How many oil refinery projects will survive?

Vietnam is believed to be a good place for setting up oil refineries, as the country still has to import petroleum products to meet the increasingly high demand. However, investors have been advised to think carefully before making investment decisions in Vietnam.

The Khang Thong Group has reportedly signed with STFE group and Thai PTTES–a contract on technical designing for an oil refinery with the expected capacity of 12 million tons per annum, expected to be located in Nhon Hoi Economic Zone in Binh Dinh province.

As such, the list of the oil refinery projects has been extended.

Partners for joint ventures – where to find?

According to Nguyen Van Thuyet of the Nghi Son Oil Refinery Complex project management board, Vietnam’s oil and gas industry remains a fledgling; therefore, setting up joint ventures with foreign partners is always the thing Vietnamese investors want

However, it is not easy to find out foreign partners to form up joint ventures which can run oil refineries. The foreign partners need to satisfy the requirements set by the Vietnamese side: they need to have experiences in running oil refineries, have the capability to arrange capital, and seek the crude oil sources which can ensure the supply for the projects’ lifespan. Vietnam does not intend to use domestically sourced oil because of the decreasing reserves.

To date, only the Nghi Son oil refinery project in Thanh Hoa has found the foreign partners who can meet the above said requirements. Of the three partners which have teamed up with PetroVietnam to set up the joint venture, Japanese IKC is running four oil refineries in Japan and it can arrange the capital of four billion dollars for the project. Kuwaiti KPI, which provides crude oil to the world market, can ensure the oil supply for the whole life span of the project. Mitsui (MCI) can be responsible for the outlet of the products.

Meanwhile, other oil refinery projects have not succeeded in seeking foreign partners for the joint ventures. Dung Quat project, for example, failed to find foreign partners after tens years of seeking, and it is now running as 100 percent Vietnamese owned enterprise.

The Vien Dong Investment and Trade Corporation once found a foreign partner – the US-based Semtech Limited B.V.I. However, the US company finally decided to withdraw from the project. To date, Vien Dong still has not found new partners.

Since 2009, the Hai Phong-based Hapaco Company has been calling for foreign investment in the 5 million-ton oil refinery which is expected to be located in Nam Dinh Vu Industrial Zone, capitalized at 1.8 billion dollars. Hapaco plans to contribute 20 percent of total capital, while the remaining 80 percent will be contributed by foreign partners. However, no such foreign investor has been found.

Meanwhile, Petrolimex is also seeking investors for the 4 billion dollar- project on Nam Van Phong oil refinery.

According to Thuyet, international investors keep indifferent to oil refinery projects in Vietnam because the expected profits in the field are low, while the investment costs are very high. They understand well that the oil refineries in Vietnam will have to compete fiercely with regional oil refineries, especially the ones in Singapore.

Which one will survive?

Experts have pointed out that two million ton oil refineries will not bring high efficiency, and that it would be better to build the oil refineries with the capacity of ten million tons per annum. Big refineries will require huge capital, which far exceeds the Vietnamese enterprises’ capability.

Except for the 3 billion dollar Dung Quat project, which is considered as national project which gets support from the State budget, other projects’ investors have to seek capital themselves.

As for Nghi Son, the joint venture contract on building Nghi Son oil refinery was signed in April 2008 already, but the construction of the main factory of the complex has not kicked off yet because the involved parties have not arranged enough capital for the 7 billion dollar project.

Besides the capital, investors will also have to deal with a lot of other problems, including the crude oil supply sources.

In general, oil projects need to have the IRR (internal rate of return) at 13-17 percent to bring efficiency, but the actual IRR is just 6-8 percent. Therefore, most of investors ask the government to give certain preference packages to ensure minimum efficiency of the projects.

However, it is clear that preference packages are not reserved for all projects, except the ones invested by PetroVietnam.

With so many difficulties, it is still unclear if the oil refineries can survive and develop in Vietnam.

Tags: vietnam oil refineries