Vietnam's Oil Refining Plans May Be Fraught with Obstacles

Vietnam's Oil Refining Plans May Be Fraught with Obstacles
Vietnam's oil refining ambitions are gaining momentum, but the game plan the country is using to achieve those goals is receiving mixed opinions.

Vietnam's oil refining ambitions are gaining momentum, but the game plan the country is using to achieve those goals is receiving mixed opinions from policy makers and analysts both within the country and abroad. In January the story continued to unfold. Ho Quoc Dung, chairman of the People's Committee for Bing Dinh province, said that preparations were underway for building infrastructure to serve the proposed $22 billion, 400,000 barrel per day (bpd) (20 million ton per year) Nhon Hoi refinery, in Bing Dinh.

Vietnam's Thanh Nien News, quoting Ho, said that investors have been told to complete paperwork by March 5 so consultants can start their work. Construction will begin in 2016 with plans for the refinery to go on-stream in 2019. Project partners will include Thai state-owned oil major PTT and Saudi Aramco, each with a 40 percent stake; Vietnamese partners will hold the remaining 20 percent.

Questions, however, are already being raised over the project's viability. State-run PetroVietnam – the country's only major oil and gas company, which owns Vietnam's sole refinery Dung Quat – claims that Nhon Hoi will upset the country's domestic supply-demand balance and that Dung Quat is all that is needed.

The Dung Quat refinery has an operating capacity of 140,000 bpd, but PetroVietnam plans to upgrade capacity to as much as 200,000 bpd (10 million tons per year) by 2019. The expanded Dung Quat would meet 70 percent of the country's domestic demand for finished oil products, according to the latest U.S. Energy Information Administration (EIA) analysis of Vietnam's energy sector.

PetroVietnam's plans notwithstanding, the Nhon Hoi refinery has the backing of the Vietnamese government. The government claims Nhon Hoi will positively impact the Vietnam's economy by boosting finished oil product exports, strengthening competition in the domestic market and lowering gasoline prices.

Two additional refineries are under construction in Vietnam. Nghi Son refinery, with a capacity of approximately 200,000 bpd (10 million tons per year), is slated for completion in 2017 and the roughly 160,000-bpd (8 million tons per year) Vung Ro refinery should be ready in 2019, according to EIA reports. With 48 million tons of capacity per year (nearly 964,000 bpd) by the end of the decade but a government-forecasted domestic demand of just 27 million tons per year (542,000 bpd) by 2025, what will the country do with its excess finished oil products?

Refinery obstacles

Many in the Vietnamese government want their country to become a petrochemical and oil refinery center for export like Singapore. However, numerous obstacles have the potential to sidetrack those plans, including China, which has more than 50 refineries in operation. China's refining capacity climbed to more than 13 million bpd in 2013.

Ewe Ee-Foong, vice president of ICIS Development and Consulting Asia, voiced concern over Vietnam's refinery plans. "Taking Asia Pacific as a region, North East Asian countries -- Japan, Korea and Taiwan -- are projected to be long on fuel products and looking towards China primarily as export destinations. Some spill over to Vietnam is likely competing with occasional surpluses coming from South East Asia," he told Downstream Today.

Al Troner, president of Houston-based Asia-Pacific Energy Consulting (APEC), takes the argument further. He told Downstream Today that Vietnam currently lacks the sophistication to become a major oil products exporter and that even the big Chinese refineries export products as a function of what they cannot use – and now realize that they have over built.

"The worry is that with the slowdown in Asian demand growth, the question is whether it's cyclical or structural," Troner said. "Subsidies are being cut away also in the region, for example in Indonesia, so if Vietnam builds two, possibly three new refineries, where will products go and how can they make a profit?"

Another problem for Vietnam's refining plans is its declining crude oil production. A recent Business Monitor International Report said that BMI "has grown increasingly bearish on Vietnam's long-term oil and gas production outlook, as new output and ongoing project expansions fail to offset severe decline at the country's major producing fields." Currently, the country is a net exporter of crude oil but a net importer of finished oil products; meanwhile, domestic oil consumption has increased yearly and overall by more than 70 percent from 238,400 bpd in 2004 to 413,000 bpd in 2013.

However, meeting feedstock demands for four refineries would further complicate Vietnam's oil export future. Declining crude oil production in addition to increased crude imports needed for its new refineries is a factor that Vietnam has to come to terms with by the end of the decade if its three new refineries are built.

Ewe said it is ICIS' view that not all of the proposed refineries in Vietnam will be realized. "That which has integrated economics and with strong financial sponsorship backdrop stand a higher probability," he said. "In the same breath, availability of a sustained crude source is basic to a refinery operation. Without such supply assurance, such projects are not viable."

Troner said that developing countries always want product self-sufficiency, but if you have a situation like Vietnam where you have not tackled energy price reform and oil production is slack and not going up in the future you are a creating recipe for disaster. "China and Singapore are competitors, also western India has two large refineries equal to size and sophistication to anything the U.S. has in the Gulf of Mexico (region) and even South Korea is a potential competitor for Vietnam," he said.

Troner sounded a note of caution for Vietnam's energy planners. He said that it is not a good time to invest in downstream while getting into the export of products takes money, sophistication and time – something Vietnam has not mastered yet. "They have to concentrate on one new refinery, not many new refineries, they can propose and propose new refineries but who will put money into them," he asked.