Vietnam strives to pursue fuel self-sufficiency with Dung Quat refinery expansion

Vietnam is looking to expand the capacity at state-run Dung Quat refinery by more than 30% in five years as Hanoi strives to maintain adequate volume of domestic oil products output amid recent financial troubles at Nghi Son refinery, while continuing to pursue its goal to progressively reduce the country's reliance on imported essential fuels.

Vietnam's long-term goal to become fully self-sufficient in industrial and transportation fuels was facing a major setback as the 200,000 b/d Nghi Son Refining and Petrochemical was at risk of suspending operations in central Vietnam due to a cash squeeze.

With operational and fuel production outlook at the Nghi Son complex in jeopardy, Hanoi responded by approving the upgrade and expansion of the 130,000 b/d refinery at Dung Quat in central Vietnam, the refinery operator Binh Son Refining and Petrochemical said in a statement May 5.

Although Vietnam is one of East Asia's rare crude suppliers capable of producing more than 300,000 b/d, higher oil prices bode ill for the country with a population of close to 100 million as it depended heavily on imported fuels. Dung Quat and Nghi Son have a combined refining capacity of about 330,000 b/d, which was only enough to cover about half the country's oil products and chemicals demand.

Industry sources said they expected Vietnam to ramp up its domestic refining capacity as it moved to rely on domestic production to meet fuel demand.

"Vietnam has been facing financing difficulties in importing oil products since the second half of 2022, it makes sense that they are expanding their own refining capacity," a regional gasoil trader said.

The Vietnamese government initially approved a $1.8 billion plan in December 2014 but the project was put on hold in April 2022 due to funding issues.

However, the gravity of the financial and operational troubles at the Nghi Son complex would likely speed up the government's approval and funding process, industry sources said.

In a decision signed by Deputy Prime Minister Tran Hong Ha on May 5, the refinery's capacity will be expanded to 8.6 million mt/year, or around 170,000 b/d. Its refined products will be upgraded to meet Euro-V standards, from current standards of between Euro-II and Euro-III.

BSR will add seven new units and revamp nine existing units. Currently, Dung Quat has 15 units.

The capital investment for the upgrade and expansion project, expected to be operational in first-quarter 2028, will be reduced to $1.257 billion with about $503 million contributed from BSR's equity, while the remaining $754 million from bank loans.

Long road to self sufficiency

The operational hiccup at Nghi Son could hamper Vietnam's efforts to tame near-term inflation and achieve its long-term goal of fuel self-sufficiency as the country would need to continue to rely heavily on imported automotive and industrial fuels, especially from South Korea, industry and trading sources based in Hanoi, Singapore and Seoul said.

NSRP needed to pay $375 million in debt due in May and another $277 million in November 2023, S&P Global Commodity Insights reported previously.

State-owned PetroVietnam, which has a 25.1% stake in the refinery, has not agreed to a financial restructuring scheme proposed by NSRP. PetroVietnam said the terms and conditions of the proposed plan are outside the company's authority and it may have to seek approval from local authorities.

The Ministry of Finance warned during a Price Regulation Steering Committee meeting with Deputy Prime Minister Le Minh Khai on March 24 that Vietnam's inflation could reach as high as 4.8% in 2023, based on increasing primary product prices, such as petroleum, food, household electricity tariffs and construction materials.

In an effort to tame inflation, PetroVietnam aimed to maximize domestic oil products output and minimize imported oil products, middle distillates supply, and distribution management, company sources told S&P Global previously.

PetroVietnam said its first-quarter oil products output, mainly from the 130,000 b/d Dung Quat refinery, was 1.74 million mt, or about 13.05 million barrels, up 7% year on year.

However, the S&P Global Vietnam Manufacturing PMI fell to 46.7 in April from 47.7 in March, the fifth deterioration in business conditions in the past six months and posting the sharpest decline year to date as demand remained subdued.

"Vietnam's demand for oil products is expected to continue to be weak because industrial and manufacturing activity is affected by macroeconomic [headwinds]. I don't think this will change soon," a refinery source said.