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Idemitsu's Vietnam refinery enters an uncertain market

Project to decide Japanese oil company's fate as demand shrinks at home

The Nghi Son refinery launched commercial operations Nov. 14. (Photo by Tomoya Onishi)

HANOI -- Idemitsu Kosan said Tuesday its new oil refinery in Vietnam has begun commercial operations, but the project seen as key to its expansion in emerging Asia faces risks in a changing business climate.

The Nghi Son facility in Thanh Hoa Province in northern Vietnam, which went online Nov. 14, is the first oil refinery set up by a Japanese company in 43 years.

"This is the first overseas refinery in the history of our company," Executive Vice President Takashi Matsushita told reporters in Tokyo.

Idemitsu has invested about 150 billion yen ($1.32 billion) in the $9 billion project, which also counts state-owned PetroVietnam and Mitsui Chemicals as stakeholders. Under the arrangement, PetroVietnam is to buy almost all of the output at prices linked to the Asian market -- offering a stable source of income over the long term.

Idemitsu aims to turn the business profitable in fiscal 2020, but has not announced any other targets for it.

But the business environment has changed markedly since Idemitsu began considering the project in the early 2000s, driven by a sense of urgency after Japan's oil demand peaked in 1999. Even though the Vietnamese economy has been growing steadily, gasoline demand has not risen as once projected, due in part to a slow shift from motorcycles to cars, as well as the recent wave of vehicle electrification.

And a continued increase in output from other Asian refineries could flood the Vietnamese market with cheap petrochemical products.

A loosening market is already affecting similar projects in Vietnam. Idemitsu's compatriot JXTG Nippon Oil & Energy, part of JXTG Holdings, for instance, has called off a plan to set up a refinery in southern Vietnam with Vietnam National Petroleum Group, known as Petrolimex. The Hanoi government, citing a supply glut, apparently decided not to grant the same level of tax breaks as it had to two other refineries.

"Under the current conditions, it's difficult to secure the level of profit that justifies massive investments in Asia," a JXTG Nippon Oil executive said.

Idemitsu's interim net profit jumped 80% on the year to a record 103.4 billion yen in the April-September period. The company is merging with Showa Shell Sekiyu in a much-needed streamlining move. But as Japanese oil demand keeps sliding, Idemitsu's future may depend on its Vietnam refinery's performance.

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