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Cablegate: Oil Production Down, Revenues Up at Petrovietnam

VZCZCXRO4630
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #0975/01 2330950
ZNR UUUUU ZZH
R 200950Z AUG 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 8336
INFO RUEHHM/AMCONSUL HO CHI MINH 5042
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000975

SIPDIS

E.O. 12958: N/A
TAGS: EAID ECON SENV ENRG TRGY VM
SUBJECT: OIL PRODUCTION DOWN, REVENUES UP AT PETROVIETNAM

REF: (A) HANOI 2064 ("First Oil Refinery Takes Shape");
(B) HANOI 1865 ("In Vietnam The Future Is Coal");
(C) HANOI 0649 ("Extracting Revenues")

HANOI 00000975 001.2 OF 002


1. Summary: Shrinking reserves meant Vietnam produced only 16.5
million tons of crude oil in 2007, down 7.6 percent from 2006. Oil
revenues increased sharply, however, as world prices soared.
Vietnam, currently a net oil exporter, expects to be a net importer
by 2015 due to rising domestic demand and the introduction of
refining capacity (two refineries are under construction and another
two planned). State-run PetroVietnam Group is actively investing in
overseas offshore production and exploitation in Asia, Africa, the
Middle East and Latin America. Oil and gas revenues now comprise
25-30 percent of Vietnam's state budget. End summary.

VIETNAM'S OIL PRODUCTION DOWN, REVENUES UP
------------------------------------------

2. Vietnam had proven crude oil reserves of 3.4 billion barrels (500
million tons) at the end of 2007, the fifth-largest reserves in the
Asia Pacific Region, according to BP's June 2008 "Statistical Review
of World Energy." July 2008 production averaged 290,000 barrels per
day (bpd). Bach Ho (White Tiger), Rang Dong (Dawn), Hang Ngoc, Dai
Hung (Big Bear), and Su Tu Den (Ruby) are Vietnam's largest oil
producing fields.

3. Domestic oil production in Vietnam is on the decline due to
shrinking reserves at Bach Ho, the biggest field. Vietnam produced
16.5 million tons of crude oil in 2007, a 7.6 percent decrease from
2006. The decline thus far in 2008 has been even more pronounced,
and Vietnam's production has now declined by 13.6 percent from its
level in 2006.

4. Despite the drop in production, oil revenues increased sharply
due to the rise in world oil prices. Through the first six months
of 2008, state-owned PetroVietnam Group's (PVN) revenues rose by 49
percent year on year, according to PVN's Vice President of Finance,
Dr. Nguyen Ngoc Su.

5. In contrast, gas production was up by 10 percent in 2007 at 7.7
billion cubic meters. Vietnam currently has around 220 billion
cubic meters of proven natural gas reserves, the third highest in
the region. Most of it is offshore in the South China Sea and the
Gulf of Thailand.

RACING TO BUILD REFINING CAPACITY
---------------------------------

6. Vietnam exports nearly all of its crude oil production and relies
on imports of refined petroleum products because the country lacks
refining capacity. Vietnam imported all of its gasoline and other
refined products in 2007, a total of 9 million tons. Through the
first six months of 2008, Vietnam imported 5.9 million tons of
refined products worth $6.8 billion.

7. Vietnam is currently a net oil exporter but expects to become a
net importer by 2015 due to rising domestic demand and the
introduction of refining capacity. Construction on the Vietnam's
first refinery, located in the Dung Quat District of central Quang
Ngai Province, is 90 percent complete. Dung Quat will enter service
on a trial basis in February 2009 with an expected annual processing
capacity of 6.5 million tons per year of gas, diesel, kerosene, and
jet fuel. PetroVietnam currently exports all of the Bach Ho Field
output, but plans to divert approximately 100,000 bpd to supply Dung
Quat starting in December 2008.

8. A consortium of foreign companies, including Spain's Tecnicas
Reunidas and Japan's JGC Corporation, is building the Dung Quat
complex, which includes a tank farm and nearby marine oil terminal.
The Government of Vietnam (GVN) is financing the entire $2.5 billion
project after its foreign partners, including Russia's Zarubezhneft,
withdrew from the venture after they were refused access to
Vietnam's retail petrol market.

9. Construction is also underway on Vietnam's second refinery, the
Nghi Son Petrochemical Complex in Thanh Hoa Province (125 miles
south of Hanoi). The $6 billion plant, a joint venture of PVN,
Japanese refiner Idemitsu and Kuwait Petroleum International (KPI),
is slated to enter service in 2013 with a projected refining
capacity of 10 million tons per year. Nghi Son will rely entirely
on Kuwaiti crude oil for its supply and, in return, PVN will allow
KPI and Idemitsu to sell directly to Vietnam's domestic petrol
market.

10. Vietnam plans to build a third refinery, the $10 billion Long
Son Petrochemical Complex, in southern Ba Ria-Vung Tau Province.
Long Son is scheduled to enter service in 2013 with an annual
refining capacity of 10 million tons. PetroVietnam, Vietnam
National Chemical Corp, and two units of Siam Cement, Thailand's top

HANOI 00000975 002.2 OF 002


industrial conglomerate, will build Long Son. Siam Cement will own
71 percent and the two Vietnamese firms the remainder. As a silent
investor in Siam Cement, Dow Chemicals has an interest in this
project. The GVN also recently announced that it would build a
fourth refinery in south central Khanh Hoa Province, scheduled to
enter service in 2015.

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

11. PetroVietnam says that near-term oil and gas production in
Vietnam could fall or rise depending on the outcome of territorial
issues (Vietnam currently has maritime disputes with Malaysia,
Thailand, Indonesia and China). To make up for diminishing reserves
at home, PetroVietnam is actively investing in overseas offshore
production and exploitation in Iraq, Peru, Indonesia, Kuwait (where
it is the operator), Cuba, Iran, Algeria, Mongolia and Morocco
(where PVN will build a $600 million fertilizer plant). PVN is also
considering upstream exploration in Mauritania and Venezuela.

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

U.S. PRIVATE SECTOR INVOLVEMENT
-------------------------------

13. ConocoPhillips (CoP) is the single largest U.S. investor in
Vietnam with investments of over $625 million. The company entered
the Vietnamese energy market in 1996 and currently holds a
concession for 4.1 million acres in five offshore blocks. CoP
operates two oil-producing blocks and two exploration blocks. CoP
also owns a stake in the Nam Con Son Pipeline, a 244-mile offshore
pipeline that delivers gas from the Nam Con Son Basin to southern
Vietnam.

14. Chevron has a working interest with Malaysia's Petronas, Japan's
Mitsui and Thailand's PTTEP in three blocks in the South China Sea.
Chevron has certified two trillion cubic feet of gas in Blocks B and
52, enough to supply 2700 MW of power for 20 years. The company is
currently engaged in negotiations with the GVN to build an offshore
pipeline that would supply gas to a 3,000 MW power complex that
state-run Electricity of Vietnam (EVN) would build in O Mon in
southern Can Tho Province.

15. ExxonMobil has entered into a preliminary agreement with PVN to
conduct feasibility and seismic studies for natural gas in Blocks
117/8/9 offshore north central Vietnam. ExxonMobil also has a
concession in four blocks, 156/7/8/9, about 350 nautical miles
southeast of HCMC.

MICHALAK

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