Downstream Expansion Looms In South East Asia

BMI View : The Nghi Son refinery in Vietnam is greatly needed to meet the country's growing consumption needs - a pattern that is replicated through many parts of S outh E ast Asia. This has in turn invited a flurry of proposals and plans to expand and upgrade the sub-region ' s downstream segment. Market and regulatory challenges in S outh E ast Asia leave hybrid partnerships between foreign state-owned oil companies and private investors best suited to capitalise on this growth opportunity.

After years of deliberation, it has finally been confirmed that the Nghi Son refinery in Vietnam will proceed with construction. On January 15 2013, Idemitsu annou nced that it has approved a US$9bn investment required to build the 200,000 barrels per day (b/d) refinery, which will be Vietnam's second after Dong Quat . Construction is due to begin in Q213 and the plant is scheduled to come online in 2017.

Idemitsu holds a 35.1% stake in the project and Kuwait Petroleum , via its marketing arm Kuwait Petroleum International , holds the other 35.1%. The remaining interest is held by state-owned PetroVietnam (25.1%) and Mitsui Chemicals (4.7%). A consortium formed by Chiyoda Corporation , JGC Corporation , Technip , GS Engineering and SK Engineering has been awarded the engineering, procurement and construction (EPC) contract to build the plant.

Nghi Son's supplies are much needed by Vietnam, whose oil consumption has expanded beyond total fuel production growth. The 130,500b/d Dong Quat refinery came into operation in 2009, but the country still imports more than half of its required fuel needs. If Nghi Son is operational by 2017 as planned, in 2018 we estimate that its net import requirement could fall to about 23% of total consumption.

Nghi Son: Boost To Domestic Fuel Output
Vietnam's Refining Capacity vs. Oil Consumption, 2011 & 2018 ('000b/d)

Nghi Son is unlikely to be the last of new downstream projects in Vietnam. In July 2008, state-owned Petrolimex proposed a US$4.5bn facility in Van Phong, which would also have about 200,000b/d in refining capacity. More recently, state-owned Thai energy giant PTT expressed interest in a US$28.7bn mega-refinery and petrochemical project near the port of Nhon Hoi, which would have a massive capacity of 600,000b/d and target the domestic market.

New investment into Vietnam's downstream is reflective of a regional trend. South East Asia has seen a flutter of news and rumours about interest in further development of its downstream industry as the sub-reg ion ' s demand continues to expand alongside economic growth.

Downstream Rises In Importance

The wave of new downstream projects proposed or planned in South East Asia include s the following :.

  • Myanmar: A refining and petrochemical complex in the planned Dawei Industrial Estate;

  • Cambodia: A 100,000b/d facility in Kompong Som planned by Sinomach China and Cambodian Petrochemical Company ( see our online service, January 3 2013, 'Steps Taken For Refining Action');

  • Malaysia: A 300,000b/d refinery as part of the Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang, Johor, led by state-owned Petronas ( see 'Charging RAPIDly Ahead', May 29 2012);

  • Singapore: A possible US$500mn upgrade to the 290,000b/d SRC Refinery in Jurong Island, for which a final investment decision (FID) is to be made in early 2013 by its partners Singapore Refining Company (joint venture between Chevron and Singapore Petroleum, a subsidiary of Chinese state-owned PetroChina);

  • Philippines: PTT is rumoured to have expressed interest in building a refinery, though the location is uncertain;

  • Indonesia: A US$1.5bn upgrade to the Balikpapan refinery ( see 'Balikpapan Upgrade To Ease Import Burden', July 6 2012). PTT was also reported on January 16 2013 to be studying the feasibility of a new refinery in the country together with state-owned Pertamina. Azerbaijan's national oil company (NOC) SOCAR has also proposed a 600,000b/d mega refinery project to be located on Batam Island.

These additions and upgrades to regional refining capacity could go a long way to meet ing South East Asia ' s needs. Excluding Singapore, which is still Asia Pacific's premier refining hub, the sub-region ' s spare capacity available for export has fallen precipitously in recent years, as illustrated in the chart below.

Soaring Domestic Consumption Sees Refining Shortfall
Change In Regional Spare Fuel Export Capacity (Excluding Singapore), 2000-2011 ('000b/d)

Hold The Horses

Besides the recently-confirmed Nghi Son development, other planned projects mentioned have already been included in our 10 -year forecasts of refining capacity growth. However, we have been cautious about including proposed projects into our forecasts due to the combined effects of issues that we foresee.

Limited upstream growth : The sub-region ' s limited crude oil growth potential could undercut its downstream potential. Inadequate supplies of domestic crude feedstock necessitate expensive foreign crude imports, which in turn cut into refining margins unless efficiency gains can be made elsewhere.

Fierce market competition : T here are certainly economies of scale to be r eaped from these mega-projects. If both PTT and SOCAR proceed with their 600,000b/d refinery plans in Vietnam and Indonesia respectively and the plants come online by 202 2, the addition would provide a slight theoretical surplus in regional refining capacity.

Comfortable Surplus, But Are There Markets?
Forecast Of Regional Refining Capacity In 2022: With And Without Mega-Refineries* (in mn b/d)

This does not appear to be an issue regionally. However, on an individual country basis , some of the expected increase in refined fuel output could struggle to find export markets. For instance, the addition of Nhon Hoi by 2022 could give Vietnam a theoretical surplus of 688,000b/d in the same year.

Countries such as Indonesia and the Philippines will most likely continue to require fuel imports, but Vietnam would have to compete with the traditional refining bigwig Singapore, aspirant Malaysia, and even sellers further away such as emerging global giants Saudi Ara bia and China for both domestic and the global export market s . Fierce competition could cause potential investors to dial down their optimism about the region ' s downstream prospects.

This could further hurt growth opportunities in the sub-region ' s older players , such as the Philippines and Malaysia. Unlike countries in mainland South East Asia (Cambodia, Myanmar, Vietnam etc), they are more established in oil trade and could find imports more economical than domestic production. Phillips66 is considering a sale of its 47% stake in the 129,000b/ d Melaka-1 refinery in Malaysia, which chief executive Greg Garland said was because the firm '[ does not ] envision growing in the Asian refining space ' . The future of the 110,000b/d Tabangao refinery in the Philippines could also be closed if owner Royal Dutch Shell concludes later in 2013 that further investment to upgrade it s facilities is not profitable.

Regulation : The practice of fuel price regulation in many countries in the sub-region could also restrict a private downstream investment boom. At present, much of the demand in countries such as Indonesia, Malaysia, Thailand and Vietnam has been kept artificially high by price ceiling s on fuel products. While these ceilings are partially supported by subsidies from the state, the post-payment nature of these subsidies, together with the cumbersome bureaucratic process involved in revising prices, p ose s regulatory hindrances.

The Hybrid Partnership

These challenges will limit a downstream investment boom in South East Asia, though they will in no way negate the considerable demand opportunities that still remain. T here could be players willing to take on refining projects. Joint ventures ( JVs ) formed between state-owned companies - both domestic and foreign - and private firms appear to be the likely type of ownership we can expect to see for new refineries in particular.

Foreign s tate-owned oil companies have been some of the most common candidates for downstream partnership s . The Nghi Son refinery, in which Kuwait's national oil company ( NOC ) Kuwait Petroleum has a share, is one example. Saudi Arabia's Saudi Aramco has also been a participant of a study for a 300 ,000b/d refinery in Tuban , Indonesia . Chinese downstream behemoth Sinopec has expressed interest in both Indonesia and Vietnam's refining sectors , while Thai NOC PTT has been named as a potential investor in most recent refinery proposals.

For Sinopec and PTT, over seas ventures help supplement domestic operations , which are not always profitable . Without the burden of fulfilling their national duties, they are freer to con centrate on profit-making in running overseas businesses. NOCs with sizable upstream production - such as Saudi Aramco, SO CAR and Kuwait Petroleum - can also create cross-national integrated operations through refining operations abroad. By investing in South East Asia's d ownstream, they can earn larger margins from selling higher value-added oil products than selling crude oil to a growing market. The ability to procure cheap feedstock internally could also help make their refining operations in South East Asia more cost-competitive .

Teaming up with local NOCs or experienced downstream players help s these foreign NOCs overcome possible regulatory barriers and/or enhance the efficiency of refining operations. This appears to be the combination that can best weather the challenges presented in South East Asia's downstream segment.

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