Paul Cornelius, Partner, Corporate and International Tax, PwC Singapore
Paul Cornelius, Partner, Corporate and International Tax at PwC Singapore offers a cautionary perspective on the SGX’s ability to attract oil and gas companies, questioning its capacity to compete against the major international exchanges
Singapore is widely viewed as the region’s corporate magnet; yet, Malaysia is becoming increasingly competitive with its fiscally attractive initiatives. Considering rising competition, what role do you see Singapore playing in the region’s energy growth story?
In the oilfield services arena Singapore has undoubtedly lost ground to Malaysia; nonetheless, with the renewed focus towards engineering, the country will continue to be important player. Singapore’s great and enduring draw is that as a destination for senior executives to live, it is unparalleled.
In the trading sphere, Malaysia is not only competing but in some ways surpassing Singapore’s fiscal incentive package. Nevertheless, Malaysia trading industry has struggled to gain traction because the market and network has been and remains firmly rooted in Singapore. Market intelligence is critical for trading entities and there is no place better than Singapore to gather that. Moreover, the trading activity comes off the back of a gargantuan amount of bunker sales coming out of Singapore. Furthermore LNG is the major energy source for the future and Singapore has the physical and financial infrastructure to be a regional powerhouse in this field.
Singapore will continue to be a major petrochemicals and refining hub. There is simply too much invested here for that to change.
Looking ahead, in 2015 ASEAN should come together as an economic union and will only present further opportunities for the region and Singapore will clearly be the commercial center within the forthcoming bloc.
How will the Iskandar Development Initiative mutually bolster Singapore and Malaysia’s oil and gas industries?
Today, from an oil perspective, Southeast Asia’s oil production is fairly stagnant. Consequently to catalyze efficiency and better productivity, technology has a fundamental role to play. Enhanced oil recovery processes could unlock considerable crude potential in the region’s two hydrocarbon titans: Indonesia and Malaysia. As demand is only going in one direction, terminal space will become increasingly paramount. As a result, Singapore needs more storage and therefore land space to supplement this necessity and along with increased capacity in Singapore the Iskandar Development can provide that.
What role will Singapore play in the region’s natural gas growth story?
With the global push towards clean energy and seemingly away from nuclear power, the importance of gas as an energy source is only going to increase exponentially. With the development of its LNG terminal and regasification plant, Singapore is positioning itself at the very heart of the region’s buoyant gas growth story. Currently, despite the noise around the development of a particular spot market, most oil investors remain very reluctant to take on an LNG projects, unless long term, fixed contracts are in place. Yet, regional gas pricing is under substantial pressure as gas flows permeate into the region from the Middle East (namely Qatar). In the future, when the US gas juggernaut comes into play and the Panama Canal is widened to bring the LNG tankers through, we will be looking at an entirely different energy landscape. How this will impact regional gas projects is a cause for concern as their prices could become undermined and undercut. Indeed, this is a considerable challenge for Australian producers which are confronted with immense CAPEX and OPEX costs. In this gas ecosystem of shifting forces, Singapore is in a strong position to emerge as the region’s LNG price setter.
According to SGX data, total market capitalization of O&G Exploration companies has quadrupled to S$3.6 billion over the last year. However, Singapore has not yet reached its ‘tipping point’ that would bring in a mass of energy companies. What more does Singapore need to be exchange hub?
The government is putting in a lot of effort to educate the mining and oil and gas community. However, I am still somewhat skeptical over the SGX’s ability to compete against the major international exchanges. Specifically, for alternative areas of energy, a number of clients still come to me and state it is easier to raise money in London and Hong Kong. Their perception is that the market is more attuned to the risks associated with the energy industry and are drawn by the established track records of raising capital in these markets. Nonetheless, Kris Energy has had a very smooth and successful listing and if it can develop a good track record, it can be the flag bearer for the SGX’s oil and gas sector. We need another three or four ‘Kris Energy’s’ to come through onto the SGX to really evolve the exchange into a sector powerhouse. A further development in Singapore’s capital markets has been the growth of the analyst community which I view as essential. They are part responsible for making recommendations on company’s and have the capacity to bestir the investment community to invest.
Shell’s profit warning in January sent shockwaves throughout the downstream oil and gas industry. As a company that works closely with oil majors, what are the core downstream industry issues they face in 2014?
There are a couple of central challenges that the regional downstream community face. The refining industry in Singapore has traditionally been instrumental to the economy and regional sector. Refineries the size of Shell’s and ExxonMobil’s, with its recently expanded petrochemical facility, can only be a blessing for Singapore and that is the area to make returns. Yet, a number of smaller downstream assets are struggling to be economical because they lack economies of scale and this issue is compounded by the fact the downstream industry is such a heavily regulated market, with regulated prices squeezing margins. Furthermore, the feedstock of crude oil is high and expensive, tightening margins further. Consequently, the sustainability of downstream areas such as retail, commercial and small refining are areas of uncertainty.
The trend of Asian midcap & majors gaining a stronger hold regionally, and globally, is being evidenced as they race to secure supplies and replace declining reserves. How is PwC’s client base evolving with this trend?
The NOCs are increasingly starting to resemble the IOCs and the services we offer both categories are similar. The people within the NOCs are incredibly knowledgeable buyers and are assisted with tremendous acquisition power. There remains a number of opportunities to work with NOCs who do need our help and service expertise, particularly on the operations side. With their expansion, we certainly see working with the NOCs as a growth area.
How does PwC help oil and gas firms capitalize on regional potential and support business growth?
There are a number of ways we can help this sector. Firstly, on the transactions side we play a central role. Our supply range is not limited to offering only financial and tax due diligence, we come in with valuation support and financial model review. From a corporate angle perspective, we assist companies in their quest to raise capital. Furthermore, we need to play into the value chain. As well as working in the pre-deal and the deal space, there are a lot of opportunities for us post-deal, including risk management and mitigation.
In 2011, Asia was perceived as the mergers & acquisitions hotbed. Looking ahead to 2014 how do you assess Southeast Asia’s M&A outlook in the O&G industry?
We are seeing continued divestment of fields by some of the largerplayers and this presents opportunities for junior and smaller players to fill the void through either farm-in’s or full takeover of fields. This is a trend that will continue and likely grow.
In analyzing major M&A takeover activity, it is tough to predict. Collaboration through joint-ventures will continue; but, that is not a new story for the upstream sector. I believe we will see continued activity at the small and medium end, but I do not envisage too much ‘major’ action or take-overs. Ultimately, there is too much in the hands of the NOCs & IOCs for takeover to occur.
As ASEAN’s Economic Community ambitions edge close to a free trade zone, how has the regional tax system improved in recent years to facilitate regional growth, rather than individual market growth?
There has been improvement in customs duties through free trade agreements. In indirect taxes there have been developments, with many countries talking to one another. However, in the corporate tax field, particularly for energy, there is little traction. It is a sensitive issue.
Corporate tax treaties are supposed to give power to the country where the resources are located. Host countries want to minimize the loss of value from sharing the bounties of their resources treasures but are forced to close by many factors including capital scarcity and availability of technology. Naturally, this mindset thwarts the evolution of common systems and approaches.