The 148,000 barrel-a-day plant, located at Dung Quat Bay in the central province of Quang Ngai, away from the main industrial hubs and offshore oil fields, opens at a time of excess supply in refined products and slumping crude prices.

The opening of the refinery, designed to meet about one- third of Vietnam’s fuel demand next year, comes more than two decades after the Communist Party-ruled nation began a shift to a market economy, helping it shed the label of being one of the world’s poorest nations.

The refinery will be operated by state-owned Vietnam Oil & Gas Group, after the company pushed on alone with the project in spite of the loss of Total and Russia’s OAO Zarubezhneft as partners, and amid criticism that political considerations had trumped economic efficiency.

“The determination to prevail in a difficult situation is a Vietnamese characteristic,” said Raymond Burghardt, a former U.S. ambassador to Vietnam and now director of seminars at the East-West Center in Honolulu.

“In the case of the refinery, the determined side of the Vietnamese character was not necessarily consistent with another characteristic that we are often glad to see in the Vietnamese people, which is pragmatism,” he said.

Years of Criticism

Vietnam Oil & Gas, known as PetroVietnam, has had to endure years of criticism of the refinery’s location, starting with Total’s abandoning talks on investing in 1995, citing Vietnam’s insistence on locating the plant in the center of the country, hundreds of miles from the local oil fields and industrial base.

In 1997 the World Bank said the project would “not do anything for the economy” and the next year the International Monetary Fund said Dung Quat’s value was “questionable.”

Even while signing up in 1998 to invest in the project, Zarubezhneft, which operates the nation’s largest oil field, termed Dung Quat Bay “a very bad site.” The Russian company pulled out of the venture in 2002. The following year, the United Nations cited the refinery in arguing that Vietnam should move away from “low-return investments.”

Yet through it all, Vietnamese authorities remained steadfast, insisting that the plant would indeed be built in one of the country’s poorest, most remote and most typhoon-prone regions.

“We had to consider factors include economic, social and political ones before we decided to build the refinery at Dung Quat,” said Dinh La Thang, PetroVietnam’s chairman and a member of the central committee of Vietnam’s Communist Party. “It will create momentum to improve the country’s central part.”

Vietnam does have crude oil to refine. In 2007, the country was Southeast Asia’s third-biggest producer after Indonesia and Malaysia, at 340,000 barrels per day, according to BP Plc. While output has declined annually since 2005, that trend is likely to reverse this year, after groups including one led by ConocoPhillips bring new fields on-stream.

Falling Margins

Still, the refinery is opening at a time of excess industry capacity and falling margins.

Vietnam’s petroleum-product needs, which have grown by 10 to 13 percent annually in previous years, have now slowed with the global economic crisis, according to Do Huu Hao, deputy minister of trade and industry. Vietnamese petroleum-product imports last year rose 0.1 percent to 12.86 million metric tons, according to the General Statistics Office in Hanoi.

“It is true that even without a refinery, Vietnam has had no trouble up to now procuring product supply, much of it coming from Singapore,” said Victor Shum, a Singapore-based senior principal for Purvin & Gertz Inc. “But eventually more regional capacity will be needed.”

The Dung Quat refinery isn’t designed to fully meet existing demand, with an annual capacity of 6.5 million tons, the bulk of which is of diesel and gasoline, with the balance including products such as liquefied petroleum gas and propylene.

While the plant’s output will initially be supplied by domestic oil from the Bach Ho field, plans are to soon add in foreign grades to be supplied by BP. PetroVietnam still hasn’t given up on hopes of attracting a foreign partner to the project, saying that suppliers who provide crude to the refinery may be interested in buying a share in the plant.

“After the refinery is running at full capacity later this year, we will hire a consultant to value the plant, and hopefully we can sell shares next year,” said Thang. “We would like to sell up to 49 percent of the plant to foreign companies.”

Local Market

PetroVietnam is targeting the local market for Dung Quat’s product range, according to Hao.

“Dung Quat won’t have to worry about finding a market for its product, and it will have a cost advantage in Vietnam,” said Shum of Purvin & Gertz.

Still, the economics surrounding the refinery take a back seat to broader strategic considerations.

“There are issues of national energy security, there are issues of developing poorer regions of the country, and there are issues of import substitution, which irrespective of how it may be viewed by economists is a clear plank of Vietnamese government policy,” said Dominic Scriven, a director of Dragon Capital in Ho Chi Minh City.

As for the foreign criticism of the project’s location, former ambassador Burghardt said it makes sense to the Vietnamese.

“Because of the war history, foreigners who look at Vietnam tend to think of the country as two regions: north and south,” said Burghardt. “No Vietnamese thinks of it that way. They think of three regions, where the center is the poor brother.”

By Jason Folkmanis - Bloomberg - February 22, 2009

Vietnam to open first oil refinery

DUNG QUAT – Vietnam was to open its first oil refinery Sunday after more than a decade of delays, in what is being hailed as a significant moment in the country's development and energy security.

Prime Minister Nguyen Tan Dung is expected to inaugurate the more than 2.5-billion-dollar Dung Quat refinery Sunday evening live on nationwide television, an indication of its importance to the communist country.

Although Vietnam has considerable offshore oil reserves, it currently has to import all its petroleum products, costing the southeast Asian nation hundreds of millions of dollars -- a figure rising as energy consumption soars.

It spent 10.88 billion dollars importing refined products in 2008, according to official figures, while exporting 10.45 billion dollars of crude oil.

State-owned PetroVietnam Group financed and will run the new facility, which is expected to churn out 6.5 million tonnes a year or 148,000 barrels per day -- about 30 percent of the country's needs.

PetroVietnam, which expects the refinery in the centre of the country to be at full capacity from August, is designing another refinery, in the north, and has tentative plans for a third as Vietnam strives for energy autonomy.

"Dung Quat refinery is one of the most modern in the world," said Dinh Van Ngoc, senior vice-president and chief executive of the arm of PetroVietnam that will run and manage the facility.

"It's very meaningful for Vietnam, both practically and also spiritually -- it can prove to the whole nation and Vietnamese people that Vietnam can build a refinery."

Ngoc told AFP the final figure for the cost of the refinery would be higher than 2.5 billion dollars but declined to be more specific.

The complex, built by an international consortium led by French oil services group Technip, has a long and chequered history.

When plans were first drawn up in the 1990s, the estimated cost was 1.5 billion dollars.

But several foreign backers pulled out, among them French giant Total, which baulked at the authorities' insistence that the refinery be built in a mainly agricultural area with no tradition of heavy industry.

Critics and foreign investors argued that central Quang Ngai province was too far from the offshore oil reserves in the south and from Ho Chi Minh City, Vietnam's economically advanced commercial capital.

Experts say the government refused to have the first refinery anywhere else because it wanted to develop one of the poorest regions in the country.

The communist leaders also want to forge a new industrial area as a counterbalance to the capital Hanoi, in the north, and Ho Chi Minh City, formerly Saigon, in the south.

Authorities hope the refinery and the industrial zone being built around it will create jobs for more than 20,000 people in the area, spurring the local economy.

New roads have been built in the zone and around the refinery, with a handful of new factories springing up, including at least one from South Korea.

Bruno Le Roy, the engineer managing the site for Technip, acknowledged it was "a political decision" to build the refinery in Quang Ngai province, referring to the authorities' determination to bring money to central Vietnam.

"I've seen in the last two years a big change in this area," he told AFP at the refinery, which covers 338 hectares (834 acres) of what was once farmland.

Vietnam's economy grew 8.5 percent in 2007, and its energy needs for industry, households and transport are estimated to be rising at twice that rate.

Economic growth was however down to 6.2 percent in 2008, the lowest level in almost a decade, although premier Dung earlier this month said he expected the slowdown to end by May.

Agence France Presse - February 22, 2009