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Cablegate: Vietnam's Oil and Mining Companies Extract Revenues Where

VZCZCXRO9715
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #0649/01 1550946
ZNR UUUUU ZZH
R 030946Z JUN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 7929
INFO RUEHHM/AMCONSUL HO CHI MINH 4790
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000649

SIPDIS

E.O. 12958: N/A
TAGS: EAID ECON SENV ENRG TRGY VM
SUBJECT: VIETNAM'S OIL AND MINING COMPANIES EXTRACT REVENUES WHERE
THEY CAN FIND THEM

REF: (A) HANOI 2064 ("First Oil Refinery Takes Shape");

(B) HANOI 1865 ("In Vietnam The Future Is Coal")

HANOI 00000649 001.2 OF 002


1. Summary: As rising domestic energy demands compel Vietnam's
transition from exporter to net importer of crude oil and coal,
state-run PetroVietnam (PVN) and the Vietnam National Coal-Mineral
Industries Group (Vinacomin) are expanding their horizons.
PetroVietnam, which expects a 140 percent increase in revenues in
2008 due to high oil prices, is expanding overseas exploration and
production while Vinacomin is preparing to exploit Vietnam's bauxite
reserves, the world's fourth largest, to compensate for diminishing
coal exports. End summary.

PETROVIETNAM LOOKS ABROAD
-------------------------

2. PetroVietnam (PVN) Vice President of Finance Dr. Nguyen Ngoc Su
(one of eleven vice presidents at PVN) told a visiting SFRC Staff
Delegation on May 30 that domestic oil production in Vietnam is
fading because of declining reserves at Bach Ho (White Tiger), the
country's biggest oil field. Vietnam produced 16-18 million tons of
crude oil in 2007 and exported virtually all of it, he said.
Vietnam, which currently lacks refining capacity, imported all of
its gasoline and other refined products in 2007, a total of 9
million tons. Rising domestic demand and the introduction of
refining capacity means Vietnam will shift from a crude oil exporter
to a net importer by 2015.

3. Dr. Su said near-term domestic oil production in Vietnam could
fall or rise depending on the outcome of various territorial
disputes, and he noted that Vietnam has disagreements with China,
Malaysia, Thailand, and Indonesia. To make up for diminishing
reserves at home, PVN is actively investing in overseas offshore
production and exploitation in places such as Iraq and Kuwait (where
it is the operator), Peru (where it holds a 100 percent interest in
Block Z47), Indonesia, Cuba, Iran, Algeria, Mongolia, and Morocco,
where PVN will build a $600 million fertilizer plant.

4. Oil and gas revenues now comprise 25-30 percent of Vietnam's
state budget, equivalent to 18-20 percent of GDP. PVN earned
approximately $80 billion in 2007 and expects to earn $115-120
billion in 2008, a 140 percent increase year on year, due largely to
the increase in oil prices. The company currently employs 26,000
people, the biggest SOE in Vietnam, and expects its workforce to
rise to as many as 40,000 by 2010, he added.

5. Vietnam's first refinery, located in the Dung Quat district of
central Quang Ngai Province, is expected to enter service in
February 2009 with an annual refining capacity of 6.5 million tons
of unleaded gas, diesel, kerosene, and jet fuel (Ref A). As well,
construction is now underway on what will be Vietnam's second
refinery, the $6 billion Nghi Son Petrochemical Complex in northern
Thanh Hoa province (125 miles south of Hanoi), which will enter
operation in 2013 with a projected refining capacity of 7-8 million
tons per year. The GVN recently announced plans to build a third
refinery in the Long Son District of southern Ba Ria-Vung Tau
Province.

6. By 2010, PVN hopes to produce 24 million tons of oil and 17
billion cubic meters (bcm) of natural gas annually. Vietnam
produced seven bcm of gas in 2007. Chevron recently announced that
it had found at least 170 bcm of gas in the Malay Basin offshore
southwest Vietnam - 30 bcm more than first believed. Much of
Vietnam's substantial gas reserves are tied up in seemingly
intractable territorial disputes in the South China Sea, however, so
attaining these ambitious production targets may require a
commercial or political settlement.

7. A May 23 agreement between PVN and Russia's Gazprom creates
additional ties to a foreign partner, allowing for the exploration
and development of natural gas deposits in four new blocks on the
Vietnamese shelf. The agreement also provides for the establishment
of a new joint venture that would allow PVN to participate in
projects in Russia and third countries. According to a Russian
Embassy official, it is hoped that the impact of the new gas venture
in Vietnam will rival the VietSovpetro venture during the 1980s that
brought thousands of Russian oil workers to Vietnam and has
generated a steady stream of revenues to its Russian partner,
Zarubezhneft.

WORLD'S FOURTH LARGEST BAUXITE RESERVES
---------------------------------------

8. Vietnam National Coal-Mineral Industries Group (Vinacomin), Vice
President Nguyen Van Hai said Vinacomin and its 22 subsidiary
companies mine 95 percent of Vietnam's annual coal production and
currently exports about half of that. In 2007, Vietnam mined 41
million tons and exported 23.8 million tons of coal. The state-run

HANOI 00000649 002.2 OF 002


group has now equitized all 22 of its sister companies although
Vinacomin retains a 51 percent stake in each subsidiary, he said.

9. By 2010, as new coal-fired electricity plants come online,
domestic demand will increase to 37 million tons per year while
annual production will rise to 47 million tons, Hai said. Coal
shipments to China have dropped by 32 percent Vinacomin plans to
eliminate Chinese exports altogether in the near future. By 2012,
Vietnam will shift from a coal exporter to a net importer (Ref B).

10. Vietnam has the world's fourth largest reserves of bauxite,
estimated at 2,770 million tons, with most of it in the central
province of Dak Nong on the border with Laos. Several of the
world's largest aluminum production companies, including U.K. /
Australia-based BHP Billiton, U.S.-based Alcoa, Russia's RUSAL, and
China's CHALCO, are currently engaged in negotiations with Vinacomin
and the GVN to establish bauxite mining and alumina refining
projects that could be worth as much as $10 billion.

11. The GVN is apparently poised to grant Alcoa up to a 40 percent
stake in a major mining and refining venture. Vinacomin would hold
a 51 percent stake in the project while 9 percent would be sold to
the public. The venture would mine enough bauxite to refine 600,000
tons of alumina per year, 100 percent of which the GVN would export
for aluminum production. The price of aluminum has increased
significantly over the last several years and Hai indicated that
alumina exports could help Vinacomin recoup much of the revenue lost
because of Vietnam's diminishing coal exports.

MICHALAK
#0649

NNNN

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