Vietnam: The Counterbalance to Chinese Oil Expansionism

Vietnamese and Chinese relations have never been exactly cordial, regardless of the regime in place or the political ideology practiced.

China has been expanding its spheres of influence in Asia with an aim at controlling vast tracks of oil and gas reserves. Many of these reserves are in disputed areas that multiple nations claim through a myriad of justifications ranging from historic to arbitrary annexations based on national interest.  All nations in the surrounding areas have had their sovereignty violated either through a lack of diplomatic consideration or outright refusal to negotiate by China.

The discord that has resulted from China's hegemonic territory grab has created an opportunity for Russia to expand its business interests in the region. Commercially, China has established its E&P industry in these areas and created a virtual monopoly.  Russia is countering this influence on the energy market by bolstering ties with Vietnam and leveraging Russian E&P companies to create JV's. Gazprom Neft (NASDAQOTH: GZPFY  )  last November bought a significant stake in the Dong Quat refinery, acquiring 49% shares of Binh Son Refining and Petrochemical.

Gazprom Neft has committed to modernization of the Dong Quat refinery with the hopes that in one year liquid fuel output can be doubled from 6.5 million tons to 10-12 million tons. This modernization project would open up markets and provide an opportunity for Vietnam to benefit from the vast oil and gas reserves in the South China Sea.

Source: Energy-Pedia

Dong Quat is Vietnam's only refinery. It is located in the Binh Son district by the East Vietnam Sea making it an ideal location for refining both onshore and offshore oil sources. If the Gazprom Neft partnership is successful, it could lead to more refineries being built, making Vietnam a potential petrochemical refining hub for the region, offsetting China's hegemonic hold on the market.

ExxonMobil (NYSE: XOM  ) has a limited presence in Vietnam through its subsidiary Exploration and Production Vietnam Limited. Current activities are focused on exploration and production in the offshore area around Danang. The majority of Vietnam's hydrocarbon potential is in the south within the 200 mile economic exclusion zone (EEZ).

A solution and a way forward
Vietnam has plans for developing the Nhon Hoi Refinery – a megarefinery that is planned to begin construction in 2016 and be completed by 2019. Peak output is expected to be 660,000 barrels per day.

Rosneft has pledged to invest $25 billion along with Thai-based PTT Group, which pledged $25 billion-$30 billion to build the megarefinery. The Nhon Hoi Refinery is part of a larger Nhon Hoi economic zone that has close proximity to the Nhon Hoi deepwater port.

The Nhon Hoi refinery is one of several planned that will dramatically increase Vietnam's ability to refine liquid fuels. Along with the refinery are plans for an expansive economic zone that would attract other industries and investors.

Factors hampering Vietnam's growth
The rapid industrialization and growth of Vietnam is outpacing its ability to produce enough energy to sustain development. The primary hurdle is a lack of refining capability and government support. With only one refinery in all of Vietnam, they are subject to overuse issues that will delay production and import issues and will pose a greater risk of supply problems.

The massive multi-billion dollar projects are also having issues with reaching a deal that would outline the exact extent of Vietnamese government involvement. PTT is looking for tax breaks to encourage investors from AramcoSK Innovation, and JX Nippon Oil and Energy and offset their total contribution amount.

Long-term investment
Investors should view Vietnam's plans for building multiple refineries and entering into numerous JV's as a strong indicator of a promising ROI over time. While China firms up its presence in the regional energy markets, Vietnam will be able to provide competition and a balance to price monopolization with political and financial support from Russia. The further development of Nam Con Son basin will also open opportunities for Vietnam.

China's unilateral move to control oil fields in the region alienated many of the nations that would have normally been trade partners. Out of necessity, these nations have started to develop their own resources with backing from Russia. Through Rosneft and Gazprom Neft, Russia is creating a commercial presence that will counterbalance Chinese oil expansionism.

The bottom line: Where there is a choice there is an opportunity for profit. Investors do not have to settle on a pricing structure based on Chinese controlled commodities. They will have a choice that Vietnam will be able to offer markets.

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  • Report this Comment On December 14, 2013, at 7:25 PM, dollarjilt1 wrote:

    The only problem with your conclusions is that there is and will increasingly be a glut of refined oil products, particularly in Asia from Chinese over refining capacity. It is conceivable that once Vietnam builds these additional refineries, meets its own domestic demand, that the price they get for these exported refined products may not justify the billions it takes to build said refineries. ROI in the case of future Vietnamese refineries is problematic giving these dynamics.

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