VIETNAM OPENS FIRST REFINERY, ENDS RELIANCE ON IMPORTS

UNCLAS SECTION 01 OF 02 HANOI 000166 SIPDIS STATE FOR EAP/MLS E.O. 12958: N/A TAGS: EAID ECON SENV ENRG TRGY VM SUBJECT: VIETNAM OPENS FIRST REFINERY, ENDS RELIANCE ON IMPORTS REF: (A) HANOI 2064 ("First Oil Refinery Takes Shape"); (B) HANOI 0649 ("Extracting Revenues"); (C) HANOI 0975 ("Production Down, Revenues Up at PVN") HANOI 00000166 001.2 OF 002 ¶1. (U) Summary: Vietnam celebrated the long-awaited opening of its first oil refinery on February 22. The new facility, located in central Quang Ngai Province, in one of Vietnam's poorest regions, ends the country's reliance on imported fuel and will allow Vietnam to curtail fuel imports by 30 percent when the refinery runs at full capacity starting in August. The refinery's opening caps a decades-long effort, dogged by delays, failed joint ventures and criticism over the facility's remote location, far from Vietnam's southern oil fields. Crude oil remains Vietnam's number one export, but declining offshore production, increasing domestic demand and plans to further increase domestic refining capacity mean that Vietnam will soon transition to a net oil importer. End summary. ¶2. (U) Vietnam celebrated a major milestone on February 22 with the long-awaited commissioning of its first oil refinery. The opening of the Dung Quat Petrochemical Refinery Complex in central Quang Ngai Province ends Vietnam's complete reliance on imported fuel (much of it purchased from Singapore) and will allow Vietnam to curtail petroleum imports by 30 percent when the facility runs at full capacity starting in August, refining 140,000 barrels per day (6.5 million tons per year). Owner-operator state-run PetroVietnam (PVN) plans to boost the refinery's capacity to 200,000 barrels per day (10 million tons per year) by 2014. The refinery's opening caps a decades-long effort, dogged by delays, failed joint ventures and criticism over the facility's remote location, far from Vietnam's southern oil fields. A LONG ROAD TO HOE -------------- ¶3. (U) The Government of Vietnam (GVN) commenced planning for its first refinery more than two decades ago. The GVN had originally planned to locate the facility near the southern port of Vung Tau, close to Vietnam's offshore oil fields. In 1988, the government began to clear the proposed site of unexploded wartime ordnance. In the early 1990s, France Total expressed interest in joining the venture just as the GVN contemplated relocating the facility first to Van Phong Bay, north of Nha Trang, and later to Dung Quat, in one of Vietnam's poorest regions. Total pulled out in 1995, citing the refinery's remote location and complete lack of infrastructure. A consortium of foreign investors including LG Group and Petronas subsequently replaced Total, only to withdraw two years later. ¶4. (U) In 1998, the GVN signed a joint venture with Russian state-run energy firm Zarubezhneft and Foster Wheeler Energy, but that agreement was terminated in December 2002 after disagreements over contractual issues and the refinery's location. The GVN, determined to leverage the refinery's development to jumpstart economic development in Central Vietnam, stood firm on the location and chose to go it alone. PVN is now in negotiations with Royal Dutch Shell, India's Essar Group and South Korea's SK Group to sell up to 49 percent of Dung Quat's equity, upgrade the facility's capacity, and build a $1 billion desulfurization unit that would allow the refinery to operate on lower quality imported crude. SIPHONING OFF VIETNAM'S CASH COW -------------- ¶5. (U) Vietnam views completion of this latter task as particularly urgent. The lack of a desulfurization unit will force PVN to supply Dung Quat with expensive, high quality, light sweet crude from Vietnam's largest offshore oil field, Bach Ho (White Tiger). Completion of the desulfurization unit, scheduled for 2011, will allow Vietnam to switch to a cheaper source of crude, Dubai heavy sour, which BP has agreed to supply under a recently signed contract. Until then, the yearly diversion to Dung Quat of more than 25 million barrels of Bach Ho sweet crude, which fetches a dear price on the international market, could cause a significant drop in Vietnam's oil revenues, the country's biggest source of foreign exchange. ¶6. (U) Vietnam had proven reserves of 500 million barrels of crude oil at the end of 2008 and daily production of 390,000 bpd, according to BP's latest Statistical Review of World Energy. New offshore development should spur a modest increase in daily production to 400,000 bpd in 2009-2010, followed by a slow decline to 330,000 bpd by 2018. Declining offshore production, increasing domestic demand and plans to build as many as three more refineries by 2015 means Vietnam will soon transition to a net oil importer. MORE REFINING CAPACITY ON THE HORIZON -------------- ¶7. (U) Land clearance is currently underway on the site of Vietnam's HANOI 00000166 002.2 OF 002 second refinery, the Nghi Son Petrochemical Complex, located in Thanh Hoa Province, 125 miles south of Hanoi. Once again, there are allegations that the GVN is situating a multi-billion dollar refinery in an inappropriate, remote location simply to kickstart economic development. The $6 billion plant, a joint venture of PVN, Japanese refiner Idemitsu, Mitsui Chemical and Kuwait Petroleum International (KPI),is slated to enter service in 2013 with a projected refining capacity of 10 million tons per year. In exchange for their investment, PVN will give KPI and Idemitsu access to Vietnam's domestic retail gas market. In addition, KPI will supply Nghi Son with Kuwaiti heavy crude. ¶8. (U) Vietnam has plans to build a third refinery, the $10 billion Long Son Petrochemical Complex, in southern Ba Ria-Vung Tau Province. Long Son would enter service in 2013 with an annual refining capacity of 10 million tons. PetroVietnam, Vietnam National Chemical Corp, and two units of Siam Cement, Thailand's top industrial conglomerate, will build Long Son. Siam Cement will own 71 percent and the two Vietnamese firms the remainder. As a silent investor in Siam Cement, Dow Chemicals has an interest in this project. MICHALAK