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Russia refines Vietnam oil
ventures
By Sergei Blagov
MOSCOW - Russia has opted to withdraw from a
major venture, VietRoss, to build Dung Quat, Vietnam's
first oil refinery, citing economic reasons. However,
Russian oilers remain interested in Vietnam's off-shore
oil fields.
The state-run Zarubezhneft oil firm,
the Russian partner in VietRoss and the Vietsovpetro
joint ventures, has issued a statement saying that
Zarubezhneft has withdrawn from VietRoss, remaining a
subcontractor in the Dung Quat project for two bidding
packages worth some US$110 million. Zarubezhneft also
said that the money previously invested in Dung Quat and
returned to Russia would be subsequently re-invested in
developing Vietnam's off-shore oil and gas fields. This
was confirmed on December 25 when Russian deputy Prime
Minister Viktor Khristenko announced in Hanoi that
Zarubezhneft was pulling out of the $1.3 billion
VietRoss joint venture.
Khristenko and his
Vietnamese counterpart, Deputy Prime Minister Vu Khoan,
also signed a protocol on annulling the bilateral August
25, 1998 deal to build the Dung Quat oil refinery. On
December 31, Vietnam reimbursed Russia the $235 million
it had put into the VietRoss venture. On the other hand,
in the same protocol, Khristenko and Vu Khoan also
pledged continued cooperation in the development of oil
and gas fields off Vietnam's southern shore.
According to Russia's latest calculations, under
the current market circumstances, the Dung Quat refinery
makes no economic sense, at least at its present site.
Russian experts argue that investments in Dung Quat
could be recouped in no less than 18 years, while
subsequent profitability would be no more than 4.6
percent per annum. Therefore, by supporting Dung Quat,
Russia's state coffers could have suffered losses of
about $200 million had it moved ahead with the project.
Not surprisingly, Zarubezhneft became increasingly
hesitant regarding Dung Quat's viability.
When
Zarubezhneft clinched the deal with PetroVietnam on the
Dung Quat refinery, the Russian firm was looking at the
long term in an attempt not only to produce oil, but
also to refine and sell oil products in Vietnam.
However, earlier last year the state-run monopoly
PetroVietnam backpedaled on its earlier pledges and
declined to allow Russians to act as oil products
traders in Vietnam.
Vietnam's over-regulated oil
sector is totally dominated by PetroVietnam and its
outfits. PetroVietnam Trading Company (Petechim) exports
crude oil and imports materials and equipment for the
oil and gas industry and oil products, earning lucrative
commissions.
Yet another reason for
Zarubezhneft's withdrawal was possible competition in
the longer term. PetroVietnam officials are already
talking about contracting large multinationals, Japan's
Marubeni and Mitsui, to build a second oil refinery. One
of the sites for this refinery, in Hon La locality in
Quang Binh province, has been proposed. This refinery is
expected to cover an area of 14,600 hectares in Quang
Binh, an even less developed area than the Dung Quat
vicinity.
Russia and Vietnam agreed to build the
Dung Quat oil refinery in central Vietnam on August 25,
1998. PetroVietnam and Zarubezhneft each held 50 percent
equity in the joint venture, VietRoss. The Dung Quat
plant is to be located in Quang Ngai province, 900
kilometers south of Hanoi. It will have an annual
processing capacity of 6.5 million tons of crude oil, or
130,000 barrels per day. Operations were expected to
begin in 2005. Since the venture was formed by an
intergovernmental agreement, VietRoss was dissolved by
the two governments.
During the Soviet era,
Vietnam planned to build a refinery near the port of
Vung Tau, just 100 kilometers away from the offshore oil
fields. In 1988, Vietnamese workers started clearing
grounds from unexploded wartime ordnance for the
refinery. However, following the Soviet demise in 1991,
the refinery project was shelved - but not for long.
During the foreign investment frenzy of the
early 1990s, Hanoi moved to attract Western oil majors
to build the refinery, and France's Total SA expressed
interest. First the Vietnamese government suggested to
move the site to Van Phong bay, north of Nha Trang, 500
kilometers from the country's main oil fields.
Then the authorities moved the site further
north to Dung Quat. In choosing the refinery site, Hanoi
has said that it wants to develop its central provinces,
which have largely missed out on the benefits of the
economic reforms adopted in the late 1980s. However,
Quang Ngai province is roughly 1,000 kilometers from the
country's main oil fields off Vietnam's southern shore.
The site is also far away from the country's economic
centers Ho Chi Minh City and Hanoi, hence the refinery's
location implies higher transportation costs for both
crude oil and refined products.
The Dung
Quat saga began in 1995 when Total SA pulled out,
claiming that the site made no economic sense
whatsoever. According to some estimates, the refinery's site
removal from Vung Tau to Dung Quat involved extra costs to
the tune of some $500 million. A consortium of
foreign firms, including South Korea's LG Group and
Petroliam Nasional Berhad (Petronas) of Malaysia, stepped in
to replace Total in Dung Quat - only to pull out two years
later.
The refinery was initially expected to
cost a total of $1.3 billion, yet the estimate was
subsequently raised by $200 million. Now Russian experts
argue that back in 1998 initial calculations of the
refinery's economic viability were based on low price
estimates of about $20 per barrel. With the current
price at nearly $30 per barrel, the Dung Quat refinery
project is not economically viable, according to
Zarubezhneft.
Apart from VietRoss, Zarubezhneft
operates Vietnam's main oil field in waters off the
south of the country in partnership with PetroVietnam.
The $1.5 billion Russian-Vietnamese Vietsovpetro joint
venture, or VSP, accounts for the bulk of Vietnam's oil
exports, which totaled nearly 14 million tons of crude
oil in the first 10 months of last year. In 2002,
Vietsovpetro pumped 13.52 million tons, while Vietnam's
overall output reached some 17 million tons.
The
50 percent stake in VSP is Russia's most profitable
state-owned asset. Russia earned $312 million of profit
from Vietsovpetro in the first nine months of 2002. Not
surprisingly, Russia remains keen to keep running VSP, a
venture that plans to pump 13 million tons of crude in
2003.
Notably, the protocol signed on December
25 by Khristenko and Vu Khoan mentioned off-shore blocks
04-3, 05-1a and 17 as potential extensions for the VSP's
operations. In the event of commercial discoveries
inside these blocks, within one year Russia and Vietnam
are to sign bilateral agreements so as to prolong the
July 16, 1991 deal on VSP's operations. Therefore, the
Russians may hope to pump crude for up to 25 more years
and exploit gas fields for up to three decades.
Last October, VSP announced the discovery of a
new hydrocarbon deposit at the Dai Hung off-shore oil
field at a depth of more than three kilometers. In
November, VRJ-Petroleum, a joint venture between
Zarubezhneft (50 percent), PetroVietnam (35 percent) and
Japan's Idemitsu (15 percent), decided to drill a first
well to explore the 09-3 off-shore block. These fields
are to be developed by VSP.
In October, Russian
officials announced that VSP's proven oil reserves had
been raised to 493 million tons from the earlier figure
of 430 million tons. They also pledged to sustain VSP's
annual output at more than 13 million tons until 2006.
Therefore, Russian oilers can expect to reap benefits
off Vietnam's southern shores - especially if oil prices
remain at their current level of about $30 a barrel.
(©2003 Asia Times Online Co, Ltd. All rights
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