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Copyright © 1999-2013  Vietnam Venture Group, Inc. All rights reserved.   Updated March 9, 2001

By Peter N. Sheridan

The planners and thinkers of Vietnam are taking a shot at petroleum refining once more.  Long before the first plant has any steel in the ground, they are planning the second plant and considering a third refinery. They have also for the first time, started to talk seriously about how they will try to raise the huge sums needed for any one of these projects.

Market & Geography.  The commercial-level producing oil fields in Vietnam are all in the south, many in close proximity to the port of Vung Tau, or “Oil City,” which is currently 120 km east Ho Chi Minh City (Saigon).  When the new connecting road is commissioned, the road distance between the two cities will be about 90 km. 

The largest market for refined petroleum products by far is in the southern region of Vietnam.  The Ho Chi Minh City area uses more than half of all the nation’s petroleum products. 

The second market is in the Hanoi area, including the port of Hai Phong about 130 km to the east of inland Hanoi. About one-third of the petroleum products are used in the north.

The central section of Vietnam, a broad, narrow ribbon of land between the two major cities that are about 1,500 km apart, is the third major market calling for the use of about 1/8th of the nation’s petroleum products.

Brief History.  Although the first refinery project (proposed in 1992) was to have been placed in the south at Vung Tau and near to Ho Chi Minh City, after approval and prior to construction the State elected to move the plant to the central coastal region at Dung Quat, near DaNang. 

France's Total, which had been planning to build and operate the refinery JV project with PetroVietnam, pulled out of the project in 1995. It was their position at the time that the project’s capitalization at US$1.2 billion would not be sufficient to build the plant so distant from the source of crude, due to the lack of infrastructure at the site and in the region as a whole.  Total thought that if capitalization were increased to $1.5 billion the project could be built in Dung Quat, but it was still not willing to do so.

Total reasoned that the finished cost of refined product could be higher than imported product due to excessive transportation charges.  Total sought pricing authority on the finished product to protect its position.  Total reasoned that the cost to transport the crude, and then the refined product, via pipe, ship, or truck would eat away at if not destroy the profitability of the product.

The State and PetroVietnam did not agree with Total who eventually withdrew from the project.

Several other consortiums (one led by Conoco) spent millions of US dollars on further Feasibility Studies only to pull out as well.  There was a consensus by all foreign oil companies that the crude pumped from the south, primarily from the Bach Ho fields near Vung Tau, would incur huge transportation costs to bring it 700 km up to Dung Quat for refining, and then another 700 km north to Hanoi, or back south to HCMC. Those added costs would destroy the incentive for any foreign enterprise to operate the facility.

Russia's state owned petroleum company (which has been drilling and producing crude since the late 1980s under another JV at Bach Ho) then formed a new partnership with PetroVietnam in 1997-98 to build the refinery.  

At the time, insiders considered the move political by Russia, predicting the plant would not ever be built.  Under this current plan the JV is to build the "first" refinery at Dung Quat with the estimated capital now projected at the same $1.5 billion the State refused to authorize for Total's plans back in 1995! 

The State has not before ever said, and no one has determined, where Russia will get its $500 million cash contribution needed. Vietnam will no doubt assert the value of its land will provide a substantial portion of its $500 million contribution and thus deprive the JV of much needed working capital.  Before the recent announcement (below) there was no serious speculation on (i) who will lend the projected cash-starved JV the additional $500+ million needed to purchase the technology and hardware, or (ii) how the JV will have its product compete favorably with imported refined fuels. 

And not surprisingly, other than land clearance, there has been no refinery site construction in Dung Quat for more than two years.

Current Picture.  Notwithstanding the lack of progress, nine years after the proposal to build the first refinery, the State recently announced plans for its second refinery.  Reports are that the State seeks to place this "second" refinery in Nghi Son Commune of Thanh Hoa province. The State controlled media, without giving distances, reports that this is in the "central" portion of the nation. 

While the State acknowledges the need for the Thanh Hoa refined product to travel to Hai Phong for the trip back to Vung Tau and Ho Chi Minh City, few readers know that Nghi Son is about 140 km south of Hanoi and about 150 km southwest of Hai Phong. Hai Phong and Nghi Son are each more than 1,200 km north of Vung Tau.

Interestingly, the State now raises the very same arguments for going further north to Nghi Son that Total first raised in 1995 for not going north to Dung Quat - economics!  The cost of transporting the crude more than 1,200 km north to Nghi Son (via a pipe line through rugged mountains or along the coast, or by ship to Hai Phong and then by truck or pipeline to the refinery) is projected to cost $7.50 per tonne.  This the State claims is cheaper by $1.50 per tonne than moving the crude through from Vung Tau to Dung Quat!

To those who are following this saga over the years, by implication the State now seems to admit that the Dung Quat plant cannot competitively supply refined petroleum products to the north (or one wonders, the south).  It is no wonder that the transportation cost was the rationale used by all foreign firms (except the Russians) for not going to Dung Quat in the first place.

And yet the State media is now talking about a third refinery.  While no location is mentioned, it is reported that PetroVietnam favors that it be near the "first" one in Dung Quat.

Some predict that this “third” refinery may wind up being placed back in the south at Vung Tau where the first one was to have been built!  If that happens, it would not be surprising if the "third" refinery is commissioned long before the "first" refinery has steel in the ground and there is land clearance for the second one. 

Opportunity knocking.  As the industry is well aware, demand for refined product is less than  33% in the north, perhaps as much as 12% in the central region, and greater than 55% in the south of Vietnam.  This demand structure is not expected to change substantially in the next 5-10 years.  

It seems that the time is NOW for suppliers of refined petroleum products to go to Vietnam, particularly as the current 8 million tonne demand is projected to grow to 57 million tonnes in the next five years.  There is less than a slight chance that Vietnam will see any local production much before that time.

*State-Run Petrovietnam Eyes NASDAQ Listing-Paper

HANOI, March 8 (Reuters) - State oil and gas monopoly Petrovietnam is in talks with a U.S. investment bank about a possible listing in the United States, the first ever by a firm from the communist country, official media reported on Thursday.

The state-run Saigon Times Daily quoted Petrovietnam's deputy director general Hoang Van Hoan as saying the talks with Morgan Stanley Dean Witter were still at an exploratory stage and there would be further discussions next week.

"A U.S. mission will arrive in Hanoi next Monday to discuss the plan to add Petrovietnam shares to the list of tech-heavy Nasdaq shares," Hoan was quoted as saying.

"We mooted the plan a long time ago, but the negotiations to date have not borne fruit. We have convened dozens of such expert level meetings already," he said.

"What we are doing is just exploring the matter; whether we join the bourse is still undecided."

The paper quoted another Petrovietnam official as saying if things went smoothly Petrovietnam could be listed next year.

It would be the first Vietnamese firm to list overseas.

Petrovietnam officials could not immediately be reached for comment on the report.


Earlier this year Petrovietnam opened a finance arm, Petrovietnam Financing Co, that will be allowed to raise capital for several major projects in the pipeline by issuing shares and corporate bonds.

State media reports last April said Petrovietnam was considering issuing international bonds worth $300-$500 million, mainly in the United States, to help build the country's first oil refinery with Russia's Zarubezhneft.

Petrovietnam said then it would seek advice from Morgan Stanley on issuance of corporate bonds. It said the U.S. firm would be the underwriter but gave no figure for the issue amount or any timeframe for the issue.

The cost of the 50:50 refinery joint venture project has recently been estimated in the official media at $1.3 billion and the two countries agreed in December to boost its registered capital to $1 billion.

State media has said funds raised from bonds would also be used to help develop a $1.5 billion integrated gas project involving Britain's BP Amoco (BP.L), Norway's Statoil STAT.CN and India's ONGC Videsh (ONGC.BO), in which Petrovietnam has a 15 percent stake.

Petrovietnam also aims to raise $170 million overseas to finance a $486 million urea fertiliser plant which will use gas from Nam Con Son.


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