All

talk?
David Hayes,
Contributing

Editor,

examines Vietnams

nascent refining
industry
whether

it is

ready
the
For information only. Not to be reproduced. Copyright Palladian Publications Ltd 2005.

and asks
finally

to

move off

drawing board.

n May this year, Petrovietnam, the state owned

oil and gas monopoly, awarded a US$ 1.56 billion EPC turnkey contract to build Vietnams long
delayed first oil refinery. The foreign consortium
that won it is led by French oilfield services firm
Technip-Coflexip and includes JGC Corporation of
Japan, Technicas Reunidas of Spain and Technip
Geoproduction of Malaysia.
Once complete in February 2009, the Dung
Quat oil refinery will be capable of processing
130 000 bpd, with a processing capacity of
6.5 million tpy of low sulfur crude oil. Of this,
5.5 million tpy will come from Vietnams offshore
Bach Ho field, to add to 1 million t Middle East sour
crude. Processing facilities at the refinery will
include a continuous catalytic reformer, a residual
fluid catalytic cracker and a BTX plant for producing benzene, toluene and xylene.
This will be the first time Vietnam has had a
refining capability. Up until now it has relied on
imports to meet domestic demand. In 2002, for
example, it imported approximately 10 million t
of oil products, worth more than US$ 2 billion.
Most of Dung Quats output will be used to
replace this. Products from the refinery will
include gasoline, jet fuel, kerosene, diesel, LPG
and feedstock for propylene production. It is
hoped these will help it earn a revenue exceeding VND 35 trillion (US$ 2.35 billion) annually.
However, according to Petrovietnam officials,
construction costs for Dung Quat have doubled
since detailed planning began in 1997. Design
changes and the slide in the value of the
US Dollar against the Euro have seen the
expected cost rise to US$ 2.5 billion from an
intial estimate of US$ 1.3 billion.
It has also faced a series of delays. The withdrawal of a series of foreign partners that the government hoped would invest in the refinery saw
ground preparation for the refinery pushed back to
2000; then there were further delays after the
Russian partner, the Zarubezhneft Russian
External Economic Association, Vietnams largest
oil producer, withdrew from the project.
The Vietnamese government has now decided
to undertake the project alone rather than face the
possibility
of
further
delays.
However,
Petrovietnams search for additional foreign
investors continues for the proposed No 2 refinery
in northern Vietnam, and a Russian backed investor
has proposed building a third refinery in the south,
this time without Petrovietnams involvement.

Location, location, location

According to one European diplomat, the Dung
Quat refinerys difficulties are down to its location.
The site for the refinery lies 850 km south of the
capital, Hanoi, in Dung Quat Bay, Quang Ngai
province, in central Vietnam. It was chosen by the
government to provide an economic boost to the
central region, but has instead proved controversial with foreign investors due to its distance from
Vietnams oil fields and main markets for refined
products. Nor is the site for the second refinery, at
Nghi Son in Thanh Hoa province, located approximately 180 km south of Hanoi, any better.
This has also caused uncertainty among politicians so that, while site clearance has begun for

For information only. Not to be reproduced. Copyright Palladian Publications Ltd 2005.

the No 1 refinery, nothing else has been started. The National

Assembly is discussing the projects feasibility again because
the location will increase product prices as there is no nearby
market and there are transport costs to Ho Chi Minh City and
Hanoi afterwards, says the diplomat. Both the No 1 and No 2
refineries would have to receive oil by tanker.
For Total, the location was definitely a factor. The French
company pulled out of the No 1 project in 1995 due to disagreements over the proposed site; its own recommended
site in the south is in fact the proposed site for No 3 refinery.
Consequently, Petrovietnam conducted talks with a new
consortium, including Conoco, Petronas of Malaysia, South
Koreas LG Group and China National Petroleum Corporation
(CNPC), which broke down in 1997, causing Vietnam to turn
to Russia for support. In December 1998 the Vietnamese
government issued a license to build Dung Quat refinery to
VietRoss, a joint venture company between Zarubezhneft
and Vietsovpetro (itself a 50:50 joint venture between
Petrovietnam and Zarubezhneft). The partners agreed to provide US$ 800 million towards project costs and borrow
US$ 500 million overseas. The refinery commissioning date
was set for 2004, and in April 2002 VietRoss awarded the
Technip-Coflexip consortium a contract worth US$ 720 million
to construct the refinery. However, disagreement over details
of the main contract followed, and in December 2002
Zarubezhneft withdrew from the VietRoss joint venture and
the refinery project. After this the Vietnamese government
decided to proceed alone. In October 2003 Petrovietnam
appointed UK company Stone and Webster as consultants
for the Dung Quat project. The US$ 21 million contract
involves appraising the technical design for the refinery, which
will be prepared by the EPC contractor Technip-Coflexip.

Second time lucky?

The search is still on for foreign investors for the second refinery, in which Petrovietnam will take a majority stake of 51%.
Mitsubishi Corporation of Japan has been the first foreign
company to offer financial support. In August 2004, it agreed
to arrange US$ 950 million of the estimated US$ 3 billion
needed for the Nghi Son project.
The money will come from the Japan Bank for
International Cooperation (JCIC) which, along with Mitsubishi
and Petrovietnam, prepared the projects detailed feasibility
study approved by the government and National Assembly.
This suggested that the refinery will cost approximately
US$ 1 billion to build while the petrochemical complex will
cost a further US$ 500 - 600 million. Surrounding infrastructure including roads, a harbour, water and electricity facilities
will add another US $1 billion or more.
To meet these costs, Petrovietnam will provide at least
US$ 400 million of the project capital in addition to the
Japanese investment, and four major Vietnamese banks will
lend approximately US $ 500 million. Finally, it will need additional overseas loans amounting to approximately US$ 1 billion.
Some of this is expected to come from SK Corporation,
South Koreas fourth largest conglomerate and operator of
one third of its oil refining capacity. In October 2004 SK Group
chairman Chey Tae-won was a member of a business delegation accompanying South Korean President Roh Moohyuns state visit to Vietnam, during which Roh signed an
agreement with Vietnamese president Tran Duc Luong. This
covered bilateral cooperation in the energy sector and was
aimed at helping South Korean companies increase their role
in oil and gas exploration in Vietnam while offering technical
and financial support for Vietnams energy development programme.
Following the state visit, SK Corporation announced that

it had signed a technology transfer agreement with

Petrovietnam to provide Vietnam with oil refining know how
and to help train refinery engineers. SK also announced that
the company had agreed with Petrovietnam to speed up oil
exploration in Vietnams Su Tu Vang region as part of a diversified investment programme in Vietnam which includes operating a mobile telephone network. Following these agreements, SK Corporation announced in April 2005 that it
planned to join the refinery project, but details of its involvement have not been given.
The Nghi Son refinery will be larger than Dung Quat.
Designed to refine 140 000 bpd of Vietnamese and Middle
East sweet and sour crude, it will process a total of approximately 7 million tpy of crude.
Processing facilities will include a continuous catalytic
reformer, a continuous catalytic cracker and other equipment
to produce a range of products including jet fuel, diesel,
kerosene, fuel oil, LPG mogas 90-92-95, as well as
polypropylene and polyester to boost Vietnams nascent
petrochemicals industry. Other products such as bitumen will
be produced to replace imports.
Commercial arrangements for Nghi Son refinery will also
differ to the sales and pricing policy of Dung Quat, which will
be state controlled. Petrovietnam has said that foreign
investors in Nghi Son will be entitled to a proportionate share
of the refinerys output, which they will be able to sell at international prices in the local market.

The third refinery

For most foreign investors that have discussed opportunities with the government, however, the obvious location for
a refinery is in the south of the country, its largest and
fastest developing economic area. This could finally be
happening. According to Vietnam Investment Review, a
local business journal, International Business Corporation
of the British Virgin Islands has carried out a feasibility
study for a third refinery, which would be located in Vung
Ro in southern Phu Yen province, close to Vietnams major
offshore oil fields.
The project is being handled by Russian managed
Techno Star Management, a wholly owned subsidiary of
International Business Corporation. It is currently trying to
obtain an oil supply agreement with Petrovietnam for the
refinery, as importing crude from a foreign supplier would
increase its operating costs. Other than this, however,
Petrovietnam does not have any involvement in the project
and has not indicated any support for the scheme so far.
Techno Stars initial plan was to build a refinery with the
capacity to process 3 million tpy of oil, but this has now
been expanded to 4 million tpy. Provincial authorities in
Phu Yen say construction of the Techno Star refinery is
due to begin in 2006 and will take three years to complete;
the company has already appointed Saigon Transportation
Service Co as the project consultant. However, details of
oil supply arrangements and plans to distribute the refinerys products will need to be prepared before Techno Star
can present a feasibility study to the government for
approval.
Other than its proximity to the main domestic market,
one advantage the Techno Star refinery enjoys is that it will
be able to receive some oil delivery by pipeline. Vietnam has
600 million bbls of proven oil reserves, a total that is
expected to grow as exploration continues, and Phu Yen
province lies several hundred kilometres from the Phu
Khanh Basin, which contains nine oil and gas exploration
blocks for which Petrovietnam opened bidding in 2004. The
Techno Star refinery project also ties in with government
plans for a pipeline to transmit gasoline to Gia lai, Dak Lak

For information only. Not to be reproduced. Copyright Palladian Publications Ltd 2005.

and Kon Tum provinces in the Central Highlands region that

lies approximately 200 km east of Phu Yen.
Consequently, Vietnams relevant ministries are believed
to be supportive of the refinery. Last year, Vietnamese Prime
Minister Phan Van Khai expressed his backing for the
scheme during an official visit to Phu Yen province, saying
that in order to supply the domestic market it was necessary
for Vietnam to have a medium sized refinery in addition to the
other two projects. This is despite Petrovietnams expectation
that its two refineries will supply 70% of Vietnams total
demand for petroleum products by 2010.

Selling out
While industry and consumer energy consumption (particularly for transport) are driving petroleum product demand in
the country higher, crude oil remains Vietnams largest
export item.
Oil production averaged a record 402 000 bpd in 2004,
making Vietnam the third largest oil producer in Southeast
Asia after Indonesia and Malaysia, and the government is
continuing to encourage local and foreign companies to
invest in exploration (so far, it has awarded contracts for only
approximately 25 - 30% of offshore geological shelves with
hydrocarbon potential). However, despite this production, net
oil exports last year totalled only 193 000 bpd because the
nations petroleum product imports are almost equivalent to
half the countrys total oil production.
With the refinery projects still mainly on paper, not much
will immediately change. This year, for example, the
Ministry of Trade says Vietnam will export 19.6 million t of
crude worth US$ 5.5 billion.
However, plans to expand the countrys oil storage facilities in preparation for the launch of Vietnams refining industry are already underway. Petrolimex, the storage and transport division of Petrovietnam, has said it will build a new storage facility in central Khanh Hoa province by early 2006. The
depot will be the largest in the country with a storage
capacity of 3.68 million bbls. Elsewhere, Comeco, the petroleum products company, has received approval from the
Ministry of Trade for a petroleum depot in southern Dong Nai

province. The company will build an undisclosed number of

44 400 m3 storage tanks on the 20 ha site where a pier for
25 000 dwt tankers to berth is planned.
Oil production could also fall sooner than expected.
Vietsovpetro, Vietnams largest oil producer and operator of
its largest oil field Bach Ho (White Tiger), has government
approval for plans to produce 10.5 million t of crude this year.
However, in January 2005, the government announced that
total oil production could fall to approximately 352 000 bpd in
2005 due to decreased output from Bach Ho and Su Tu Den
(Black Tiger) oil fields aimed at extending the life of the fields.
Not surprisingly, foreign oil majors are therefore looking
for opportunities to enter the downstream domestic market,
and Vietnams application to join the WTO, which is
expected to be approved later this year or in 2006, is likely
to increase opportunities.
For the moment these remain limited. Companies such as
Shell, BP, Petronas and TotalFinaElf are among the foreign
companies involved in LPG distribution, which is run in conjunction with a local partner, while Petrolimex and more than 40
local brands run their own LPG bottling facilities. Foreign companies can also acquire naming rights to service stations, but
they are permitted to sell only lubricants and not petrol.
Nevertheless, BP, Castrol and several other foreign oil
majors have acquired naming rights for service stations in
major locations as part of preliminary efforts to promote their
brand names. The real opportunities may still be on the horizon, but the majors in Vietnam are gearing up. For all the
false starts, things here finally seem to be moving.
____________

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For information only. Not to be reproduced. Copyright Palladian Publications Ltd 2005.