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Singapore will need to strike the right balance in implementing a planned carbon tax from 2019 to ensure its refining industry remains competitive as the sector faces headwinds from volatile margins, growing exports from China and rising capacity in the region.

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Singapore Monday announced it will implement a carbon tax starting 2019.

The tax, which will be Southeast Asia's first carbon tax, will likely cost between $10-$20 per mt of emissions.

The tax is aimed at helping Singapore meet its commitment to cut emissions by 36% below 2005 levels by 2030 under the Paris Agreement.

Analysts told S&P Global Platts Wednesday that the tax will raise the cost of operations and pose new challenges for the refining sector, but the way the tax is implemented will determine the final impact. Wood Mackenzie estimates that the increase in cost for the refining sector from this carbon tax regulation could be between 40 cents/b and 70 cents/b.

"By 2019, we expect gross refinery margins to be $4-$5/b. So the profit margins could be impacted by 10-15%," said Sushant Gupta, research director for refining and chemicals at Wood Mackenzie.



The additional burden from the carbon tax will reduce refineries' competitiveness as passing on these costs to products will be tough, as those prices are set by the international market, he said.

"There is an uneven ground as other export refiners do not have similar tax regulation," Gupta said.

According to Tushar Bansal, director at Ivy Global Energy, an independent energy research and consulting firm, the government will not let the country's refiners become uncompetitive

"The government might find a way to ensure that there is a level playing field for oil product exports from the country's refiners," he said.


SHELL, EXXONMOBIL


Shell, which operates a 500,000 b/d Bukom refinery in Singapore, said it was committed to working with the government on cutting emissions but it is crucial that the policy is designed to ensure the competitiveness of Singapore companies in the international market place.

"It must ensure companies can compete effectively with others in the region who are not subject to the same levels of CO2 costs," a spokeswoman with Shell Singapore told S&P Global Platts.

The Bukom refinery is Shell's only major refinery in the Asia Pacific.

The company has a 110,000 b/d refinery in the Philippines, but has exited Malaysia and Australia and is in the process of selling off its refining asset in Japan.

Singapore has a total refining capacity of 1.38 million b/d spread across three refineries -- Shell Bukom, ExxonMobil's 593,000 b/d integrated refinery on Jurong Island and Singapore Refining Company's 290,000 b/d refinery on Jurong Island.

ExxonMobil told Platts it was still early to discuss specific impacts because the government was still consulting industry.

"We are committed to working together with the Singapore government on this important issue and finding the balance between addressing the risks posed by greenhouse gas emissions and ensuring Singapore remains a strong, internationally competitive economy, supported by an affordable energy supply," the US major said in an emailed statement.


REFINERS FACE HEADWINDS


Singapore's refining capacity compares with domestic consumption of around 200,000 b/d, which leaves the refiners at the mercy of the export market.

Singapore refiners have been facing stiff competition from their counterparts in the region.

China's gasoil exports more than doubled to 313,566 b/d in 2016, while gasoline exports rose 64% year on year to 225,197 b/d, General Administration of Customs data showed.

Chinese suppliers have made inroads across Asia Pacific markets with supplies to Australia rising seven-fold in 2016.

Singapore's oil product exports to Australia meanwhile fell 6% year on year in 2016 to 5.6 million barrels, data from Australia's Office of the Chief Economist showed.

Singapore's share of Vietnam's oil imports fell to 34% in 2016 from 38.3% in 2015 as Malaysia's share rose to 26% from 7.2% and South Korea's to 16% from 3.4% over the same period, data from Vietnam Customs showed.

Meanwhile, Asia is gearing up for refining capacity additions, with one of the plants -- a 200,000 b/d refinery -- coming up in Vietnam, which will reduce its demand for imports.

Asia also witnessed wild swings in gross refining margins in 2016, with GRMs climbing above $10/b in early 2016 before weakening to as low as $3/b in August and recovering to $5/b in October.

Analysts have told Platts that margins are expected to remain positive in the first half of 2017 before turning slightly negative in the second half.


COST OF BUSINESS


"Having a carbon tax in theory will impact the refining sector as it will raise the cost of doing business. It will create some challenges for the refiners here who are highly export-oriented," Victor Shum, vice president of IHS Energy, told Platts Wednesday.

The Asian refining sector is highly competitive and Singapore faces quite a bit of competition from China and other suppliers, Shum said, adding that the question is how the government will help refiners remain competitive. "The devil will be in the details on how the tax will be implemented," he said.

According to Nevyn Nah, refined products analyst at Energy Aspects, it will erode Singapore refiners' margins further.

"It's quite similar to what Australia refineries face but at least they have a decent domestic market. Singapore refineries are already not running at maximum capacity, and will have to trim marginal runs further. It's going to hurt," Nah said.

WoodMac's Gupta said that reducing energy intensity of operations will be key to remaining competitive.

ExxonMobil told Platts that the company is taking action to reduce greenhouse gas emissions at its manufacturing facilities in Singapore.

There are ongoing initiatives to improve energy efficiency, including investments in cogeneration plants, which significantly improve energy efficiency and competitiveness, the company said.

Shell too said that numerous improvements to energy consumption have been implemented across Shell manufacturing sites in Singapore, and the company will continue to look for emissions intensity improvement opportunities.

The government has said that it will conduct public consultations on the carbon tax in March. It has already started consultations with industries.

--Mriganka Jaipuriyar, mriganka.jaipuriyar@spglobal.com

--Sambit Mohanty, sambit.mohanty@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com