Shifting the blame

Shortly before the country’s first oil refinery launched its first oil product early last year, the operator of the refinery said with confidence that the domestic fuel market would be more stable with less upward price movements as seen in the past.

In fact, the Dung Quat Oil Refinery in the central province of Quang Ngai is able to meet 30% of fuel needs in a country that used to export all its crude oil and import all oil products.

The US$3 billion refinery is scheduled to attain a total processing capacity of 6.5 million tons by 2011. And the plan for this year is to refine around 5.2 million tons of crude to produce 4.1 million tons of oil products, thus partially meeting local demand and ensuring energy security as originally hoped by the Binh Son Oil Refinery and Petrochemical Co., the operator of Dung Quat.

But the possibility that this production plan would crash is real high. It is weird but true: the refinery is grappling with huge unsold volumes of oil products and liquefied petroleum gas (LPG) while main fuel importers are continuing their import shipments as planned.

Not surprisingly, the backlog of 750,000 tons of gasoline and other oil products and two million cubic meters of LPG has made big headlines in local media though the ongoing Thang Long-Hanoi millennium extravaganza and the killer flooding in the central region have come into the media spotlight this week, occupying a lot of newspaper space and airtime.

The refinery may be forced to slow production as its storage facilities are all full. What Deputy Minister of Industry and Trade Nguyen Cam Tu has pointed out this week is a certain indicator of possible disruption at the nation’s only oil refinery. And Vu Quang Nam, deputy general director of PetroVietnam as the parent firm of the refinery operator, also affirms this, saying that if its sales remain as poor as now, the refinery will resort to a production slowdown given lack of storage facilities.

The news site vneconomy.vn quotes Deputy Minister Tu as saying that Dung Quat’s current production is 20% higher than earlier planned while fuel consumption is normally down toward the end of year and leading traders keep their fuels import plans unchanged. So with such a consumption bottleneck, a redundancy is unavoidable at the refinery, Tu says.

Key fuel importers are also quick to catalogue the reasons for the mounting stockpile at Dung Quat.

Dam Thi Huyen, deputy general director of Petrolimex, the country’s largest fuel trader and importer with 60% local market share, says on vneconomy.vn that it is Dung Quat’s fault. The refinery has been unable to produce a stable supply scheme, thereby causing uncertainty among buyers who are really in need of an uninterruptible supply, Huyen says.

This explains why those buyers have contracted to buy limited volumes of oil products from Dung Quat despite an import tariff advantage. Nine of 11 main fuel trading houses in the country are Dung Quat’s customers but their purchases make up a slight 30-40% of their needs. In particular, Petrolimex, the biggest player on the market, buys from the refinery a quantity equivalent to a meager 19% of its total demand.

Companies often sign fuel import contracts with foreign suppliers at the start of year, so the refinery’s unexpected production increase has made it hard for them to turn their hand abruptly. Switching to purchasing Dung Quat products would cost them dearly as they could not avoid compensation for breach of contract terms with foreign suppliers. According to Saigon Tiep Thi newspaper, Tu, the deputy minister of industry and trade, points the finger at Binh Son Oil Refinery and Petrochemical Co. Tu’s ministry – which is mandated to over the fuel market – is in an awkward situation now, he says, adding leaders of the refinery operating firm should have made its production expansion plan widely known.

Nam of PetroVietnam at a meeting at the ministry early this week sought the ministry’s help to clear stock at the refinery but of course, the ministry’s hands are tied.

Figures released at the ministry meeting put January-September fuel import value at US$4.87 billion, 4% higher than a year ago. This is indeed a hefty sum, especially at a time when banks are finding it increasingly difficult to raise dollar funds.

Huyen of Petrolimex has also criticized the refinery’s current selling mode which forces trading firms to buy its oil products through intermediary PV Oil while traders want to transact directly with refinery operator Binh Son. And Minister of Industry and Trade Vu Huy Hoang seconds her view, saying there is no reason for Binh Son and its clients to go through a third party.

However, this reveals a problem. What has the ministry done so far to oversee the fuel market and direct the industry? According to the Government Inspectorate, the ministry has not sent out a single team to look into fuel trading operations over the past two years, leading to lack of transparency in the sector. The ministry is facing the possibility of self-criticism over this issue.