Vietnam Inks Deal for Second Oil Refinery Amid Growing Energy Consumption
By Tim Daiss
Vietnam is tenacious. The country pulled itself out of abject poverty in just a few decades after its reunification in 1975 and had its own economic miracle. Now it battles different problems. Rapid inflation, government corruption and banking problems are causing a drag on GDP growth. Yet its energy sector has potential. Vietnam’s proven oil reserves are increasing almost yearly and the country is finally starting to build more infrastructure to accommodate those reserves.
On January 27, Vietnam signed a nearly $9 billion deal with firms from Japan and Kuwait to build its second oil refinery. The deal comes as Vietnam’s energy needs continue to grow.
The Nghi Sơn refinery will be located in Thanh Hoa province, about 112 miles south of Hanoi. Per terms of the deal, Kuwait will provide feedstock to the refinery, which will be able to process 10 million tons of crude a year.
State-owned PetroVietnam will own a 25.1 percent stake in the refinery, while Japan’s Idemitsu Kosan and Kuwait Petroleum International (KPI) will each hold a 35.1 percent stake. Mitsui Chemicals of Japan will hold the remaining 4.7 percent.
According to the Kuwait News Agency, the refinery’s first phase will have an oil processing capacity of 200,000 barrels per day (bbl/d) when operational, while production will double to 400,000 bbl/d after phase two is complete.
This will be Vietnam’s second refinery and the first one with participation from foreign investors. The Dung Quat Oil Refinery, Vietnam’s first, became operational in 2009, with a capacity of 6.5 million tons of material crude oil per year (130,000 bbl/d) and is being fed solely with Vietnamese crude, with plans to add 15 percent feed from the Middle East.
According to PetroVietnam the two refineries combined will meet 65 percent of Vietnam’s oil and gas needs.
Refining woes
Beni Suryadi, an energy policy analyst for ASEAN (Association of Southeast Asian Nations) told Energy Tribune that for its energy security Vietnam has planned to construct at least five more refineries with total capacity of 32.5 million tons.
“Vietnam issued the decision of Prime Minister [Nguyễn Tấn Dũng] in 2009 on the Master Plan of stockpiling up to 2015,” he added. “However, up to now there has been no actual detailed plan so it’s difficult to attract FDI [foreign direct investment].”
Though Vietnam’s oil reserves have increased, the country desperately needs the additional planned refineries. According to the US Energy Information Agency (EIA) Vietnam is a net exporter of crude oil but remains a net importer of oil products. Vietnam needs to import about 70 percent of the refined products and petrochemicals it needs.
In fact, Vietnam’s oil reserves have leap-froged in just a few years due to increased offshore exploration activity. At the end of 2001 Vietnam’s proved oil reserves stood at 2.2 billion barrels of oil (bbl), but at the end of 2010 were placed at 4.4 bbl, third largest in the Asia-Pacific region, bypassing former OPEC member Indonesia and neighboring Malaysia, according to BP Statistical Review of World Energy, July 2012.
Analysts state that Vietnam’s waters are still relatively underexplored and that the country’s oil reserves could continue to increase.
“There are some optimistic projections where the current reserves will increase five times by 2025,” Suryadi said. He added however, for this to happen “Vietnam definitely needs huge investments.”
One of the biggest quandaries for Vietnam’s offshore oil ambitions is China. As we’ve reported consistently over the past year, both Vietnam and the Philippines have overlapping claims in the hydrocarbon rich waters of the South China Sea (SCS.) How this unfolds and effects Vietnam’s ability to both locate then extract oil and gas in these disputed waters remains to be seen.
Not only are Vietnam’s limited refining capacity and SCS woes an impediment for its oil industry so is its domestic consumption. Though the country’s GDP fell slightly last year and is also forecasted to see slower GDP growth this year, Vietnam’s oil consumption, just like its natural gas consumption, has tracked then superseded its rapid economic growth.
Vietnam’s GDP grew by an aggregate 7.2 percent in the last decade, while nearly 25 percent of the country’s domestic energy consumption comes from oil. Oil demand has nearly doubled in the past five years from 175,000 bbl/d in 2005 to 320,000 bbl/d in 2010.
Flattening production is another hurdle for Vietnam’s oil ambitions. The country’s oil production increased each year from 2001 to 2006, then started declining after that, except for a slight increase in 2009 and a 2.1 percent increase in 2011 over 2010.
One reason for this drop is declining output at the Bach Ho (White Tiger) field, which comprises around 50 percent of Vietnam’s crude oil production. The field’ production peaked at 263,000 bbl/d in 2003 but in 2011 dropped to just 92,999 bbl/d. Forecasts are for the field’s production to continue to drop to around 20,000 to 25,000 bbl/d by 2014.
According to Business Monitor International’s “Vietnam Oil and Gas Report Q1 2013,” oil output will remain fairly steady over the next five years as production from new developments offsets declining volumes at the Bach Ho field. The report states that oil output should peak in 2013, at 370,640 bbl/d, before declining rapidly to just 308,550 bbl/d by 2021.
Suryadi said that with ”business as usual and the current rate of oil production, Vietnam will become a net importer of crude oil by 2015.”
So, it appears that Vietnam has its work cut out for itself. Though foreign companies have been hesitant to enter Vietnam’s oil and gas sectors due to inefficient regulations, news of its second refinery with international players Japan and Kuwait onboard is a positive development.
Perhaps Vietnam’s biggest challenge (but with the greatest reward) is unearthing hydrocarbon deposits in the SCS. If the Southeast Asian country can do that as well as better manage its domestic energy policy and address energy consumption, it can chart its own energy course.
