Vietnam: Biggest Oil Refinery Cuts Down Production, Local Market Suffers Fuel Shortage

Commencing production in 2018, Vietnam’s biggest refinery Nghi Son has suffered an accumulated loss of 61,200 billion VND (~ 2,683 million USD) in its first 3 years of operation. In lack of money to import crude oil, the refinery announced in Jan 2022 to cut down its production capacity to 80% from the peak of 105%.

Nghi Son Oil Refinery and Petrochemical 

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With an investment capital of 9 billion USD, Nghi Son Refinery located in the Northen Central Province of Thanh Hoa has a phase 1 capacity of 200,000 barrels of crude oil per day (equivalent to 10 million tons of crude oil per year). This capacity is nearly double the Dung Quat Refinery located in Quang Ngai Province, the older and smaller one.

Nghi Son Refinery’s oil products are currently accounting for 35% of the local market. Therefore, its production cut is causing a widespread shortage of fuel supply. Many gas stations throughout the country are reportedly closed or selling on a limited amount.

Nghi Son Refinery is a joint venture between Vietnam National Oil and Gas Group (PVN) - 25,1% of equity; Idenmitsu Kosan Company (Japan) - 35.1%, Mitsui Chemical Company (Japan) - 4.7% and Kuwait Petroleum Group - 35.1%. 

In 2013, two major agreements related to this project were inked: Government Guarantees and Undertakings Agreement (GGU) between the Government of Vietnam (represented by the Ministry of Industry and Trade) and foreign investors, Nghi Son Refinery and Petrochemical LLC (NSRP); and the Fuel Products Offtake Agreement (FPOA) between VPN and NSRP.

According to these agreements, PVN will be the offtaker of Nghi Son Refinery's products, with the wholesale price equal to the imports’ price plus preferential  import tax of 7% for petroleum products, 3% for petrochemical products (polypropylene, benzene...). In 10 years (until 2028), if Vietnam reduces import tax to lower than the above preferential rates, PVN will be responsible for compensating for Nghi Son Refinery for such difference.

In reality, according to the ASEAN Trade in Goods Agreement (ATIGA), the import tax on gasoline from 2023 will be reduced to 5% and from 2024 to 0%. Tax on diesel and mazut has been 0% since 2016. Meanwhile, according to the Vietnam - Korea Free Trade Agreement (VKFTA), diesel import tax from 2016 is 5% and from 2018 is 0%, while it is 0% on mazut from 2016.

Thus, the import tax rates in reality are far lower than the preferential rates of 3-7%, and PVN will have to compensate quite a lot for Nghi Son Refinery’s losses. The compensation can be $1.5-2 billion as quoted by local newspapers. It’s not clear whether such “compenstion” has been materialized already.

Amid negative reports by local mass media, NSRP made a press release on 30th Jan denying its financial difficulties: “Recently, various newspaper articles have reported that the Refinery will be shut down from mid-February due to NSRP's financial difficulties. while NSRP reserves its view and position in response to such articles, the Company would like to such articles were made on unauthorized and confidential information with regard to clarify to the business and were based on assumptions likely to cause misunderstanding. NSRP confirms that the Company had indeed sought relevant approvals from the Sponsors on a short term proposal to improve the Company's immediate needs. Today, NSRP is pleased to officially announce that the short term proposal has been approved by the Sponsors which will support NSRP in maintaining its operations. yes, we are pleased to announce that a possibly lengthy shutdown will not be required.”

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