Vietnam being bled dry in Indonesian coal deal

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Piles of coal near the Uong Thuong-Dong Vong mine in Quang Ninh Province

Industry insiders say Vietnam is losing out big on a 30-year coal contract it handed to an Indonesian mining firm in 1991.

Pham Van Tu, deputy general director of Uong Bi Coal, said that predecessors gave PT Vietmindo Energitama almost complete control over the Uong Thuong-Dong Vong mining area.

"Vietmindo was the first and only foreign company to do business with the local coal industry," Tu said. "We realize that the contract that we signed was not reviewed thoroughly. Indeed there are loopholes that put us at a disadvantage."

The 1,000-hectare open-pit mine in the northern province of Quang Ninh is believed to have one of the highest quality coal reserves in Vietnam. The contract allowed Vietmindo to develop mining facilities, extract reserves and export all products until 2021. It granted Uong Bi just 10 percent of the profits.

Tu's company is a subsidiary of Vietnam National Coal-Mineral Industries Group, a state-owned mining company also known as Vinacomin. Even though his company entered into the deal, Tu says officials from the Ministry of Industry now the Ministry of Industry and Trade brokered the details.

"The problem has been passed down"¦ We are only the inheritors," Tu told Vietweek.

Jakarta-based Vietmindo operates the mine in a closed environment "” all outsiders, including its Vietnamese partners,­ are forbidden from entering its facilities, industry insiders say.

The Indonesian handles all the exports itself.

Breaching the contract

The contract grants Vietmindo a maximum annual commercial coal output of 500,000 tons. However, its output exceeded the limit by 250,000 in 2010 and by 300,000 tons last year, according to statistics obtained by Vietweek.

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Tu said that since his company has been kept out of the loop, he's been the last to know about Vietmindo's annual extraction.

"We have been calling for renegotiations of old terms so that the deal will be fair for both sides but they haven't agreed to this," Tu said.

Vietnamese law requires all miners to apply for annual certificates limiting their annual mineral extraction. Vietmindo is not subject to that rule since it inked its contract with Uong Bi before the regulation came into effect, Tu said.

Attorney Pham Van Phat does not think Uong Bi has done enough to push for a renegotiation, given the fact that its Indonesian partner has blatantly violated the contract terms.

"Uong Bi, as a partner, has to have a say. It's unreasonable that they claim they don't have any right to interfere even when their partner is breaking the terms of its agreement," the Hanoi-based lawyer said.

"All foreign companies operating in Vietnam must comply with Vietnamese regulations. If there are terms in the contracts that are not fair, the partners should renegotiate."

Nguyen Thanh Son, director of Song Hong Energy Co., a Vinacomin subsidiary, said Vietnam is the clear loser in the deal.

Dwindling reserves, rising exports

Son, who has been warning that Vietnam's coal reserves are smaller than previously believed, said the country's mining industry faced many difficulties in the 1980s, when the largest coal mines produced less than half a million tons a year due to lack of machinery and capital.

After the Soviet Union dissolved, demand for Vietnamese coal plunged, he said.

"The contract with Vietmindo was intended as an experiment. Vietnam expected to learn more about modern mining technology while its foreign partner took care of selling the product.

"I know that many people in the industry at the time considered it a no-brainer. Uong Bi Coal Company didn't have to do anything but earn a 10 percent profit. What they didn't think about was the losses of natural resources that the country would suffer."

Son said that, even if Vietmindo only turned out 500,000 tons of coal per year, the deal would cost the country a total 15 million tons over the course of 30 years. That amount of fuel will mean a lot to Vietnam, which will have to import huge volumes of coal in the next few years.

Vietnam, a major coal exporter, began importing the fuel for the first time last year, when Vinacomin bought 9,500 tons of low quality coal on a trial basis at US$100.6 per ton.

The imports came from Indonesia.

"˜Left with the bones'

Analysts have decried Vietnam's plan to sell its mineral reserves now and begin importing up to six million tons of coal a year starting in 2014.

Son argued that the coal from Uong Thuong-Dong Vong should fetch much higher prices than the coal bought from Indonesia, though he did not provide an estimate of the cost differential.

"It's not just about money. It's natural resources that we are talking about," he said. "Vietmindo's annual extraction has been capped at 500,000 tons per year, so it will simply dig out the highest quality coal and ignore the rest."

The Uong Thuong-Dong Vong is an open-pit mine, so after the Indonesia company has exhausted all the reserves near the surface, Vietnam will have to spend much more money to extract the coal using underground mining methods, Son said.

"It's like the foreign partner is eating all the good bits, leaving just the hard bones," he said.

"The lesson here is that we have sold a public mineral mine and incurred huge losses, but nobody is taking responsibility."

Let the bidding commence

To avoid the same mistake in the future, Vietnam should introduce competitive bidding for mineral mining rights, Son said.

"The company that proposes the best mining plan with minimum environmental impacts and the highest royalties for the government will be chosen," he said.

Since Vietmindo has breached its contractual output ceiling, trade officials should strengthen surveillance and prevent excessive exploitation of local coal reserves, Son suggested.

He also urged the government not to "compromise" or consider any request from the foreign firm to increase its production or extend its contract.

An official from the Ministry of Industry and Trade said that Vietmindo representatives had already inquired about raising its maximum output a few months ago.

"The ministry said that, before it can make a decision, the company needs to seek authorization from provincial authorities, the Ministry of Environment and Natural Resources and the Ministry of Planning and Investment," the official said, requesting anonymity.

"The Vietmindo contract was negotiated within a certain historical context, and now government agencies have to cooperate to protect natural resources and national interests in the best way possible."

Do Thong, deputy chairman of Quang Ninh People's Committee, said the province is against such a proposal.

An email to Vietmindo seeking comment on Monday did not elicit any response.

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