Vietnam aims to secure 2 mil barrels/month of Azeri Light to feed Dung Quat for next decade

Vietnam's state-run PetroVietnam is looking to secure a regular supply of Azerbaijan's Azeri Light crude for the next decade, while light-end US, Nigerian and Abu Dhabi grades could also regularly feature in its 2025-2035 crude slate.

General Secretary of the Communist Party of Vietnam, To Lam, visited Azerbaijan over May 7-8, establishing a strategic trade and energy partnership with the non-OPEC crude producer. PetroVietnam's refining arm, Binh Son Refining and Petrochemical, and The State Oil Company of the Republic of Azerbaijan signed a memorandum of understanding for the long-term supply of crude oil for the Dung Quat refinery, industry and government sources said over May 12-20.

Under the agreement, SOCAR will supply BSR with 2 million barrels of Azeri Light crude per month, starting July 1, 2025, and continuing through 2035, as per a government statement and a crude oil logistics source at PetroVietnam.

BSR's Dung Quat refinery, with a capacity of 130,000 b/d, has processed Azeri Light crude intermittently over the past decade. This light, sweet grade is a familiar feedstock for its crude distillation unit. However, due to the rapid decline in domestic low and medium sweet crude production, the proportion of Azeri Light crude in the feedstock blend may increase significantly, according to sources at PetroVietnam and traders in Singapore familiar with the Dung Quat crude slate.

While the Azeri Light crude supply agreement is not yet final and remains at the MOU stage, a long-term supply deal is anticipated based on the history of spot and term purchases, according to PetroVietnam's logistics management source.

Since 2009, PetroVietnam's trading arm, PV Oil, and BSR have signed multiple agreements and supply contracts with SOCAR's trading arm, SOCAR Trading SA. From 2010 to January 2025, SOCAR Trading Singapore supplied the Dung Quat refinery with nearly 31.7 million barrels (an average of around 5,500 b/d) of Azeri crude, valued at approximately $2.55 billion, according to BSR.

"Buying directly from SOCAR Trading Singapore also helps BSR shorten the intermediary chain, save on logistics costs, and ensure a stable operating schedule," BSR stated.

Despite being one of East Asia's few crude suppliers capable of producing more than 300,000 b/d, Vietnam remains a significant net importer of refinery feedstock. In 2024, Kuwait was its top crude supplier, delivering 234,369 b/d of Kuwait Export Blend sour crude to the Nghi Son refinery, which operates solely on Kuwaiti sour crude.

Nigeria was Vietnam's second-largest crude supplier last year at 14,011 b/d. However, Azerbaijan is likely to surpass Nigeria for the second position if the 2 million barrels/month (approximately 67,000 b/d) long-term supply deal is finalized, based on calculations by Platts, part of S&P Global Commodity Insights, using Vietnam customs data.

Bach Ho output, refinery expansion

Vietnam's domestic Bach Ho crude has been the main feedstock for Dung Quat. However, production is declining after years of exploitation, limiting self-reliance on domestic raw materials. This situation necessitates BSR to expand imports from international sources to maintain stable refinery operations, according to BSR.

Incorporating Azeri Light crude -- light, low in sulfur, and easy to process -- will enhance BSR's operating efficiency, reduce processing costs, and optimize overall system performance.

Azeri Light is classified as a light sweet crude with a specific gravity of 35.3 API and a sulfur content of 0.21%. In contrast, Vietnamese Bach Ho Heavy has a gravity of around 35 API and a sulfur content of 0.05%.

In terms of feedstock economics, Azeri Light is cheaper than many light sweet Southeast Asian grades available in the spot market. Platts assessed the price spread between Azeri Light and Kimanis crude at an average discount of $3.36/b in May. In April, the discount averaged $3.1/b, and in March, it averaged minus $3.9/b.

In addition to Azeri Light, other light crude grades suitable for the Dung Quat refinery include Nigeria's Bonny Light, the US WTI Midland crude, and the UAE's light sour Murban. BSR noted that SOCAR Trading SA could supply these crudes, allowing BSR to avoid dependency on a single source and increasing the refinery's operational flexibility.

BSR indicated that the MOU with SOCAR is a strategic move in preparing for imported crude oil sources for the Dung Quat refinery upgrade and expansion project, expected to be completed in 2028. After the upgrade, Dung Quat will be capable of processing a wider variety of crude oils, enhancing flexibility and market adaptability.

Expanding refining capacity has long been Vietnam's ultimate goal as Hanoi aims to reduce the country's reliance on imported fuels. Volatile oil prices pose challenges for a nation of nearly 100 million that heavily depends on imported fuels. Dung Quat and Nghi Son refineries have a combined capacity of about 330,000 b/d, sufficient to cover only half of the country's demand for oil products and chemicals.