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Greater Singapore storage developments challenge Singapore

New independent oil storage terminals due to start-up in 2014 and 2015 could threaten Singapore’s good times

By the middle of 2015, two new independent oil terminals near Singapore will have started operations, competing for the trade which has given the Singapore operators the highest storage fees in the world. The new terminals – in Indonesia and Malaysia, but directly facing the shipping lanes to Singapore – will add capacity equivalent to 22% of Singapore’s existing terminal capacity.

For a while now, Singapore’s storage insiders have been talking about the emergence of a Greater Singapore oil hub. With no more land available for storage terminals in Singapore, some argue that new terminals to be built nearby will secure the long-term future of the Singapore hub – which is seeing competition from China and elsewhere. Others say the new capacity will weaken the business and undermine fees.

Much depends on how Singapore-area oil flows develop. After years of breathtaking growth, which even the worldwide recession of 2008 hardly dented, the past two years have seen a slow-down. Bunker fuel sales – Singapore is the world’s largest bunkering port – are an index for overall activity: after doubling over the eight years to 2011, when they reached 43.2 million tonnes, sales dipped by 1.1% to 42.7m tonnes in 2012.

The contraction continued over the first nine months of 2013, when bunker deliveries were down by 1.7% compared with the same period the previous year, according to the Maritime and Port Authority (MPA).

The Singapore optimists – and there are many – interpret the bunker figures as showing that the shortage of terminal capacity has allowed some oil trade to move away from the hub, and they say the new terminals in a Greater Singapore will pull it back. The oil business likes hubs, and Singapore’s refineries, deep-water terminals and trading operations have made the port the supreme hub for Asia.

New terminals

Table 1 - Singapore independent storage capacity

Greater Singapore gathered momentum in June with the announcement that Oiltanking, in a venture with trading company Gunvor, is to build a new terminal on Karimun, one of Indonesia’s Riau islands. The companies will construct a facility with an initial capacity of 760,000 cubic metres (cm) for clean products and fuel oil, with jetties to accommodate vessels of up to very large crude carrier (VLCC) size. The terminal, to be operational in the second quarter of 2015, will be about 65 km southwest of Singapore’s oil installations on Jurong island, but Oiltanking cites the existing moored-tanker storage off Karimun, together with favourable sea conditions, as supporting the development. The terminal will be operated by Oiltanking as an independent facility, with Gunvor holding a minority interest and renting part of the capacity.

Another Greater Singapore terminal is due to open in April 2014. At a site in Johor, Malaysia – facing the eastern tip of Singapore – the Pengerang Independent Deep-water Terminal will provide an initial capacity of 1.3m cm. The facility will handle crude oil as well as products and is targeting 20%-25% of its capacity for spot storage and the rest for term customers.

With a water-depth of 26 metres, the terminal will be able to accept the largest VLCCs. The facility is being built by a venture between Malaysia’s Dialog, with 45.9%, Vopak, with 44.1%, and the Johor state government with 10.0%.

Dialog says the delays to Petronas’s large refinery and petrochemicals development, planned to be constructed in Johor, will not affect the terminal. The Petronas project – Refinery and Petrochemicals Integrated Development (Rapid) – was launched after the Pengerang terminal was planned, Dialog says, although it acknowledges that go-ahead for Rapid will be positive for future expansions in the terminal’s capacity, which is seen as rising to 5.0m cm in 2017. The investment decision for Rapid has been put back to first-quarter 2014 so, if it goes ahead, the refinery will not be starting-up until late-2017 at the earliest.

There is already a terminal nearby – Tanjung Langsat, used solely by Trafigura and owned by Dialog with 44.0%, Misc, a subsidiary of Malaysia’s Petronas, with 36.0%, and a Trafigura subsidiary with 20.0%. Tanjung Langsat provides 130,000 cm of capacity for naphtha and middle distillates, and there is 270,000 cm of fuel oil capacity.

Also in Johor, and set up to compete directly with Singapore’s terminals, is the Tanjung Bin terminal, owned by VTTI – a 50:50 venture between Vitol and Misc. The facility opened in April 2012 and provides 890,000 cm of capacity, main users being Vitol and Petronas. VTTI says the terminal is fully leased-out and the firm is constructing an expansion, adding 250,000 cm of capacity for fuel oil and clean products, for start-up in the second quarter of 2015 (see box).

Meanwhile, land-limited Singapore is digging down for new storage capacity. Jurong Rock Caverns – a project owned by the state development corporation, JTC – will provide an initial 480,000 cm of capacity in two caverns, 130 metres beneath Banyan basin on Jurong island.

The user of the first two caverns will be the Jurong Aromatics joint-venture, which is constructing a 1.44m tonnes a year (t/y) aromatics facility, due for start-up in early 2014. The facility’s 4.5m t/y of condensate feedstock will be stored in the caverns.

JTC says the two caverns have been completed, but there has been a long delay in the selection of an operator for the facility – and, it seems, some lack of enthusiasm for JTC’s envisaged business model for the job. Initially, JTC wanted an operator signed-up in second-half 2012; a year ago, it was planning to name the company in early-2013; the latest target is the end of the year. The operator will be responsible for the first phase of the rock-caverns development – the first two caverns and three more, giving a capacity of 1.47m cm. Completion of the first phase is now targeted for 2015, delayed from 2014.

Also delayed is JTC’s plan for a floating storage installation, to be constructed on a very large floating structure (VLFS) moored off Pulau Sebarok. The project was targeted to go out to tender early in 2013, but is now on hold.

Sharper competition

The past year has seen sharpening competition in the Singapore storage business, most notably in capacity for fuel oil and bunkers. Market sources cite the substantial users which have not renewed their contracts: BP and Gunvor, which pulled out from the Universal terminal; Itochu from Helios; Sumitomo from Horizon; Marubeni from Vopak. The departures have allowed some newer users to secure space, where they might otherwise have had difficulty.

One such is China Aviation Oil, Asia’s largest jet-fuel supplier, which is building up its position in fuel oil trading. The company signed to lease 174,000 cm of capacity for fuel oil and fuel oil blending components from Horizon, on Jurong island, for three years from September.

The company said it plans to build a supply-chain for fuel oil and views a presence in Singapore as essential because it is the largest fuel oil market in the world and because it is strategically located between the Middle East and China.

Fuel oil concern

But Mohamed Merican, a Singapore-based consultant and seasoned observer of the storage business, is concerned about the fall in fuel oil volumes because “the health of Singapore’s oil storage sector is very much determined by the fuel oil and bunker trade”. “A weaker oil market and expansions in Johor, Malaysia, will gradually chip at Singapore’s business”, he forecasts.

For the moment, however, such are Singapore’s attractions that main terminals are still almost fully-booked, despite the more-competitive conditions. Oiltanking, with its two oil terminals on Jurong island, says “utilisation is 100% and tank-turns remain comparable to previous years”.

According to an executive, “demand has come off slightly due to the difficult trading conditions and the steep backwardation; yet, nobody is releasing tanks”.

Oiltanking says it is satisfied with its Helios terminal, which it bought from Chemoil in October 2012, and says the company has not been affected by the start-up of new capacity in Malaysia. The Singapore-based market can support further increases in capacity, an executive says – “hence Oiltanking’s Karimun project”.

“Taking a forward projection, demand for products in the Asia-Pacific region will continue at a healthy pace and imbalances will remain”.

Cuthbert Choo, commercial manager at Horizon Singapore Terminals, is also optimistic. “Business conditions in Singapore storage are still stable compared with 2012, and new traders have taken up storage capacity made available by those who have exited in 2013”, he says. Utilisation and tank-turns have not changed over the past year, although he acknowledges that fuel oil storage has become more competitive.

Choo draws his optimism from the volume of floating storage capacity, in moored tankers, still in use. “There is a significant presence among Singapore-based traders in the floating storage environment in Malaysia that suggests that the impending increase in storage capacity, specifically in Pengerang, will be supported”, he says.

Floating storage sets a baseline for costs. A moored VLCC, available at a depressed day-rate of as little as $13,000 in 2013, represents storage capacity at under $1.50/cm a month, if fully utilised. But floating storage is disadvantaged, logistically, compared with land terminals.

The largest supplier in the Singapore bunker market is BP, according to MPA figures, but Sentek has moved rapidly up the league to become the second-largest supplier, with Brightoil moving down to third place. SK retains fourth place, followed by Chemoil and ExxonMobil. In total, 71 companies participate in the bunker trade.

Of the 42.7 million tonnes of bunker fuels delivered in 2012, the main MFO 380 grade made up nearly 79% with MFO 500 increasing its share to nearly 15% and other grades accounting for 6%. Of more than 130,000 vessels calling at the port in 2012, 22,230 were tankers.

VTTI opened its opened its terminal at Tanjung Bin, Malaysia, in April 2012, and says it has been fully leased-out since then. The company, owned 50:50 by trading firm Vitol and Malaysian shipping company Misc, is clear about why customers choose to use a terminal on the Johor coast, about 30 km west of Singapore’s installations.

Cost advantage at Tanjung Bin

“Costs are lower and turnarounds are faster than in congested Singapore”, says Jasper Schmeetz, commercial manager. “Storage costs are about 10% lower than prevailing Singapore market rates. Other auxiliary charges are in line with Singapore. The big difference is in port costs, which are approximately 50% discounted to Singapore port charges, and also wharfage fees in Tanjung Bin are 50% lower than in Singapore.”

“Together with low congestion and fast pump-rates, clients in Tanjung Bin can turn their tanks faster than in Singapore, keeping the cost per tonne substantially lower than elsewhere. At the same time, products from Tanjung Bin are priced at parity with Singapore terminals in the Platts trading window, offering a competitive advantage for our tenants.”

VTTI says most of the terminal’s 890,000 cubic metres (cm) capacity is taken on long-term contracts, and contracts having come up for renewal have all been extended. About 2m tonnes of products are handled each month, with more than 100 ships calling every month.

The firm is constructing an expansion, the although start-up date for the new capacity has been put back from 2014 to second-quarter 2015. The expansion will provide an additional 250,000 cm – 150,000 cm for fuel oil and 100,000 cm for clean products – and there will be a new jetty for ships of up to Aframax size. VTTI says it is marketing the new capacity, which it expects to be used by its shareholders and third-parties.

Schmeetz is confident the new capacity in the region will be utilised. “Currently there are about 20 ships used for floating storage holding fuel oil, and representing a potential for 5m tonnes of storage capacity onshore”, he says. “The moment charter-rates for ships exceed the prices for land-based tanks, it will all move ashore.”

Safety considerations also count against floating storage. “Floaters are being pushed away from traditional anchorage areas for environmental reasons and because of the risk of collisions in the Malacca strait. In Singapore, floating storage has been banned for years, then Pasir Gudang followed, and now floaters are being asked to move from the Pelepas anchorage. The further they move out from the Singapore trading hub, the less attractive it will become to operate from a floating storage vessel.”

Clean products demand

Demand for clean-products capacity is being driven by international trade. “Indonesia will soon be overtaking the US as the biggest gasoline importer in the world”, Schmeetz says. “Vietnam lacks sufficient refining capacity, and there are the emerging markets of Myanmar, Bangladesh, Sri Lanka, Laos and Cambodia, and also trade resulting from the refinery closures in Australia”.

“Overall occupancy rates remain very high, close to 100%”, Schmeetz says. “Earlier this year we saw some Japanese trading houses returning some low-sulphur fuel oil storage capacity in Singapore. LSFO trading margins came under pressure when Japanese power-plants switched to LNG, and when some nuclear reactors were temporarily restarted after the Fukushima disaster – they have all shut down again. But new entrants took up the freed capacity, and existing players expanded their portfolios.”

Schmeetz does not expect the start-up of the Pengerang terminal in a few months to destabilise storage fees. “Putting more capacity in the market will potentially put pressure on fees, but one would expect Vopak [a partner in Pengerang] not to undermine business at their existing facilities by offering low rates at Pengerang.”

“There is still new demand for tanks”, he says. “New refining capacity in the Middle East and shale oil developments in the US will push barrels to Asia, and Singapore specifically because it is the pricing centre for Asia.”

Singapore fee indications

The Singapore oil storage market has seen demand for fuel oil capacity easing over the past year while demand for distillates capacity remains strong. While overall volumes are high, fees for new long-term contracts reflect the expected increases in capacity in the Singapore area over the coming few years.

Storage of heavy fuel oil (HFO) and bunker fuel together account for about 65% of Singapore’s storage business, so the easing of demand affects the market generally, as well as the HFO and bunker specialists particularly. Although the main operators report that space contracted and volumes in-tank both continue to be high, fee discussions now are evidently more favourable to their customers.

Petroleum Economist’s assessment, based on discussions with terminal operators and larger users in November, is that HFO capacity is renting in the range $4.50-$4.80 a cubic metre (cm) a month, under contracts agreed recently. A year previously, our assessment was $4.60-$5.10/cm. However, terminals capable of handling vessels of very large crude carrier (VLCC) size – used in the long-distance HFO trade to Singapore – can charge more, with fees of over $5.00/cm indicated.

The above fees are for one-year contracts. Users having signed-up for three-year contracts recently will probably have achieved discounts of 5%-6% from the one-year fee, to reflect the increase in Singapore-area capacity over the coming two years. But some holders of three-year contracts taken out a while ago, when demand exceeded capacity, might still be paying up to $5.50/cm.

Storage of bunker fuel generally attracts a premium of $0.20-$0.30/cm over HFO fees.

Demand for middle distillates capacity is being driven by the volume of gasoil flowing through Singapore – the historical flow from the Middle East out to Asia now being supplemented by a flow from the new Asian refineries out to Europe. Fees have firmed: in November, our assessment was that middle distillates capacity was renting in the range $6.00-$6.30/cm, compared with $5.60-$6.20/cm a year previously.

One terminal manager said he would want $6.50/cm for middle distillates capacity for 2014, but there was talk of a large trader recently having secured capacity at $6.00/cm. As always, much depends on the volume of capacity required and the standing of the user – smaller and newer users are likely to be paying at the top of the range while large and established users will get a better deal.

Fees for low-flashpoint capacity generally have not shared in the firming shown by middle distillates fees – although, in response to the increasing demand for middle distillates capacity, some low-flashpoint tanks have been converted to middle distillates use and the volume of low-flashpoint capacity available has been trimmed. This has had the effect of raising fees at the lower end of the range.

Our assessment is that in November low-flashpoint capacity was renting in the range $5.70-$5.90/cm – a narrower band than a year previously, when our assessment was $5.40-$6.20/cm. Two terminal managers said they were asking over $6.00/cm for capacity for 2014.

With oil markets forecast to be predominantly in backwardation – futures prices lower than spot – in 2014, speculative storage is not viewed as a likely feature of the market. However, physical flows through Singapore are expected to continue to be strong, driven by its hub role. Accordingly, there are forecasts that Singapore fees could show some growth in 2014, led by fees for middle distillates capacity.

All fees are monthly and include one fill and discharge per month. The exchange rate at the time of writing was S$1.24 to $1.00.

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