Vietnam's Refinery Gamble: Will it pay off?

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.