Vietnam’s emerging energy industry

By Fred Stakelbeck Jul 18, 2006, 16:15 GMT

Scarred by decades of war, widespread poverty and communist oppression, Vietnam has quietly transformed itself into an Asian success story.

The country has become one of Asia’s best economic performers, with GDP growth averaging an impressive 7.4 percent since 2000. Supported by a nearly 20 percent growth in domestic consumption, favorable trade agreements, highly-productive manufacturing and textile sectors and increasing amounts of foreign investment, Vietnam’s future has never looked so bright. Michael Smith, President of the Hong Kong and Shanghai Banking Corporation (HSBC) Limited, told a gathering of journalists in June that Vietnam holds great potential for foreign investors, describing the nation as a “new Asian tiger.”

Hanoi has also taken important steps to integrate itself into several regional and world bodies becoming a member of the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB). Of particular importance has been Vietnam’s participation in the Asia-Pacific Economic Cooperation Forum (APEC), Association of Southeast Asian Nations (ASEAN) organization and current efforts aimed at World Trade Organization (WTO) membership. 

Moving forward, a key component needed to secure Vietnam’s economic resurgence and plans for the future will be the development of its potentially lucrative energy industry. Bolstered by strong global energy demand from China, India, Japan and the U.S., Vietnam is an emerging player on the international energy scene.

According to data from the Oil and Gas Journal, an industry publication, the country has 600 million barrels of proven oil reserves with crude oil production averaging 366,000 barrels per day (bpd) in 2005. That total is likely to increase as exploration and development efforts expand and a host of new oil fields come on-line in the next few years, led by the country’s largest oil producer Vietsovpetro (VSP), a joint venture between Vietnam and Russia’s state-controlled energy-giant Zarubezhneft. At a conference in March organized by the American Chamber of Commerce and Industry (AmCham), delegates recognized the country’s energy potential, noting that oil firms from 13 countries were already involved in nearly 30 projects worth an estimated US$7 billion.

Vietnam is only one of four countries in the China Rim region generating a crude oil production surplus. However, its lack of refining capacity has diminished the country’s overall energy profile. For the past several years, Vietnam has been forced to export almost all of its crude oil production to neighboring Asian countries such as Japan, Singapore and South Korea and import refined products for domestic consumption. As a result, production costs have soared, affecting profitability and return on investment (ROI).

The April announcement by the Dung Quat Economic Zone Authority (DEZA) that   construction of the country’s first crude oil refinery, the US$1.5 billion Dung Quat Refinery located in Quang Ngai province, is a positive for Vietnam’s emerging energy industry. Commercial operation of the refinery is expected to begin by February 2009, with processing capacity of 6.5 million tons of crude oil annually, or an estimated 48.6 million barrels. A second refinery project at Nghi Son near Hanoi in Thanh Hoa province is also under consideration.

The country is also rich in natural gas reserves with approximately 6.8 trillion cubic feet (Tcf), according to the Oil and Gas Journal. Domestic consumption has risen steadily over the past decade, making the distribution of natural gas throughout the country much more important. A pipeline contract was awarded in March for the construction of a 200-mile natural gas pipeline which is expected to be completed in late 2007.

The country’s approximately 165 million short tons of coal reserves are growing in importance as well. Domestic consumption and exports, mostly to Japan and China, have increased recently. The construction of eight new coal-fueled thermal power plants have commenced with six in various stages of planning and construction. Although Vietnam’s electricity demand is currently the lowest in Asia, demand for electricity has increased, as the Vietnamese population continues its gradual move from rural to urban areas. Total electricity capacity is expected to reach 2,900 MW by 2010, and the new coal-fueled thermal plants are expected to provide 25 percent of the country’s total electricity production. Vietnam is also exploring nuclear power and expects to complete its first 2,000-MW power plant by 2020.

The rapid development of the country’s energy infrastructure is a top priority for Vietnam’s national government; with recent visits by government officials to energy facilities a clear indication of Hanoi’s overall commitment. But to realize its full potential, Vietnam’s energy industry will need significant short-term investment and long-term financial commitments. The country has called for an additional US$25 billion in foreign direct investment (FDI) on top of an already US$115 billion, much it earmarked for improvements in the energy sector. If secured, this investment could offset costly infrastructure improvements and mitigate risks associated with uncertain commodities markets, instability in commodity prices and a possible rise in inflation. 

The most serious risks facing the country could arise from opening the economy to foreign competition and unresolved energy disputes with neighboring countries. Foreign business competition has been severely limited in the past by a communist government determined to protect state-controlled businesses and industries. Changes to the legal framework for the Unified Enterprise Law (UEL) and the Common Investment Law (CIL) will help both foreign and domestic businesses; however, state-protected enterprises will almost certainly have difficulty adjusting to a competitive energy market. In addition, Vietnam claims partial or full ownership over the oil-rich Spratley and Paracel Islands, contesting claims made by several other Asian nations including China, Japan, Malaysia and the Philippines. This has caused concern among foreign investors regarding the security of proposed development and exploration projects.

Despite these significant hurdles, optimism is in the air, especially among the country’s young, educated and ambitious workforce, as Hanoi implements a mix of economic reforms, infrastructure spending and state-controlled capitalism.

Vietnam, the “new Asian tiger,” is on the prowl. Years of harmful isolation and corrupt communist policies are rapidly being washed away, replaced by a more Western friendly investment environment. But many unfamiliar challenges, such as the support and encouragement of a free market system, lie ahead for the Hanoi government. How an increasingly capitalist-minded Vietnam faces these challenges, while simultaneously developing a robust and efficient energy infrastructure, will determine the country’s prospects for future prosperity and security.

Fred Stakelbeck is a Senior Asia Fellow with Washington-based Center for Security Policy. He is an expert on the economic and national security implications for the U.S. of China’s emerging regional and global strategic influence. Comments can be forwarded to Frederick.Stakelbeck@verizon.net.