Russians tough it out in Vietnam's oilfield of broken dreams
In the aftermath of a series of pullouts by Western oil majors, Vietnam
has gone into partnership with its former Cold War ally Russia to
develop its oil industry. Paradoxically, as the Russian economy
nosedives, Moscow is emerging as a leading player in Vietnam's oil
sector.
Furthermore, Vietsovpetro (VSP), an oil joint venture between Vietnam
and Russia, plans to expand throughout Asia, joining projects in Iraq,
exploring Cambodia's offshore blocks, selling rigs and rehabilitating
wells in Indonesia. Presently, Zarubezhneft, the Russian partner of
VSP, buys oil from Iraq's state oil company SOMO under the UN
oil-for-food deal and plans to drill there ''based on our stakes in
exploration deals there'', says Oleg Popov, general director of state-run
Zarubezhneft.
VSP operates Vietnam's main oil field, Bach Ho (White Tiger), in
waters off the southern port of Vung Tau. Zarubezhneft and state-run
Petrovietnam hold equal 50 percent stakes in the $1.5 billion VSP.
Established in 1981, VSP is pumping more than 80 percent of Vietnam's
crude, bringing in roughly half of the country's currency revenues. It is
estimated that Vietsovpetro has contributed about $6 billion in taxes and
royalties to Vietnam's state coffers over the past decade.
VSP expects to pump 12 million tons of crude in 1999, and 13 million
tons in 2000, Sergei Omelchenko, Zarubezhneft's head of external
relations told Asia Times Online. In 1999 the Russians earned some
$232 million from VSP - $70 million more than expected due to higher
oil prices. ''We are satisfied with 1 million tons a year output growth,
and we plan to sustain it,'' VSP first deputy CEO Fanis Badikov said.
However, despite a viable growth rate, partners in VSP now disagree
on a new economic scheme, which includes maintaining separate
accounts at VSP units. The Vietnamese argue it is designed to improve
the efficiency of all VSP units, while the Russians point to the
unfortunate experience of Gorbachev's economic reforms back in late
1980s, when the same method, known as ''khozraschet'', sparked the
collapse of many enterprises. The Russians ''view it as a maneuver to
destroy VSP, and we have a tough discussion with the Vietnamese'', a
source in Zarubezhneft said.
Despite the disagreements, VSP is going to expand off the southern
Vietnamese shore - to blocks 4, 9-03, 17 as well as the Dai Hung
oilfield, without setting up a separate joint venture.
VSP was offered operation of the ill-fated Dai Hung field in the wake
of a series of high-profile withdrawals. Last March Petrovietnam took
over as operator of Dai Hung because Malaysia's Petronas withdrew
from the field, producing just 10,000 barrels per day. The Petronas
departure followed the withdrawal of Australia's Broken Hill
Proprietary Co Ltd (BHP) in 1997, saying the field off southern
Vietnam was not profitable.
Analysts argue that Hanoi's reliance on Russian partners in building up
its oil and gas sector can be explained in many ways. A reasonably
qualified Russian workforce is relatively cheap, while state-run
Zarubezhneft tends to venture into projects of questionable economic
viability, including the controversial $1.3 billion Dung Quat refinery
project.
On December 29, 1998, Hanoi issued a license for VietRoss to build
Dung Quat refinery. Petrovietnam and Zarubezhneft each hold a 50
percent stake in the 25-year project. The partners in VietRoss are
expected to provide $800 million, while the remaining $500 million will
be borrowed overseas. The refinery is scheduled to begin full operations
by the year 2004, and will have a capacity of 130,000 bpd.
The refinery, the first to be built in Vietnam, is situated at Dung Quat
Bay, Quang Ngai province, central Vietnam - 125 kilometers south of
Danang and close both to My Lai village and the former US military
base Chu Lai - a barren location hundreds of kilometers from the
nearest crude supplies and potential markets. Annual transport costs to
Dung Quat will be about $30 million more than if the refinery were
located near Vung Tau, which is just 100 kilometers from the main
offshore oil fields.
Hanoi's decision to set up VietRoss is the latest in the long saga of the
refinery, which began in 1995 after the pullout of French oil giant Total
SA from the deal. The move was prompted by the surprise decision of
the Vietnamese government to locate the refinery in Dung Quat. Total's
preferred site, near Vung Tau, the heart of Vietnam's oil industry, was
overruled by Hanoi who wanted to use the project to bring economic
development to the country's impoverished central region. A consortium
including South Korea's LG Group and Petronas of Malaysia, in
partnership with US and Taiwanese firms, stepped in to replace Total.
But the group broke up after Petrovietnam rejected its demands for
financial incentives, including the subsidized prices for the products of
Dung Quat refinery.
The British arm of US group Foster Wheeler Corp is now a technical
consultant for the project. But the Russians accuse Foster Wheeler of
delaying the design stage of the project. VietRoss has planned to spend
some $80 million for design in 1999, but only $35 million is expected to
be actually disbursed. Zarubezhneft reportedly rejected many Foster
Wheeler offers, and they in turn are understood to be refusing to work
with the Russian contractors - design firm VNIIPINEFT and
Hanoi-registered construction JV Vietmontazhspecstroi.
Russian Fuel and Energy Minister Viktor Kalyuzhny - when visiting
Hanoi last week - reportedly asked Vietnamese PM Phan Van Khai to
intervene with Foster Wheeler.
The Russians concede that the project is likely to be delayed. The first
unit of Dung Quat must be completed by 2002, while normally
construction on this scale takes 4-5 years. However, building up
infrastructure for Dung Quat refinery is still underway, and construction
tenders will be organized in March 2000.
Analysts argue that with excessive refining capacities in Southeast Asia
coupled with low profit margin forecasts, new refineries in the region
would not be justifiable without special incentives. However, lacking a
refinery, Vietnam must export all its crude oil and then import refined
products.
Interest in Vietnam's oil sector has been evaporating in recent years as
early exploration failed to find sizeable reserves. Vietnam, a minor oil
producer by world standards, exports most of its crude. The country
aims to pump 14.5 million tons this year, compared to 12.6 million tons in
1998.
Apart from oil negotiations, last week PetroVietnam director general
Ngo Thuong San and Gazprom's deputy CEO Boris Nikitin signed a
Memorandum of Understanding to develop off-shore gas fields in
Tonkin Gulf in a joint venture. Gazprom, which produces around a
quarter of the world's natural gas, is Russia's largest firm and the
world's biggest gas company. It has set up joint venture companies in
over 12 countries since 1990, and is still actively pursuing links with
possible foreign partners. ''We view Vietnam as a promising partner in
the Asia-Pacific region,'' Gazprom chief spokesman Igor Ivantsov told
Asia Times Online, adding that setting up a Tonkin Gulf JV is some time
off.
By Sergei Blagov - Asia Times Online - December 3, 1999.
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