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News
November 26, 2002
Russia's $1.3bn
Vietnam refinery venture in doubt
By Sergei Blagov
MOSCOW (Asia
Times Online) - Russian oilers have prided themselves on playing a dominant
role in Vietnam's oil sector, but a row over a major bilateral refinery venture
may deal a blow to Moscow's interests in the country.
In an unprecedented development, Vietnamese officials have opted to make public
their grievances over a major investment project by announcing that Russia has
withdrawn from a US$1.3 billion joint venture to build Vietnam's first oil
refinery Dung Quat. The chairman of the state-run oil monopoly PetroVietnam,
Pham Quang Du, told Vietnam's National Assembly last month that the Russian
government had agreed to exit the refinery venture, and that "Zarubezhneft lacks
experience for such a project", according to the Thanh Nien newspaper.
PetroVietnam and the Russian state oil company Zarubezhneft agreed in 1998 to
build the refinery at Dung Quat Bay in central Quang Ngai province. The
companies have equal stakes in the joint venture company VietRoss, a structure
that PetroVietnam blames for stalemates in making decisions, such as the choice
of construction contractors. Moreover, Russian media reports also pointed to
Zarubezhneft's alleged financial manipulations in Vietnam, connected with the
company's CFO Yuri Pyrikov, who was fired in summer.
Interestingly, though, the Russian government has yet to confirm Hanoi's
announcement. Indeed, on November 22, Russia's foreign ministry spokesman
expressed hope that Moscow and Hanoi could continue cooperation to build Dung
Quat. "Long-term positive experience of cooperation in the energy sector will
enable Russia and Vietnam to find a mutually acceptable solution," spokesman
Alexander Yakovenko was quoted by the Interfax news agency as saying.
Vietnamese official statements sounded less optimistic, though. Any development
relative to Russia's further role in the Dung Quat refinery project "should not
negatively affect bilateral relations", Vietnamese foreign ministry spokesperson
Phan Thuy Thanh said in a statement on November 21.
Vietnamese officials definitely sounded unhappy over their refinery partnership
with the Russians. Pham Quang Du implicitly accused Zarubezneft of blocking the
largest bidding package worth $740 million, adding that the Russian partner had
been plotting to supply the plant with outdated technology. According to Du,
since the two sides held equal 50 percent stakes, they were unable to reach
consensus over the procurement of equipment. Pham Quang Du also commented that
although Zarubezneft had experience in gas and oil production, it did not have
any in building oil refineries, the Vietnam News Agency (VNA) reported.
Vietnamese government officials also blamed Russian oilers of stalling the
refinery project. Disputes on the details of supply contracts for the refinery
have delayed its construction, the VNA quoted Planning and Investment Minister
Vo Hong Phuc as saying. Phuc reportedly pledged that Vietnam must build the
refinery by itself.
The Vietnamese government has also promised that a winning Dung Quat bidder, a
consortium led by France's Technip-Coflexip, was going to continue working with
PetroVietnam.
VietRoss' tendering difficulties reportedly involved disagreements over a choice
of subcontractors. For instance, Zarubezhneft head Nikolai Tokarev has said that
his firm supported the Samsung-ABB consortium, while PetroVietnam favored the
Technip-led consortium.
Nonetheless, PetroVietnam's announcement came as a surprise to Russian oil
executives. Zarubezhneft's spokesman Anatoly Chuchko told Asia Times Online that
his company "was surely going to take part" in Dung Quat construction. On
November 21, Zarubezhneft issued a statement pledging continued interest in the
refinery project. However, Zarubezhneft conceded that the company may
participate in Dung Quat "in a different format in order to achieve better
economic results".
In the meantime, the Russian government may think otherwise. On November 21, the
official news agency RIA quoted anonymous government sources in Moscow as
confirming Russia's intention to dissolve the VietRoss joint venture due to
"economic reasons". Yet Russian government officials are yet to come up with any
clear statement on VietRoss.
Moreover, despite Zarubezhneft's official optimism, sources in Moscow have
indicated that in October the company probably signed a MoU with PetroVietnam,
formally agreeing to dissolve VietRoss. Since the venture was formed by an
intergovernmental agreement, VietRoss must be dissolved by the two governments.
The Dung Quat plant is to be located in Quang Ngai province, 900 kilometers
south of Hanoi. It will have an annual processing capacity of 6.5 million tons
of crude oil or 130,000 barrels per day. Operations were expected to begin in
2005.
In choosing the refinery site, Hanoi has said that it wants to develop its
central provinces, which have largely missed out on the benefits of economic
reforms adopted in the late 1980s. However, Quang Ngai province is roughly 1,000
kilometers away from the country's main oil fields off Vietnam's southern shore.
The site is also far away from the country's economic centers of Ho Chi Minh
City and Hanoi, hence refinery's location implies higher transportation costs
for both crude oil and refined products.
The Dung Quat saga began in 1995 when France's Total SA pulled out, claiming
that the site made no economic sense. A consortium of foreign firms, including
South Korea's LG Group and Petroliam Nasional Berhad (Petronas) of Malaysia,
stepped in to replace Total - only to pull out two years later.
When Zarubezhneft clinched the deal with PetroVietnam, Russian oil executives
conceded that the site was undesirable, but Zarubezhneft agreed to the
Vietnamese terms. As former Zarubezhneft head Oleg Popov put it, "It's a bad
site, but we take what the Vietnamese gave us. They dictated the rules of the
game, and ... we accepted." Zarubezhneft was looking at the long term in an
attempt not only to produce oil, but also to refine and sell oil products in
Vietnam.
The refinery was expected to cost a total of $1.3 billion. Russian oilmen
expected up to $2.3 billion in profits from Dung Quat, estimated on 35 years of
operation. Apart from VietRoss, Zarubezhneft operates Vietnam's main oil field
in waters off the south of the country in partnership with PetroVietnam. The
$1.5 billion Russian-Vietnamese Vietsovpetro joint venture, or VSP, accounts for
the bulk of Vietnam's oil exports, which totaled nearly 14 million tons of crude
oil in the first 10 months of this year. Vietsovpetro plans to pump 13.5 million
tons this year, while the country's overall output is expected to reach 17
million tons, according to PetroVietnam.
The 50 percent stake in VSP is Russia's most profitable state-owned asset.
Russia earned 9.92 billion rubles ($312 million) of profit from Vietsovpetro in
the first nine months of this year. During the same period, the Russian
government earned only $18.8 million from all fully state-owned businesses in
Russia.
Initially, VietRoss was supposed to be funded from VSP's profits. In its
November 21 statement, Zarubezhneft pledged to re-think its investment policy in
Vietnam in order "to concentrate funding" on critical projects to develop
off-shore oil fields in southern Vietnam. However, the Vietnamese government now
is reportedly considering raising tax of VSP profits from 40 to 55 percent. As a
result, the Russian government may loose up to $100 million a year.
Officially, Moscow has long prioritized cooperation with Vietnam in oil, gas and
energy sectors. In March 2001, when Russian President Vladimir Putin visited
Hanoi, he inked a bilateral declaration of "strategic partnership" with Vietnam
which specifically mentioned energy cooperation.
In the spring, Prime Minister Mikhail Kasyanov traveled to Vietnam and praised
bilateral oil and gas cooperation. Kasyanov, who visited Hanoi from March 26 to
28, said that he had high hopes for the commissioning of the Dung Quat oil
refinery. He hailed Vietsovpetro and Dung Quat as Russia's most important
projects in Vietnam. In October, Vietnamese Communist party chief Nong Duc Manh
traveled to Moscow to meet Putin, and both leaders also praised bilateral energy
projects.
Yet despite the official optimism, the much heralded showcase project VietRoss
has only set off bitter controversy. Following last July's early exit from Cam
Ranh Bay naval base, even though Russia's lease there was due to run until 2004,
it is understood that relations between the former Cold War allies have
experienced some turbulence. Therefore, despite official upbeat pronouncements,
Russia and Vietnam are yet to forge a new partnership based on a strong
pragmatic basis of sustainable economic cooperation.
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