Dung Quat Refinery: The ball of oil rolls on the field of tax and tariffs

Vietnam Ministry of Finance has promulgate Circular No. 48/2015/TT-BTC to reduce the MFN import tariffs on some petroleum products, releasing the high-raised concerns by Binh Son Oil Refinery and Petroleum Company (BSR) over the possible profit loss and even business closure facing the Dungquat refinery.

In a simple logic, currently supplying around 30% of the domestic demand for petroleum products, if the Dungquat refinery had not faced some kind of “import tariff”, the state budget would have lost a considerable amount of revenue coming from taxes imposed on petroleum imports. Meanwhile, this refinery was initially invested by the state budget. Therefore, contrary to the thinking of many outsiders, Dungquat oil refinery despite being a domestic-based oil producer still has to pay the some  import duties imposed on its oil and gas products sold domestically under a special tax adjustment mechanism stipulated by the Vietnam prime minister under a regulatory decision promulgated since 2009 – the year this refinery was completed and put into operation.

According to the said mechanism, such import duties are lower than and based on the applicable import tariffs framed by the National Assembly and regulated in details from time to time by the Ministry of Finance. The specific rates shall be the MFN import rates deducted certain percentages dependent on each type of petroleum products (7% for petrol and diesel; 5% for LPG and 3% petrochemical products). This factor in combination with some new arising factors have stirred a intense controversy in local mas media in April 2015.

Dropping crude oil prices can lead to dropping business?

When crude oil prices started to decrease dramatically last year, the debates over the scenario of Vietnam economy, under end-users, enterprises and government perspectives, also began to get heated. Considering the fact that taxes collected from crude oil export and oil products import constitute a high percentage in the state revenue.

In reaction to that circumstance, Vietnam Ministry of Finance in late 2004 decided to raise the import tariffs on petroleum products. A decision by the Ministry clearly defined that import tax on petroleum products would be based on the price of crude oil, in the principle that the lower crude oil price is, the higher import duties are. Accordingly, if the Platt's crude oil price is below $60 per barrel, the import duty of petrol, kerosene, diesel, fuel oil shall be at the maximum rate of 40%. For example, if the price of crude oil is at around $ 52 per barrel as recently, the import duty for fuels and oil products can be raised to the rate of 40%; when crude is priced at 60-75USD per barrel, the import duty on kerosene, gasoline and diesel fuel would be at 35%, fuel oil at 30%.

Meanwhile, earlier this year, it was estimated that Petro Vietnam Group’s total revenues in 2015 could drop to 434.5 trillion VND (20.2 billion USD) and remittance to the State budget would be only 79.8 trillion VND (3.7 billion USD) in case the oil price was 40 USD per barrel compared to 33.4 billion USD and 7.4 billion USD, respectively, if the price was 100 USD per barrel.

The two factors including the decreasing crude prices and increasing duties seemed to put Dungquat refinery at an hard time of business, and warnings of possible business loss were widely circulated.

The coming “threats” from ASEAN petroleum products?

In application of the ASEAN Trade in Goods Agreement (ATIGA), Ministry of Finance in Nov 2014 , specified the tariffs for imported goods from the ASEAN member countries, of which the rate imposed on petroleum products  have been significantly lower than those applied by the MFN tariffs (normal rate) to which Dungquat refinery’s products are subject to. For example, the ATIGA import rate for petrol (HS 2710) shall be only 20% in 2015-2018; meanwhile, the MFN rate for the same goods at that time was at a high level of 35%.

Sensing the possible threats coming from ASEAN petroleum products because they are enjoying lower tax rates, PVN and BSR raised their voices of concerns and petitions in early April 2015 to Ministry of Finance and some other ministries. They said that such tax situations would make their petroleum products less competitive in the local market and the closure of the young and first refinery in Vietnam may happen, and petitioned to the Ministry to lower the MFN rates on petroleum to the same rates as per ATIGA.

 Some observers commented that the said spoken concerns by BSR were groundless; however Ministry of Finance on 13^th April 2015 issued Circular No. 48/2015/TT-BTC cutting the MFN import tariffs for petrol from 35% down to 20%, diesel from 30% down to 20%, jet fuel from 25% to 10%. These rates are largely similar to these of ATIGA and the concerns by BSR are said to be released.

 Upon issuing that new circular, a representative from Ministry of Finance did not forget to note in a news conference that the cut taxes would make the state revenue reduced by VND 13,000 billion (~ USD 600 million). However, consumers in Vietnam shall not benefit so much from this tax cut because the environmental protection levy imposed on petrol will be tripled from the current 1.000 VND (~4.62 cent) per liter to 3.000 VND (~14 cent)/liter since May 2015.

At this point of time, the situations seem to be harmonized somehow, however, another issue relating to the above-mentioned “special tax adjustment mechanism” may arise when the MFN import tariffs are lower than the “deducted rates”, and shall be analyzed in another article.

I4G

Dung Quat Refinery expansion plan fixed at 8.5 mln tons of crude and investment of USD 1.82 billion

After much study and calibration, the ambitious plan to expand and upgrade the Dung Quat oil refinery based in Dung Quat Economic Zone of central coastal Quang Ngai province has been eventually fixed and ratified by an Investment Certificate issued by the local government. The target capacity is announced to be 8.5 million tons of crude per year (192,000 barrels per day),  lower than the figure of 10 million tons as tentatively publicized previously. The total cost for this plan is said to be roughly 1.81 billion USD, 30% of which shall be contributed by the involved partner(s) and the remaining 70% shall comes from loans, according to a news article from PVN/BSR.

A ceremony was organized on 23rd Jan 2015 at Dungquat EZ to officially announce the expansion project.

The expansion plan will involve the construction of some new technological units, upgrade the capacity of existing units, building more crude oil tanks, product tanks, upgrading the existing loading jetties ... so that more crude can be processed, a wider variety of crude input types can be handled by the refinery, and the products can meet the environment standard of Euro V. Besides the current single point mooring (SPM) accessible for  150,000 DWT crude vessels, another SPM for vessels up to 300,000 DWT will also be built.

Layout of the Dung Quat Refinery expansion area.

It’s projected that the work for FEED contract and license contract shall finish in Q. II 2015, EPC contract shall be executed since Q.IV 2017 until Q.III 2021 and the expanded refinery shall be put into operation before 2022.

The investment certificate came after an announcement on the Prime Minister’s approval for this expansion plan. Accordingly, the Prime Minister agreed to let Petrovietnam invest this project on its own in parallel with negotiating with Gazpromnheft (Russia) about the [possibility/options of] transferring. Considering the dropping oil price, it seems that Petrovietnam will still maintain its role as the sole owner of Dungquat refinery until there is an official announcement on when and how the Russian oil giant will become a stakeholder in this project.

According to PVN yearly review for 2014, the operator of Dungquat refinery being Binh Son Refining and Petrochemical Company (BSR) under PetroVietnam  processed 6.4 million tons of crude into 5.81 million tons of oil products and reached a revenue of approximately USD 6 billion, contributed to the state budget more than USD 1 billion.

The revenue targeted for 2015 was announced to be lower than last year, at roughly USD 5.75 billion. 

Dungquat’s refinery upgrade and expansion plan estimated to cost $2 billion

PetroVietnam Deputy General Director Le Manh Hung acknowledged during a recent meeting with the Authority of Quang Ngai, where the Dungquat refinery is located, that the plan to upgrade and expand this refinery shall be kicked off in Q.1 2015, clear site should be available in Q2 2016, and construction will commence in Q.3 2017 and expectedly complete in 2021.

The upgrade and expansion plan is estimated to cost between 1.8 to 2 billion USD and shall raise the refinery’s annual capacity from the current 6.5 million tons of crude oil to 10 million tons.

Surroundings of the current refinery

Much hope is being casted on the formation of a giant refining-petrochemical center in the Dung Quat area where there would be many petrochemical plants to follow, not just an alone oil refinery because after upgrade and expansion, the refinery can handle more diversified types of crude oil, with more types of by-products to be used as input materials for downstream petrochemical plants. 

Research and preparation work for this project started since 2009 - the time when the Dungquat oil refinery was completed and put into operation. According to the latest study, two options are now under consideration: the project shall be invested solely by Vietnam or it shall be joined by a foreign partner, possibly Russian Gazprom group.

The necessary area for the upgrade and expansion of the refinery area is 108.2 hectares, of which 94 hectares shall be used for construction works, the safety corridor is around 14.2 hectares. In order to get such space for expansion, it’s projected to relocate around 400 families away from the area and remove some existing civil facilities.

In the latest event, Deputy Prime Minister has ordered PetroVietnam to complete the investment Project and submit to the Industry and Trade Ministry in November this year for evaluation. The project shall be evaluated by a Council to be set up by Ministry of Industry and Trade, with the participation of related Ministries and Quang Ngai province People’s Committee, and then be reported to Prime Minister by the end of 2014.

150,000 DWT oil tanker accesses Dungquat SPM

According to news released by PVN, on 23^rd August 2014, Binh Son Refining and Petrochemical Company Limited (BSR) successfully received crude oil tanker of 150,000 DWT to import 1 million barrels of AZERI crude oil from Azerbaijan through the Single Point Mooring (SPM) system of Dung Quat Oil Refinery. This is the biggest first-ever oil tanker accessing this facility after 5 years of operation; in the past, only tankers of up to 110,000 DWT could visit here.

During the 2^ndoverall maintenance of the refinery which lasted 57 days, nearly 7,000 items were done with the involvement of 3,400 professional staffs of BSR, contractors, partners. It was divided into 5 main packages, notably the the package 4 was implemented by BSR themselves including the maintenance of rotating equipment, electrical equipment, automation equipment, a number of simple static devices and oil pipelines. Meanwhile, the repair of defects for thermal expansion joints EX-101 in RFCC workshop was conducted by Technip/JGC contractor (EPC contractor of Dung Quat Oil Refinery Plant) and connection of awaiting ends for SRU 2 project was implemented by JGC contractor.

The first 150,000 DWT Oil Tanker at Dungquat SPM. Photo courtesy: PVN

Following the successful maintenance and upgrading of single-point mooring buoy, BSR imported the first crude oil from tanker of 150,000 DWT instead of 110,000 DWT previously. At transformation cost of US$ 300,000 only, SPM system has been improved to receive crude oil vessels of double capacity from Aframax vessel size (80,000 - 110,000 DWT) to Suezmax vessel size (150,000 DWT). Currently, BSR is capable of receiving crude oil from different regions of the world such as West Africa, the Mediterranean ... to help diversify sources of crude oil for processing at Dung Quat Oil Refinery, improving efficiency, reducing production costs and saving USD 10-15 million .

It was the 398^thcrude oil vessel received BSR through this SPM since the plant was put into operation in 2009, with totally 31,288,140 million tons of crude oil handled, approximately 27,985,737 tons of products refined.