Dung Quat Refinery, Vietnam

The Dung Quat refinery was planned in January 1998 when the Vietnamese Ministry of Planning and Investment, keen to have domestic refining capability, granted approval for an oil refinery in the Central Quaûng Ngaõi region of Vietnam (originally estimated to cost $1.3bn but will now cost over $2.5bn).

The project has been plagued by a series of delays, three times involving the withdrawal of foreign oil companies involved in the project.

One of the main reasons for the reluctance of foreign investors is that the refinery is sited in Dung Quat (it was moved from a more viable location at Vung Tau). The Vietnamese government wanted it there to bring employment and development to central regions of Vietnam.

This means however, that the refinery will be 1,000km from the country's Bach Ho oil fields off the southern coast which will certainly increase costs for transportation of crude oil and refined products (there might be a need to construct a pipeline). The site is also situated far from the country's economic centres Ho Chi Minh City and Hanoi.

HISTORY OF THE REFINERY CONSTRUCTION

The saga began in 1995 with the withdrawal of Total SA from the project (Total claimed the siting of the refinery made no sense at all and would involve increased costs of over $500m). A consortium of foreign firms stepped in (LG Group, Petronas, Conoco, Stone and Webster and PRC - Chinese Petroleum Company and China Development Co) but withdrew two years later for the same reasons. Still nothing solid had been decided or constructed.

In 1999, Prime Minister Phan Vaên Khaûi took steps to speed up construction of the country's first oil refinery. The rekindled project was a joint venture between Vietsovpetro (itself a Vietnam-Russia joint venture, responsible for the bulk of Vietnam's oil exports) and Russia's External Economic Federation (Zarubeznheft).

The joint venture was dissolved in December 2002 by the Russians who claimed that the refinery was not economically viable at the intended site.

In February 2003, Vietnam decided to go it alone and continue with the refinery construction. Phase one is expected to be operational by mid-2008 according to Dr Nguyen Kim Hieu, Chairman of Central Quang Ngai Province People's Committee, he said: "The project was approved by the Prime Minister in July 1997. The oil refinery should have been completed and put into operation by now. But this is the first large-scale oil refinery project in Vietnam, and we have little experience in carrying out such a project."

"Because of our lack of experience, we faced problems managing a joint-venture investment scheme that was part of the project."

"Currently, the Government, ministries, and related offices are trying to solve such problems to assure the oil refinery gets completed, which is expected to be in mid-2008."

CONTRACTORS AND CONSTRUCTION

The Dung Quat refinery has costs estimated at $2.5bn for construction and equipment. The front-end engineering and design contractor for the project was Foster Wheeler Energy Ltd of the UK.

Vietnam has awarded contracts to a group of construction companies including Technip-Coflexip of France, JGC Corp of Japan and Technicas Reunidas of Spain, for technology and equipment supply.

One of the consortia, TPC Complex, which consists of Technip, Technip Geoproduction and Technicas Reunidas, was awarded the engineering, procurement and construction turnkey contracts No.1 and No.4 for the refinery in May 2005. In June 2006 the Dung Quat Refinery selected SmartPlant Enterprise as its standard software for management of plant design, maintenance and operations of the plant.

Construction is currently still underway on the refinery; in June 2006 the construction work had reached a peak. The projected capacity is 6.5 million t/yr of low sulphur crude (5.5 million t/yr of Bach Ho crude from Vietnam and one million t/yr of Middle East sour crude - 130,000bpd) using deep and modern processing configurations including: Continuous Catalytic Reformer (CCR), Residual Fluid Catalytic Cracking (RFCC) and Benzene, Toluene Xylene (BTX) plant.

The products will include: LPG, unleaded gasoline, kerosene / jet fuel, feedstock for propylene plant and diesel (industrial and auto). The products from the refinery should meet about 40% of domestic requirements.

PROJECT FUNDING

Vietnam's National Assembly approved the construction of the Oil Refinery No.1 (Dung Quat) in 1997 with an investment of $1.3bn (costs have since increased to $2.5bn), this will be provided from crude oil revenue, credits and bond sales.

Vietnam reimbursed Russia the $235m it had put into the VietRoss venture in December 2002 when Russia withdrew (this money had previously been earmarked for reinvestment into the offshore oil and gas fields of Vietnam). The Bank for Foreign Trade of Vietnam (Vietcombank) was able to arrange loans worth $250m.

The consortium of contractors which won tender package No.1 was also able to arrange loans of $500m in deferred payment terms. The foreign contractors are willing to help finance the project but PetroVietnam is giving priority to domestic loans to finance the refinery.

CRUDE OIL EXPORTS

Vietnam exported 18.08 million tons of crude oil worth nearly $7.39bn in 2005, mainly to China, Singapore, Japan, Britain and the United States, down 7.3% in volume but up 30.3% in value against 2004. Vietnam's crude oil production decreased 7.7% to roughly 18.5 million tons in 2005.

Recently, the Ministry of Planning and Investment proposed the Vietnamese Government lower crude oil exports between 2006 and 2010 so as to ensure sufficient supply of the product for domestic industries. Accordingly, the country's crude oil export will decline to 18.5 million tonnes in 2006 and 15.6 million tonnes in 2010 to reduce reliance on petroleum imports.

PORT CAPACITY

There are still major problems with the deep sea port of Dung Quat in that it is still not large enough and well equipped enough to allow the easy transport and unloading of the heavy equipment required to build the refinery. Also the road from the port to the site of the refinery is not in good condition.

The Viet Nam National Shipping Lines (VINALINES) and the GEMADEPT (a transport joint-stock company) have been given permission from the Ministry of Transport to invest in building two new wharves at the port to help alleviate problems.

Abnormal Loading Engineering Ltd (ALE), a UK-based worldwide heavy transportation and lifting company has been at the port and refinery to conduct a series of on-site surveys to determine if their expertise can help in the movement of refinery heavy equipment. However, Abnormal Loading Engineering raised a number of issues needing to be addressed if they were to work on the project.

Some marine port construction groups from Japan and Singapore are also surveying the area.

The port will be crucial as this is where crude oil will be transported to for the refinery (in the absence of a viable pipeline from the oil fields) and where refined products will be transported to market.

FUTURE PROJECTS

The Vietnamese government are already talking about the construction of a second and third refinery within the same timescale as Dung Quat. The second installation would be at Nghi Son in Than Noa Province, about 1,200km north of the oil fields – still a logistical transport problem for both crude feedstock and refined products.

The third planned refinery may be located in the south at Vung Tau – much nearer the oil fields and with a better chance of being economically viable.

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