28 February 2005 00:01 [Source: ACN]
EYEBROWS were raised when news broke out at end-2004 of state-owned PetroVietnam’s plan for yet another refinery, this time in southern Vietnam.
The project is, in a way, unexpected, as, back in the 1990s, the government had rejected a suggestion by Total of France to build the country’s first refinery in the south, close to the main market.
More important, Vietnam has yet to complete building the No 1 refinery in central Vietnam and the No 2 refinery in northern Vietnam.
Also, the Petrochemical Master Plan (PMP), drafted in the 1990s and still applicable, does not include a third refinery for Vietnam.
Though the government has finally recognised the need for a refinery near the market, foreign companies are no longer rushing to invest as before.
Given PetroVietnam’s track record, the outlook for this project is uncertain. More than ten years have passed since the idea for the No 1 refinery was first mooted, and construction of the 130 000 bbl/day refinery in Dung Quat, Quang Nai, has not started.
PetroVietnam’s negotiations with Technip, the No 1 refinery’s engineering, procurement and construction (EPC) contractor, are still deadlocked, with both parties unable to agree on building costs (ACN 7 February 2005). The latest news is that Technip, with its partners JGC Corp and Technicas Reunidas, has submitted a proposal for the third time. The first proposal was submitted in 2001, and the second in 2002.
The No 1 refinery was originally projected to cost US$1.3bn, but owing to the rising costs of equipment and construction materials, it will now cost US$1.5bn–1.6bn.
But even Technip’s latest proposal is unlikely to sit well with PetroVietnam, says a source close to the project. He adds that, even though the project is under PetroVietnam, the company is a state-owned enterprise that does not have the autonomy to decide independently on it: the final decision lies with the government.
When the No 1 refinery was first proposed in the mid-1990s, big names such as Total, Chinese Petroleum Corp (CPC), Petronas, Conoco, the LG Group, and Russia’s Zarubezhneft had shown interest. Now, PetroVietnam is going solo.
Why foreign investors opted out
In 1995, Total, CPC, China Petrochemical Development Corp (CPDC) – formerly China Investment and Development Co – and PetroVietnam had carried out a feasibility study on the No 1 refinery. The group had favoured a site close to Ba Ria-Vung Tau in the south.
The French major had said the project would cost several hundred million dollars more to build in Dung Quat. But the government insisted on Dung Quat, prompting Total to pull out.
Subsequently, Petronas, Conoco, and the LG Group were invited in 1996 to replace Total.
A shareholding structure was drawn up, but it was abandoned a year later when PetroVietnam refused to accept the terms set by the foreign partners.
A Vietnamese government official said at the time: ‘The foreign partners wanted to take part in the project’s EPC and hold the rights to distribute the refinery products in Vietnam. They also wanted prices to exclude the costs of oil product and transportation. We simply cannot agree.’
The last foreign company linked to the project was Russia’s Zarubezhneft. Things should have gone well considering that the company was already participating in an oil-and-gas joint venture with PetroVietnam. But it too withdrew in 2002.
The source close to the project believes that one of the reasons the venture collapsed was that, by giving Zarubezhneft a 50% stake in the project, PetroVietnam would not have been the final decision-making authority – a difficult situation, as the refinery is vital to the nation’s interests.
However, another source says the Vietnamese government’s excessive requirements drove the Russian major away. He was unable to say what the requirements were.
It is, perhaps, ironical that the government, which has the final say on the project, is also worried about the slow progress. ‘It [the No 1 refinery] is brought up at every National Assembly. The prime minister is always asking about it,’ says the first source.
During a meeting early this year to review the company’s operations, Deputy Prime Minister Nguyen Tan Dung urged PetroVietnam to focus on completing the No 1 and No 2 refineries as well as a PM3-Ca Mau gas-pipeline project, according to the Vietnam News Agency. The minister also reminded the company’s leaders to step up efforts to tackle their shortcomings in the search for investors, choice of bidders, and technical issues that have put so many projects behind schedule.
PetroVietnam’s current strategy up to 2010 calls for a refinery to be built in each of the country’s three main regions and to start up at least one of them during this period.
Besides the refineries, PetroVietnam also plans to produce petrochemicals. It is still keen on a 150 000 tonne/year polypropylene (PP) plant downstream of the first refinery.
When the PP project was first proposed in the late 1990s, Mitsubishi Chemical, Mitsui Chemicals, LG Chem, and Amoco had shown interest. But, as with the refinery project, these companies gradually pulled out.
Zarubezhneft’s subsidiary, VietRoss, was also looking at partnering PetroVietnam for this project, but it too withdrew.
The slow progress of the first refinery project chilled investors’ interests in the No 2 refinery. Last year, PetroVietnam planned to hold roadshows in the US and Europe for potential investors in the second refinery, but shelved the plan.
A source close to the project says foreign companies are likely to show interest only after PetroVietnam secures final government approval.
So far, two foreign companies, Mitsubishi Chemical and ABB Lummus, have taken part in the No 2 refinery’s feasibility study, which was submitted to the government last year. The 7m tonne/year refinery and an associated petrochemical project in Thanh Hoa, Nghi Son, is projected to cost US$3bn, double that of the No 1 refinery.
And even though PetroVietnam’s oil exports reached a record US$6bn last year, it will need foreign partners to realise the project.
Ironically, the No 3 refinery, which is far behind the other two in terms of progress, will be the most viable. This is because the project is in the south, which accounts for 50% of total fuel consumption in the country, compared with 30% in the north, and 20% in the central province.
Industry sources say the greater viability of the third refinery, which may be located near a crude-oil source in Ba Ria-Vung Tau, is likely to lure some brave investors to pump in money.
Petronas is likely to partner PetroVietnam in this project, says a source close to PetroVietnam.
He explains: ‘Petronas and PetroVietnam have cooperated for a long time. Both companies enjoy a very good relationship. Also, Petronas had selected Vietnam to be its first overseas investment destination,’ he says, referring to Phu My Plastics Co (PMPC), a polyvinyl chloride (PVC) joint venture between Petronas and PetroVietnam.
‘PMPC was formed during the difficult period after the Asian financial crisis of 1997 and it has survived. Hence there is a strong willingness to cooperate. If it had been companies from other countries, they would have left the country.’
He adds that Petronas, which has expertise in refining, is keen on investing in Vietnam’s refinery and distribution network.
A PMPC source hopes the PVC joint venture will turn out to be a beachhead for Petronas’ foray into Vietnam.
He believes Petronas is keen to collaborate, but first it needs to be reassured that the PVC venture will be successful. PMPC started operations in 2003.
He adds: ‘Petronas worked with PetroVietnam and the Ministry of Industry on the development of the PMP. Petronas’ strategy depends very much on the progress of the PMP, so they are following that closely.’
Petronas is looking at an upstream integration of the PVC business and the potential of developing other petrochemicals based on gas and naphtha.
‘One of the springboards will be the refinery project. Once it kicks off, it will spur or spin off other petrochemical projects such as a cracker,’ the source adds.
Besides being a source for naphtha, the planned refineries can also provide condensate feedstock for aromatics production, says the source close to the No 2 refinery project.
As textiles and garments make up the country’s second-biggest exports, Vietnam’s masterplan calls for the production of aromatics, purified terephthalic acid, and polyethylene terephthalate chips for fibre production, he adds.
The country’s plastics industry also urgently needs locally produced polymers. Processors currently rely on imports for all polymers and plasticisers, except PVC and dioctyl phthalate.
To solve this problem, the Vietnam Saigon Plastics Association (VSPA) has taken a few steps to jumpstart petrochemical projects.
It has started studying projects for polyethylene (PE), PP, and polystyrene (PS) in the hope that the country’s processors will eventually invest in these plants.
But as with the refineries, the road ahead is littered with obstacles.
The VSPA is considering building plants for PE and PP with a combined capacity of 300 000 tonne/year. But for the projects to be viable, each plant must have a capacity of at least 300 000 tonne/year. Hence the investment cost would double.
VSPA is also looking at using Vietnam’s abundant gas resources to feed the PE and PP plants. But it could run into difficulties as the country’s gas and oil resources are controlled by PetroVietnam.
A VSPA source says one of the aims of the PMP is to produce basic petrochemicals by 2010, but he adds that the general industry sentiment is that it will be tough to achieve this goal.
Very often, he notes, ‘the wishes of the investors and that of the government are different’.
A case in point is Tamilnadu Petroproducts Ltd’s experience with PetroVietnam in a linear alkyl benzene project that was abandoned in 2002. The Indian company had insisted that the terms of investment, including tax payments, be guaranteed in writing before proceeding with the project, but the government refused to document the terms.
Another factor that could make investors shy away from Vietnam are the low import tariffs, which the government decided on to safeguard the interests of the downstream industry.
The VSPA source points out that tariffs on most petrochemicals are at 5%, which is hardly a barrier to imports, although he believes that the government would consider raising tariffs if petrochemical projects take off.
But it was the low tariffs that led Mitsui Chemicals and Mitsui & Co to drop the idea of manufacturing in the country, according to a trader close to the two companies.
Both companies were shareholders in Mitsui-Vina Plastic and Chemical Corp (Viplaco), now known as TPC Vina Plastics and Chemical Corp. Viplaco, which runs an 80 000 tonne/year PVC plant in Dong Nai, near Ho Chi Minh City, had reportedly appealed for temporary tariff protection of up to 40% to stave off possible bankruptcy barely a month after its plant started operations in 1998. But the government levied only a 10% temporary import surcharge over a 3% tariff in 1998; the tariff was brought down to 5% in 1999.
This minimal protection and a 50% tax reduction on its turnover for the financial year 1998-99 did not help Viplaco. The company suffered losses of more than US$16m during its first three years.
Eventually, the Japanese majors sold their stakes to Thai Plastics Co in 2000, increasing the latter’s stake to 70%, with the remaining 30% owned equally by Vietnam National Chemical Corp and Vietnam Plastics Corp.
‘The plant was not profitable, as the government did not support it by raising the import duty. As a result, Viplaco was completely defeated by imports,’ says the trader.
Can the potential be realised?
The frustrations of foreign investors have left indelible marks on the country’s projects landscape.
To make matters worse, the country is facing stiff competition for investors’ money from China and the Middle East, which offer a more salubrious investment climate.
The LG Group, which was actively interested in Vietnam in the 1990s, has switched its focus to China, Russia and Oman. Many of the early birds have also moved to other destinations.
Having said this, it might not be right to write Vietnam off completely.
The country’s attractiveness lies in the growing size of the downstream markets, according to Aaron Yap, consultant at Chemical Market Associate Inc. Vietnam’s plastics industry growth is expected to be robust (see page 15).
‘It could become the next frontier after China, as production costs in China may escalate, causing investors to turn to Vietnam,’ says Yap. A plus point for Vietnam is its readily available pool of cheap labour, he adds.
But the PMPC source says petrochemical companies wanting to tap Vietnam’s growth opportunities have to be in the country for the long haul.
‘Vietnam is all about untapped potential; so it depends on how much stamina one has to wait for this potential to be realised.’
His advice to interested companies: ‘If you’re in for a quick return, I don’t think this is the country to be in.’
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