Oil refineries: Vietnam could be on a slippery slope

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Workers at Vietnam's first refinery Dung Quat in the central province of Quang Ngai

More oil refineries are set to be built, stoking fears of an oversupply since the export market is hard to predict with capacity being added rapidly in many parts of Asia.

Construction of Vietnam's second oil refinery, Nghi Son, has begun this month, one of a string of new projects that slated to take the country a big step closer to becoming self-sufficient in gasoline and oil products.

If things go to plan, the US$9-billion refinery in Thanh Hoa Province, 200 kilometers south of Hanoi, will be operational by 2017. The 200,000 barrels per day (bpd) Nghi Son facility will increase the country's oil processing capacity to 330,500 bpd by 2017, but it and a smaller older plant will only be able to meet half of the nation's fuel demand by then, according to PetroVietnam, the state oil and gas group.

PetroVietnam owns a 25.1-percent stake in the joint venture while Japan's Idemitsu Kosan and Kuwait Petroleum International will each hold 35.1 percent. Mitsui Chemicals of Japan will own the remaining 4.7 percent.

Construction of the $3.2-billion Vung Ro refinery is expected to start soon in the central province of Phu Yen after land acquisition and clearance are completed.

The UK's Technostar Management has signed an engineering, procurement, and construction contract with Japan's JGC Corp. The work is expected to take 48 months.

Earlier this year the refinery was allowed to double its annual capacity to eight million tons and investment to $1.7 billion.

In all six refinery and petrochemicals projects are under way at a cost of around $46 billion, and if all go on stream after 2020 as planned, total supply will be an estimated 36 million tons compared to demand of around 29 million tons, according to the Ministry of Industry and Trade.

The surplus would rise to 11 million tons by 2025, it said.

Now Vietnam gets around a third of its supply from the 6.5-million-ton Dung Quat refinery and imports the rest.

PetroVietnam, which owns the refinery, plans to expand its capacity to 9.5-10 million tons by 2017.

It is trying to complete the expansion as soon as possible, Nguyen Hoai Giang, chief executive of Binh Son Refining and Petrochemical Company Limited, which operates Dung Quat, said.

PetroVietnam is also planning on building a 10-million-ton a year Long Son refinery in the country's southern region, targeted for completion in 2018.

Exports no longer easy

Some experts have expressed concern over the looming supply hang.

PetroVietnam does not want Thai company PTT Pcl to get a license to build a refinery in the central province of Binh Dinh, saying it would upset the demand-supply balance.

PTT's $27-billion plant, if approved, will become Vietnam's largest refinery with a capacity of 30 million tons per year when it opens in 2019.

Sukrit Surabotsopon, senior executive vice president of PTT's petrochemicals and refining operations, said half of the refinery's output is expected to be sold in the domestic market and the rest exported to China, some other Asian countries, and Europe.

But Ho Sy Thoang of the Vietnam Oil and Gas Association said it is not an easy business to succeed in.

Refineries require large investments, offer small profits, and cause environmental pollution, he said.

Even Singapore, Asia's largest oil-trading hub and fifth largest oil refiner, is reducing investments in the field because of low profits. Some Singaporean refineries are looking to sell off.

Singapore used to be keen on expanding its refineries, but these days, attracting new refinery projects is not a "specific aim" of the Economic Development Board, a government agency that promotes Singapore as an investment destination, Wall Street Journal quoted Eugene Leong, director of energy and chemicals at the EDB, as saying.

Major refiners in Asia were able to make large profits in the past, but the addition of new capacity in the region, especially in China and the Middle East, will put pressure on prices, the US newspaper said.

In China, Saudi Aramco, Kuwait Petroleum Corp., Qatar Petroleum International, Russia's Rosneft, and Venezuela's PdVSA are all building refineries which would displace imports and allow greater exports, it said.

JP Morgan said China alone is expected to add around 750,000 barrels a day of refinery capacity both this year and next.

Persian Gulf oi producers are also building strings of big refineries to take advantage of their guaranteed and relatively cheap crude oil supplies.

The supply-over-demand imposes pressure on the Asian region with oil and gas researcher Wood Mackenzie pointing out lower profits as a result.

Oil refineries in the region have reported a profit of $5-10 per barrel on average in the past three years, but the number would decline by $1.5 per barrel by this year's end, and by further 50 cents in 2014, the Scotland-based firm said.

Economist Le Dang Doanh said the government should carefully consider refinery projects because of risks of oversupply, environmental pollution, and shortage of crude oil.

He questioned the benefits that would accrue to Vietnam from refinery expansion since it has to import crude oil for production, offer incentives to investors, and grapple with environmental pollution.

Dung Quat uses Vietnamese crude but other refineries will rely on imports since Vietnam does not produce enough to meet all their demand, the Ministry of Industry and Trade said.

NET PRODUCT IMPORTS SEEN DOWN 16 PCT BY 2018: IHS

Even after the Nghi Son refinery starts operation in 2017, Vietnam remains a steady importer of oil products, which helps keep regional fuel prices supported. In addition, the refinery will also have a petrochemicals plant, which will soak up some of the output, leaving less volumes of fuels such as gasoline for sale in the local market.

"You may wonder why the reduction in product imports post Nghi Son startup looks small. One reason is that Nghi Son will produce paraxylene. As a result, its gasoline production will be quite low," said Victor Shum, vice-president of energy consultancy IHS Energy Insight.

"Another reason is product demand growth in the market."

IHS expects Vietnam's net product imports to fall only 16 percent by 2018 to 180,000 bpd, after the start up of the second plant, from 215,000 bpd in 2012.

Vietnam's economic growth is expected to accelerate to 5.4 percent this year and is targeted to quicken further in 2014, Prime Minister Nguyen Tan Dung said.

Vietnam used to be completely dependent on oil products imports until its sole refinery came onstream in early 2009.

For the first nine months of this year, its oil products imports had fallen 23 percent to 5.58 million tons from the same period a year ago due to full runs at the 130,500 bpd Dung Quat plant, government statistics showed.

Total oil products demand this year is estimated to reach up to 17 million tons, 60 percent of which will be met via imports, based on an Industry and Trade Ministry forecast.

The nation's dependence on imports may remain particularly heavy for products such as jet fuel despite the new refinery, one Singapore-based trader said.

The International Air Transport Association expects Vietnam to become the world's third-fastest growing market for international passengers and freight next year, and second-fastest for domestic passengers.

Diesel imports may hold steady, with the new refinery feeding the expected growth in consumption of the fuel.

"Diesel imports are likely to remain the same as the demand growth in Vietnam is in line with the supply growth, keeping the 2018 imports at same levels as in 2013," said Suresh Sivanandam, an analyst at Wood Mackenzie.

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