Oil majors Royal Dutch Shell and ExxonMobil could see a 10 to 15 per cent hit to profit margins at their Singapore refineries when the city state imposes a carbon tax in 2019, one analyst told CNBC.
On Monday, Singapore announced its intention to introduce a carbon tax of between S$10 and S$20 per tonne of greenhouse gas emissions. That will impact 30 to 40 large direct emitters in the country, including power stations and refineries, the government said.
"Increase in cost from this carbon tax regulation could be between $0.40 and $0.70 per barrel coming from the refining sector. By 2019, we expect gross refinery margins to be US$4 (S$5.60) to US$5 per barrel, so the profit margins could be impacted by 10 to 15 per cent," said Sushant Gupta, refining and chemicals research director at Wood Mackenzie.
The Southeast Asian city state is home to three oil refineries run by ExxonMobil, Shell and Singapore Refining Company. ExxonMobil and Shell both base their largest refineries globally in Singapore.
Gupta said the additional financial burden from the carbon tax will reduce the refineries' ability to compete, especially against other exporters in the region such as those in China, India and South Korea.
"Passing on these costs to products will be tough as those prices are set by international market… Reducing energy intensity of operations will be key to remain competitive," he added.
When asked by CNBC, both ExxonMobil and Shell said they agree on the need to address environmental concerns and have, in the past years, taken steps to reduce their carbon footprint.
However, they stressed the importance of maintaining competitiveness while doing so.
"We would emphasise the critical importance of a policy design which addresses strong economic growth and 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 carbon dioxide costs," a Shell Singapore spokesperson said.
An ExxonMobil spokesman in the country said a uniform price of carbon applied consistently across the economy, such as a carbon tax, is a sensible approach to reduce emissions.
"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 spokesman added.
Singapore Refining Company could not be reached for comment.
Ravi Krishnaswamy, vice president for energy and environment at Frost & Sullivan Asia Pacific, told CNBC that while the competitiveness of certain sectors may be hit, Singapore's economy as a whole would not be severely impacted by the carbon tax.
Singapore ratified the Paris Agreement on climate change in September 2016, sealing its commitment to reduce emissions - even though it contributes just 0.11 per cent of global greenhouse gases.
Finance Minister Heng Swee Keat, in his budget speech on Monday, said the government has started consultations with the industry and will seek views from the public next month.