VZCZCXRO1794
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #0166/01 0561016
ZNR UUUUU ZZH
R 251016Z FEB 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 9187
INFO RUEHHM/AMCONSUL HO CHI MINH 5601
RUCNASE/ASEAN MEMBER COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000166 
 
SIPDIS 
 
STATE FOR EAP/MLS 
 
E.O. 12958: N/A 
TAGS: EAID ECON SENV ENRG TRGY VM
SUBJECT: VIETNAM OPENS FIRST REFINERY, ENDS RELIANCE ON IMPORTS 
 
REF: (A) HANOI 2064 ("First Oil Refinery Takes Shape"); 
 (B) HANOI 0649 ("Extracting Revenues"); 
 (C) HANOI 0975 ("Production Down, Revenues Up at PVN") 
 
HANOI 00000166  001.2 OF 002 
 
 
¶1. (U) Summary: Vietnam celebrated the long-awaited opening of its 
first oil refinery on February 22.  The new facility, located in 
central Quang Ngai Province, in one of Vietnam's poorest regions, 
ends the country's reliance on imported fuel and will allow Vietnam 
to curtail fuel imports by 30 percent when the refinery runs at full 
capacity starting in August.  The refinery's opening caps a 
decades-long effort, dogged by delays, failed joint ventures and 
criticism over the facility's remote location, far from Vietnam's 
southern oil fields.  Crude oil remains Vietnam's number one export, 
but declining offshore production, increasing domestic demand and 
plans to further increase domestic refining capacity mean that 
Vietnam will soon transition to a net oil importer.  End summary. 
 
¶2. (U) Vietnam celebrated a major milestone on February 22 with the 
long-awaited commissioning of its first oil refinery.  The opening 
of the Dung Quat Petrochemical Refinery Complex in central Quang 
Ngai Province ends Vietnam's complete reliance on imported fuel 
(much of it purchased from Singapore) and will allow Vietnam to 
curtail petroleum imports by 30 percent when the facility runs at 
full capacity starting in August, refining 140,000 barrels per day 
(6.5 million tons per year).  Owner-operator state-run PetroVietnam 
(PVN) plans to boost the refinery's capacity to 200,000 barrels per 
day (10 million tons per year) by 2014.  The refinery's opening caps 
a decades-long effort, dogged by delays, failed joint ventures and 
criticism over the facility's remote location, far from Vietnam's 
southern oil fields. 
 
A LONG ROAD TO HOE 
------------------ 
 
¶3. (U) The Government of Vietnam (GVN) commenced planning for its 
first refinery more than two decades ago.  The GVN had originally 
planned to locate the facility near the southern port of Vung Tau, 
close to Vietnam's offshore oil fields.  In 1988, the government 
began to clear the proposed site of unexploded wartime ordnance.  In 
the early 1990s, France Total expressed interest in joining the 
venture just as the GVN contemplated relocating the facility first 
to Van Phong Bay, north of Nha Trang, and later to Dung Quat, in one 
of Vietnam's poorest regions.  Total pulled out in 1995, citing the 
refinery's remote location and complete lack of infrastructure.  A 
consortium of foreign investors including LG Group and Petronas 
subsequently replaced Total, only to withdraw two years later. 
 
¶4. (U) In 1998, the GVN signed a joint venture with Russian 
state-run energy firm Zarubezhneft and Foster Wheeler Energy, but 
that agreement was terminated in December 2002 after disagreements 
over contractual issues and the refinery's location.  The GVN, 
determined to leverage the refinery's development to jumpstart 
economic development in Central Vietnam, stood firm on the location 
and chose to go it alone.  PVN is now in negotiations with Royal 
Dutch Shell, India's Essar Group and South Korea's SK Group to sell 
up to 49 percent of Dung Quat's equity, upgrade the facility's 
capacity, and build a $1 billion desulfurization unit that would 
allow the refinery to operate on lower quality imported crude. 
 
SIPHONING OFF VIETNAM'S CASH COW 
-------------------------------- 
 
¶5. (U) Vietnam views completion of this latter task as particularly 
urgent.  The lack of a desulfurization unit will force PVN to supply 
Dung Quat with expensive, high quality, light sweet crude from 
Vietnam's largest offshore oil field, Bach Ho (White Tiger). 
Completion of the desulfurization unit, scheduled for 2011, will 
allow Vietnam to switch to a cheaper source of crude, Dubai heavy 
sour, which BP has agreed to supply under a recently signed 
contract.  Until then, the yearly diversion to Dung Quat of more 
than 25 million barrels of Bach Ho sweet crude, which fetches a dear 
price on the international market, could cause a significant drop in 
Vietnam's oil revenues, the country's biggest source of foreign 
exchange. 
 
¶6. (U) Vietnam had proven reserves of 500 million barrels of crude 
oil at the end of 2008 and daily production of 390,000 bpd, 
according to BP's latest Statistical Review of World Energy.  New 
offshore development should spur a modest increase in daily 
production to 400,000 bpd in 2009-2010, followed by a slow decline 
to 330,000 bpd by 2018.  Declining offshore production, increasing 
domestic demand and plans to build as many as three more refineries 
by 2015 means Vietnam will soon transition to a net oil importer. 
 
MORE REFINING CAPACITY ON THE HORIZON 
------------------------------------- 
 
¶7. (U) Land clearance is currently underway on the site of Vietnam's 
 
HANOI 00000166  002.2 OF 002 
 
 
second refinery, the Nghi Son Petrochemical Complex, located in 
Thanh Hoa Province, 125 miles south of Hanoi.  Once again, there are 
allegations that the GVN is situating a multi-billion dollar 
refinery in an inappropriate, remote location simply to kickstart 
economic development.  The $6 billion plant, a joint venture of PVN, 
Japanese refiner Idemitsu, Mitsui Chemical and Kuwait Petroleum 
International (KPI), is slated to enter service in 2013 with a 
projected refining capacity of 10 million tons per year.  In 
exchange for their investment, PVN will give KPI and Idemitsu access 
to Vietnam's domestic retail gas market.  In addition, KPI will 
supply Nghi Son with Kuwaiti heavy crude. 
 
¶8. (U) Vietnam has plans to build a third refinery, the $10 billion 
Long Son Petrochemical Complex, in southern Ba Ria-Vung Tau 
Province.  Long Son would enter service in 2013 with an annual 
refining capacity of 10 million tons.  PetroVietnam, Vietnam 
National Chemical Corp, and two units of Siam Cement, Thailand's top 
industrial conglomerate, will build Long Son.  Siam Cement will own 
71 percent and the two Vietnamese firms the remainder.  As a silent 
investor in Siam Cement, Dow Chemicals 
has an interest in this project. 
 
MICHALAK