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Royal Dutch Shell PLC announced late last year it would slash capacity by half at its biggest oil refinery. For Singapore, where the plant has been a mainstay of the economy for six decades, it marked a turning point in one of the most successful bets on fossil fuels in history.

The plant on Bukom Island is part of a massive refining and petrochemical industry built largely on reclaimed islands just off the city-state. In tandem with the cargo vessels they fueled, the refineries helped drive Singapore’s economic success after independence, attracting billions in investment and spawning businesses from plastics to rig construction and finance.

“We’ve come a long way as a result of the energy and chemical sector,” said Tan See Leng, Singapore’s labor minister and second minister for trade and industry. “The key thing is not to completely sort of move away, but to see how we can pivot, how we can transform.”

To that end, the government this year released the Singapore Green Plan 2030, setting out a path for the city-state to become a leading regional hub for carbon trading, green finance, consulting and risk management and other services. Sovereign wealth fund Temasek Holdings Pte., along with the Singapore Exchange, Standard Chartered PLC and DBS Group Holdings Ltd. announced in May a plan to set up a global exchange for high-quality carbon credits.

The city also offers a modern base with a skilled workforce from which new energy companies can run their operations in the region. Vena Energy Capital Pte., one of the largest independent renewable power generators in Asia-Pacific, with wind and solar projects stretching from Australia to India, established its headquarters in a modernist glass-and-steel tower in the city’s financial center, despite having no other operations in the country.

“Given the regulatory transparency that Singapore has, it gives comfort to investors,” said Vena Chief Executive Officer Nitin Apte. “That was true in the past and will be true in the future with renewables.”

Oil town

But Singapore’s switch from black gold to green energy is a difficult balancing act. In 2019, the city was the world’s fourth-biggest exporter of refined petroleum, and fuels and chemicals accounted for around 23% of its total merchandise trade, according to data from the World Bank and the Observatory of Economic Complexity. It’s still a regional trading center for coal, natural gas and oil products and supports dozens of finance houses that specialize in the commodities. More than 100 global chemical companies have operations in the city.

Bukom Island was there at the start. As far back as the 1890s it was the landing place for Russian kerosene. Shell opened Singapore’s first refinery there just prior to independence in 1961 and four more plants were added over the next couple of decades.

Exxon Mobil Corp.’s antecedents soon followed, including a refinery on the nearby island of Ayer Chawan, now part of the giant Jurong Island refining complex that Singapore is hoping to transform into an industrial park for sustainable energy and chemicals.

Now Shell’s investment is in reverse. About 500 jobs will go at the Bukom complex, and many more will likely disappear in Singapore in the coming years. For a nation with no natural resources of its own, its position as an intermediary in the global fuel supply chain will be hard to replace.

Singapore owes much of its economic success to imaginative and ruthless exploitation of its location, wrote historian Michael Barr in his book “Singapore: A Modern History.” In the energy sector that meant leveraging its position on one of the world’s busiest shipping routes, between the Middle East and the major economies in East Asia.

That won’t necessarily help its status as an energy hub for renewables like solar and wind that tend to be located in consuming countries, but it could still be an asset for hydrogen, which is gaining momentum as a possible emissions-free fuel for transportation and other energy supplies.

Hydrogen hopes

“As it has with natural gas, it may be able to position itself as an intermediary for hydrogen in terms of pricing, terminal facilities and storage,” said David Skilling, founding director of Landfall Strategy Group, which advises small, advanced economies. Still, it’s not yet clear to what extent the hydrogen economy will rely on hubs, said Skilling, who was based in Singapore for more than a decade before relocating recently to the Netherlands.

More than 30 countries have released hydrogen road maps, according to a report by the Hydrogen Council and McKinsey & Co. But Singapore isn’t yet ready to commit to a strategy, Tan said.

The government has agreements with Australia and Chile for potential collaboration on hydrogen technology, and is working with Japanese companies on ways to transport the gas, Tan said. “As the technology gets more accepted, more widely available, as costs start to drop somewhat, I think they’ll come to an inflection point,” he said.

Hydrogen and liquefied natural gas have the advantage for Singapore that some oil and petrochemical infrastructure can be retooled for them, said George Nassaouati, who looks at energy transition risks as head of natural resources Asia at Willis Towers Watson. Singapore could also provide engineering and project management expertise to help set up LNG or hydrogen facilities in Southeast Asia, he said.

Landfall’s Skilling says the “constructive paranoia” that enabled Singapore to navigate waves of economic disruption may help it make the transition. “It’s always very adept at figuring out what the next thing is, figuring out what its niche in that space is and being able to extract value from it,” he said.

The attention and direction from the government is definitely there, said Selena Ling, head of treasury research and strategy at Oversea-Chinese Banking Corp. The Monetary Authority of Singapore is developing grant programs to support green and sustainability loans, as well as placing $2 billion of funds with asset managers to catalyze green finance activities out of Singapore, she said.

Singapore is looking at raising its carbon tax higher than originally planned, Minister for Sustainability and the Environment Grace Fu told Bloomberg in an interview on Friday. The city-state was the first in Asia to introduce a levy on carbon, currently set at 5 Singapore dollars ($3.68) per ton of greenhouse gas. The tax will be revised shortly, Fu said.

A privately run carbon-credit trading platform that’s backed by some of the nation’s biggest firms would probably be up and running by the end of the year, she said.

The state of 5.7 million people may also have more time to adapt than Europe or the U.S. because it’s in a region that looks set to rely on hydrocarbons for many years to come. South and Southeast Asia will have the highest oil products demand growth over 2019 to 2035, according to another report from McKinsey. Singapore’s refiners don’t need to do anything drastic yet, said Victor Shum, vice president of energy consulting at IHS Markit.

Until around 2030 at least, there’s little risk of a major drop-off in demand for oil products, Tan said. Meanwhile, the government is encouraging innovation in areas like carbon capture and moving toward more solar and tidal power, in its drive to be in the vanguard of the energy transition in the region.

“I’m not sure they necessarily want to follow us, but I think we hope to be the green oasis,” he said.

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