Vietnam's Block B&52 may not start gas output before 2029 on funding crunch: S&P Global

Vietnam's flagship upstream gas asset, Block B&52, has the potential to reduce dependence on future LNG imports and boost domestic gas production, but it faces development hurdles and may not start until 2029, S&P Global Commodity Insights said in an August report.

The obstacles included low power prices that do not allow high fuel costs to be passed on to end-users and the urgent need for financing as the project could cost $15 billion-$20 billion, according to the report titled, "The bare necessities Vietnam requires for domestic gas security."

Vietnam pledged to phase out coal-fired power generation due to decarbonization goals and the approval of clean energy funding of at least $15.5 billion over the next 3-5 years under the Just Energy Transition Partnership backed by developed countries.

The country's gas demand is projected to grow by around 7% on average annually until 2040, driven primarily by the power sector, and accelerated by coal-to-gas switching post-2030, necessitating new gas production, S&P Global research analyst Amanda Kang and Director Zhi Xin Chong said in the report.

The latest Power Development Plan released in May 2023 for the 2021-2030 period highlighted the country's focus on domestic gas security and targeted Block B&52 for development and starting gas production by 2027.

S&P Global expected Block B&52 to be among the first of three major undeveloped gas fields in Vietnam to come online, with plateau production of 490 million cubic feet/day of gas supply, equivalent to around 40% of total gas demand in 2030 and 20% in 2040.

"However, although the field was discovered more than 25 years ago, it has been beset by challenges leading to delays in the commercialization of the resources," the analysts said.

Low electricity prices

One major obstacle was the regulated power tariff.

Based on the PDP, Block B&52's gas price including transportation was estimated at around $13.70/MMBtu in 2030, resulting in a breakeven price of $10.20/MMBtu after factoring in transportation and capital costs, according to S&P Global.

"This would likely place the final Block B&52 selling gas price at a similar level to LNG prices by 2030," the analysts said, adding that at current retail power price of $81/MWh, electricity generated from Block B&52 gas will be around 40% more expensive than the current tariff.

"Consequently, owing to the slow rate of price increases, negotiations to finalize downstream gas sales agreement to support higher wellhead gas prices have been unsuccessful, even after state-owned PetroVietnam took over Chevron Corp's stake in the project," the report said.

"The inability to finalize downstream gas sales agreements to guarantee revenue has hindered capital raising on a project financing basis," they added.

S&P Global said Block B&52 needs $10 billion of capital to develop, but with inflation escalating EPC, or engineering, procurement and construction costs, and the cost of developing onshore pipelines and power plants, total project cost could range from $15 billion-$20 billion.

"This situation is worsened by a higher cost of capital as lending rates by commercial banks are estimated to be more than 9%," the report said.

Financing difficulty

"It remains uncertain if PetroVietnam has adequate financial support for this costly project. Relative to the five highest-producing gas fields in Vietnam, Block B&52 will be the most expensive, and PetroVietnam having a 70% stake in this development also means a higher contribution of capital for its equity stake," S&P Global analysts said.

They said one possible source of funding would be concessionary loans from the Japan Bank for International Cooperation and tapping on JETP funds. Block B&52 is not expected to start up until 2029, but things could change, they added.

"A change catalyst could emerge to break Vietnam's limbo, leading to crucial gas investments," the report said.

"In our current forecast, LNG requirements could increase to 5 million mt/year by 2030 and 16 million mt/year by 2040 in a scenario where Block B&52 fails to start up. But the successful development of Block B&52 will immediately yield a new trajectory and mark a paradigm shift in Vietnam's economy. This is something worth watching for," the analyst said.