Singapore oil & gas infrastructure construction 5 comments

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The oil and gas theme has been in play for the last 2-3 years already, and the optimism surrounding the industry shows no sign of abating. For potential stock picks into this sector, one need not go further than Singapore itself.

The anchor trends suggest that Singapore oil and gas services companies are well-positioned for the sustained upturn. Let's proceed through a top-down view of the hierarchy of trends. Globally, oil prices are maintaining a sustained uptrend, leading analysts to keep revising their 2006 oil price estimates upwards (US$67 at last count) and also oil majors to adjust their long-term price estimates upwards (these figures are for the purpose of planning large capital expenditures). In the Asia-Pacific, Southeast Asia is seen as a potential hotbed of exploration and production activity, which is explained in a previous article "Southeast Asia as an energy resource hotzone". And finally, Singapore has for long been one of the key energy hubs in Asia, being one of the world's top three oil trading hubs and refining hubs. Given the underinvestment in oil and gas infrastructure during the last decade, the scene looks set for Singapore oil services companies to profit greatly from the ongoing and upcoming infrastructure construction.

Let's omit the offshore infrastructure boom which has benefited the shipbuilding industry and the rig construction industry; less prominent but no less capital-intensive are the onshore oil and gas infrastructure itself. There are three big areas where capital expenditure will be huge in the coming years.

The first is oil storage. It is natural that Singapore could develop as Asia's de facto oil storage hub, given its existing strengths in refining and trading. And yet current storage space -- held by refineries and independent storage operators (Vopak, Oiltanking, Tankstore)-- is inadequate. Consequently, there are several private sector investments to build more oil storage terminals -- eg. Vopak's Banyan terminal, Horizon Terminals (a Middle-Eastern venture), Universal Terminal, Titan (planned), and Oiltanking's terminal expansion. These are huge -- eg. Universal Terminal's construction is worth S$500M to Rotary Engineering which secured the contract. Also on the cards is the possibility of the construction of underground oil storage caverns on Jurong island (typically for strategic storage purposes) which would probably be the biggest project of them all if approved.

The second is refinery and petrochemical plant construction. ExxonMobil and Shell are reportedly planning to invest US$3bn in cracker plants on Jurong Island and Pulau Bukom. SPC had also announced that it would be spending $200M to produce clean fuels at its refining arm SRC. This is expected, given the global shortage of refinery capacity.

The third is natural gas infrastructure. Singapore has historically imported all of its natural gas via pipeline from Malaysia and Indonesia, but recently has been looking into LNG as another source of natural gas to diversify. The $500M cost of the required import terminal is probably more viable following rising oil prices and the recent unreliability of piped Indonesian gas. Such LNG import terminals have already received consideration elsewhere in Europe and the US in past years, and should indeed be gaining strength given the viability for natural gas as a credible oil substitute (see "Natural Gas: Alternative Energy Source"). Indeed, an LNG import terminal could be the first step towards a natural gas export/trading terminal and the development of Singapore as a regional gas hub. There are plans for a regional gas grid for ASEAN members, and should this come to fruition, there will be heavy construction of more infrastructure to support the grid.

All these projects are expected to fill order books all the way till 2010 at least, giving great visibility to order books of companies which secure the contracts. Typically, foreign EPCs (eg. from Japan, US) will be the main contractors for these construction jobs but local contractors will receive sub-contracts to fabricate the structures and provide process packages and instrumentation. Just look at Technics and its meteoric share price surge. Check out its peers.

References:
(1) Department of Energy: Singapore Country Analysis brief
(2) OCBC analyst report 16 June 06: Oil and gas support service sector