Petrovietnam Launches Vietnam's First Oil Refinery at Dung Quat

At Long Last…

At 13.00 hours on 22 February 2009, Vietnam's first 148,000-b/d refinery located in Dung Quat Bay, Quang Ngai Province finally began commercial production, more than a decade after planning began in January 1998. When the plant ramps up to full capacity in August 2009 it is due to supply around 2.7 million t/y of oil products accounting for approximately one third of domestic demand, according to Vietnam's Ministry of Trade and Industry. The plant will produce 250,000 tonnes per month (t/m) of diesel and 150,000 t/m of gasoline (petrol) as well as jet fuel (30,000 t/m), liquefied petroleum gas (LPG) (24,000 t/m), fuel-oil (25,000 t/m) and propylene (110,000 t/y). The refinery will be supplied mainly by light and sweet crude from the Bach Ho (White Tiger) field offshore Vietnam until 2011 with the possibility of additional sour crude supplies sourced by BP in later years (see Vietnam: 13 January 2009: BP and Petrovietnam Sign Dung Quat Crude Supply Agreement). The plant's operator Binh Son Refining and Petrochemicals Company Ltd. (a subsidiary of Petrovietnam) has also announced that it is looking to sell a stake of up to 49% in the refinery to a supplier who can guarantee long-term supplies.

The launch of the refinery will significantly reduce Vietnam's oil-product import levels, which were around 12.86 million tonnes in 2008. This is expected to save the state significant amounts of revenue, given that imports cost around US$10.89 billion last year. The refinery is also slated to earn Petrovietnam around 55 trillion dong (US$3.14 billion) in 2009 through fuel sales. However, the refinery will further reduce the amount of Asian light and sweet crude grades on international markets (already in decline from reduced sales of Malaysia's Tapis crude), although given the current regional supply glut this may be no bad thing. At the same time Dung Quat will reduce Vietnam's crude oil exports, thereby significantly decreasing contributions to the state budget. Indeed, in 2008 Vietnam's earnings from crude oil accounted for a hefty 31% of state budget income. However, a reduction in crude exports will not lead to such great revenue losses in the current economic environment given low crude prices, a sharp falloff in regional demand, and the recent rise in the natural resource tax on crude oil which has increased crude oil export costs (see Vietnam: 31 January 2009: Vietnam Increases Natural Resource Tax on Crude Oil).

The location of Dung Quat, in the central province of Quang Ngai, has led to criticism from former project partners Total and OAO Zarubezhneft as well as international financial institutions that the project's commercial value was questionable. Indeed, the refinery is located around 900 kilometres away from Vietnam's main consumption centre in Ho Chi Minh City and 855 kilometres south of the capital Hanoi. It is also far from offshore oil fields and the country's key industrial zones in the south. Its location will push up the cost of supplying the refinery and distributing fuel. The refinery also comes online at a time of slowing growth in domestic fuel demand. Indeed, Vietnam's oil product imports last year only rose 0.1% to 12.86 million tonnes compared with previous annual increases of 10% to 13%, pointing to a steep falloff in domestic demand.  

Outlook and Implications

Despite these problems, the outlook for the refinery is not so bleak. First, the absence of competition means Dung Quat has an advantageous position in supplying the domestic market. The refinery is likely to suffer least from a falloff in domestic fuel demand, as the government is far more likely to reduce costly fuel imports from regional suppliers like Singapore and Japan rather than undermine a domestic industry. Indeed, the government will want to protect the refinery that it is expected to create one thousand or so jobs while spurring growth in Vietnam's relatively underdeveloped central region. Second, while the slowdown in domestic fuel demand seems quite severe, Vinapco (Vietnam's monopoly distributor of jet fuel) recently announced that it still expects demand for jet fuel to rise by 4.1% year-on-year (y/y) to 601,000 tonnes in 2009, suggesting that there is still growth in the domestic market, at least for some fuels. Fuel from Dung Quat is likely to be relatively attractive to private retailers who need to meet certain infrastructure and storage requirements before they can import crude from abroad. Third, the refinery will enjoy a relative cost advantage in the domestic market, which will help to ensure fuel sales. Plans by PV Oil (a subsidiary of Petrovietnam) to build a number of storage depots across the country will also help the refinery to better respond to demand shifts in the domestic market (see Vietnam: 12 January 2009: Petrovietnam to Build Oil Depot for Dung Quat Refinery). Fourth, the planned partial privatisation of the refinery has attracted interest from potential investors, suggesting confidence in its future. Shell, Essar, and SK Energy have all approached Petrovietnam for talks on buying an equity stake and on investing in upgrading the refinery. Indeed, foreign companies are keen to acquire a foothold in Dung Quat, given the potential investment opportunities from the proposed expansion of the refinery to 8.5 million t/y over the next few years. More broadly, a stake in Dung Quat would provide an investor with an important foothold in Vietnam's downstream sector, due to expand significantly in future years as demonstrated by plans for three additional refineries; Nghi Son, Long Son, and Vung Ro.