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THE OIL AND GAS INDUSTRY

Promising Scenario for Vietnam's expanding oil and gas industry

Deputy Prime Minister Nguyen Tan Dung recently discussed Danish investment opportunities with ambassador Peter Lysholt Hansen. Dung is encouraging Petro Vietnam to attract more foreign partners.

This sector analysis provides information about market opportunities in the Vietnamese oil and gas industry. Vietnam has the potential to become a regional oil and gas supplier. Ongoing explorations have led to several oil and gas discoveries in recent years.

Consequently, the government highly prioritizes investments in both upstream and downstream production, which makes it an interesting market for Danish companies.

IntroductionVietnam ranks third in oil production among Asian countries, trailing only Indonesia and Malaysia. Provided that thecurrent rate of development continues, Vietnam will become the world's 30th largest oil-producing nation. And perhaps the most interesting aspect about Vietnam, its gas reserves seems even more promising than its oil reserves.

Vietnams oil and gas industry has undergone a significant development since the first oil was produced from the BachHo oil field in 1986. Until then, Vietnam’s economy relied heavily on imported petroleum products from the SovietUnion.

Later on, as Vietnam started exploration of its reserves, The Soviet Union also provided the equipment and expertise in all areas of production.

To date, Vietnam has produced almost a billion barrels of crude oil and 8,5 billion cubic metres of natural gas. In 2004 alone, Vietnam produced around 20 million tons of crude oil and around 6 billion cubic metres of natural gas.

The industry has attracted 5 billion USD of foreign capital for exploration and production. Additionally, a large amount of capital has been invested in the downstream sector and related infrastructure. Having no refinery capacity of its own, Vietnam exports all of its crude production and imports fuels and petrochemical products.


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Vietnam has extensive oil and gas reserves

Market size indicatorsOverall, Vietnam’s oil and gas reserves seem attractive. Comparatively, the gas reserves are considered morepromising than known oil reserves with large confirmed amounts of gas in Vietnamese waters. Oil and gas areanticipated in almost 50 fields and prospects.

Vietnam has proven gas reserves of 220 billion cubic metres (bcm), but it is expected to contain up to 651 bcm.Vietnam’s natural gas production and consumption are rising with further increases expected as additional fields comeon-stream.

The Cuu Long basin, a source of associated gas from oil production, is the largest Vietnamese production area of natural gas. Only two fields have been developed specifically for their natural gas potential, Tien Hai, with a potential output of 1,76 million cubic feet per day (mmcf/d) and Lan Tay/Lan Do of Nam Con Con with a production of 5 mmcf/d.

With regard to oil, Vietnam has 600 million barrels of proven oil reserves. However, the exploration in Vietnam continues to yield new discoveries and the reserves may amount to 4,5 billion barrels.

Currently, Vietnam has six operating oil fields; Bach Ho (White tiger), Rang Dong, Ruby and Dai Hung (Big Bear), Bunga and Kekwa. In addition, a new well, Su Tu Trang, is scheduled to be developed by 2008. Most oil exploration and production activities occur offshore in the Cuu Long and Nam Con Son Basin. In October 2004 PetroVietnam announced the first discovery of oil offshore northern Vietnam. The find came in the area Yuen Tu Field east of Hai Phong and its initial reserves are estimated to be 700-800 million barrels.

The actual production in Vietnam reached 20,17 million tons of crude oil and brought ashore 6,27 b.c.m. of gas in 2004. Regarding oil, PetroVietnam wants to raise crude oil output in the coming years, but because its production capacity is limited due to lack of technology and investment, the production will remain at about 20 million tons of crude oil annually in the coming years.

With respect to gas, the output will be raised to between 6,3 and 6,5 bcm in 2005. As Vietnam’s demand for energycontinues to expand, its gas reserves will become increasingly important. On a more long-term basis PetroVietnam,therefore, plans to triple its gas production by 2010 in order to offset the country’s shortage of gas supply.

Naturally, this strategy of raising gas production will require a substantial development of the infrastructure transporting the energy.

Market trends and key playersPetroVietnam is the dominant player on the market. The company is the sole state-owned petroleum corporation forVietnam. It has a full monopoly on all upstream exploration and exploitation and plays a significant role indownstream operations as well.

It has received investment licenses to build the country’s first oil refineries. Any foreign oil company working onupstream projects will have to deal with PetroVietnam in some capacity.

The central management of PetroVietnam is located in Hanoi, while it has two subsidiaries supervising upstream activities; PetroVietnam Exploration and Production Co (PVEP) and PetroVietnam Supervision Co (PVSC).


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Most of Vietnam’s crude oil is lifted from the Rong (Dragon) and Bach Ho (White Tiger) fields by the joint venturecompany Vietsovpetro. This is a 50-50 joint venture between PetroVietnam and Zarubezhneft, a company formedunder the former Soviet Union

This is the sole joint venture company in upstream exploitation. It has been lifting oil in the Bach Ho field since 1986. It has the only operational gas pipeline and delivers roughly two to three million cubic feet of gas per day to Vung Tau.

Companies covering other fields include, Petronas, a Malaysian state-owned oil company operating in the Cuu Long basin, the Japan Vietnam Petroleum Corporation (JVPC), an oil company of the Mitsubishi Corporation of Japan operating in the Rang Dong field, and finally BP Amoco, which has joined a partnership with PetroVietnam and operates in the Hai Thach and Moc Tinh area.

Additionally, PetroVietnam recently signed a contract with Talisman, Canada’s largest independent oil and gascompany, to explore oil and gas in block 15-2/01 in Cuu Long Basin, off the southern coast of Vietnam.

This block is believed to have great potential for oil. Moreover, PetroVietnam has announced that it will finalise two or three other exploration contracts this year with foreign oil and gas contractors raising the total number of operating contracts to more than 30.

RefineriesCurrently, Vietnam has no operating refineries, and consequently most fuels and other oil products (lubricant, bitumen, etc.) consumed in the country have to be imported. However, PetroVietnam is in the process of building its first refinery (Dung Quat refinery).

The refinery was originally scheduled for completion by 2002, but due to delays the plant is not fully operational until 2008. The $2,5 billion refinery, located in Quang Ngai province, will have a yearly capacity of 50 million barrels. PetroVietnam and Zarubezhneft each hold a 50 percent stake in the 25-year project.

In May 2005 Petro Vietnam and the French oil company Technip signed a contract for building the main part of the refinery. Other contractors in the consortium include the Japanese engineering company JGC anfd Spain's Technicas Reunidas.

Moreover, a second refinery project is under planning, which should be located at Nghi Son, north of Hanoi. The refinery will have a capacity of 7 million ton a year and will cost $3 billion. It should be operational by 2012.

The refinery is a result of a partnership between PetroVietnam and Mitsubishi Corporation. The Complex will produce high quality gasoline and petrochemical products such as LPG, mogas 90-92-95, kerosene, jet fuel, diesel, FO, bitumen, polypropylene, polyester, benzene, etc.

This project is of great importance and it is expected to act as a catalyst for the Vietnamese economy in general and the northern Central provinces in particular, not only promoting the domestic petrochemical and commodity producing industries, but also ensuring energy security.

Finally, the government is considering building a third refinery in the southern Phu Yen province and has, consequently, contracted the International Business Company (IBC) of the British Virgin Islands to conduct a feasibility study of the project.

In this context, it should also be noted that PetroVietnam has extended its focus beyond these huge projects. In terms of refineries, VTN-P Petrochemical Joint Venture Co. is opening a small-scale refinery on a trial basis in the Mekong Delta City of Can Tho. The refinery may serve as a pilot-project for similar projects. The 8 million USD refinery, the first of its kind in Vietnam, is expected to operational mid-June this year.

In addition, PetroVietnam’s business strategy includes oil-processing projects, which require smaller investment andshorter time for implementation, i.e. the Condensate Processing Project to provide another gasoline supply fordomestic market. The Bitument Project to produce bitumen, diesel fuel, and fuel oil.

These projects are considered as means to minimize import of oil products, thus reducing the country’s spending ofhard currency.

PetroVietnam plans to add 7-10 new oil & gas fields from 2005-2010. More specifically, PetroVietnam will focus on the following areas in the period of 2005-2010.

To speed up exploration work on the whole continental shelf of the country, with expectation to discover 7-10 new oiland gas fields in order to secure national energy demand.

In the production sector, PetroVietnam aims at maintaining the oil production from current fields and to triple gas production from developing fields (Eight oil and gas fields are being developed, and production will be commenced in this period).

Increased concentration on construction of infrastructure, especially to develop the gas market (power plants,


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petrochemical plants) to meet with potential gas supply. The refinery projects previously mentioned are explicit means to pursue this strategy.

For 2005, PetroVietnam aims at completing the first deepwater licensing round and expect to sign two-three contracts in this area and two-three contracts in other open blocks. Development work for four gas fields should deliver gas in 2006-2009.

Production wise, the strategy is to double volume of the Su Tu Den oil field, Vietnam's second largest oil field, and to keep the production at around 150 mmbo and 250 billion cubic feet of gas.

In order to implement its strategy, PetroVietnam expect to invest around 15-21 billion USD until the year 2020.

Market evaluationOverall the Vietnamese oil and gas industry shows promising potentials. As indicated, there is a need for futureinvestments in both upstream and downstream production in order to tap the country’s recourses effectively.

Regarding upstream operations, the opportunities appear large. The ongoing explorations continue to yield new discoveries of oil and gas reserves. PetroVietnam is increasingly aiming at attracting foreign investments for locating and tapping oil and gas reserves and to effectively implement contracts signed with foreign partners.

Companies should, however, bear in mind that the field is competitive and contract-negotiations lengthy. Moreover, there is no separate petroleum authority, meaning that PetroVietnam determines the rules of the game, but is at the same time a commercial enterprise.

Several foreign organisations have, however, lobbied heavily for improved operating conditions for oil and gas companies, and the efforts have resulted in some improvements of the business climate.

Regarding machinery and services, Vietnam has shown a strong demand for basic and less expensive products. Due to this strong and increasing demand, a substantial amount of imported oil and gas machineries is required. Moreover, given the country’s need to develop the oil & gas industry in the coming years, more sophisticatedmachinery and services will inevitable be required.

Thus, Danish companies can find opportunities to provide machineries for platforms of various types and sizes, oil rigs, drilling equipment, operations and maintenance, fire-fighting, underwater tools, towing and rescue vessels etc.

Local production of oil and gas machinery in Vietnam includes primarily basic and low-end equipment of oilrigs, platforms and pipelines. These machinery and services are mainly provided by subsidiaries of PetroVietnam such as PetroVietnam Exploration and Production Company (PVEP), Petroleum Technical Services Company (PTSC), PetroVietnam Engineering and Construction Company (PVECC).

To date, 47 oil and gas contracts have been signed between PetroVietnam and its foreign counterparts. Foreigncompanies active on the market mostly operate through production sharing contracts (PSCs) or joint operating contracts (JOCs) with PetroVietnam. The international players are companies such as Shell, Total, BP, Mobil, ConocoPhillip, Unocal etc.

At present, 23 of the 47 oil and gas contracts have been completed and the remaining 24 contracts are being implemented.

It should be noted that Russia has established a strong base in exporting its offshore oil and gas machinery and services to Vietnam due to its long-established history in Vietnam. Korean, Japanese, Indian and US companies are also active players on the market.

The total investment for exploring and exploiting the works has reached 7 billion USD.

In terms of investment and financing capacity, PetroVietnam has an exceptionally large cash flow in comparison to other Vietnamese companies.

Last year it grossed total revenues of 7,3 billion USD and remitted around 3.1 billion USD to the state budget.However, it should also be noted that although PetroVietnam is the largest hard currency earning company inVietnam, it still faces challenges in terms of mobilizing necessary capital to develop the country’s oil and gas industry.

In this context, Deputy Prime minister, Nguyen Tan Dung, has recently proposed that PetroVietnam should strengthen its efforts to develop into a strong economic group.

Consequently, PetroVietnam has worked out measures to continue attracting foreign investments for locating and tapping oil gas in the offshore areas, and it also seeks to invest in oil and gas exploration and exploitation in other regions of the world.


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Edited February 27, 2008

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