Singapore, once a preferred hub for oil and gas exploration companies, is losing its world class status as four of the world’s top multinational subsea contractors announce plans to shift the bulk of their operations to neighboring Malaysia where cheaper operational costs will help them survive low crude oil prices.
It’s a short-term type of thinking that represents the desperate fallout of persistently low crude oil prices.
Singapore and Malaysia have long been in a tough competition to solidify their status as the regional hub for offshore and marine companies. But lately, concerns have emerged about the competitiveness of Singapore as the weight is tilting towards cheaper Malaysia where wages, office space and transport cost less than in Singapore.
Multinational companies including Subsea 7, McDermott, Technip and Saipem have already uprooted their Singapore operations in favor of Malaysia. Cost is the primary factor behind the shift, because Singapore has long been the better choice in terms of strategic location, sound infrastructure and stable government. But Malaysia offers one additional plus: for some, it’s closer to the contractors’ clientele.
Subsea 7 told the Financial Times that it was “committed to streamlining processes, reducing costs and finding efficiencies in light of ongoing market conditions”.
The company is readying to shift its Singapore office to Kuala Lumpur, Malaysia, even though several vital functions will still be based out of Singapore, including the company’s logistics base at Loyang.
According to Technip, which also gave a statement to the Financial Times, “prior to the shift, it [Technip] had two subsea hubs in Southeast Asia which were geographically close to each other — one in Kuala Lumpur and one in Singapore with each offering different expertise, engineering disciplines and services.”
Technip said its move had created a “one-stop center” in the region. It was important to be closer to customers for “better visibility”.
In February, McDermott also cited proximity to regional clients as a motivation for relocating or consolidating their operations.
Meanwhile, the weak Ringgit (MYR), Malaysia’s currency, has added even more to the cost differential. The Malaysian Ringgit’s depressed value makes it even cheaper for the transition of these oil and gas majors. The Ringgit is currently hovering around 4.0 against the U.S. dollar.
From an investment prospective, it makes strategic and commercial sense to have a strong presence in oil-producing Malaysia, as opposed to non-producing Singapore.
Depressed oil prices have also hurt the industry in Malaysia as the economy and the oil and gas majors have announced huge job cuts.
Malaysian state-run oil firm Petronas recently announced that its ongoing cost-cutting measures will result in huge job cuts. As many as 1,000 positions are likely to become redundant over the next six months.
Other majors such as ExxonMobil Exploration and Production Malaysia Inc. are expected to embark on cost-cutting measures particularly in terms of office space. Their partners are considering quitting several floors of office space they currently occupy in Kuala Lumpur once their tenancy agreement expires in 2017. Instead, they will resort to an “open office concept” to maximize space usage, also reducing headcounts.
But not everyone is sure about ditching Singapore, despite the higher cost of doing business. Singapore’s benefits, after all, go beyond the cost differentials. For one, it’s a lot easier to do business in Singapore where corruption is lower, healthcare is better and operators are ensured a more educated workforce. At the same time, Malaysia, as an economy, simply cannot compete with these parameters.
The underlying sentiment is that the shift to Malaysia, based primarily on cost concerns, does not necessarily leave Singapore out of the game forever.
Industry experts are optimistic that Singapore is still a key competitor for the title of regional offshore hub. While those relocating to Malaysia may have the short-term advantage, the long-term will have to go to stable Singapore.
By Charles Kennedy, Oilprice.com