields such as The Gorgon Field, facilities have been built to extract and liquefy gas into LNG before it is distributed to various markets.
Local companies have also provided services to oil fields within the region and further afield in places like West Africa.
Financing these “dirty” sectors will become increasingly difficult in the coming years.
For instance, Keppel has divested Keppel Offshore and Marine and its legacy rig assets.
Oversea-Chinese Banking Corporation (OCBC) announced in May 2023 its 2030 and 2050 targets to reduce financed emissions in six sectors: power, oil and gas, real estate, steel, aviation and shipping.
In addition, OCBC said it would no longer extend project financing to upstream oil and gas projects that obtained approval for development after 2021.
The move comes on top of the bank’s sector target to cut oil and gas emissions by 35% by 2030 and 95% by 2050, compared to a 2021 baseline.
OCBC was the last of Singapore’s three major banks to announce their sectoral decarbonisation plans.
United Overseas Bank’s (UOB) plan, announced in October 2022, covers the power, automotive, oil and gas, real estate, costruction and steel sectors.
UOB also committed to exit financing for the thermal coal sector by 2039, and no new project financing for upstream oil and gas projects will be approved for development after 2022.
DBS, meanwhile, announced its plans in September 2022, covering the power, automotive, oil and gas, real estate, shipping, steel and aviation sectors.
DBS said it will cut its oil and gas financed emissions by 27.7% by 2030 and 92% by 2050.
The common sectors identified across all three banks are power, oil and gas, real estate, and steel.
Renewables outlook
The renewable energy sector has remained resilient this year despite climate issues, supply chain disruption, social inflation and geopolitical conflicts.
However, overall profitability remains challenging due to variable results within energy classes, according to a July report by Nasdaq-listed advisory firm WTW.
Countries in Asia increasingly embrace renewable energy, and WTW anticipates a continued surge in investments this year, particularly in Southeast Asia.
According to Sam Liu, WTW’s head of renewable energy in its natural resources global line of business in Asia, countries are setting ambitious targets to meet their net-zero emissions goals.
“We are also seeing increased cross-border projects being announced to import and export electricity within the region,” says Liu in WTW’s Renewable Energy Market Review 2024 report.
“This includes the Energy Market Authority of Singapore granting conditional approval to import 2GW of clean energy from Indonesia, whilst Laos is positioning itself to be the ‘Battery of Southeast Asia’ and accelerating the development of large-scale projects, such as hydropower and wind farms to increase electricity export to neighbouring countries.”
However, Liu adds that challenges remain for these projects, including cross-border regulations and complex transmission facilities such as subsea cables and financing.
Meanwhile, Malaysia has also identified hydrogen as a key element of its energy transition strategy. It is developing a large-scale clean hydrogen hub in Sarawak, generating interest from Japanese and Korean investors.
According to Liu, there has also been a shift to develop more hybrid projects to increase reliability, grid stability and optimise resource use.
However, this also increases the interfacing risk between different technologies.
According to Liu, the insurance market remains stable, with new entrants entering the sector.
“However, we still expect tightening of capacities and coverages for emerging technologies and natural catastrophe risks, which remain the key underwriting concerns due to large global losses.”
Liu sees signs of market easing, with some insurers taking a more commercial approach, being receptive to long-term deals and increasing their support of portfolio programs to improve efficiency and economies of scale.
“Overall, the insurance market is well-positioned to cope with the rapid growth, but we still expect disciplined underwriting approaches to persist,” says Liu.
Oil demand hard to abate
Despite efforts to pivot to renewables and the slowdown in global growth, including China, oil demand continues to rise.
Global oil demand is still forecast to be 3.2 million barrels per day, higher in 2030 than in 2023, unless more robust policy measures are implemented or changes in behaviour take hold.
According to the IEA, the increase is driven by emerging Asian economies — especially higher oil use for transport in India — and greater use of jet fuel and feedstocks from the petrochemicals industry, notably in China.
By contrast, oil demand in advanced economies is expected to continue its decades-long decline, falling from close to 46 million barrels per day in 2023 to less than 43 million barrels per day by 2030.
Apart from during the pandemic, the last time oil demand from advanced economies sank that low was in 1991.
In a June 2023 update, BMI, a Fitch Solutions company, points out that the rise of a more fragmented world with unsteady energy supply chains is expected to support elevated domestic investment in energy infrastructure, particularly in the oil and gas industry.
BMI blames the investment into oil and gas infrastructure on the war in Ukraine.
Although the invasion strengthened the resolve of some countries to diversify into renewable sources, investment in oil and gas continues “on energy security grounds risking climate targets”.
Investing in renewable energy and saving the earth may be noble.
Still, with global reliance on oil and gas, net-zero emissions by 2050, stopping global temperatures from rising more than 1.5°C this century may just be a pipe dream.
With additional reporting by Jovi Ho
Read the rest of the stories here:
- Mermaid Maritime hunts new opportunities in O&M space
- Bursa-listed Yinson balancing growth and debt
- Greener waters the way to go for Kim Heng
