VN oil and gas 2014.PDF

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INDUSTRY COVERAGE

Crude oil price performance in one year

Source: Bloomberg

Natural gas price performance in one year

Source: Bloomberg

Vietnam’s primary energy consumption has grown rapidly in the last 10

years compared to other countries in Southeast Asia. The country has

highest growth in primary energy consumption among countries within

the region. Consumption increased by 27.7% in 2004, and decreased to

3.7% in 2005. Total primary energy consumption in the period of 2003-

2013 had a compound annual growth rate (CAGR) of 7 %, while GDP

growth was about 6% on average for the same period. Vietnam no

longer looks capable of producing 400,000 barrels per day like it could

earlier in the century. Meanwhile, the demand for oil and gas

increasingly continuously. Vietnam is trying to increase its crude oil

production by expanding Exploration & Production (E&P) activities

abroad at the same time, the State and PVN will have to open up

foreign investors to reaping more of the reward. According to PVN, the

country’s oil production will reach 420 thousand barrels per day (kbpd)

at its peak in 2014, reflecting a CAGR of 3.7% in 2009 to2014. Domestic

production is then estimated to decline dramatically to only 150 kbpd

by 2020.

Vietnam’s Liquefied petroleum gas (LPG) consumption is forecast to

grow stronger than suppliers; as a result refinery production cannot

meet the demand. However, thanks to new suppliers Vietnam will

significantly reduce import volumes. Demand is expected to reach 2.1

million tons (Mt) by 2020 with potential shortages in supply after 2025,

not mention to other large LPG consumers -PP and PE petrochemical

plants – which will commence operations after 2020. Vietnam will

continue to face a deficit in LPG after 2020 and imports shall remain as

the country’s primary solution.

To develop domestic petroleum supply, Vietnam is planning to put

online several refineries in the near future. As a result, the country’s

refining capacity should reach 31 Million tonnes per annum (Mtpa) in

2020, 36 Mtpa in 2021 as maximum. As a result the import of petroleum

products declines, Vietnam will experience a surplus in gasoline and

jetA1. The quota amount as well as the market share will change

dramatically. The market will belong to the manufacturers of petroleum

products. Since PetroVietnam has a stake in all of the emerging

refineries, we expect PV Oil to overtake Petrolimex and become the key

player in the market.

Oil and gas stocks are currently within the few favorable choices of

investors on the stock market. Energy stocks in Vietnam stock

exchange are currently trading at an average PE of 14.3x, average PBV

of 1.6x and ROE of 27.5 %. Prices of petroleum stocks in the past two

weeks have increased about more than 10% on average. In the medium

term, we expect these stocks to continue to rise, especially when the

crude oil and gas prices are increasing.

80

85

90

95

100

105

110

115

3.0

3.5

4.0

4.5

5.0

VIETNAM OIL AND GAS INDUSTRY January, 2014


CONTENTS

REGIONAL OVERVIEW ................................................................................................................................................................................. 3

Crude oil ................................................................................................................................................................................................... 4

Natural Gas .............................................................................................................................................................................................. 5

VIETNAM CASE ............................................................................................................................................................................................ 7

Oil and gas industry’s structure ............................................................................................................................................................. 7

Key Players ............................................................................................................................................................................................... 8

PetroVietnam ........................................................................................................................................................................................ 8

Petrolimex ........................................................................................................................................................................................... 10

Where to exploit oil and gas ................................................................................................................................................................. 11

Legal frameworks – Investment guide? ............................................................................................................................................... 13

Upstream ............................................................................................................................................................................................ 13

Downstream ....................................................................................................................................................................................... 15

Exploration and production .................................................................................................................................................................. 17

PetroVietnam Exploration Production Corporation (PVEP) – The oil taker ................................................................................ 17

PetroVietnam Oil (PV Oil)– the oil exporter .................................................................................................................................. 17

PV Gas –the Natural Gas taker ...................................................................................................................................................... 17

Crude oil - Seeing the shortage! ....................................................................................................................................................... 17

Crude oil price ................................................................................................................................................................................ 19

Natural Gas ......................................................................................................................................................................................... 20

Supply – saving from the North? .................................................................................................................................................. 20

Natural Gas market: Multi sellers –single buyer- single reseller ................................................................................................ 24

Downstream – Processing and Distribution ........................................................................................................................................ 27

LPG ...................................................................................................................................................................................................... 27

Market regulation ........................................................................................................................................................................... 27

Key Players ..................................................................................................................................................................................... 29

LPG Infrastructure - Storage: Time to stop building .................................................................................................................... 30

Pricing ............................................................................................................................................................................................. 32

LPG Market Outlook ........................................................................................................................................................................... 34

Supply ............................................................................................................................................................................................. 34

Demand ........................................................................................................................................................................................... 35

LPG supply-demand forecast ........................................................................................................................................................ 36

Profitability of listed LPG Traders ................................................................................................................................................. 37

Petroleum products ............................................................................................................................................................................ 39

Market regulation and key players ................................................................................................................................................ 39

Key players ..................................................................................................................................................................................... 40

Petroleum products infrastructure ................................................................................................................................................ 42

Retail distribution ........................................................................................................................................................................... 43

Pricing ............................................................................................................................................................................................. 43

Gasoline distribution profitability ................................................................................................................................................. 45

Petroleum products supply ............................................................................................................................................................... 46

Domestic supply development - booming decade ...................................................................................................................... 48

Demand ........................................................................................................................................................................................... 51

CONCLUSION ............................................................................................................................................................................................. 53


REGIONAL OVERVIEW

ASEAN is one of the fastest growing economic regions in the world and has rapidly

growing energy demand that is being driven by economic and demographic growth.

ASEAN is an extremely diverse and disparate region with vast differences in the scale

and patterns of energy use and energy resource endowments, both among and

within the member countries. Indonesia, the largest energy user in the region with

36% of overall demand, consumes 66% more energy than Thailand (the second-

largest user) and over 50 times more energy than Brunei Darussalam (which has the

lowest consumption). Another important indicator, access to electricity, also varies

widely: ranging from near universal access in Brunei Darussalam, Malaysia, Thailand

and Singapore to below 50% in Cambodia and Myanmar.

ASEAN countries’ energy sources

Source: International Energy Agency (IEA)

ASEAN’s primary energy requirement is projected to triple between 2005 and 2030

and contributed about 4% to the world’s total consumption in the period of 2003 to

2012. According to ASEAN Energy Outlook 2013 of IEA, the region’s energy demand

is forecast to reach 1,004 million tonnes of oil equivalent (MTOE) in 2035 from 549

MTOE in 2011, an average annual growth rate of ~3%. This is higher than the world’s

projected average growth rate of 1.8% in primary energy consumption through 2030.

The biggest consumer of primary energy in Southeast Asia is Indonesia. Indonesia

consumes 128.4 MTOE per year, while consumption in Thailand ranks number two

with an average of 93.6 MTOE. Primary energy consumption in Vietnam ranks fifth in

the region with an average of 35.2 MTOE. However, the growth in consumption is the

Vietnam has the strongest

growth in primary energy

consumption among ASEAN

countries.


biggest in Southeast Asia. Energy demand in Vietnam has exhibited strong growth in

the last decade.

Vietnam’s primary energy consumption has grown rapidly in the last 10 years

compared to other countries in Southeast Asia. As we can see in bellow figure,

growth of Vietnam’s primary energy consumption always ranks highest among

countries within the region. Consumption growth was 27.7% in 2004, and decreased

to 3.7% in 2005. Total primary energy consumption in the period of 2003 to 2012 had

a CAGR of 8.8%, while GDP growth was about 7% on average for the same period.

According to the Ministry of Industry and Trade, Vietnam’s energy consumption will

grow rapidly over the next few years and add to its status as a net oil importer. In

2012, Vietnam consumed about 52 MTOE of primary energy and in 2013, it is

estimated that Vietnam will consume about 55 MTOE, an increase of 5.5% compared

with 2012.

Growth in primary energy consumption

Source: BP Statistical Review of World Energy 2013

Crude oil

Oil production for the ASEAN nations (the lion's share of which is produced by

Indonesia and Malaysia) peaked in 2000. Indonesia's production in 2010 was more

than 40% below its peak production year while Malaysia has fallen back 27% from

its highs. Vietnam no longer looks capable of producing 400,000 barrels per day like

it could earlier in the century. Of the top four producers in the region only Thailand

is increasing production year over year and for now reached its max in 2012. The

region’s rapid growth has reversed what was a great outflow of oil to the rest of the

world to an even larger inflow as total oil demand has raised to more than 28

million barrels per day (mbpd) while total production is just 2.5 mbpd, the bulk

from Indonesia (36%), Malaysia (27%). This accounts for just over 2.9% of the

global production and is expected to decrease at a CAGR of -1.7% through 2030 to

1.9% of global production. Indonesia remains the largest producer at the end of the

4.7%

27.7%

3.7%

8.4% 8.1%

5.3%

14.6%

3.9% 5.0%

13.2%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2003 2006 2009 2012

Indonesia Malaysia Philippines

Singapore Thailand Vietnam

ASEAN crude oil demand is

going to increase while

regional production is going

down.


projection period, followed by Malaysia and Vietnam. Myanmar, which is relatively

under-explored after years of economic isolation, may hold potential for additional

oil output.

In stark contrast to the production outlook, SE Asia demand is going to increase.

The major oil companies are all positioning themselves to source future needs.

ASEAN now represents 5.34% of global crude oil demand. The region accounted

for 12% of the global increase in demand from 2000 to 2011.World oil consumption

is likely to rise at a CAGR of between 1.0 and 1.2% through 2030. This will mean the

global oil market growing from approximately 89 mbpd to more than between 105

mbpd (CAGR of 1.0%) and 110 mbpd (CAGR of 1.2%).

ASEAN countries crude oil production as of 2012

Source: IndexMundi

Natural Gas

Southeast Asia is loaded in natural gas more than oil, with 7.5 trillion cubic metres

of proven reserves at the end of 2013, representing 3.5% of the global total.

Demand for natural gas in Southeast Asia is expected to increase from 141 billion

cubic metres (bcm) in 2011 to around 250 bcm in 2035, an increase of 77%. The

share of gas in the energy mix remains more or less flat through to 2035, at just

over 20%. Higher gas prices are the main reason that gas demand growth slows

compared with past trends. Because many of the region’s gas-producing basins

are mature and prospective ones are poorly located relative to demand centres, gas

demand throughout the region increasingly will be met by liquefied natural gas

(LNG) imports, which tend to be more expensive relative to the low (and often

subsidized) gas prices that have been commonplace.

However, ASEAN countries are currently introducing more stringent local pollution

regulations (or potentially carbon abatement measures in the longer term) which

20 kbpd

440 kbpd348

kpbd

19.99 kbpd

158 kbpd657

kpbd

918 kbpd


could boost the prospects for natural gas, given its cleaner attributes relative to

coal.

Proved Natural Gas Reserves in ASEAN countries

Source: BP Statistical Review of World Energy 2013

Therefore, transformation sector—power generation, gas processing, refineries,

and other transformation processes—is expected to contribute the most to

incremental growth between 2010 and 2035, accounting for 55.6%, followed by

other sectors (mainly the residential and commercial sectors) at 24.3% and the

industry sector at 14.7%.

2.9 1.3 0.2 0.3 0.6

41.2

20.3 17.4

6.9

65.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Indonesia Malaysia Myanmar Thailand Vietnam

Trillion cubic

metres Proved natural gas reserves R/P ration


VIETNAM CASE

Oil and gas industry’s structure Vietnam's oil and gas sector is dominated by the state-owned Vietnam Oil & Gas

Corporation (PetroVietnam) under control of the Ministry of Industry and Trade,

essentially both the operator and regulator in the industry. All oil and gas

production in the country is carried out by PetroVietnam’s upstream subsidiary,

PetroVietnam Exploration and Production (PVEP), or through joint ventures (JVs) or

production sharing contracts (PSCs), in which the national oil company (NOC) has

at least a 20 percent equity interest.

Vietnam Oil and Gas industry key players

Source: VBPS

PetroVietnam is also involved in Vietnam's downstream oil sector through its

subsidiary, PetroVietnam Oil Processing and Distribution Company (PV Oil). The

largest oil producing company in Vietnam is Vietsovpetro (VSP), a long-standing

joint venture between PetroVietnam and Zarubezhneft of Russia, which continues

to operate the Bach Ho, Rong, and Rong South-East oilfields. The two firms agreed

to extend the partnership for another 20 years starting in 2011.

Goverment

(Prime Minister)

MOIT

UPSTREAM MIDSTREAM DOWNSTREAM

PetroVietnam

Group

(PVN)

PVEP

VietSovpetro

PVN

PV GAS

PVN Petrolimex

Refinery

PV Gas

Join -ventures :

TNK-BP, Lukoi,

Gazprom,

ExxonMobil,

Chevron, BHP

Billiton, Korea

National Oil

Corporation (KNOC),

Total, India's ONGC,

Malaysia's Petronas,

Nippon Oil of Japan,

Talisman, Thailand's

PTTEP, Premier Oil,

SOCO International,

and Neon Energy

Other state-

owned

companies

PVD

PV Oil

Dung Quat

Refinery

Petrolimex Gas

JSC (PGC)

Other

subsidiaries

companies

Sai Gon Fuel

JSC (SFC )

Saigon Petro

JV/Private

companies

PetroVietnam

Southern Gas

(PGS)

PetroVietnam

Northern Gas

(Gas)

PV Gas D JSC

(PGD)

Directorate General

of Energy (DGE)

Militarry

MIPEC

Vietnam Marine

ZETA1

Petrolimex

Nam Viet Oil

Thanh Le

Vinapco

Petimex

Hiep PHiep

Phuc Petroleum

huc Petroleum

Anpha Petro

Ha Noi Petro

Emeco

Others JV and

JSC companies


In natural gas, PetroVietnam's main foreign partners involved in the production and

development are TNK-BP, Chevron, KNOC, Gazprom, Petronas, Thailand's PTTEP,

Talisman, ExxonMobil, Total and Neon Energy. Shell also expressed interest in

entering Vietnam's upstream and downstream natural gas markets, including

liquefied natural gas (LNG), and is in the process of signing a memorandum of

understanding with the country. PetroVietnam and Gazprom formed a strategic JV,

Vietgazprom, which is now exploring undeveloped natural gas fields in both

countries.

In the downstream sector, PVN and Petrolimex are the two biggest players

however; Petrolimex is currently involved only in transportation and distribution

while PVN also produces refined products and gas processing. In addition, there

are other companies which are active in the downstream sector. These companies

are divided in two three types: private, state owned and foreign joint ventured

companies.

Key Players PetroVietnam

PetroVietnam Group (PVN) was established in 1975 as the only domestic petroleum

company and represents Vietnam’s government in operating and managing the oil

and gas industry of Vietnam. PVN is controlled under the Ministry of Industry and

Trade and is directed by the Prime Minister.

Petro Vietnam’s revenue (USD bn)

Source: PVN

PVN’s revenue mainly comes from crude oil, natural gas production, urea

production, power production and production of petroleum, petrochemical

products. In addition, income is also derived from petroleum trading activities

including the export of crude oil, sale of crude oil to Dung Quat refinery. The

group’s revenue contributes about 20% of the country’s GDP on average. PVN’s

upstream activities contribute about 50% of the total income of the group,

05 07 10 11 13 16 16 23 23 31 36

46%

36%

18%

13%

30%

-05%

49%

00%

34%

17%

-10%

00%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E


meanwhile, downstream business makes up 30% and others activities contribute

the remaining 20%. In 2013, PVN reached revenue of VND 762,860 billion (USD 36.3

billion) increased by 16.8% vs 2012.

Being one of the biggest sources of revenue for the country, PVN had many

members that operate similar business. The group is a diversified conglomerate

and currently controls forty companies and enterprises:

Seven subsidiaries under 100% control of PVN including: Petro Vietnam

Exploration & Production (PVEP), PetroVietnam Oil (PV Oil), PetroVietnam

Power (PV Power), Binh Son Refining and Petrochemical Limited (BSR)

which operates the Dung Quat refinery, Dung Quat Shipping Company and

Lai Vu Industrial Zone

14 affiliates responsible for project management, scientific research and

training units

14 member units in which PVN holds 50% control. These units are mainly

PVN’s former subsidiaries, being equalized and listed on the Vietnamese

stock market

six associates with domestic and foreign investors.

PVN's organization chart

Source: PVN

PETROVIETNAM (PVN)

Directly under PVN

NASOS

Ca Mau Power Gas Fertilizer Board Management

Nghi Sơn Petrochemical complex Board Management

Dung Quat Refinery Board Management

Vietnam Oil University

Long Phu - Song Hau Power Project Board Management

Thai Binh Power plant Board management

Vung An- Quang Tract Power plant management

Jackup buiding Management

Bien Dong POC

PV Coal

Members

100% Capital

PetroVietnam Exploration Production (PVEP)

PetroVietnam Oil (PV Oil)

PetroVietnam Power (PV Power)

Bình Sơn Refinery-Petrochemical (BSR)

Dung Quat Shipping (DQS)

Petrovietnam Ca Mau fertilizer Company (PVCFC)

Lai Vu industry zone

Above 50% Capital

PetroVietnam Drilling (PVD)

Petrovietnam Techical service JSC (PTSC)

Petrovietnam Transportation JSC (PVT)

PetroVietnam Financial Corporation JSC (PVFC)

Petrovietnam Insurance JSC (PVI)

Petrovietna general Service JSC (Petrosetco- PET)

Petrovietnam Construction JSC (PVC)

Petrovietna Fertilzier Chemical JSC (PVFC) Co

Drilling Mud Corporation (DMC)

PETEC Trading and InvestmnetCorporation (PETEC)

Petrocvietnam Petrochemical and Fibre JSC (PVTex)

PetroVietnam Energy Technology Corporation (PV EIC)

Phuoc An Port Construction Investment Consultant JSC (PCIC)

Associates

Vietsopetro (VSP)

Rusvietpetro

Nghi Son refinery plant (NSRP)

Ocean Bank

Long Sơn Petrochemical Company Ltd.Co

Dong Duong XanhDevelopment Company

Science Research Institutions

Vietnam Petroleum Institute (VPI)

PetroVietnam University (PVU)

PetroVietnam Manpower Training College (PVMTC)


Petrolimex

Vietnam National Petroleum Group (Petrolimex) was instituted from the

equitization and restructure of Vietnam National Petroleum Corporation by

Decision 828/QD-TTg of May 31, 2011 by the Prime Minister as a public company as

per document 2946/UBCK-PLQH of August 17, 2012 by the State Securities

Commission. Petrolimex’s main business scope is to import, export and deal in

petroleum, refining and petrochemical products, invest in other fields which

Petrolimex is operating and other sectors allowed by law. Petrolimex’s income is

estimated at about USD 10 billion on average which makes up 10% of the country’s

GDP.

Besides petroleum products, oils, greases, petrochemical products, LPG and oil

transport, Petrolimex invest in such fields as engineering, installation, mechanical

and oil equipment, insurance, banking and other commercial and services activities

in which several trademarks are classified as leading brands of Vietnam as PLC,

PGC, VIPCO, PITACO, PJICO…

Petrolimex organization

Source: Petrolimex

Petrolimex currently has about 42 member companies which are directly dealing in

oil products in 62 out of 63 provinces and cities. In addition, Petrolimex has

Petrolimex single-member company limited in Singapore, Petrolimex single-member

company limited in Laos, and recently a representative office in Cambodia. Besides

petroleum products, Petrolimex also distributes lubricants, gas and is involved in

insurance and banking businesses. In 2013, Petrolimex’s income is estimated to have

reached VND 196,330 billion (USD 9.4 billion, profit before tax is about VND 1,929

billion (USD 92 M), an increase of 97% vs VND 978 billion (USD 47 million) of 2012.

VIETNAM

PETROLIMEX

SHAREHOLDERS

MEETING

SUPERVISORY

BOARD

BOARD OF

MANAGEMENT

CEO

SECRETARIAL OFFICE

INTERNAL AUDITING

DEPARTMENT

DEPARTMENT OF PLANNING

AND INVESTMENT

COMMITTEE OF RECOGNITION

AND PROMOTION

SUBSIDIARIES

HOLDING

COMAPNIES

ASSOCIATE

COMPANIES

SPECIALIZED DEPARTMENTS

AND FINANCIAL ACCOUNTING

CENTRE

REPRESENTATIVE

OFFICE IN HO CHI

MINH CITY

REPRESENTATIVE

OFFICE IN CAMBODIA

PETROCHEMICALS (PLC

GAS (PGAS)

INSURANCE

(PJICO)

WATERWAY OIL

TRANSPORTATION

CONSTRUCTION AND

INSTALLATION

PETROLEUM

SERVICES

MILITARY

PETROCHEMICALS JSC

VIETNAM EXPRESSWAY

SERVICES JSC

OTHER ASSOCIATE

COMPANIES

PETROLIMEX GROUP

COMMERCIAL JOINT

STOCK BANK

CASTROL-BP-

PETCO LTD CO.

AVIATION FUEL JSC

VAN PHONG BONDED

PETROLEUM TERMINAL LTD CO.

SINGAPORE-BASED PETROLIMEX

ONE-MEMBER LTD CO.

42 VIETNAM-BASED PETROLEUM

ONE-MEMBER LTD CO.

INTERNATIONAL TRADING JSC

CHEMICALS LTD CO.

INFORMATION TECHNOLOGY

AND TELECOMMUNICATION JSC


Where to exploit oil and gas

According to BP Statistical Review 2013, Vietnam’s oil reserves make up 0.3% of

the worldwide total, increasing by an annual average rate of 8.5% from 2000 to

2012. The country’s oil reserve to production ratio (RPR) holds the highest level

among ASEAN countries and in the Asia Pacific region. In comparison with

neighboring countries such as Thailand, Malaysia and Indonesia, Vietnam has the

biggest proven crude oil as of 2012 (4.4 billion barrels). However, Vietnam’s natural

gas proven reserves lag behind Indonesia and Malaysia reaching 0.6 trillion bcm.

Vietnam’s oil and gas potential is located mainly in seven basins: Cuu Long, Con

Son, Red River, Malay Tho Chu, PhuKhanh basin, Hoang Sa and Truong Sa. Five of

these are in operation and two are under exploration and reserve investigation (the

Hoang Sa and Truong Sa basins). The oil basins of Vietnam are mainly

sedimentary, and possess complex characteristics. In particular, the two latter

offshore basins in the East Sea lie in the deepest water requiring heavy investment.

The Cuu Long basin was the first to be exploited in Vietnam, and is considered as

having the largest oil reserves. However, it has been exploited for 23 years and is

now showing signs of decreases in output. Malay Tho Chu has more gas potential,

while Red River basin’s potential is not considerable.

The Cuu Long basin: Stretching over an area of 60,000 km2, from the

Mekong River to the East Sea, this basin had very high oil and gas potential

that has been almost completely developed and exploited. Most fields in

the basin consist of crude oil and condensate gas except for the Su Tu

Trang and Emerald fields that contain gas and condensate gas.

The Nam Con Son basin: This basin is located southeast of the Cuu Long

basin covering an area of about 160,000 km2. Most fields in the Nam Con

Son basin are gas-condensate fields (with the exception of the Dai Hung

and Moc Tinh oil fields). The principal component is methane gas, with low

CO2 and sulfur content. The basin currently has seven fields in production,

Lan Tay and Dai Hung, Chim Sao, Thien Ung along with others namely Lan

Do, Rong Doi/Rong Doi Tay. In addition, there are some promising fields in

the evaluation stage such as Thanh Long, Hai Au.

The Malay-Tho Chu basin: Located in the southwest of Vietnam’s

continental shelf, in the Gulf of Thailand, this basin saw oil and gas

exploration begun in the early 1990s. The basin, covering an area of about

40 km2, has potential reserves of between 300 to 400 million cubic metres

(Mm3) oil equivalents. Gas findings with high levels of methane and CO2

have been predominant findings in this basin. Currently, only block PM3-

CAA in the overlap pending area of Vietnam and Malaysia has been

Vietnam’s oil reserves make up

0.3% of the worldwide total,

increasing by an annual

average rate of 8.5% from 2000

to 2012

Cuu Long and Nam Con Son

basins contribute about 87% of

Vietnam’s total crude oil

production


developed, beginning in 2003, supplying its first gas to Ca Mau in April

2007.

The Red River basin: The Red River basin is located in an area close to

Hanoi passing through the Gulf of Tonkin and the central continental shelf.

At present, only the Tien Hai C gas field is close to achieving production.

This field has a recoverable reserves of 0.6 billion m3, and is expected to

have a production rate of eight to 10 Mm3 per year.

The Phu Khanh, Tu Chinh and Vung May basins: The Phu Khanh, Tu Chinh

and Vung May basins are located in the deep water area of the southern

part of the East Sea and are estimated to have large reserves of about

1,450 MTOE. Only minimal exploration has been carried out in this area

thus far.

The Parcel and Spratly basins: The Parcel islands' basin, located near the

center of the East Sea and surrounded by Vietnamese sea territory (off Da

Nang) and the Philippine islands (Lucon island), has a total area of

approximately 50,000 km2. The Spratly islands are located to the Northeast

of the East China Sea. The total surveyed area is approximately 190,000

km2, including groups of island sand coral reefs in an elliptic shape. The

Parcel islands' basin is a potential source of gas with in-place reserves

estimated to be 340 billion m3, and potential recovery of 198 billion m3. The

Spratly Islands basin is estimated to have a substantial reserve of oil, but

geological expedition and exploration activities progress at a slow pace due

to the geopolitical complications of the area.

Vietnam Oil and Gas areas

Source: PVN

Ho Chi

Minh City

Da

Nang

Hanoi

Hoang Sa basin

Truong Sa basin group

Nam Con Son basin Major oil producing area

Major gas producing area

Major gas producing area

The country has seven types of

crude oil and all are essentially

light sweet type

Natural Gas in Vietnam

currently is extracted from 20

fields in three basins


The country has seven types of crude oil which are produced from different oil

fields: White Tiger, Dragon, Dai Hung, Rang Dong, BungaKekwa/CaiNuoc and Black

Lion. Generally, all seven types of oil are of good quality and sell at higher prices

compared with Brent standard in the world market. Vietnam’s crude oil is

essentially light sweet, with a density of 380 to 402 API (The American Petroleum

Institute gravity )and low sulfur content (0.03 to 0.09%), which fetches a premium in

the global market. However, Vietnamese crude oil recently produced has contained

high levels of mercury, which has decreased its value.

Natural Gas in Vietnam currently is extracted from 20 fields in three basins such as

Cuu Long, Nam Con Son and Malay Tho Chu. According to numbers of 2012,

Vietnam has an estimated 12.6 trillion cubic feet (Tcf) of total proven natural gas

reserves and potentially has 23.1 Tcf of gas reserves, which are mainly contained

within the Cuu Long, Nam Con Son, Malay – Tho Chu and Song Hong basin. There

is an estimated gas potential of 10.5 Tcf in the as yet developed Song Hong Basin.

The high CO2 content of the gas stream has increased development cost

projections and delayed extraction The Block B O Mon gas field of the Malay-Tho

Chu basin is expected to come online in late 2015 with a gas supply capacity of 250

Bcf/year to compensate for depleting gas supplies from the Bach Ho gas field.

In addition, Vietnam is estimated to have coal-bed methane (CBM) potential of

approximately 14.1 Tcf. Australia-based Dart Energy conducted technical studies

appraising drilling at the Hanoi Trough block, which was believed to contain CBM

deposits beyond 1,000m underground. Dart Energy eventually relinquished the

block when it found the extraction of CBM at such depths to be uneconomical.

Other areas with high CBM potential include: Song Hong Basin – located in

northern Vietnam’s largest river in the Haiphong area, with gas content of CBM

deposits spread over a 3,500 km2 area estimated at six to 10 TCF, Quang Yen Basin

– located in northeast Vietnam with an area of approximately 5,000 km2. The basin

is estimated contain 5 billion tons of anthracite.

Legal frameworks – Investment guide?

Upstream

Vietnam's oil and gas sector is dominated by PVN under the MOIT as essentially

both the operator and regulator in the industry. Foreign companies typically

negotiate directly with PVEP for upstream licenses of major fields in Vietnam, and

all awards must receive approval from the Oil and Gas Department of the Prime

Minister. Vietnam’s legal framework for upstream are listed as following:

Regulations:

Vietnamese petroleum law and its guidance

Investment law

Chevron is withdrawing its

capital from the Block B O Mon

gas field project.


Circular 32 providing specific guidance on tax applicable to the oil and gas

industry

Decision No. 459/QD-TTg

Key taxes:

Upstream:

Value added tax (VAT)

Corporate income tax (CIT)

Foreign contractor withholding tax

Natural resources tax/royalties

Export duty

Import duty

Environmental fee

Windfall tax

Capital assignment profit tax

Personal income tax

Petroleum is considered to be a main resource of the nation. The exploitation tax

on it is therefore of great importance and strictly collected by the state. Several

taxes, including VAT, royalty, CIT, crude oil export tax and windfall tax, impact

investment decisions in the upstream oil sector in Vietnam. Conventional projects

and projects with priority (projects that need heavy capital investment, require

complex technology and represent a high risk) are treated separately for tax issues.

The table below shows the VAT levied on oil projects depending on different type

of products.

VAT on crude oil production

Crude oil-for export Exempt

Crude oil-for domestic use 10.0%

Natural gas-for export 0.0%

Natural gas-for domestic use 10.0%

Source: PricewaterhouseCoopers (PwC)

In addition, a royalty tax is applied at a rate negotiated and stipulated in each

contract and calculated based on the production for the entire block. It is payable

on a provisional basis, in cash or in oil equivalents on a quarterly basis.

Natural sources tax

Output Conventional projects Projects with priority

Up to 20 kbpd 7.0% 10.0%

20-50 kbpd 9.0% 12.0%

50-75 kbpd 11.0% 14.0%

75-100 kbpd 13.0% 19.0%

100-150 kbpd 18.0% 24.0%

More than 150 kbpd 23.0% 29.0%

Source: VPI

Taxes on the export of crude oil

have increased from 4% to 10%

since 2011.


Generally, Vietnam has higher tax rates compared to other countries in the region

with income tax on realized profits in the range of 32% to 50%. Table 5 compares

natural resource taxes for Vietnam, China, Malaysia and Indonesia.

Comparison of tax policies in some regional countries

Tax Vietnam China Malaysia Indonesia

Royalty tax rate 7-29% 0-1.25% 0.1 15-20%

Corporate income tax rate 32%-50% 0.33 0.4 35.0%

Crude oil export tax rate 10.0% NA 0.2 NA

Source: PVI

Vietnam also has a windfall tax on contractors’ profits when the crude oil price

goes up. This additional tax is applied when the crude oil selling price in a quarter

is 20% higher than the average price of the year. The rate of the additional tax is

progressively calculated based on the crude oil price. The breakdown of how the

windfall profits tax is applied is shown as bellow.

Tax breakdown of windfall profits

Type of project Difference between selling price and

basic price

Additional

tax

Regular oil and gas

projects 20%-50% 50%

>50% 60%

Favorable oil and gas

projects >20% 30%

Source: PVI,

Downstream

To invest in the downstream sector in Vietnam, investors must adhere to

Vietnamese investment law. As this is a specially-encouraged sector, there are

several policies to promote investment. Investing in a refinery or petrochemical

project will enjoy a lower rate of CIT of 10% instead of the normal 25% for the first

15 years of operation. The incentive policies also include a full tax exemption for

the first four years of production from the point of first profits being realized. After

that period, the tax rises to 5% for next nine years and then to the normal 25%

thereafter. In addition, investors will be exempt from import taxes on equipment

that is required for the project but is unavailable in Vietnam. For example,

investment in the Dung Quat refinery has a special incentive scheme in accordance

with Correspondence 13/UDDT dated February 15, 2006 from the Dung Quat

Economic Zone Management Board, with details as follows:

Exempted from land rent, land utilization fees, land utilizing taxes for the

entire life of the project

Granted a 10% CIT rate within 15 years from the commencement of

commercial operation of the facility, with 0% for the first four years, 5% for

years five through 14, 10% for the years 15 and 16, and 25% after the 16th

year.

Vietnam has higher tax rates

compared to other countries in

the region.

Refinery and petrochemical is a

specially-encouraged sector for

investment


Entitled to a 50% income tax reduction for high income people— designed

to attract the most highly skilled management and staff.

Exempted from import taxes on some raw materials, supplies, components

and unfinished products during the first five years of commercial operation.

Exempted from import taxes levied on supplies and equipment during the

construction period.

Exempted from import taxes levied on equipment, machinery and special

transportation that contributed to the establishment of the company’s fixed

assets as well as worker transportation vehicles.

Each refinery will have different incentive and subsidies depending on the

investment size and agreements with the government. For example, the incentive

for the Nghi Son and Dung Quat refineries: The wholesale petroleum product price

(spot) is to be calculated in the same way as the CIF price for the first 10 years of

commercial operation, and the import tax rate is to be 7% for refined products, 3%

for petrochemical products, and 5% for LPG. Meanwhile incentive for others

refinery projects would be different. In the event that the country’s import tax rate

is adjusted to be lower than the rates quoted above, the government will subsidize

the difference in prices.

These policies are quite profitable for the refineries, since the products are made in

Vietnam but the selling price is the same as the import price. The domestic

refineries will benefit even in the event of no import taxes. However such

subsidization schemes are economically unsustainable, raising end-user prices

while also draining the state treasury. These specific subsidies are being

considered for cancellation. Regarding petroleum products distribution, foreign

investors are not allowed to invest in this sector with the exception of LPG and

lubricant distribution. Foreign investors are allowed to invest in local distributors

(excluding import/export rights) up to a level of 49%. This regulation is expected to

change after 2015 such that foreign investors in the refining sector will also be

allowed to invest in petroleum distribution.

In conclusion, Vietnam’s investments policies, with high corporate income taxes in

the upstream oil sector, are less attractive, compared to other countries in the

region. Although investments in refineries enjoy incentive policies, the investment

process is complicated and hinders potential investors in Vietnam. And after more

than two decades of strangling growth and profitability in this sector PetroVietnam

is now seeking a large amount of foreign investment and prioritizing investment in

E&P projects (especially deep-water projects) and refineries/petrochemical projects.

Vietnam can easily find itself continuing to struggle raising capital under the

current investment/incentive structure as capital will flow to where it is treated best.

Selling price for Dung Quat

efinery’s products are

calculated as imported price

Vietnam’s investments policies,

with high corporate income

taxes in the upstream oil

sector, are less attractive,

compared to other countries in

the region


Exploration and production

PetroVietnam Exploration Production Corporation (PVEP) – The oil taker

PVEP was established on May 4, 2007 by merging PetroVietnam Exploration &

Production Company with PetroVietnam Investment & Development Company and

belongs 100% to PVN. The goal of the establishment of PVEP is to unify the

business and production activities of exploring and exploiting oil and gas in

Vietnam as well as abroad. In Vietnam, PVEP conducts its operations in the Red

River, Mekong River, Con Son South, Malay Tho Chu and Truong Sa sedimentary

basins. The company has about 2,000 employees and its total assets are USD 6

billion. The organizational structure of PVEP includes 15 divisions, 10 executive

companies, 10 general executive companies, two joint operating companies, two

branches and seven representative offices in other countries. PVEP’s revenue in

2012 was USD3 billion while net profit was USD1.6 billion.

PetroVietnam Oil (PV Oil)– the oil exporter

PV Oil started in June 2008 with the unification of PetroVietnam Trading

Corporation (Petechim) and PetroVietnam Oil Processing and Distribution Company

Limited (PDC). PV Oil emerged with the responsibility of developing the

downstream oil sector in Vietnam and being responsible for importing and trading

petroleum products. In addition, PV Oil is the only company allowed to export

crude oil produced in Vietnam. PV Oil is also responsible for ensuring sufficient

crude oil feedstock for PetroVietnam’s refinery and consumption of the refined

products.

PV Gas –the Natural Gas taker

PetroVietnam Gas Corporation (PV GAS) established in 1990 and has activities

which include collecting, transporting, processing, storing, distributing and trading

gas products nationwide. PV Gas is the only company that represents PVN in

natural gas buying from wells and reselling and distribution to consumers. PV Gas

is listed on the Ho Chi Minh Stock Exchange under the ticker GAS and is one of the

largest companies by market capitalization. PVN holds about 97% of PV Gas. PV

Gas’s charter capital is about VND18,950 billion (USD911 million).PV Gas’s income

mainly comes from natural gas and LPG selling. These two segments contribute

about 90% of PV Gas’s total revenue. The company’s annual income is about VND

80,000 billion (USD 3.8 billion) on average.

Crude oil - Seeing the shortage!

Over the last decade, crude oil production in Vietnam has reached a total of 205.8

Mt with annual output in recent years held between approximately 320 and 350


kbpd (thousand barrels per day). As of the end of 2012, crude oil production of

Vietnam ranked fourth in Southeast Asia with 345 kbpd after Indonesia, which has

the biggest production at 918 kbpd, Malaysia at 657 kbpd and Thailand at 440 kbpd.

Vietnam’s crude production reached its peak in 2004 and has been declining since

then. A lot of this is due to the increasingly uneconomic terms offered to

international oil firms by PVN and the state. As mentioned above, the

intermingling of tax policy and contract structuring has dampened enthusiasm for

oil and gas deposits that are not of the highest potential profit margin. Most, if not

all, of those highest profit deposits have been exploited.

Vietnam’s crude oil production over years (kbpd)

Source: PVN

At present, Vietnam is trying to increase its crude oil production by expanding E&P

activities abroad at the same time, the State and PVN will have to open up foreign

investors to reaping more of the reward. According to PVN, the country’s oil

production will reach 420 kbpd at its peak in 2014, reflecting a CAGR of 3.7% in

2009 to 2014. Domestic production is then estimated to decline dramatically to

only 150 kbpd by 2020.

Vietnam now is pushing its refining development to meet domestic strongly

growing demand. Obliviously, this strategy will lead to a rapid increase in crude oil

demand meanwhile the domestic production strongly depletes. In explanation, the

Bach Ho field is expected to deplete by 2015, at which time Vietnam would increase

oil demand to 424 kbpd. According to our calculation, Vietnam’s crude oil demand

during period of 2013 to 2025 will have a CARG of 6% y.o.y, reaching 424 kbpd in

2015, and 810 kbpd in 2025.

365 430 395 359 339 317 348 321 328 348 351

2.4%

17.9%

-8.3% -9.0%

-5.7% -6.4%

9.8%

-7.9%

2.1%

6.2%

0.9%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0

50

100

150

200

250

300

350

400

450

500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

Kbpd Total Crude Oil Production (kbpd) Growth

The country’s oil production

will reach 420 kbpd at its

peak in 2014, reflecting a

CAGR of 3.7% in 2009

to2014. Production is

estimated to decline

dramatically to only 150 kbpd

by 2020.

Refining development will

lead to a rapid increase in

crude oil demand.

t

h

e

c

o


Vietnam’s crude oil production and demand estimation (kbpd)

Sources: PVN, VPBS Research

After 2014, the gap between production and demand will get larger as the country

no longer can secure its oil demand due to the market limitations over the past

decade. Imports will have to feed the refineries that are in process or the planning

stages.

By 2020, Vietnam expects a number of refinery and petrochemical plants will

commence operations, leading to demand for crude oil for refineries of 810 kbpd,

more than double Vietnam’s current production and higher than projected demand.

Vietnam will shift from a net exporter to net importer of oil. Looking ahead to 2018,

with the big gap between production and demand, Vietnam is eager to increase its

oil production by seeking new offshore developments domestically as well as

internationally now.

Crude oil price

Price of Vietnam crude oil is based on the worldwide price. Sales of Vietnamese

crude are handled by a monthly auction organized by PetroVietnam Oil (PV Oil),

enabling the highest bidder to purchase domestically produced crude. Vietnam

exports almost all of its crude oil production, selling it mostly to Japan, Australia,

China and Malaysia. Crude oil export has been in decline since 2010 when

Vietnam’s first refinery, Dung Quat, began operation. The refinery with a nameplate

capacity of 6.5 Mtpa (130 kbpd) mainly uses crude from the declining Bach Ho field,

which accounts for 40% of the country’s crude oil production. The oil price for Dung

Quat refinery is calculated as import crude.

331

420

350 300

230 210 190 150 130

100 100 100 100

383 406 424

455 488

523 561

600 637

677 719

763 810

0

100

200

300

400

500

600

700

800

900

2013E 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Crude oil

production


Natural Gas

Supply – saving from the North?

Natural gas exploitation in the tanks is transported to treatment plants and

consumers according to the following pipeline systems: Natural gas is transported

from the tanks to the treatment plants and consumers as in the following pipeline

system:

The Phu My-White Tiger pipeline system has a length of 220 km and a

diameter of 16''. This pipeline transports gas from the Rang Dong White

Tiger field in the Cuu Long basin to onshore customers. Phase one of the

pipeline systems was completed in 1995 and phase 2 in 2002 with a total

investment of USD400 million. The pipeline system has a capacity of 2

billion m3 per year and transmits gas to power producers in Ba Ria, Phu My

and Dinh Co gas processing plant and to the Phu My Fertilizer plant;

The Nam Con Son pipeline system transmits gas from Lan Tay, Double

Dragon and Double Dragon West field to the power plants in Phu My. It has

a capacity of 7 billion m3 per year. Phase one was completed in 2002 and

phase 2 in 2008. This pipeline system stretches over 400 km and has a

diameter of 26'' with an investment of USD565 million.

The PM3-CAA pipeline system transports gas from PM3 to the Ca Mau

Power-Fertilizer complex located in Ca Mau city. It has a capacity of 2 billion

m3 per year, investment was USD300 million and a length of 330 km was

completed in 2007;

The Golden Lion Air-Rang Dong gas transmission project transports gas

from the Black Lion/Gold Lion and from the White Lion to Rang Dong.

In addition, there are two pipelines system which are estimated to come online

in the near future. The total capacity of these pipelines will be 1.8 bcm per day.

PV Gas is the major gas distribution arm of PetroVietnam. PetroVietnam and its JV

partners directly negotiate domestic gas rates with power generators and industrial

users on a project-by-project basis. Natural gas prices are kept generally low

compared to international market rates mainly because wholesale electricity prices

remain low. Transportation costs vary by gas pipeline and are approved by the

Ministry of Industry and Trade. As Vietnam's gas market evolves and LNG enters

the market, gas prices may lift to more market-based rates. Natural gas production

in Vietnam is about 9 bcm per year on average (over the last five years). The

country’s production reached a CARG of 9.6% in the 10-year period from 2003 to

2012.

Natural gas resources in

Vietnam are mainly located in

the South.


Natural gas pipelines

Source: PVN

Vietnam natural gas production is estimated to quickly decrease in the next 10

years due to the Bach Ho field in the Cuu Long Basin depletion and the Nam Con

Son basin’s production decrease to 0.2 bcm in 2035. In particular, Vietnam’s natural

gas production in 2013 reached to be 9.75 bcm, increasing by 4.8% compared with

2012 and reaching the maximum level of 15 bcm in 2018. After that the production

will drop quickly. By2035 the country’s total natural production will remain about 7

bcm.

Vietnam’s natural gas production

Source: PV Gas

The natural gas is a product that can’t be reserved. The production will be

consumed as soon as it comes out. About 85% of the natural gas demand in

Vietnam comes from power generation, 10% for fertilizer production and the rest is

provided via low pressure gas form or LPG to industrial consumers. However, the

current gas supply can only meet 60% of the country’s power demand, 30% of the

3.7

6.3 6.9

7.5 6.9

7.5 8.0

9.4

8.2

9.3 9.8

71.4% 70.2%

8.8% 9.1%

-8.8%

9.3% 6.8%

17.4%

-12.8%

13.4%

4.8%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f

Bcm Natural Gas Production Growth

Vietnam’s natural gas

production is estimated to

quickly decrease in the next 10

years due to the Bach Ho field

in the Cuu Long Basin

depletion and the Nam Con

Son basin’s production

decrease.


fertilizer demand and 60% of the LPG demand. According to the country’s forecast,

these demands would sharply increase which in return means a further increase in

the natural gas demand.

Natural Gas consumption

Source: PV Gas, VBPS

The projected total natural gas demand for 2013 is estimated to have reached 9.46

bcm, an increase of 11% compared with 2012. Natural gas consumption is forecast

based mostly on demand from power generation, fertilizer production. Currently,

Vietnam has two fertilizer producers, Phu My and Ca Mau plant. Each plant

consumes an amount of 0.5 bcm to produce a total output of 1.5 Mt of urea.

Estimation of natural gas consumption (bcm per year)

Source: PV Gas

The urea production is pretty stable meaning fertilizer plants will consume about

1.1 bcm per annum, making up 6% on average of the total demand. Other

consumers than fertilizer production such as low pressure gas to industrial, CNG

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f

Growth BCM Consumption for power (bcm)

Non-Power consumption (bcm)

Using gas for power ultilization

9.85

11.11

12.37 12.79 12.79 12.79 12.79 12.79 12.79 12.79 12.79 12.79

1.32 1.88 2.13 2.34 2.47 2.58 2.69 2.79 2.91 3.01 3.10 3.20

1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 -

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Demand for Power

Demand for Industrial (including CNG)

Demand for Fertilizer

About 85% of the natural gas

demand in Vietnam comes

from power generation, 10%

for fertilizer production and the

rest is provided via low

pressure gas form or LPG to

industrial consumers

Demand for natural gas is

forecast to continue increasing

in the next 10 years


and LPG production contributes an amount of 1.7-3 bcm, accounts for 7 to 16% in

the total demand. In terms of demand for power estimation, based on the Viet Nam

Power Master Plan VII (PDP VII), the country installed power generation would

reach to 97,424 MW in 2025 which will lead to the gas demand of 17.1 bcm in 2025,

an increase of 90% compared with that of 2012. All in all, Vietnam’s natural gas

demand will have a CAGR of 4.5% during period from 2014 to 2025 meanwhile the

production -2%.

In summary, gas supply shortfalls will increase as the gap widens between gas

supply and demand. The shortage will sharply rise from the time when the Cuu

Long basin goes out of production. By 2015, Vietnam will lack 1.23 bcm of natural

gas, five years later the shortage will be 5.9 bcm. New gas fields will have to come

online in time to make up for depleting gas fields. Despite the new field

developments domestic gas production capacity is expected to fall rapidly from

2017 further widening the gap between domestic supply and demand. LNG imports

will be necessary to close this gap.

Balance supply-demand (bcm)

Source: PV Gas, VPBS estimation

Vietnam now declares that it has found more natural gas, which is located in the

Central of the country. This natural gas resource is to be larger than that of Nam

Con Son basin. However, this gas contains a high amount of CO2 and there is no

confirmed size of this resource. In consequence, Vietnam will have to import

natural gas; PV Gas is planning to import the first LNG cargo by 2015 for Thi Vai

fast track and Son My in Binh Thuan from 2018. The import of LNG is expected to

diversify primary energy sources used for power production, ensure the national

energy security. However, the will be an impact on the domestic natural gas market

from the LNG import. A new level of gas prices will be established.

(10.00)

(5.00)

-

5.00

10.00

15.00

20.00

2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Shortage

Total Suplly

Total Demand


Natural Gas market: Multi sellers –single buyer- single reseller

Vietnam’s approach to gas pricing generally involves separate negotiations for

each project. The exception to this approach is gas coming from the PM3 CAA

fields where gas is calculated as a ratio to the price of Medium Fuel Oil (“MFO”)

which is derived from an earlier negotiation for the sale of a proportion of that gas

for power generation in Malaysia. So far the methodologies for pricing gas in

Vietnam (fuel oil-related pricing for PM3 CAA and cost-plus pricing for Nam Con

Son and Cuu Long) are not linked to the dynamics of the power generation market.

These gas pricing methodologies are focused only on the gas supply component of

the gas value chain.

PV Gas is the only company that is charged with selling and distributing natural gas

in Vietnam. The natural gas selling prices to end consumers in Vietnam are

determined based on following principals:

Gas supplied to power & fertilizer production is regulated by the

Government.

The gas price for industrial customers is based on costs of alternative fuels.

Domestic gas price versus international gas price:

Vietnam gas market

Source: PVN, VBPS

The gas selling price in Vietnam includes a transmission and distribution tariff, VAT

and profit margin norm. Transmission and distribution tariffs (“T&D”) are generally

regulated by MOIT and determined by PVN. Gas prices for existing gas fields

currently range from USD 3.5 to USD 7 per mmbtu. Vietnam’s gas price can be

considered as the lowest in the region with the exception of Malaysia, which has a

state subsidy on the domestic gas market. Existing gas pricing appears to be by a

Methodologies for pricing gas

in Vietnam are not linked to the

dynamics of the power

generation market. These gas

pricing methodologies are

focused only on the gas supply

component of the gas value

chain.


perceived need to achieve low electricity prices and to confer subsidies on gas

consumption in the fertilizer sector.

Low gas prices for power generation tend to discourage investment in gas

exploration and development and therefore work against some high level

objectives for the sector such as rapid growth and diversification of fuel sources for

power generation. PVN certainly wants to raise domestic prices to be equivalent

with the world prices. In 2010 PVN implemented certain measures to increase

prices from 2012: (1) To raise gas prices to the electricity sector, (2) Increase gas

prices to the sector of electricity/urea production facilities of its subsidiaries. (3)

Prices for other consumers such as power generation and industrial productions

are scheduled to increase by 2% per year. As a result, the natural gas price in

Vietnam is set as below tables.

Cuu Long gas price schedule

Cuu Long Gas 2013 2014 2015 2016 2017 2018 2019 2020

For power production 5.16 5.36 5.58 5.72 5.86 6.01 6.16 6.31

For Fertilizer production 6.56 6.69 6.83 7.98 8.54 9.14 9.78 10.50

For Industrial consumers 6.63 7.29 8.02 8.22 8.43 8.64 8.85 9.07

Nam Con Son gas price is scheduled as below table and slippage 2% per year.

Nam Con Son (Block 06.1 and 11.2) gas price

schedule

Block 06.1 and 11.2 2013 2014 2015 2016 2017 2018 2019 2020

under consumption of

3.8 bcm 3.6 3.7 3.7 3.8 3.9 4.0 4.0 4.1

above 3.8 bcm 5.2 5.4 5.6 5.7 5.9 6.0 6.1 6.2

Tariff 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Collection fee 1.1 1.1 1.2 1.2 1.2 1.2 1.3 1.3

Nam Con Son (Hai Thach MocTinh) gas price

schedule

2013 2014 2015 2016 2017 2018 2019 2020

Selling price 5.36 5.46 5.57 5.68 5.80 5.90 6.02 6.13

Collection fee 1.12 1.14 1.16 1.18 1.21 1.23 1.26 1.28

PM3 gas price is calculated to equal 46% of the FO price which is listed in the

Singapore market (according to Platts) plus a collected tariff which is estimated at

USD 1.17 per mBTU. As of 2012, the PM3 gas price is USD7.

PM3 gas price schedule

PM3 Gas 2013 2014 2015 2016 2017 2018 2019 2020

Selling price 7.7 8.0 8.2 8.41 8.62 8.83 9.05 9.28

For Ca Mau 4.98 5.19 5.3 5.46 5.6 5.74 6.61 6.6

Collection Fee 1.17 1.17 1.17 1.17 1.17 1.17 1.17 1.17

Based on the road map for natural gas prices, businesses of following sector would

have impact:

DPM is using Cuu Long gas for its production. On average, Phu My plant

consumes about 0.5 bcm of gas, equivalent to 20.76 mmbtu. The gas price

Natural gas price in Vietnam is

set following a road map till

2020.


for the Phu My plant is scheduled as in the table below. The schedule is

based on a comparison of gas prices to Ca Mau and Phu My in order to

ensure that Phu My fertilizer will have a profit margin of 15% and to support

gas prices for Ca Mau, the second fertilizer production of PVN. The gas

price to Phu My is projected at USD 6.43 per mmbtu, increasing by 2% till

2015 and to 7.98% in 2016. From to 2017 to 2021 the gas price will increase

by 7% per year. As a result, Phu My fertilizer plant will have a ROE of 13% to

15% during the period of 2011 to2015. After 2015 till the end life of the

plant, the ROE is estimated to reach 15%.

Ca Mau fertilizer, the main consumer of PM3, the gas price is way too high

for the project. Therefore, PVN has proposed to the government a schedule

price for Ca Mau which is a 35% decrease in gas prices for the period of

2012 to 2018, decrease 27% after 2018 to ensure that the ROE of Ca Mau will

stay at 14% per year. The difference between PM3’s original price and price

to Ca Mau will be subsidized from profit of price increases to Phy My

fertilizer.

Other consumers such as CNG and LPG will have to buy gas at prices

scheduled for industrial consumers. These consumers are also going to

suffer the most under the market prices move up to new levels for LNG to

fill the gap between supply and demand. Power and fertilizer will partly be

under government subsidies. As a result, investments in the power and

fertilizer sectors are considered beneficial in Vietnam. Listed companies

which are in the sectors are good picks for stock price appreciation.

Tick

er Name

Outstandin

g shares

Price

at1/22/1

4

Market cap

(VND billion)

EPS

(VND) P/E

BVPS

(VND) P/B ROE

GAS PetroVietnam Gas JSC 1,895,000,00

0 77,000 145,915 6,700 11.49 17,580 4.38 43.69%

PVD PetroVietnam Drilling & Well services Corp. 300,281,878 73,500 22,071 7,410 9.92 32,380 2.27 20.43%

PGD PetroVietNam Low Pressure Gas

Distribution JSC 42,900,000 45,000 1,931 5,060 8.89 24,800 1.81 21.36%

DPM PetroVietnam Fertilizer and Chemicals

Corp. 377,554,320 47,300 17,858 6,550 7.22 26,390 1.79 26.75%

PVS PetroVietnam Technical Services Corp. 446,703,141 29,700 13,267 3,040 9.77 17,090 1.74 19.41%

CNG CNG Vietnam JSC 27,000,000 34,800 940 4,980 6.99 16,430 2.12 30.06%

Source: VPBS


Downstream – Processing and Distribution LPG

Market regulation

The LPG market is under the control of multiple ministries, such as the Ministry of

Trade and Industry, Ministry of Technology and Science, Ministry of Finance,

Ministry of Transportation, and Ministry of Construction, which oversees LPG

quality, storage, facilities and pricing. Other ministries, such as the Ministry of

Police, Ministry of Environment, Ministry of Labor and Social Affairs oversee the

safety of LPG production and provide support to LPG producers. LPG traders have

to get approval from all the ministries before being allowed to operate in the

market. The LPG market is regulated under decree number 107/ND-CP, dated

August 22, 2009.

Vietnam LPG market chain

Source: VBPS

Traders participating in the LPG market are divided in four categories: LPG traders,

Level 1 LPG distributors, general agents and LPG stores. LPG traders are only able

to participate in import-export, production, transportation and distribution

channels. Level 1 LPG distributors are able to distribute and transport but can’t

import, export or produce. Ultimately, general agents, agencies and store only

distribute LPG to consumers.

Ma

na

ge

me

nt

LP

Gtr

ad

ing

Storages under

5,000 m3

LPG production

Safety LPG

production

Ministry of Transportation People's Committte

Ministry of Technology and

Science

Ministry of Finance

Ministry of Police

Ministry of Environment

Ministry of labor and social

affairs

Ministry of Construction

Ministry of TradeControls storages

above 5,000 m3

Approves LPG quality

Supervises LPG price,

manages depreciation time

of LPG cylinders

Supervises and approve s

LPG transportation

Controls LPG's

infrastructure construction

Supervises LPG

producers

Producers/Importers

LPG subsidiary trading companies

LPG contracted

trading companies

Independent

agents

Subsidiary agents

Contracted

agents

Independent

agents

Customers

Short channel

Short channel

Long channel Long channel

Long channel Long channel

Short channel

Vietnam has 53 LPG trading

companies, 23 of which are

permitted to import and export

LPG, more than 130 general

agents and 11,500 gas

agencies.


At present, there are 53 gas trading companies in the Vietnamese LPG market, 23 of

which are permitted to import and export LPG with the remaining engaged in

distribution. Vietnam has more than 130 general agents and 11,500 gas agencies in

total with Hanoi and Ho Chi Minh City accounting for nearly 50%. LPG is produced

domestically or imported by traders, distributed by them directly or via level 1

traders to general agents/agencies/stores, and from stores to end-users. Among

them, only producers and traders are allowed to import or export LPG.

Gas traders in Vietnam include 100% state-owned companies, joint stock

companies, JV companies, private companies and 100% foreign capital companies.

Together, joint venture and state owned companies have a market share of more

than 50%.This has decreased over the past five years due to new private and joint

stock companies with high growth rates of 25 to 30% per year entering the market

in a period when joint ventures and state-owned companies were barely moving

forward. It can be concluded that private companies with flexible and economic

policies have lessened the considerable impact of state and joint venture

companies.

LPG traders

Name Brand name

Type of

business

Import

Wholesale Retail

100% State-owned

Saigon Petro Saigon Petro

Gas Yes Yes Yes

Ha Noi Petro Yes Yes

Emeco Emeco Gas Yes Yes No

JS Company

PV Gas South PetroVietnam

Gas Yes Yes Yes

PV Gas North PetroVietnam

Gas Yes Yes Yes

PetroVietnam Gas PetroVietnam

Gas Yes Yes Yes

Petrolimex SG Petrolimex Yes Yes Yes

Petrolimex CT Petrolimex Yes No

PetrolimexĐN Petrolimex Yes Yes Yes

Vinagas VINAGAS Yes No

Saigon gas Saigon Gas Yes Yes Yes

Vimexco Vimexco Yes Yes Yes

Anpha SG GiaDinh Gas Yes Yes Yes

PTS (Petrolimex) Yes No

JV and 100% Foreign Capital

Shell Gas Hai Phong (Siam Gas took

over) Shell Gas Yes Yes Yes

Thang Long Gas Yes Yes Yes

Total Gas Total Gas Yes

Yes

Gas traders in Vietnam include

100% state-owned companies,

JS companies, JV companies,

private companies and 100%

foreign capital companies


Dai Hai Gas DHP Gas Yes

Petronas PETRONAS Yes Yes Yes

Elf-Total- Sai gon-Vina Elf Gaz Yes Yes Yes

VT Gas VT Gas Yes Yes Yes

Total Can Tho Total Yes Yes

Shell Gas (Siam Gas took over) Shell Gas Yes Yes No

V-Gas V-Gas Yes Yes Yes

Elf GazĐN Elf Gaz Yes Yes Yes

BP Petco BP Yes No

Private Ltd Co

A Gas A Gas No

Tran Hong Quan SA Gas No

Thai Binh Duong TB Gas Yes Yes

Cong Nghiep Yes

GiaDinh Gas GiaDinh Gas Yes

Hong Moc H Gas Yes No

KhanhHoa Gas Khagasco No

Tan Hung Long No

Tan NhaVinh No

VinhPhat No

Shinpetro Yes Yes Yes

PhatVinh PVI Gas Yes No

TP gas TP Gas Yes No

Thai Lan gas Thai Lan Gas Yes No

Mai Khe Gas MK Gas Yes No

Dang Phuoc DP Gas Yes No

Thu Duc Gas Thu Duc Gas Yes No

Vinh Long Yes No

DakGas DAK Gas Yes No

Gas Dai Duong Ocean Gas Yes No

For Gas For Gas Yes No

Phutagasco Phutagasco Yes No

KhanhThien No

RachKien AT Gas Yes No

Dong Bac (Hong Moc took over) DB Gas Yes No

Petrimex Petrimex Yes Yes

Thanh Tai TTA

Source: PGS, VPBS

Key Players

Key players in the retail market are mostly state-owned companies, including Gas

Petrolimex JSC, Sai Gon Petro, Petro Vietnam Gas (via PetroVietnam Southern Gas

and PetroVietnam Northern Gas) and Elf-total-Saigon Vina, a French company

which is the only company that is fully owned by foreigners. These players are all

allowed to import LPG and are the main distributors. Their strengths, including

bigger storage capacities and larger distribution systems, allow them to control the

local retail price. Together, they hold about 50% of the total retail market share.


LPG retail market share

Source: VTGas, PGS, VPBS

PetroVietnam Gas is the biggest LPG distributor in Vietnam thanks to its two owned

companies: PetroVietnam Southern Gas and PetroVietnam Northern Gas. From

2011 to 2012, as a result of its M&A activities designed to expand its distribution

system, PV Gas South (PGS) became the biggest player in the southern market. In

fact, PV Gas South and PV Gas North are the two strongest companies in terms of

supply owing to their mother company PV Gas, which belongs to PVN, is the only

LPG producer in Vietnam. However, due to the difference in consumption between

North, South and Central Vietnam, PV Gas South holds the larger market share

than PV Gas North. Elf Gas ranked second with a market share of 12.4% and Gas

Petrolimex ranked fourth with a market share of 8.6%. Based on the companies’

business plans and performance in 2013, the market share break down should

change, although PV Gas should still keep the leading position with 17 to 18%

market share. Other players such as Elf Gas and Saigon Petro will remain stable in

the market.

LPG Infrastructure - Storage: Time to stop building

Storage plays a very important role in LPG trading business. Vietnam currently

does not have enough capacity but more than enough is currently under

construction. Before 2009, Vietnam has 27 LPG storage sites with a total capacity of

83 ktons. The capacity of the largest storage terminal of the was only 3,000 tons,

which belong to Petrolimex Gas JSC. Consequently, Vietnamese LPG traders were

only able to acquire average/small sized LPG vessels on a spot basis due to small

capacity of storage. This was a big issue for LPG traders since with small inventory

rotations traders cannot store a large amount during times of falling prices

resulting in unstable retail LPG prices in the country.

As of 2013, Vietnam’s LPG storage system raised at 50 storage facilities with an

average capacity of approximately 4,000 tons. The biggest storage which has a

capacity of 60,000 tons under cold storage form belongs to PV Gas. The total LPG

storage capacity of Vietnam is about 129.2Kt, with the north accounting for 13.8%,

PV Gas

16.9%

Elft -Total -

Saigon-Vina

12.6%

Petrolimex

Gas

8.7%

Saigon Petro

6.1%

Petronas

4.7%

Anpha Petro

4.5%

VT Gas

4.0%

H-Gas

2.8%

Petimex Gas

2.4%

DHP Gas

2.0%

Shinpetrol

Gas

2.0%

CN Gas

1.7%

Others

31.6% PV Gas holds the biggest

market share., Elf Total Sai Gon

Vina is second and Petrolimex

Gas ranks third.

Vietnam’s LPG storage system

remains at 50 storage facilities

with an average capacity of

approximately 4,000 tons.


the central accounting for 6.8% and the south accounting for 79.4%.Currently, LPG

storage units are generally operated under conditions of high pressure and normal

temperature. The thirty four LPG storage units belong to twenty four LPG

companies. PV Gas owns the most storage with a capacity of about 70.6 Kt,

followed by PGS with a capacity of 8.7 Kt and PVG with a capacity of 5.9 Kt.

In addition to the above storages, a storage facility at Long An is being built with a

capacity of 84 Kt. The facility was expected to begin operation in 2013 with an initial

capacity of 40 Kt, while phase two is expected to be completed in 2014 with a total

investment of USD 244 million. However, the project is currently on hold due to

lack of capital. After the aforementioned storage facilities come online as

scheduled, it would not be advisable to make big investments in LPG storage since

the capacity will be sufficient to satisfy domestic consumption. The additional

capacity may also enable LPG traders to sign long term contracts with the provision

to export LPG to neighboring countries in the event of a surplus.

LPG storage systems in Vietnam

Source: VPBS, LPG companies

Vietnam imports LPG through big terminals in Hai Phong, Da Nang, Quang Ngai,

and other private ports that belong to LPG traders. These private ports have small

capacities, only serving companies with import demand. LPG imports are mainly

via ports in the south, an area with unusually strong demand compared to other

regions of the country.

51

Tran Hong Quan Gas Co.1.2

PVGas60Under construction

Operation

Unit: 1,000 ton

Total Gas Hai Phong0.96

NORTH17.8 Kt

Gas Petrolimex4

Anpha Petrol1.8

Shell Gas1

PVGas North4.1

Thang Long Gas0.6

Minh Quang Hai Phong

3

Dai Hai1

SOUTH102.7 Kt

Thi Vai LPG storagePV Gas8.6

Saigon Petrol3

Petronas2

Petrolimex+BP2

Elf Gas 1.7

Elf Gas2.2

Hong Moc Co.1.2CN Gas

1.2Anpha Petrol

1.5

Gas Petrolimex0.55

PVGas South4

PVGas South1.14

Elf gas0.45

MT Gas.1.2

PVGas South-VinaBenny

84

Gia Dinh Gas0.7

Sopet Gas3

VT Gas.0.8

Vimexco1.2

CENTRAL8.7 Kt

Elf Gas Da Nang 0.7

Gas Petrolimex0.5

CN Gas0.7

PVGas South1.5

PVGas North1.8

Phu Yen petrol0.8

Gas Mien Trung0.7

PV Gas2

PVGas 60

The total LPG storage capacity

of Vietnam is about 129.2Kt,

with the north accounting for

13.8%, the central accounting

for 6.8% and the south

accounting for 79.4%.

Based on our research,

investment in 1,000 tons of

storage would require VND60

to70 billion or USD3 to3.5

million. All storage in Vietnam

will have to meet the TCVN

6486-1999 or TCVN 7441-2004

standards.


Pricing

Import price

LPG prices in Vietnam are derived from global LPG prices with adjustments for

import taxes and transportation fees. Any adjustment in global LPG prices

significantly affects retail LPG prices due to limited domestic supply. As a result,

LPG import taxes have been highly unstable. The government has adjusted the rate

from 20% to 10% and even to 0% in order to match the movement of LPG prices in

the global market. The current import tax rate for LPG is 5%, adjusted from 0% in

March 2012.

Global LPG prices are generally benchmarked to the LPG price (propane and

butane price) announced monthly by Saudi Aramco. LPG prices are then fixed

based on its composition of propane and butane. The typical composition of LPG is

as follows: 30% propane/70% butane, 70% propane/30% butane and 50%

propane/50% butane. The first and third mixtures are the most common in

Vietnam.

Saudi Aramco’s LPG price is calculated using the following formula:

CP = (%C3)*CPC3+ (%C4)*CPC4, where

CPC3/CPC4 is the price of one ton of propane/one ton of butane, provided

by Saudi Aramco’s publication every month.

%C3/C4 is percent of mass of propane/butane.

The price of imported LPG is calculated using the formula:

P = (CP+Pre)*(1+%TNK)*(1+%GTGT),

Where

P: Import price

CP : Global price published monthly by Saudi Aramco

Pre: Premium of Vietnam

%TNK: import tax which is currently 5%

%GTGT: value-added tax (VAT) on commodities by Government regulations

which is currently 10%

Pre is fixed by LPG transportation companies based on transportation technology

including:

Transportation of LPG in high pressure and normal temperature conditions

Transportation of LPG in conditions of normal pressure and low

temperature conditions

The first case is more common for Vietnamese LPG traders as they have limited

storage capacity. Vietnamese LPG traders can receive only small vessels that

transport LPG under high pressure and normal temperature conditions and also

cost a higher premium (Usually the premium of a small vessel accounted for 20%

of the CP price.) than the normal pressure / low temperature conditions present on


large vessels (more than 50,000 DWT). In this case, propane and butane are

transported separately and is mixed upon delivery. Vietnamese LPG traders who

own large storages capacities are in a position to control the market since their cost

will be lower by at least USD 40 to 50 per ton in transportation fees.

CP LPG price in the last years

Source: LPG Australia, VPBS collected

Domestic supplier’s price

The domestic producers’ (Dinh Co and Dung Quat) price is determined by

competitive bidding every three months and is based on the following formula:

Pdomestic = CP+Pre, where Pre is the premium which depends on location and

amount of the delivery.

Normally, bidding on premium is done by local traders and the premium paid is

dependent on prevailing market conditions relative to location and the size of the

delivery. The domestic price is calculated in a manner similar to the international

price even though bidding is done based on the curve for LPG futures.

Retail price:

Prt= Pdomestic+ expenses (management fees, cylinder depreciation and

other fees) + VAT + distribution fee

The above graph shows LPG movement in Vietnam vs. global prices. We can see

Vietnam’s retail LPG price strongly depends on global prices. When the global price

is up, the retail price in Vietnam goes up immediately regardless of supply-demand

balance. The worldwide LPG price is forecast to increase this year due to changes

in the weather boosting heating demand.

0

200

400

600

800

1,000

1,200

1,400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2012's CP price (USD/ton)

2012's Vietnam retail price (kVND/cylinder 12kg)

2013's CP price (USD/ton)

2013's Vietnam retail price (kVND/cylinder 12kg)


LPG Market Outlook

Supply

LPG is supplied by two state-owned domestic producers (Dinh Co plant and Dung

Quat refinery) with the remaining demand met through imports. Dinh Co Plant,

operated by PV Gas, is located in the south and uses natural gas from Bach Ho field

(Cuu Long basin) and Nam Con Son basin to produce LPG. Dinh Co plant provides

about 20 to 25% of the country’s total demand. It produces two types of LPG: a 50%

propane and 50% butane mix and a 30% propane and 70% butane mix which are

the most popular mixes used in Vietnam.

The other domestic LPG producer is the Dung Quat Refinery operated by Binh Son

JSC which is expected to produce about 290k tons of LPG per year. The Dung Quat

refinery processes domestic crude oil from the Bach Ho field and Dai Hung fields as

well as imports from the Middle East to produce LPG. The LPG produced by the

Dung Quat refinery contains high amounts of olefins because of the characteristics

of its inputs. The LPG is distributed to the domestic market by Binh Son Company

via its affiliate companies PetroVietnam Southern Gas (PGS) and PetroVietnam

Northern Gas (PVG).

LPG Domestic suppliers

Source: PVN, VPBS

Currently, as a result of decreasing gas production from the Bach Ho field, the Dinh

Co Plant is unable to run at full capacity. To replace the decreasing supplies from

Bach Ho, Dinh Co has begun using more natural gas from the relatively more

expensive Nam Con Son basin. Dinh Co supplies the south and south central

regions of the country while Dung Quat distributes LPG mainly to the north and

north central regions. Roughly half of the LPG produced by the Dung Quat refinery

is distributed to PetroVietnam Northern Gas (PVG); a quarter to PetroVietnam

Southern Gas (PGS) and the remaining 25% is allocated to local traders through a

competitive bidding process. High transportation fees prevent companies in the

50%

25%

25%

Dung Quat

50%50%

Dinh Co

PVG

PGS

Bidding

VietNam has two LPG

processing plants. Dung Quat

and Dinh Co.

Roughly half of the LPG

produced by the Dung Quat

refinery is distributed to

PetroVietnam Northern Gas

(PVG); a quarter to

PetroVietnam Southern Gas

(PGS) and the remaining 25% is

allocated to local traders

through a competitive bidding

process.


north like PVG from distributing the LPG produced by Dinh Co, which is located in

the south. Hence, 50% of DinhCo’s production is distributed to PGS, and the

remaining 50% is allocated to local traders through a competitive bidding process.

Due to a lack of domestic production, Vietnam imports large amounts of LPG,

mainly from China, Singapore, Malaysia and the Middle East with imports recently

accounting for about 50 to 55% of demand. China is the biggest LPG exporter to

Vietnam thanks to the advantage of its proximity to Vietnam and the fact that most

distribution is to the north of Vietnam. Besides Asian countries, Vietnam also

imports LPG from the Middle East. The export market to Vietnam has been

relatively stable over the last two years with 55% of imports from China. Due to

limited supplies from other Asian countries, Vietnam has increased LPG imports

from the Middle East mainly to the south of Vietnam. The amounts of LPG imports

to each area vary based on demand and port capacities. In general, 63.7% of the

country’s imports arrive via the South, 35.2% via the North and the remaining 1.1%

via Central Vietnam.

Demand

In the 10 years between 1994 and 2003, Vietnamese LPG consumption grew at a

CAGR of 50%. Since then growth in LPG consumption has naturally slowed with a

CAGR of 6.1% between 2004 and 2013. It is estimated that Vietnam’s consumption

of LPG will strongly decrease thanks to development in households and

commercial sector. However, growth in consumption is facing an issue if the LPG

price keeps increasing. In 2012, Vietnam consumed about 1.28 Mt of LPG, slightly

decreased from 2011. In 2013 the demand reached 1.3 Mt, increasing by 0.9%.

Vietnam uses LPG mainly as domestic cooking fuel, in commercial services such as

restaurants and cafés, and in the industrial sector. LPG is mostly consumed by the

large urban areas of Ho Chi Minh City, Hanoi and Da Nang. Only small amounts are

consumed outside of large urban areas. The LPG market can be divided into three

main regions - north, south and central. Being the most developed region, the

south consumes about 70% to 80% of the total demand. However, stronger

economic growth in other regions of the country is likely to bring about changes in

consumption levels in different regions. Currently, the south consumes about 66%

of total LPG demand, the north 30% and central Vietnam 4%.

Consumption of LPG can be broken down into three sectors: industrial, residential

and commercial/transportation. As it is still a developing country, in fact still

considered to be a frontier market by investing standards, Vietnam doesn’t use

much LPG in transportation with the sector only accounting for 3% of total demand.

The industrial sector is the largest one, accounting for 65% of demand, while 32% is

used by the residential and commercial sectors. Such a consumption structure is


considered backward, particularly because LPG is considered as an important input

material for the petrochemical industry.

Vietnamese LPG supply-demand (Kt)

Source: PV Gas, VPBS

LPG supply-demand forecast

As we mentioned above, apart from the current LPG producers such as Dung Quat

and Dinh Co, there will likely be other LPG suppliers along with refineries.

According to the Vietnam Petroleum Institute (VPI), Nghi Son Petrochemical

Complex will produce 380 KTPA of LPG equivalents to 29% of Vietnam’s current

consumption, at its full capacity. The Dung Quat refinery will continue to produce a

stable quantity of LPG at~350 KTPA from 2014 to 2020. Long Son Petrochemical

complex is estimated to produce 285 Ktpa starting after 2020.

Domestic LPG supply in the near future

Source: PVI, VPBS

363 366 348 345 281 277 258 238 264 173 212

102 303

350

339 410

658

751 786 811

900 888

1,080 1,116

1,324 1,289 1,300

0

200

400

600

800

1,000

1,200

1,400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ktons

Dung Quat Dinh Co Total Demand

1

2

4

3

5

Nghi Son 380 KTPA - 2016

Dung Quat 290 KTPA -2009

Vung Ro 160 KTPA -2020

Van Phong 480 KTPA -2020

Long Son 290 KTPA -2020


Those plants together with Dinh Co will have a total capacity of about 700 Kt from

2014-2015 to supply to the market. From 2018, the country’s total LPG output

capacity will increase by 24.6% to 960 Kt and reach 900 Mt in 2020, equivalent to

95% of the country’s total demand.

In terms of demand, we estimate that the average growth in the period of 2014 to

2020 will be 6% to 7% year-over-year. Our estimate is based mainly on Vietnam’s

growth forecast and we have not taken into account the potential demand from any

new petrochemical projects which would consume a large amount of LPG.

Currently, Vietnam only has the Dung Quat polypropylene (PP) plant which

produces about 150 KTPA. However, this plant uses gas oil cracking technology

and does not consume LPG. Other PP and polyethylene (PE) plants such as the

PP/PE plant in the Long Son Petrochemical Complex, PP plant in Nghi Son refinery

and methyltert-butyl ether (MBTE) plants may go into operation after 2020.

However, due to the uncertainties surrounding these projects, we have not taken

them into account when preparing our demand forecasts.

Vietnam’s LPG supply-demand outlook (Kt)

Source: VPBS estimated

Vietnam’s LPG consumption is forecast to grow stronger than its supply. As a

result, refinery production cannot meet the demand. However, thanks to new

suppliers Vietnam will significantly reduce import volumes. Demand is expected to

reach 2.1 Mt by 2020 with potential shortages in supply after 2025, not mention to

other large LPG consumers -PP and PE petrochemical plants – which will

commence operations after 2020. Vietnam will continue to face a deficit in LPG

after 2020 and imports shall remain as the country’s primary solution.

Profitability of listed LPG Traders

Based on financial analysis of listed LPG traders in Vietnam stock market, we see

net profit margins in LPG businesses staying low, in a range of 1 to 3%. Even, for

622 770 960 960 960 960 903

-749 -685 -594 -700 -812 -933 -1,118

1,371 1,455 1,554 1,660 1,772 1,893

2,021

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

2014 2015 2016 2017 2018 2019 2020

Shortage Production Demand


VT-Gas, a non-listed company, we learnt that its net profit margin in 2012 was only

2%. This figure is low compared with other sectors such as power, rubber, food, IT,

etc. Currently LPG stocks are trading at P/E of 5.76x on average vs. 12.7x for the

market.

LPG costs account for 80 to 90% of total sales, depending on whether LPG is

sourced from imports or domestic production. The remaining expenses such as

management fees and cylinder depreciation account for 5 to 6% of total sales.

Profits earned by LPG traders are strongly influenced by the source of LPG and

inventory rotation. Therefore, LPG traders with larger storage capacities are likely

to be the strongest players in the market.

Financial ratios of listed LPG traders

Averag

e PGS PVG MTG ASP PGC

Valuation ratios

P/E 12.3 6.4 12.7 19.1 16.1 7.3

EV to EBIT 8.2 3.9 12.4 8.2 10.6 5.6

EV to EBITDA 5.6 2.2 8.2 6.0 7.3 4.3

Price to Sales 0.1 0.2 0.1 0.1 0.1 0.2

Price to Book 0.9 1.5 1.0 0.4 0.6 1.0

Profitability

Gross margin 11.8% 22.5% 7.6% 5.1% 8.7% 15.1%

EBITDA margin 4.0% 9.3% 1.8% 2.2% 2.2% 4.2%

Operating margin 2.4% 4.7% 1.0% 2.3% 1.2% 3.0%

Net profit margin 1.6% 2.9% 0.6% 0.8% 1.3% 2.3%

ROA 3.3% 6.8% 2.2% 0.9% 1.1% 5.6%

ROE 10.5% 25.0% 7.6% 2.0% 3.7% 14.3%

Leverage

EBIT/Interest rate 3.54 8.97 1.75 0.68 0.53 5.79

EBITDA / (Interest rate +

Investment) 2.47 4.52 na 1.52 na 1.36

Debt/Investment Capital 0.38 0.33 0.42 0.30 0.49 0.36

Debt/Equity 0.65 0.50 0.73 0.43 1.03 0.58

Liquidation

Asset turnover 2.3 2.1 2.7 2.3 2.3 2.0

Trade debtors 28.3 9.9 47.7 20.4 28.7 35.1

Account payable 36.9 5.4 61.7 41.2 35.2 41.1

Inventories 18.6 38.2 10.6 17.2 6.9 20.3

Current ration 1.0 1.0 1.0 0.8 0.8 1.2

Quick ratio 0.7 0.9 0.8 0.4 0.6 0.9

Growth

Revenue 31.8% 1.0% -13.7% 178.1% -10.1% 3.7%

Profit 19.3% 104.7% 10.5% -12.9% -49.8% 43.9%

Asset 16.3% 65.3% -3.1% 18.3% -4.8% 5.8%

Equity 4.1% 15.1% -0.8% -0.5% -2.3% 9.0%

Source: Bloomberg, VPBS


Petroleum products

Market regulation and key players

Vietnam’s gasoline market, as well the market for other products such fuel oil,

kerosene, diesel and jetA1, is under control of the state in terms of distribution

through a chain of petroleum product import/wholesale companies. As a result of

the World Trade Organization negotiations, petroleum products are still listed as

excluded items; foreign-owned companies are not allowed to trade or distribute

them. Only Vietnamese companies are allowed to import, export and distribute

petroleum products. The U.S. - Vietnam bilateral trade agreement brought more

favorable conditions to Vietnam as part of its commitment to an open petroleum

market. The wholesale market opened in 2007, but as experienced in other

countries, the process of opening the retail market to foreign investors takes

between five and ten years. Since Vietnam has reached an agreement to put its

petroleum products trading on an exception list, opening up of the retail market is

inevitable.

Gasoline sector structure

Source: VPBS

The government, represented by the Ministry of Industry and Trade and the

Ministry of Finance, controls Vietnam’s petroleum market. The Ministry of Finance

manages the import tax rate and petroleum product prices while the Ministry of

Industry and Trade controls the yearly quota (the maximum amount of petroleum

products that can be imported) to ensure supply to the domestic market.

Petrolimex, a state owned group, is the biggest petroleum importer and distributor


that holds more than 50% of the import quota. The Dung Quat refinery is the only

refinery and manufactures about 6.5 Mtpa of petroleum products.

Government controls the market by decree 84/2009/ND-CP. The decree defines

price controls and facilities for import, wholesale and retail companies including

ports, terminals and distribution systems. The decree clearly specifies that all

Vietnam-based enterprises regardless of form of business that engage in petroleum

processing and production are entitled to join the gasoline distribution market of

Vietnam if complying with the above decree. With the issuance of this decree the

government has partly opened the petroleum distribution market but imposed

strict administrative measures on the trading of these products via its regulations

on business operational criteria and the state’s monopoly in the petroleum import-

export business. The decree effectively removed government subsidies and

allowed import and wholesale companies to define their wholesale prices and

adjust their retail prices according to global prices. Thus this decree represents a

move towards a market mechanism from a subsidized mechanism.

Key players

Petroleum products are distributed to the consumer by 14 enterprises, including

Petrolimex and the Dung Quat refinery, via their general agents, trading companies

and service stations. The wholesale enterprises have to organize the import of

petroleum products in a timely manner according to the allocated quota and

category or to their submitted production plan. In addition these enterprises have

to ensure that their products meet all required standards of quality and quantity as

well as a stabilized distribution network to satisfy market needs for petroleum

products. They have to ensure that their reserves of petroleum products satisfy the

amount needed for 30 commercial days. These 14 companies are authorized to

import petroleum products:

List of petroleum importers 2013

No. Company No. Company

1 Petrolimex JSC 8 Thanh Le

2 Petec JSC 9 ZA1 Petrolimex

3 Saigon Petro 10 Vinapco

4 PVO 11 Nam Viet Oil JSC

5 Petimex 12 Mipec

6 Military 13 HiepPhuoc

7 Hang Hai 14 Hai Ha Amphibious

Source: MOIT, VPBS

The list of importers can be changed every year depending on each enterprise’s

business performance, and whether they achieved the import quota of the previous

year. It is useful to note that not all the enterprises listed above distribute

petroleum products to the retail market. Vietnam Air Petrol Co. (VINAPCO) is the

distributor of air petrol for all foreign and domestic airline companies that are

operating in Vietnam’s civil airfields. Hiep Phuoc exclusively imports fuel oil for


power generation, the military imports petroleum products only for specific military

uses, and Vietnam marine (Hang Hai) imports petroleum products for Vietnam’s

marine industry. The remaining import enterprises distribute petroleum products

all over the country, giving them control over retail prices of petroleum products.

Petrolimex is the biggest petroleum products importer and distributor with a

market share of more than 50%. It provides an average of 9 Mt of petroleum

products to the market every year, mostly from imports. PV Oil and Saigon Petro

trail Petrolimex ranking second, third respectively.

Petroleum product import is based on the country’s petroleum products demand,

which is estimated by the Ministry of Industry and Trade. In the past, this quota

represented the country’s actual petroleum products demand since all

consumption was served through imports. The commissioning of the Dung Quat

refinery as added another factor to be considered in the quota decision making

process. The quota also takes into account the business plans of petroleum product

import and wholesale companies. Every year, importers have to submit the amount

of petroleum products they will be able to distribute in domestic markets to the

Ministry of Industry and Trade. Such figures must be linked to the potential

domestic demand. The petroleum products import quota is different every year but

the biggest quota always belongs to Petrolimex which is generally allocated more

than 50%.

Petroleum products import quota in 2013

Source: MOIT

The import quota in 2013 was 9 Mt, of which 4 .43 Mt was gasoline, 3.9 Mt was

diesel, the rest was fuel oil, jet fuel and kerosene. The quota was distributed to

thirteen enterprises as can be seen in figure above. The quota also serves as an

indication of the market share of each enterprise. The bigger the market share a

company has, the larger the quota the company gets.

Petrolimex

58.9%

PVO

11.4%

Saigon Petro

6.1%

Thanh Le

5.2%

Petimex

5.9%

Vinapco

4.8%

Military

1.7%

Mipec

1.8%

Viet Nam Marine

0.0%

Hiep Phuoc

1.1%

Nam Viet Oil

0.8%

ZA1 Petrolimex

0.1%

Hai Ha

2.3%


Petroleum products infrastructure

Wholesale distribution

Petroleum products are distributed throughout the country via vessels, trucks,

pipelines and trains. Vietnam has only one pipeline system, the B12, which is under

the control of Petrolimex. The B12 pipeline was built with the help of Union of

Soviet Socialist Republics. The 600km pipeline is connected to a 337,200 m3

storage system in Quang Ninh city which flows to six cities: Quang Ninh, Hai

Phong, Hai Duong, Hung Yen, Bac Ninh and Hanoi. The pipeline annually

transports petroleum to depots such as Thuong Ly (Hai Phong city), Duc Giang (Ha

Noi) and K135 (Hung Yen).

Petroleum ports in Vietnam are located in Hai Phong, Quang Ninh, Nghe An, Da

Nang, Binh Dinh, Vung Ro, Ho Chi Minh city, Dong Nai and Vung Tau. Vietnamese

petroleum ports can accommodate vessels of maximum 60,000 DWT. The figure

below shows the capacity of petroleum ports in each region.

Existing reception ports for oil tanks

Source: VPBS collected

The most outstanding ones would be Petec CaiMep petroleum port which allow a

vessel of 60,000 DWT and will increase to 80,000 DWT in 2013. The CaiMep

petroleum port is located in the deep seaport system in Cai Mep, the biggest port

area in the South. In the system, only two petroleum ports are capable of

accommodating vessels up to 120,000DWT. The Petec Cai Mep petroleum port

60,000-80,000 DWT, and Cai Mep port of Vung Tau Petro JSC will be able to receive

a vessel of 120,000 DWT. The two ports will help petroleum importers be proactive

Hanoi

25,900-60,000 DWT

5,2000—30,000 DWT

2,500-3,300 DWT

4,900-40,000 DWT

5,1000-6,4000 DWT 80,000-120,000 DWT

Da Nang

HCM city


in seeking for petroleum sources cheaper than current sources in the region,

reduce lightering cost and lightering loss as big vessels can call at the ports

directly.

Retail distribution

Vietnam has more than 12,000 petrol stations, of which 30% belong to the State

and 70% belong to private. The service stations in Vietnam tend to simply be filling

stations without any non-oil businesses attached to them such as restaurants, cafes

and motels. Ho Chi Minh City has about 580 gasoline stations - 4.8% of the

country’s total - while in Hanoi there are 474 gasoline stations - 4% of the total.

Investing in a gasoline station in Vietnam is a very complicated and time-

consuming process that takes up to one year since approvals have to obtained

from the State. Apart from complicated administrative formalities, there are three

different levels of gasoline station and each one requires a different area of land

per government regulations. Level 1 gasoline service stations require an area of

5,600 m2 and must include a motel and parking lot. Level 2 gasoline stations

require a minimum area of 3,000 m2while level 3 gasoline stations require a

minimum area of 900 m2. Vietnam is planning to increase the number of gasoline

stations to 18,000 by 2020. Ho Chi Minh City will have 853 gasoline stations (an

increase of 273 stations) and Hanoi will have about 796 stations (an increase of 322

stations). A gasoline station distributes around 70,000 to 140,000 litres per month

depending on its size and level. About USD100,000 is needed to invest in a small

level 3 gasoline station with an output capacity of 70,000 litres per month-excluding

investment in land. Private gasoline stations earn profits through commissions

from the importer.

Pricing

The retail price in Vietnam is generally below the international market price using

government subsidy to support trading business. From 2009, the government

ceased subsidizing petrol prices and left the pricing to a more market-oriented

approach which, with the new policies, is based on global prices. The price of

gasoline it is now managed in terms of the global price for oil rather than being

completely arbitrary. The policy states as follows:

Raising Prices

When the global price increases by less than 7%, the local companies can

increase domestic prices in a correlative level

In case of an increase of 7% to 12%, the companies can add 60% of the

increase to domestic prices and the remaining 40% will be subsidized by

the government


In case of an increase of more than 12% the government will decide the

domestic prices

Lowering Prices

In the case of a global decrease in prices, the companies must decrease retail prices

accordingly with the decrease of global prices.

Price competition in Vietnam’s petroleum market is nonexistent due to a lack of

businesses involved and substantial differences in the business scope and capacity.

Currently, fuel retail prices in Vietnam are lower than that of Thailand and

Singapore thanks to government subsidies and reduced taxes.

RON92 Price and changing from 2012

Source: MOIT

Vietnamese basis fuel price formula

The fuel retail price is regulated by the government, and changes as mentioned

above. The basis fuel price is composed of a number of price elements and these

can be divided into international and domestic elements. The international element

of basis fuel price is based on what it would cost a Vietnamese importer to buy

petrol from an international refinery/fuel trading and to transport the products onto

Vietnam shores. The domestic elements are included certain domestic transport

costs, government taxes and levies (VAT, environment tax, excise tax, import tax),

retail and wholesale margins (pre profit norm, business expenses norm) and

stabilization needs to be added to the international price.

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

18,000

19,000

20,000

21,000

22,000

23,000

24,000

25,000

01/01/12 -

06/03/12

09/05/12 -

22/05/12

21/06/12 -

01/07/12

01/08/12 -

12/08/12

11/11/12 -

27/12/12

10/04/13-

18/04/13

15/06/13 -

28/06/13

23/08/ 13 -

07/10/13

18/12/13 -

Now

RON 92

Change (%)


Vietnam fuel price analysis

Source: VPBS

Gasoline distribution profitability

According to the basic fuel price formula, for importers, the retail price covers 600

VND (USD 0.028) on every litter in business expense and a maximum gross profit

margin on a litre of A92/DO/FO/Kerosene about VND 300 (USD 0.014). Business

expenses here include selling and management expenses and commission for

retailers, gross profit margin is subject to margin before tax of each liter. In other

words, net margin on each litter is about VND 225. In addition, profit on each litre

can be accumulated if the business expenses are less than VND 600 on each litre.

The better importers mange business expenses, the more profit is available to

them.

Here is a quick analysis on Petrolimex, the biggest petroleum importer in Vietnam.

In first nine months of 2013, the company’s total cost of petroleum business

accounted for 99.3% in total sales. Within those costs, management and selling

expenses made up 3.1% of total sale. As a result, petroleum products and the

transportation fee accounted for 92.6% of total sales. The company’s net profit

margin was 0.4% for the first nine months of 2012. Petroleum distributor Sai Gon

Fuel JSC (under ticker SFC), which can only make a profit by commission, had a

net profit margin for first nine months of 2013 of only 0.01% even though the

company’s total cost also accounted for 99.3% of total sales, including

management and selling expenses which made up 2.7% of total sales.


The following table shows the relative valuation and profitability of the few listed

petroleum products trading companies

:Financial ratios of gasoline distribution listed companies

Peer Group Ratios (TTM) Average COM CMV SFC

Valuation Ratios

Price Earnings 10.4 13.3 7.5 10.3

EV to EBIT 11.0 8.9 14.4 9.8

EV to EBITDA 8.9 8.0 10.0 8.7

Price to Sales 0.1 0.1 0.0 0.1

Price to Book 1.1 1.0 1.0 1.3

Profitability Ratios

Gross Margin (*) 4.6% 4.4% 3.2% 6.2%

EBITDA Margin 1.0% 1.1% 0.6% 1.1%

Operating Margin 0.7% 0.8% 0.6% 0.8%

Profit Margin 0.6% 0.5% 0.6% 0.8%

Return on Assets 5.4% 5.4% 4.8% 6.0%

Return on Equity 11.4% 7.8% 13.9% 12.5%

Leverage Ratios

Interest Coverage Ratio (EBIT/I) 10.93 5.58 2.39 24.83

EBITDA / (I + Cap Ex) 1.42 1.57 1.26 na

Tot Debt/Capital 0.45 0.31 0.45 0.58

Tot Debt/Equity 0.89 0.46 0.86 1.36

Liquidity Ratios

Asset Turnover 8.8 9.9 9.6 6.8

Accounts Receivable Turnover Days 4.2 3.7 6.3 2.4

Accounts Payable Turnover Days 5.9 1.3 12.4 4.1

Inventory Turnover Days 11.3 9.0 17.3 7.5

Current Ratio 1.3 1.4 1.2 1.2

Quick Ratio 0.6 0.5 0.4 0.9

Growth Rates

Revenues 5.1% 5.5% -7.1% 16.8%

Earnings -8.1% 4.0% -36.9% 8.5%

Assets 2.8% na 2.8% na

Equity 1.9% -1.4% 2.7% 4.3%

Source: Bloomberg

Petroleum products supply

Vietnam had to import all its refined products for consumption before 2009. The

country had been processing condensate to produce gasoline long before the

startup of its first refinery in 2010. In addition, there are three small condensate


processing plants in operation that have been satisfying less than 2 to 3% of the

domestic gasoline consumption needs:

The Cat Lai condensate processing plant, owned by Sai Gon Petro

company, processes condensate from Rong Doi field and Nam Con Son

basin providing an annual output of 359 Ktpa of LPG, gasoline, diesel and

kerosene to the local market.

The Phu My condensate processing plant managed by PV Oil (PV Oil Phu

My) has a current capacity of 350 Ktpa of petrol (gasoline, diesel and

kerosene) and will be increasing to 500 Ktpa next year.

Nam Viet Oil is a private condensate processing plant with a total capacity

of 300 KTPA producing low octane gasoline. The plant mixes condensate

from Nam Con Son basin and condensate Senipah from Indonesia with

high octane petrol. Nam Viet oil plans to process condensate and LPG itself

in the future.

Existing refineries and condensate processing in Vietnam

Source: PVN, VPBS

Condensate treatment factories with simple technologies use condensate from

Bach Ho field and Nam Con Son basin to mix naphtha and petrol.

Dung Quat is Vietnam’s first fully functional refinery, located in the Dung Quat

Economic Zone, Quang Ngai province (Central Vietnam). The refinery went into

operation in 2009, facing critical international opinions against the illogical location-

1000 km from the Bach Ho field. The Dung Quat refinery was built by a consortium

(Technip Coflexip of France, Technip Geoproduction of Malaysia, JGC Corp of

Japan and Technicas Reunidas of Spain) led by Technip France. The current

maximum capacity of the refinery is 6.5 MTPA (130 kbpd) and it lifts 90% of its

4

3

12

NameCapacity

(kbpd)

Operation

date

Investment

CapitalOwner Crude supply

Dung Quat 130 2009 $3.1 bn Petro Vietnam

100%

Vietnamese fields, Middle East

Phu My Condensate processing

7.1 2004 NA PV Oil 100% Condensate Bach Ho and Thailand

Cat Lai Condensate processing

7.1 1992 NA Sai Gon Petro 100%

Condensate Nam Con Son, Rong Doi

Nam Viet Oil

5 2007 $ NA BIDV 9%, Vinacapital 36.7%, private 54.3%

Condensate Rong Doi, Nam Con Son and

import

1

4

2

3


crude oil feedstock from the Bach Ho field. Currently, Dung Quat production

provides about 40% of the country refined demand. Total investment in Dung Quat

was about USD3.1 billion, with the refinery’s debt as of 2012 estimated at USD2

billion. The refinery’s product yield includes LPG, unleaded gasoline (RON 92, 95),

jetA1, diesel, fuel oil (FO), polypropylene and sulphur with product specifications

equivalent to EURO II specifications. As of now, the refinery is operating with a

utilization rate of nearly 100%.

Domestic supply development - booming decade

To develop domestic petroleum supply, Vietnam is planning to put online several

refineries in the near future. The country currently expects to expand the capacity

of Dung Quat to 10MTPA (200 kbpd) to be able to blend crude from the Middle East.

However the plan seemed to change when GazpromNeft signed a framework

agreement with Vietnam Oil and Gas Group (PetroVietnam) to acquire a stake in

the Dung Quat oil refinery and to participate in the modernization of plant. As part

of the deal, Gazprom Neft will acquire a 49% interest in Binh Son refining and

petrochemical, which will allow controlling and managing the refinery, while both

the firms are in negotiations over the price of stake. It can be easy to understand

that if the deal works out Russia will provide crude oil to the Dung Quat refinery.

Nghi Son Refinery

The Nghi Son refinery project, currently in the EPC stage, is located in ThanhHoa

city, north of Vietnam with an area of 926 ha. Compared to the Dung Quat refinery,

the location is closer to end-users but still far from the country’s major oil

producing areas. The refinery will have a capacity of 10MTPA with a planned total

capital investment of USD7.5 billion. The refinery is scheduled to come online late

2016. A majority of the crude will be sourced from Kuwait with the following

product slate: LPG, gasoline (EU3/4), kerosene, jet fuel, diesel, fuel oil, sulfur,

polypropylene, paraxylene and benzene. The Nghi Son refinery project will employ

Technip (French/Malaysia), JGC (Japan), PVC JSC (Vietnam), and Tecnicas

(Spanish) as EPC contractors - the same contractors used in the EPC of Dung Quat

refinery. Nghi Son is a medium sized high complexity refinery, designed to supply

the growing Vietnamese domestic market, with the potential to double in size at a

later date. The EPC contract was signed on January 27, 2013, the construction

started in July 2013. Total EPC contract value is about USD 5.1 billion.

Long Son Refinery

The Long Son refinery project is located in Vung Tau province, next to the PVOS

underground storage project, in an area of 810 ha. The plant enjoys a strategic

location, being close to the international seaway route that runs close to existing

industrial zones, and has adequate utilities and services. The Long Son refinery is

expected to refine 200 kbpd of crude oil, producing about 10 MTPA of petroleum


products with minimum EURO IV specifications. The total investment is projected

to be USD 6 billion with PetroVietnam and Arabian Oil Company Ltd (AOC) taking

up 29% and 35.5% stakes in the project, respectively. PetroVietnam and SAO (Saudi

Arabian Oil Company)/Total have already completed the feasibility study for the

project but the refinery is expected to come online in 2020. Long Son is expected to

import all of its crude oil requirements; a portion of which may be sourced from

Venezuela where PetroVietnam is currently carrying out E&P activities. According

to our opinion, this project will take a long time to be completed. The reason could

be Long Son has a better location to consumption market than that of the two

others refineries in which PVN has already invested money. The operation of Long

Son refinery could hurt Nghi Son and Dung Quat. At the same time; investors of

the projects are requesting the Vietnam government to give the same incentives as

Nghi Son which is hard to be done. Hence, the project could be in a long hold.

Van Phong Refinery

The fourth refinery scheduled for construction is the Van Phong refinery with a

capacity of 10 Mtpa (200 kbpd). The project should be located in Van Phong EZ,

KhanhHoa province on an area of 304.5 ha, near the main north-south railway line

and highway. Petrolimex would like to keep a 60% of the working interests and

share the remaining 40% to investors in order to open talks about the type of crude

oil and technology. Petrolimex and South Korea’s Daelim Industrial signed a

Memorandum Of Understanding (MOU) for a feasibility study of the refinery. This

MOU covers the construction of the refining facilities, not their operations.

In addition Petrolimex and Daelim are in discussion about the opportunity for

Daelim to hold some working interest in this project, but no decision has been

made yet. The project is planned to split into two phases: Phase 1 should include

the refinery and require a capital expenditure of USD3 billion. Phase 2 would

involve the petrochemical products for the remaining USD1.8 billion

Crude oil for Van Phong refinery will come from imports, expected to be from

either Singapore or the Middle East. Regarding the time frame, Petrolimex had

originally planned for completion by 2015. But this date is likely to be postponed to

2020.

Vung Ro Refinery Project

The Vung Ro refinery project is under development by Techno-Star. The plant’s

capacity is projected to be 160 kbpd with a capital investment of USD 3.2 billion.

The project should be located in Phu Yen province. Construction of Vung Ro started

in 2013 using design technology of UOP LLC (A HoneyWell– America). The refinery

is expected to come online after 2018. Vung Ro has 100% foreign capital

investment and won’t enjoy any incentive policies of the Vietnamese government

such as Dung Quat and Nghi Son refinery. Techno start management wants to


move its project to Hoa Tam Industrial Zone (IZ). The Prime Minister has not

rejected the move but the company will have to talk with the Hoa Tam IZ owner.

Another project which might come online after 2020 is Nho Hoi refinery. This

project would be located in Nhon Hoi Binh Dinh with investment capital of about

USD27 billion. Nhon Hoi refinery is expected to have a capacity of 666 kpbd. This

supply alone is over the country consumption. We do not know about the feasibility

of the refinery as the consumption market is too small for its capacity. The investor

is PTT Group (Thailand). We don’t take this refinery into account in our

assumptions for supply in the future.

Source: PVN, VBPS

Based on the schedule of future refineries: 1/Dung Quat has a full capacity of 6

Mtpa, which will be increased to 10 Mtpa in 2018, pending success in reaching an

investment agreement. 2/Other refineries will come online only after 2018 to avoid

impacting the first refinery. We reckon until 2018, Vietnam would be able to supply

a maximum of 6.3 Mtpa of petroleum products (including the 0.8 Mtpa from small

condensate processing plants) to the domestic market, accounting for roughly 50%

of total demand. Hence, Vietnam will remain dependent on oil and gas imports.

1

2

4

3

5

Nghi Son 200 2018 $ 7.5 bn 35.1% KPC, 35.1% IdemitsuKosan, 25.1% PetroVietnamand 4.7% Mitsui Chemicals

Middle East (Kuwait) and Vietnamese

NhonHoi/Binh Dinh?

660? 2020 $27 bn PTT Group (Thailand) NA

HoaTam/VungRo

160 2018 $3.2 bn Techno Star Management 100%

Middle East

Van Phong 130 2020 $4.8 bn Petrolimex 60%, Daelim?/Partner seeking

75% Middle East, 25% Regional.

Long Son Refinery

200 2020 $ 6 bn PetroVietnam 29%, AOC 35.5%, Total 35.5% (not fixed yet)/Partner Seeking

Arabian Light crude

NameCapacity

(kbpd)Time Investment Owner Crude supply

Dung Quat Expansion

70 2018 $2-3 bn Petrovietnam, Partner seeking

Middle East

1


Future petroleum products supply

Source: PVI, VPBS estimation

Demand

Vietnam’s consumption of petroleum products has grown at a CAGR of 4.6% over

the last 12 years from 2001 to 2013. The demand comes mainly from the

transportation sector (gasoline and diesel), which accounts for 57% of total

consumption. The industrial and power sectors, which account for 19.2% and 6.9%

of consumption respectively, mostly consume diesel and fuel oil with amounts

ranging from 1.5-3 MTPA. Diesel and fuel oil consumption in the industrial sector

has been in decline over the last few years thanks to the development of the

economy, the fact that industrial producers have realized the greater efficiency of

using CNG and LPG and the small difference in price between them. Fuel oil is no

longer popular with residential users.

Vietnam’s petroleum product demand is estimated primarily based on the

country’s economic growth and energy intensity. The Vietnamese economy has

developed rapidly during the last decade due to its economic renovation and

deeper integration into the world economy. Domestic inflation and global recession

leading to a decrease in exports and a slowdown in production have hampered

growth, but we expect the country to continue on its growth trajectory from 2015

onward. Accordingly, we estimate that fuel oil (FO) will account for 17% of

consumption in 2013 to 2014 and make up roughly 16% in the following years.

JetA1 demand is expected to make up 5% of total demand in 2013 and 2014, drop

slightly to 4% till 2020 and stay at 3% from 2020 till 2025. Gasoline and diesel

consumption will increase, offsetting the decline in fuel oil and jetA1 consumption.

Gasoline demand is forecast to increase from 22% to 24% between 2013 and 2025

while diesel, which currently takes up the largest share, will account for 49% of

total consumption in 2015 and then stagnate in the years to come.

5.6 5.7 9.6 9.6 9.2 9.2 9.2

3.9 7.8 7.8 7.7 7.7

4.3 6.5 6.5

6.5

10.0

0

5

10

15

20

25

30

35

40

2014F 2015F 2016F 2017F 2018F 2019F 2020F

Long Son Hoa Tam/Vung Ro

Van Phong Nghi Son

Dung Quat

Vietnam’s consumption of

petroleum products has grown

at a CAGR of 4.6% over the last

12 years from 2001 to 2013.


Petroleum consumption

breakdown

Petroleum consumption and demand

Source: MOIT, VPBS Source: MOIT, VPBS

Taking into account only projects that are likely to be implemented, the country’s

refining capacity should reach 31 Mtpa in 2020, 36 Mtpa in 2021 as maximum. As a

result the import of petroleum products declines, Vietnam will experience a surplus

in gasoline and jetA1. The quota amount as well as the market share will change

dramatically. The market will belong to the manufacturers of petroleum products.

Since PetroVietnam has a stake in all of the emerging refineries, we expect PV Oil

to overtake Petrolimex and become the key player in the market. PV Oil is

responsible for the distribution of 100% of Dung Quat’s production, 35% of Nghi

Son’s production and 20% of Long Son’s production.

LPG

7.4%

Gasoline

31.9%

Kerosene

0.1%

Jet Fuel

2.7%

Diesel

48.1%

Fuel Oil

9.7%

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Production (Mt)

Import (Mt)PV Oil is responsible for the

distribution of 100% of Dung

Quat’s production, 35% of Nghi

Son’s production and 20% of

Long Son’s production.


CONCLUSION

Viet Nam has a very high reserve/production ratio (R/P), in which, R/P of crude oil is

32.6x (ranked 1st in Asia Pacific and 10th world wide), and R/P of petroleum is 66x

(ranked 1st in Asia Pacific and 716th world wide). This implies a huge potential

development of this industry in the future. Regarding direct investments, Vietnam’s

proved reserves are mostly developed while the potential fields are too far away

from the shores, which requires large investment capital and advanced techniques.

Therefore, the Vietnamese Government is especially seeking for investors’ interest

and cooperation in exploring and developing activities in deep waters. Secondly,

Vietnam’s oil refining industry is still in its developing stage while petroleum

consumption demand has grown rapidly in the last few decades. It can be seen that

Vietnam has started the construction of many refinery factories in order to meet the

demand. We believe that Vietnam will be a potential market of refined petroleum

products, especially in the transportation and refined petroleum production

industries due to its underdeveloped infrastructure. Thus, the distribution of refined

petroleum products such as LPG, lubricant, gasoline and etc. (gasoline products

distribution hopes to open doors to foreign investors in 2015). These investment

opportunities can be seen in the distribution companies with available infrastructure

but inefficient operation due to poor management. Moreover, petroleum storage

system in particular and petroleum products in general in Vietnam have not been

focused to develop further. This area is also one of the potential opportunities.

Regarding indirect investments, oil and gas stocks are currently within the few

favorable choices of investors on the stock market. Energy stocks in Vietnam stock

exchange are currently trading at an average PE of 14.3x, average PBV of 1.6x and

ROE of 27.5 %. Prices of petroleum stocks in the past two weeks have increased more

than 10% on average. In the medium term, we expect these stocks to continue to rise,

especially when especially when the crude oil and gas prices are increasing.

GAS: PV Gas is the biggest company on Vietnam stock exchange in term of

market capitalization and largest in the industry in term of revenues and total

assets. The group’s estimated revenue in 2013 is VND65 trillion, declined by

5% compared to 2012, however the net profit of VND12 trillion has outrun

both its business plan and previous year results thanks to the advance growth

of selling prices compared to input prices, which caused its shares to rise

more than 70% within the year. PV Gas currently is in negotiation of selling

20% of its equity to Chevron with a total deal size of USD 1 bn. We reckon PV

Gas wants to take over the ownership of Chevron in Block B- Omon gas field

since Chevron is withdrawing its capital from this field.

PGS: By the end of Q3/2013, PGS’ revenue and net profit were VND150.7

billion and 88.7 billion, beating that of 2012 by 3.8% and 70%, respectively,


thanks to the high profit margin contributed by trading CNG and a sharp

decrease of interest expense (approximately 47% compared to 2012). PGS’

share price has experienced a strong growth of 62% in 2013.

PVG: The company’s 2013 revenue and net profit were VND3,870 billion and

VND27,7 billion, declined by 6.8% and 25% compared to 2012 due to rising

input price and a significant provision for bad debt expense of VND5 billion

approximately. However, PVG’ share price appreciated sharply by 48% in the

last quarter as the construction of the new CNG project is starting in Q1/2014

and expected to strongly enhance the PVG’s profit to VND250 billion in 2017.

PGD: Net profit in 2013 fell to VND209 billion, surpassed its target by 161%

but slumped 8.3% compared to 2012 since selling price growth of 25.1% could

not catch up with that of input price, as PV Gas raised its dry gas price

supplied to PGD by 37.1%. Despite declining net profit and revenue, the

growth of PGD’s share price was 28% by the end of the year.

PVD: Revenue and net profit in 2013 continued to grow as PVD raised its rig

rentals for three jack-up rigs from 10% to 15% and its number of leased rigs to

four from two in 2012. Revenue from drilling services and drilling-related

services as of 30.9.2013 therefore both increased by 8.6% and 27.8% y.o.y,

respectively. Growth of PVD’s share price followed GAS closely at 61%.

PVS: As of September 30, 2013, the company’s revenue was recorded at

VND19, 289 billion and a net profit at VND1,024 billion, grew by 6% and 16%

y.o.y, respectively and strongly surpassed its targets by 49%. A major portion

of net profit growth comes from providing specialized ships, FPSO services

and especially its associate companies. With high expectation of total year

profit, PVS’ share price rose sharply and the appreciation rate for the 2013

was 49%.

CNG: Revenue for 2013 of CNG was VND950 billion, 19% above that of 2012.

Net profit grew at a more modest rate of 5% due to increasing input price and

operating expenses. However, interest expenses dropped by 35%, thus

keeping net profit VND123.91 billion, slightly above target. CNG’s share price

appreciation in 2013 therefore was 27.5%, much less aggressive than other oil

& gas companies.

DPM: Revenue and net profit estimates for 2013 was VND10,500 billion and

VND2,219 billion, both below that of 2012 more than 20% due to increasing

gas price and declining selling prices caused by the excess of supply over

demand. Despite this result, DPM’s shares still rose 13.7% in 2013.


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