The fact that Vietnam National Petroleum Group (Petrolimex) has recently sought the Government’s permission to cancel its US$5-billion Nam Van Phong Refinery and Petrochemical project in Khanh Hoa suggests the craze that started 10 years ago has come to an end.

Investment in oil refineries are not as profitable as expected

Nearly a month ago, during the meeting of the Prime Minister’s working group, Petrolimex Chairman Pham Van Thanh proposed the Government allow his corporation to stop implementing the Nam Van Phong project so they may invest in others of greater importance.

Though Petrolimex has not yet finalized the official documents, the leaders of the Ministry of Finance and the Ministry of Planning and Investment (MPI) at the meeting said they were in line with the proposal. That means the project that was worth nearly US$5 billion a decade ago (which had increased by more than US$1 billion by 2016 compared with the pre-feasibility study report) has almost met its end. This latest incident also means that the list of cancelled multi-dollar refining projects has been extended. Previously, the fate of Vung Ro (costing over US$3.2 billion) and Nhon Hoi (more than US$22 billion) in Binh Dinh had been sealed.

Since Petrolimex has not yet officially reported to the Prime Minister, there is no public information on the reasons for its decision. However, the question is, after nearly 10 years developing the project, how far Petrolimex has gone and why it wants to stop, especially when Petrolimex reaps hundreds of millions of dollars in profit each year and its Japanese partner is very capable.

A source said that after the Government gave the nod to include this project in the plan for the development of the refining industry, Petrolimex had constantly revised the pre-feasibility study report, particularly total investment, production capacity, incentive mechanisms, and financial capacity, etc. Based on the incentives Binh Son and Nghi Son had received, in late 2017, Bui Ngoc Bao (then chairman of the Board of Directors of Petrolimex) told the press that Nam Van Phong should enjoy the same the preferential incentives applied to Dung Quat or Nghi Son, which had no discrimination and offered only foreign investors favorable conditions.

In other words, Nam Van Phong sought incentive mechanisms on revenue from budget shares. Subsequently, during the first 10 years of commercial operation, the wholesale price applied at the factory gate should be the import price plus 7% import tax for refined products, 5% for LPG and 3% for petrochemical products. The difference will be offset if the fuel import tax is lower than the above levels. In addition, the project should be entitled to a preferential corporate income tax rate of 10% for 30 years, with tax exemption for the first four years or a reduction of 50% of tax payable for the next nine years, plus other assistance in site clearance. By January 2018, the Government had not given the final opinion on such incentives.

However, Dung Quat and Nghi Son already stopped obtaining revenue from budget shares in 2018, giving way to the competitive market mechanism. Therefore, it is unlikely that the Government would accept Nam Van Phong’s proposal for incentives since the budget could not bear that burden. Moreover, Petrolimex for years has not found any official foreign partner for the project.

According to the source, even Nippon Oil & Energy, a strategic partner holding an 8% stake in Petrolimex, is not so interested in the project. If Nippon Oil & Energy invests in the refining project, it could gain the right to product distribution like the Japanese partner in Nghi Son—a right that other foreign investors do not have.

In fact, the aforesaid moves are understandable because the fuel market is now no longer a “gold mine” for refineries.

As per the calculations on market supply and demand which Vietnam Oil and Gas Group (PVN) sent to the Government in late 2015, domestic fuel supply by the end of 2017 and early 2018 would have reached about 17.59 million cubic meters, including 7.27 million cubic meters from Dung Quat and some 9.6 million from Nghi Son, along with 17.33 million cubic meters of other gasoline, diesel and Jet A1 products. This amount would be able to meet the demand at home. Diesel in particular is already redundant.

At present, although Nghi Son Refinery has not been put into operation as the technical error is being corrected, the local market is still in good shape hinging upon imports at competitive prices. Meanwhile, Dung Quat Refinery is trying to cut costs and maximize its capacity so as to compete with imported products. In the future, when Long Son Refinery (whose controlling stake is held by a Thai investor), is in operation in 2023, the fuel market will be in excess of hundreds of thousands of cubic meters per year, yet manufacturers have no right to export.

In short, investing in refining projects now does not yield the results as expected before. In addition, it is hardly feasible to raise US$5-6 billion for investment, even if the project owner borrows and repays the loan themselves. The immediate practical lesson is the fact the expansion of Dung Quat Refinery in the second phase (from 6.5 million tons to 8.5 million tons per year) to boost production and diversify its crude oil processing has so far not completed the arrangement of US$1.27 billion (30% equity and 70% commercial loan). In addition to the reason that the bank in charge is not a leading one, other banks are now afraid of investing in refineries because of the long loan term and the modest efficiency of such projects.

Currently, on the fuel market, the fact that the State is aggressively selling shares in petroleum companies and bringing down tariffs in accordance with FTAs have urged players in the field to dominate distribution and retail channels. Enterprises with the most retail channels enjoy many advantages since there are too many suppliers that offer the market competitive prices. Petrolimex is stepping up the investment in expanding, acquiring and merging retail outlets, which is a right direction and need a lot of financial strength. Vietnam Oil Corporation (PV Oil) is also moving in this direction.

The way out for refining projects is no longer wide.

SGT