After delaying previous deadlines, the Ministry of Industry and Trade (MoIT) has decided to replace sales of RON92 gasoline with E5 biofuel from January 1, 2018. 

This represents an attempt by the government to ‘kill two birds with one stone’, protecting the environment and saving two ethanol plants - Binh Phuoc and Dung Quat,” said Mr. Phan The Rue, Chairman of the Vietnam Petroleum Association (VPA). 

From 2018, Vietnam will have only two types of gasoline for sale: E5, a biofuel containing 95 per cent RON92 and 5 per cent ethanol or E100 mixed, with 90 per cent RON92 and 10 per cent ethanol, and RON95 gasoline. 

Change in market

The change is only three months away but Deputy Minister of Industry and Trade Hoang Quoc Vuong confirmed that the ministry has been actively working with cities, provinces, and enterprises on the conversion. Tanks and gas stations can be converted quickly to E5. “We are confident of a successful transition,” he said. 

Gasoline wholesalers are ready for the change. The Tu Luc 1 JSC, one of 29 gasoline wholesalers in Vietnam, will officially sell E5 biofuel. “We have made preparations for the change and will cease storing RON92 gasoline in late November,” CEO Nguyen Van Tiu told VET.

Petrolimex, which has a market share of 50 per cent and 2,471 gasoline stations, has announced it will sell E5 from 2018, completely replacing RON92. PV Oil Hanoi has been selling E5 at 17 of its 36 gasoline stations, with all to make the change by the end of this year. 

Gasoline enterprises, however, are concerned about the shortage of E100 to blend with E5. Vietnam currently has only one supplier of E100, the Tung Lam Company in southern Dong Nai and central Quang Nam province, which will push up the cost of transportation to Hanoi by about VND200 (1 US cent) per liter, leading to an average price for E5 higher that is VND400 ($1.5 US cents) higher per liter than for RON92, excluding blending and sales costs. 

Only four out of 29 units have biofuel blending points: Petrolimex, PV Oil, Saigon Petro, and Petroleum, which is not enough for the market. Companies will need to pour funds into building more distribution infrastructure from now to the end of this year to meet demand, according to MoIT. 

Investing in a biofuel blending point costs VND10 billion ($440,000), with further investment needed in the transport of E5 and staff training on sales. “The investment is significant for enterprises,” said Mr. Rue. “This will certainly push up the cost and will be an obstacle for enterprises selling E5 and will affect their business results.”  

This is why previous deadlines for introducing biofuel have fallen by the wayside. Gasoline retailers will earn less revenue from selling E5, and many may simply choose not to. 

Getting the best out of the change, according to Mr. Tran Ngoc Nam, Deputy CEO of Petrolimex, will depend on preferential policies and incentives for retailers, as well as demand and the scale of investment in E5 production lines and blending. “How E5 will affect key gasoline wholesalers will depend on inputs for E5 production and distribution and support policies for each period and each specific goal,” he said.

Behind the story

Once the move is complete, consumption of E5 is estimated at 5.3 million cu m, with some consumers switching to RON 95 petrol, according to MoIT. As such, E100 for blending with E5 will increase to 267,850 cu m, while total demand for E100 in 2016 was about 29,500 cu m. “With such an increase, there will a notable lack of supply,” said Mr. Rue.

In theory, there are four ethanol plants in Vietnam, in Binh Phuoc, Dong Nai, Quang Nam and Dung Quat, supplying 400,000 cu m of E5 annually and fully meeting demand. Only two belonging to Tung Lam in Dong Nai and Quang Nam, are operating, however, with total capacity of 200,000 cu m, sufficient to mix 3.9 million cu m of E5 gasoline each year. The remaining two plants, at Dung Quat and Binh Phuoc, are to supply the market with about 200,000 cu m but have ceased production due to the lack of a market for their products. “These plants are urgently preparing and implementing plans to return to production, which is expected at the end of the year,” Deputy Minister Vuong said.

Sources: MoIT, VPA, 2016

Sources: MoIT, VPA, 2016

To restart these plants requires investment in the tens of millions of dollars to upgrade production lines to maximum capacity, according to Mr. Rue. A representative from the Binh Son Petrochemical Refining Co. said that in restarting the Dung Quat bio-diesel plant, the company must choose the least worst option. It is expected that if the plant is restarted, the company will see losses by 2027. “Investing in this industry is risky, so losses in the first three to five years of operations is certain,” Mr. Rue said. “Meanwhile, the price of cassava, a material used to make ethanol (E100), is unstable, making production of E5 uncompetitive compared with other countries.” 

Whether the plants can operate at full capacity will depend on the price of raw materials, the economic efficiency of investment projects, and specific support policies, according to Mr. Nam from Petrolimex. Agreeing, Mr. Tran Viet Ngai, Chairman of the Vietnam Energy Association, said the government should encourage the production of ethanol through concrete policies, including planning of raw material areas and taxes, etc. 

New crops should be researched to replace cassava, which can make soil become poor, and at a cheaper price would make ethanol and E5 production costs competitive, according to Mr. Rue. This would also help encourage production and protect the environment.

He suggested that the State needs to adopt certain policies, for example making the price of E5 cheaper than petroleum, at about VND500-VND700 (2 US cents-3 US cents) per liter, to encourage consumers to accept the move. “Importantly, the government should not intervene in market prices,” he said. Moreover, there must be support for enterprises in building blending facilities and for gasoline stations selling E5. Localities must also create good conditions for enterprises to access land and infrastructure for investment in gasoline stations.

Deputy Minister of Industry and Trade Do Thang Hai said recently that MoIT and the Ministry of Finance would continue to study and introduce tax incentives to promote biofuel production, trading, and consumption and a basic pricing method for biofuel and E5. At the same time, the ministries will guide the management and use of the gasoline and oil price stabilization fund for biofuels, initially for E5, to implement the roadmap for the application of blending ratios between biofuel and traditional fuel.

E5 can develop sustainably in the market but the State should have policies on prices, taxes, fees (exemptions of 100 per cent on petrol and environmental taxes and zero VAT applied to ethanol), and the cost of supplying and selling E5 must guarantee the benefits of businesses. In addition, biofuel production plants must ensure stable supply and avoid interruptions. Environmental fees on this kind of fuel should be cut, to avoid a situation where costs and charges make prices increase and competitiveness fall.

The biofuel development plan by 2015 and vision to 2025 was approved ten years ago but efforts to expand the use of E5 have failed. “Local consumers have shown little interest in making the switch from RON 92,” said Mr. Ngai. “More important is how local consumers can be made aware of E5 and make the switch.”

VN Economic Times