Vietnam's oil and gas sector is about to welcome the arrival of projects developed by oil conglomerates from the US, Russia, and Japan.
In the middle of August the Japan-based JX Nippon Oil & Energy Corp. was reported to be seriously considering setting up new refineries and petrol stations in Indonesia and Vietnam, to offset a slump in fuel consumption in its home country. This would be the first major downstream oil investment of the corporation in Asia outside of Japan. “Japan’s largest oil refiner sees the two markets as the most promising locations for investment due to their robust economic growth outlook and openness to foreign investment,” Mr Tsutomu Sugimori, President of JX Nippon, was quoted as saying by foreign media.
Besides the interest from JX Nippon, the attractiveness of investing in Vietnam’s oil and gas sector has been hotter than ever before in 2013 and the first eight months of 2014, with ground being broken at the $9 billion Nghi Son Oil Refinery, the restart of Khanh Hoa’s Nam Van Phong Oil Refinery, with capital doubling to $8 billion, the proposal from Thailand’s PTT Group to build a $20 billion refinery, which was initially more than $27 billion before plans were revised, Gazprom Neft’s plan to invest $3 billion more into the Dung Quat Oil Refinery, and, most recently, the $10 billion natural gas and power project of the US-based Exxon Mobil, the largest of its kind in the country.
In June, Gazprom Neft suggested increasing the capacity at Quang Ngai province’s Dung Quat Oil Refinery to 10 million tons per year with investment of up to $3 billion. The proposal was reported to have come during a working session between a Gazprom Neft delegation led by General Director A.B. Dyukov and the State-owned Vietnam Oil & Gas Group (PetroVietnam) on an investment cooperation plan for the upgrade of Dung Quat.
In the very last week of August, Mr Nguyen Hoai Giang, General Director of the Binh Son Refining and Petrochemical Company (BSR), which manages Dung Quat, revealed that the company is negotiating terms with Gazprom Neft. “The Russian side has formulated many plans corresponding to the funding Gazprom Neft can provide, which ranges between $1.5 billion and $3 billion,” he added. The money will help the Russian oil and gas corporation acquire a stake of 49 per cent in Dung Quat Oil Refinery while enabling a capacity upgrade of 54 per cent, to about 10 million tons of crude oil per year. The exact amount to be spent has yet to be decided, but PetroVietnam would prefer a proposal of $2 billion, according to Mr Giang.
Vietnam’s second oil refinery, Thanh Hoa province’s Nghi Son, with an anticipated capacity of 200,000 barrels per day (bpd), is now under construction. SGS and Manpower have been fiercely recruiting employees for the project over the last few months. Idemitsu Kosan Co., Japan’s second largest refiner by revenue, is already engaged in the construction, making it the first oil refinery to be built by a Japanese refiner in an Asian country outside of Japan. Construction is expected to be completed in 2017.
PetroVietnam is also looking for investors in the 200,000 bpd Long Son Oil Refinery in Ba Ria Vung Tau province. Estimates put total investment at nearly $8 billion. Site clearance has been robustly conducted by the provincial people’s committee and is expected to wrap up at the end of this year, with operations scheduled to begin in 2020.
Meanwhile, site clearance at Phu Yen province’s Vung Ro Oil Refinery was completed in May and the provincial people’s committee had an agreement with the investor, the UK’s Technostar Management Ltd, and its legal entity in Vietnam, Vung Ro Petroleum Ltd, to start the land-levelling phase in mid-August. According to a close source of VET, however, the phase is yet to start but it is expected to get underway after a short delay of one or two months at most.
Mr Do Van Hau, CEO of PetroVietnam, last month told foreign media that it may reach an agreement with Exxon Mobil on a $10 billion natural gas and power project next year. He said that Vietnam had received a boost from Exxon Mobil’s gas discovery off Vietnam’s coast in 2012, which would support its plans to develop natural gas fields, estimated to be the fourth-largest in East Asia. “The first phase of the mammoth project would pipe gas from the field to a processing station, from which it will be used to fuel a 2,500 megawatt power plant,” Mr Hau said, adding that “the power plant is one of the country’s largest so far and will help address electricity shortages.”
One day previously, PetroVietnam was reported to be in talks with banks over a seven-year loan of up to $1.8 billion to support its bid to buy a stake in Murphy Oil Corp.’s Malaysian oil and gas assets. The Arkansas-based Murphy Oil, which has interests in oil and gas fields in Malaysia, Vietnam, Indonesia, Brunei and Australia, is seeking buyers for a 30 per cent stake in its Malaysian assets. PetroVietnam’s offer is reported to be more than the $1.5 billion bid placed by the Indian consortium of Oil & Natural Gas Corp and Oil India Ltd. Mitsubishi Corp. is also among the bidders for the assets.
Economics and politics
With a population of over 90 million and oil demand growing 1 to 2 per cent a year, Vietnam is seeking foreign partners to help upgrade its refining capacity in order to reduce its dependence on imports. Nevertheless, this is not the sole reason, as Dung Quat’s production meets one-third of domestic demand and so just one or two more refineries would solve the issue.
According to a detailed report, BSR’s performance in the first six months of 2014 exceeded the group’s plan by 38 per cent. The result is to be expected to some degree, given that BSR has been granted a business monopoly in several segments and received handsome incentives in others. Specifically, the government has allowed BSR to add a 7 per cent import tax before selling petrol in the domestic market and 5 per cent on LPG and 3 per cent on petro-chemical products, despite the fact that BSR does not have to import any oil and gas, with all being procured from domestic suppliers. Despite a stoppage for maintenance, BSR still managed to earn revenues of VND2,081 billion ($100 million), a remarkable 232 per cent higher than the initial plan.
BSR is not the only one doing well. PV-Gas, which benefits from receiving gas from PetroVietnam’s oil rigs and BRS’s Dung Quat Oil Refinery, is another State-owned enterprise earning substantial profits. According to a report from PetroVietnam, the after-tax net profit of PV-Gas for the first six months of 2014 stood at more than VND6,400 billion (over $300 million), exceeding the initial plan by around half.
These incentives and advantages are partly why foreign investors have been so interested in oil and gas projects in Vietnam recently. At the beginning of August, the Ministry of Finance (MoF) unexpectedly agreed to offer attractive investment incentives to Thailand’s PTT, the group that plans to set up the Nhon Hoi Oil Refinery in Binh Dinh province. “Offering tax incentives to the project’s investor is ‘absolutely in accordance’ with existing laws and regulations,” insisted Mr Nguyen Dinh Thi, Head of MoF’s Department of Taxation.
Nevertheless, the government’s decision to offer investment incentives to huge investors has faced strong opposition from many quarters. Economists believe that Vietnam offers too many incentives and the State budget incurs lost revenue while not gaining anything in exchange. There was a time, not too long ago, when MoF fought against incentives being given to the Nhon Hoi project, expressing its disagreement in a document released in April, saying that the “oil refinery project is not mentioned in the overall development programme of the industry.” Mr Thi explained that investment incentives are aimed at encouraging foreign investors to pour capital into the country.
It seems that incentives will definitely be granted to foreign investors, especially for refinery projects, given that a large fleet of floating refineries may arrive in the country after China illegally placed an oil rig in the East Sea over the summer. Vietnam must establish a tight and interlocking network with major countries in the power sector and regional countries with related industrial strengths.
The incentives may not be as high as BSR and PV-Gas are currently receiving, but will be just enough to allow investors to bolster their sales and compete in the high-revenue sector. And that’s all the incentive most need.