New fuel policy in Vietnam to benefit foreign refiners
SINGAPORE: Exxon Mobil and China Petroleum & Chemical, or Sinopec, will likely benefit from demand for cleaner burning fuel in Vietnam, the fastest- growing Southeast Asian economy, after the government there cut the amount of sulfur allowed in diesel, according to analysts who monitor the industry.
Vietnam National Petroleum and Saigon Petroleum will have to pay more for diesel imports after the acceptable level of sulfur, a pollutant, was reduced by half to 0.25 percent. Vietnam, where diesel and gasoline imports have doubled since 2000, plans to buy all the fuel it burns from overseas oil companies until it completes its first refinery in 2009.
The rising Vietnamese demand for refined oil products, including diesel, gasoline and aviation fuel may exceed the 7.5 percent average annual increase between 1995 and 2004, said Victor Shum, senior principal with Purvin & Gertz in Singapore. Economic growth in the country of 84 million is spurring sales of motorcycles, cars and air tickets.
The rising demand for these products in Vietnam, and the corresponding rise in fuel sales, should help to raise the profitability of refiners in Asia, Shum said in a recent interview. "In particular those with conversion units," he said, referring to refinery units that can further process fuel oil into gasoline and diesel.
From Jan. 1, diesel imported by retailers must conform to the lower 0.25 percent sulfur specification, the Vietnamese government said Thursday. Low-sulfur diesel requires further processing to remove the pollutant, making it costlier than higher-sulfur grades of the fuel.
Prices of 0.25 percent diesel in Singapore, the biggest Asian oil-trading center, cost $1.30 a barrel more than 0.5 percent diesel, according to data compiled by Bloomberg. The premium, which was 40 cents a barrel on Nov. 20, has more than tripled in the past month.
"It may raise the cost of diesel for motorists," Bach Van Mung, director of planning and investment of the Vietnamese Ministry of Trade, said in Hanoi on Friday. "But our air quality will improve." Mung spoke the day after a conference in Hanoi on fuel specification changes.
Sinopec, the largest Chinese oil refiner, and Exxon Mobil, which operates the largest Southeast Asian refinery in Singapore, are among the Vietnamese sources for refined fuels.
Vietnam imported about 3 million tons of gasoline and 5 million tons of diesel in 2005, almost double the volumes purchased in 2000, according to traders.
Fuel demand has been driven by an economic expansion that has exceeded 7 percent each year since 2002, according to the International Monetary Fund. The 7.8 percent economic expansion expected in Vietnam this year is likely to be followed by 7.6 percent in 2007, the fund said last month.
The growth in the demand for fuel in Vietnamese will help to absorb some of the surplus supplied by South Korea, where refiners like SK Corp. and GS Caltex have upgraded plants to make more gasoline and diesel from less- profitable fuel oil.
"Vietnam will help to keep utilization rates at these conversion units high in the coming years, supporting refining margins." Shum said. "Refiners will be salivating after Vietnam."
Vietnam National Petroleum, or Petrolimex, is among ten state-run importers that buy fuel from Singapore, China, Taiwan and South Korea at international prices. They retail the fuels at a loss because the government caps fuel prices in a bid to curb inflation.
In the first 11 months of 2006, Vietnamese imports of petroleum products rose 18 percent by value to $5.39 billion compared with a year earlier, according to figures supplied by the General Statistics Office in Hanoi.
The government compensates importers for their losses incurred from selling the fuel below cost. The proposed diesel specification change will raise costs for importers.
"The diesel specification change will cost importers more to buy fuels," said Nguyen Thanh Hai of the marketing department at Petrolimex.
Vietnam is an oil producer that must export its oil for processing outside the country. Vietnamese crude oil exports, which slipped 8 percent by volume, rose 15 percent by value in the year to November to $7.75 billion, according to the General Statistics Office in Hanoi.
In November 2005, Vietnam Oil & Gas, known as PetroVietnam, started building a $2.5 billion refinery which is to have a crude processing capacity of 145,000 barrels a day. After it opens in 2009, PetroVietnam will own and operate the plant, located at Dung Quat Bay, the company said last year.
"Vietnam will remain a significant buyer of fuel even after Dung Quat starts," said Shum. "There is a growing middle class among a young, hungry population, and they'll be upgrading their mopeds to motorcycles with bigger engines, even cars."
By Trisha Huang - Bloomberg News - December 19, 2006.
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