Singapore made itself into one of the world’s most important energy hubs despite producing no oil or gas. But after three months of war in the Middle East, the city-state, dubbed the “Houston of Asia”, is feeling the strain of trying to meet the region’s fuel needs.
“Sitting here, we see first-hand the impact of the energy shortages,” said an executive at a global commodities dealer, whose Singapore office has been fielding calls from clients across Asia, helping manage their exposures, fulfil contracts and supply physical cargoes. “It’s the most hectic time I’ve experienced in this business.”
An even bigger test looms as the global crisis enters its most dangerous phase, with fears that the oil price could further surge if the Strait of Hormuz is not fully opened for exports.
Singapore’s dominance of Asian energy trading stems from its position at the bottom of another key waterway, the Strait of Malacca, where as much as 30 per cent of global maritime trade passes.
Through a carefully planned ecosystem of ports, refineries and storage facilities, the city-state has become the conduit for about a fifth of the world’s energy trade, according to government figures, and is the third-biggest market behind New York and London. Its tanks and vast underground caverns can store at least 135mn barrels of oil, though the size of its official stockpiles is a state secret.
Jurong Island, a 3,500-hectare mostly man-made landmass off Singapore, is one of the world’s biggest oil refining centres, with more than 100 petroleum and chemical companies — including ExxonMobil and Chevron — operating storage facilities and distribution bases.
By focusing on storage, refining and trading, Singapore has ensured that it plays a crucial role in maintaining global supply during times of acute stress.
“This is definitely the time where Singapore comes into its own,” said Sasha Foss, energy markets analyst at CSC Commodities, part of broker Marex Group. “All eyes are on Singapore and Asia at the moment.”
Singapore’s refineries “have shown short-term resilience as they were able to switch sources of crude and benefit from the country’s strategic storage buffers”, said Reshmi Khurana, Singapore country head for consulting firm AlixPartners. “But the longer the Strait of Hormuz stays closed, the more vulnerable they are.”
The biggest commodities trading houses — including Glencore, Gunvor, Trafigura and Vitol — also have big operations in Singapore. Global banks have commodities financing teams offering lending, derivatives and hedging instruments to allow trade to flow.
While the crisis and the accompanying price volatility have been a boon for many traders, some fear harder times ahead when supplies become even more depleted and energy demand increases in other parts of the world.
“The oil market has shown resilience and adaptability so far,” said a Singapore banking executive specialising in commodities. “The industry has been sourcing from all around the world. But how long can that last?”
The initial disruption led to a flurry of force majeure notices being issued, as suppliers were unable to meet contractual obligations to provide clients with shipments.
Baldev Bhinder, managing director of Blackstone & Gold, a Singapore law firm specialising in energy and commodities, said that so far relations between energy suppliers and their clients had been cordial, but that was unlikely to last.
“The oil business is very relationship-driven,” he said. “These guys have been buying and selling from one another for years, but at some point when losses mount up, they will start suing each other.”
In response to the supply constraints from the Middle East, the Singaporean government has set about trying to ensure Jurong’s storage tanks avoid being emptied.
In May it signed an agreement with New Zealand in what both sides described as the “world’s first” bilateral supply chain deal to keep goods flowing freely between both countries.
Under the terms, the two nations agreed not to impose measures to restrict trade on essential goods, including fuel, as well as committing to keep open trade routes — including by air and sea — to maintain the flow of energy supplies, such as petroleum oils and other essential goods.
The agreement builds on similar discussions Singapore’s Prime Minister Lawrence Wong had with his Australian counterpart Anthony Albanese in April to help meet each other’s energy security needs.
Singapore is a top supplier of refined petroleum products to Australia, while Australia is one of Singapore’s biggest providers of liquefied natural gas.
The Port of Singapore has maintained its position as the world’s biggest ship refuelling hub, selling a record 57mn tonnes of marine fuel — also known as bunker — last year. But some shipping analysts see this crucial role in global trade as a potential weak spot.
As more ships head to Singapore to refuel and seek the relative sanctuary of its surrounding waters — especially vessels that had previously been off the coast of another global bunkering port, Fujairah in the United Arab Emirates — the city-state’s reserves of maritime fuel are at risk of being drained, leaving thousands of vessels stranded.
Singapore’s bunker reserves are a closely watched barometer of global trade vulnerability. So far, they have mostly held up, thanks in part to traders replacing lost Middle Eastern cargoes with Russian oil.
But as the war in the Middle East drags on, Singapore will be forced to find other sources of fuel and forge new alliances to maintain its position as Asia’s energy marketplace. Asia has already been making up for lost oil and gas cargoes by importing from Europe and North America. But as these markets hit peak energy consumption in the summer months, Singapore’s traders will have to look further afield, including to Russia and China.
“We must reinforce Singapore’s role as a reliable energy hub even as the energy system changes over time,” said deputy prime minister Gan Kim Yong.
“Energy security is one of Singapore’s critical challenges. We must continue diversifying sources, strengthening buffers and planning ahead for disruptions.”
