Project Economics Could Challenge Mega Refinery Proposal
BMI View: A proposed 660,000b/d mega-refinery project by Thai company PTT would certainly help Vietnam meet a pressing need to increase its domestic refining capacity as consumption continues to rise. Nonetheless, the economics of the project could be challenged by costly crude feedstock imports , domestic fuel price controls and a competitive regional fuels market.
Thailand ' s state-owned PTT is contemplating a US$28.7bn refinery and petrochemical project in the Binh Dinh province of Vietnam, according to Vietnamese paper Tuoi Tre. This would be near the port of Nhon Hoi. The proposed capacity of the plant is 660,000 barrels per day (b/d), which would make it by far the largest refinery in Vietnam.
PTT chief executive Pailin Chuhottaworn stated that the refinery would serve the domestic market. Crude oil would be imported as feedstock for the plant's operations. Pending approval from the Vietnamese government, the Thai company wil l decide 'if we want to invest'. If the proposal moves ahead, construction could commence in 2016 and the plant could be operational by 2019.
Vietnam ' s rapid economic growth has led to a spectacular growth in oil consumption. Between 2001 and 2011, oil consumption has more than doubled from 178,570b/d to 352,000b/d . However, there is currently only one operational refinery in the country : the 130,500b/d Dung Quat, which is consistently plagued by outages and delays.
|Pressing Need For More Domestic Fuels|
|Vietnam's Oil Consumption & Refined Petroleum Products Production, 2001-2021 ('000b/d)|
Without further expansion in its refining capacity, Vietnam's oil import bill will rise alongside an increase in its net refined fuels import requirement. We forecast that oil consumption will continue to rise to 366,100b/d in 2012 and hit 396,200b/d by 2016.
|Vietnam's Oil Consumption, 2011-2016 ('000b/d)|
The burden will be particularly great on the government, which already heavily subsidises fuel consumption in order to control the country's worrying inflation rate and to appease the domestic population. Hence, the need to increase its refining capacity is a pressing one if Vietnam wishes to tame price increments without straining government coffers.
|Year-On-Year Average % Change In Consumer Price Index In Vietnam, 2000-2012|
Two other refinery projects are planned: the US$7.5bn, 200,000b/d Nghi Son plant in the north, developed by PetroVietnam, Idemitsu Kosan, Mitsui and Kuwait Petroleum Corporation; and a 200,900b/d refinery in Long Son, south Vietnam, to be led by PetroVietnam and JX Holdings. However, both projects have been plagued by financing difficulties and the partners have yet to fully commit to them. Another 200,900b/d refinery in the Khan Hoa province has also been proposed by state-owned Petrolimex. Also known as Van Phong, it is still seeking project partners - it has been in talks with Sinopec and Saudi Aramco - and does not look likely to materialise anytime soon.
Hence, in the short-to-medium term, Vietnam's refining capacity looks set to remain below its domestic consumption needs at 130,500b/d. We expect that an easing in capital markets as the global economy slowly improves could lead to more commitment to refining projects, and some of these plants may come online after 2017. Nonetheless, any further interest in the Vietnamese downstream would be beneficial for the country.
At 660,000b/d, the capacity of PTT's proposed Ngon Hoi plant alone would exceed Vietnam's projected domestic consumption of 454,650b/d if it is operational by 2020 as scheduled. PTT likely has plans to export some of this production to the region, supported by its location by a deepwater port. As the plant would most likely be an integrated refining and petrochemicals complex, its large size would allow it to reap the economies of scale from production.
This proposed facility follows a global trend of mega-refining projects. The project economics of it could be challenging, however. For one, Ngon Hoi would require crude oil imports. Vietnam's crude oil production is expected to be on a falling trend, declining to 313,160b/d in 2020, which is less than half of the refinery's proposed capacity. Given our forecast for the average OPEC basket price of oil to remain relatively elevated at above US$90 per barrel through to 2021, sourcing crude for Ngoh Hoi could be a heavy expense unless PTT secures a partner with abundant upstream oil assets (such as Saudi Aramco) or expands its own upstream portfolio via its upstream arm PTTEP.
Another key challenge to the commerciality of the project is Vietnam's fuel price controls, which look unlikely to be lifted soon so long as inflationary pressures endure. A combination of high crude feedstock costs and a low selling price could threaten refining margins and the overall profitability of such a big investment.
Refined fuels exports will also face significant regional competition. Not only will it be up against traditional regional heavyweights such as Singapore, the rapid growth in China's refining capacity could see it become a net refined products exporter, according to the International Energy Agency (IEA). Another strong competitor in China could erode the profitability of a mega-refinery project in Vietnam, and PTT could reconsider the size of this proposed project before it makes a final investment decision (FID) on it.