Source: Energy Tribune - Tim Daiss
State-owned PetroVietnam received some bad news last Friday.
Japan’s biggest oil refiner JX Holdings said that it would not participate in
its planned project to expand Vietnam’s Dung Quat refinery, the only operating
refinery in the country.
A JX Holdings spokesman said his company had been
considering taking part in the project but it and PetroVietnam failed to come
to an agreement on financing terms.
Though this might be bad news for PetroVietnam it might
actually be a blessing in disguise for the Southeast Asian country’s future
refining plans, which many analysts both in Vietnam and internationally admit
are too ambitious and could potentially be disastrous.
The Dung Quat refinery, with a capacity of 140,000 barrels
per day (bpd), came online in 2009. It can satisfy around one-third of
Vietnam’s domestic refined products demand, while the country imports the rest.
PetroVietnam is looking to boost Dung
Quat’s crude distillation capacity to around 200,000 bbl/d by 2017 and to
develop its ability to handle sweet and less expensive sour crude oil from
Russia, the Middle East, and Venezuela, according to the US Energy Information
Agency (EIA).
While Dung Quat is currently Vietnam’s sole oil refinery,
the country will be home to a total of seven such facilities in the next few
years, the total capacity of which is much greater than the nation’s current
demand, Vietnam’s TuoitreNews said two weeks ago.
Construction on the country’s second refinery, Nghi Son,
started on October 24 at a cost of $9 billion, with refining capacity at
200,000 bpd, or 10 million tons per year, once it comes online in 2017.
Together, the new plant and the existing Dung Quat refinery
are expected to satisfy 65% of Vietnam’s oil and gas needs by 2020, while both
refineries would nearly satisfy domestic demand at 2012 levels.
A third refinery at 160,000 bpd, in the central province of
Phu Yen, is in the planning stages and scheduled to be built by 2017.
Other petrochemical and oil refinery projects are also in
planning stages, including the Long Son project with a capacity of 200,000 bpd,
the Vung Ang project with 300,000 bpd capacity and Khanh Hoa at 200,000 bpd. In
addition Thailand’s PTT Group as well as provincial authorities in Can Tho are
also moving ahead with oil refinery plans.
By 2020, according to the Vietnamese Ministry of Industry
and Trade, the total supply of oil products produced in Vietnam could reach 36
million tons, while total demand will be just 29 million tons. The ministry
said the surplus will rise to 11 million tons in 2025.
Dr. Ho Sy Thoang, from PetroVietnam’s Oil and Gas Research
Institute, raised doubts in May over these plans, and questioned if the country
would be able to become a petrochemical and oil refinery center for export like
Singapore.
Since then others have voiced concerns for various reasons,
while some juxtapose the rapid and over-building of hydropower projects in
Vietnam and its corresponding problems with the country’s refining plans,
claiming the country is in danger of making similar mistakes if it precedes
with building five additional refineries.
Vietnam’s gamble
However, unlike hydropower projects that often lose money,
refineries are built to turn a profit, especially when exporting. The gamble
for Vietnam is just that: Can refining margins be high enough to justify the
billions in investment needed to build five additional refineries?
Several variables fit into this equation. Vietnam will have
to import the crude to supply these new refineries. The US shale oil revolution
could help. As the US produces more of its own oil, this frees up oil
shipments, mostly from the Middle East, to be re-routed to Asian markets,
potentially at lower prices in the future (though nobody can accurately predict
where world oil prices will be in the future).
Lower crude prices mean higher profit margins for
refineries. However, caution should be maintained as a worldwide glut of
refined petroleum products is in full swing as China, with 54 refineries as of
2012, leads the charge.
The EIA said in April that China’s installed crude refining
capacity is over 11 million bpd, doubling since 2000, while its goal is to
augment crude oil refining capacity by around 3 million bpd to reach 14 million
bpd by 2015.
The International Energy Agency (IEA) addressed this also.
It said that global oil demand could rise to 95.7 million bpd by 2017, but
refining sector expansion will likely take global refining capacity to 100.5
million bpd for the same period. China will account for more than 40% of global
refining capacity in the next five years.
The IEA added in June that the world is heading for a glut
of refined products as new Asian and Middle Eastern refineries increase oil
processing in a move likely to force less advanced competitors in developed
countries to close.
US refineries (especially along the Gulf Coast) that are
exporting increased amounts of refined products must also be factored into the
supply side of the equation.
The Star reported on this over supply problem last week.
Though the report addresses this situation in the short term, it will also
likely play out similarly in the long term as well. The Malaysian based
newspaper said Asian oil refiners are facing slumping profits as China is
expected to ramp up exports of diesel and gasoline this quarter, while Asian
refineries are already experienced plunges in profit margins.
Therefore, if prices for refined products remain static or
fall, especially if crude oil prices rise in the future at the same time,
Vietnam could face enormous risk. This is not even factoring in other
conditions that could adversely affect refining margins such as geopolitical
crisis and increased governmental and environmental regulations.
This situation could be exacerbated by the time Vietnam’s
planned refineries come on stream, raising doubts that having seven refineries
is in the best interest of the country and beckoning questions and concerns
that energy planners in Hanoi need to address immediately.
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