HANOI/TOKYO -- JXTG Nippon Oil & Energy's project to build an oil refinery in southern Vietnam faces cancellation, it was learned Monday, with concerns related to a potential supply glut driving the Japanese company's local partner to back out.
State-owned Vietnam National Petroleum Group, known as Petrolimex, has informed the Vietnamese government of its decision to pull out of the Nam Van Phong refinery project, which was launched in 2008 under the Vietnamese company's initiative in Khanh Hoa Province. It was to be JXTG's first overseas oil refinery construction project.
A second domestic refinery recently came online in Vietnam, and lackluster new-car sales and the resulting slow increase in gasoline demand are also contributing to fears of an oversupply of oil products.
"We are awaiting a response from Petrolimex" about the situation, a JXTG spokesperson said. "But we plan to keep the project on the table as an option."
The project, initially estimated to cost a total of $4.4 billion to $4.8 billion, was to build a refinery with an annual production capacity of a combined 10 million tons of liquefied petroleum gas, gasoline, kerosene and diesel, according to local news reports.
The two sides signed a memorandum of understanding on the project in 2014. In 2016, a predecessor of the Japanese company purchased an 8% stake in Petrolimex for about $175 million.
Unable to churn out oil products fast enough to keep up with internal demand, Vietnam has come to rely heavily on imports. Petrolimex controls more than half of the country's gasoline retail market and has craved a refinery of its own. It hoped for assistance on the funding and technological fronts from JXTG, a JXTG Holdings unit eager to expand abroad amid shrinking demand back home.
One of Vietnam's two existing oil refineries, Dung Quat, is operated by the state-owned PetroVietnam group in the central province of Quang Ngai. The other, Nghi Son, in the northern province of Thanh Hoa, was built with investment from Japanese oil refiner Idemitsu Kosan and chemical company Mitsui Chemicals. The Nghi Son refinery started shipping products in May.
Those two refineries were built the help of tax breaks from the government. Petrolimex apparently could not secure enough such support, in what some view as a key factor in the decision to call off the JXTG project.
Petrolimex "cannot build the refinery without receiving a similar level of support to what the existing two did," an energy-sector source said.
Concerns over oversupply are seen as a factor in the government's reluctance to offer aid. If the Nghi Son refinery boosts production, about 90% of domestic gasoline demand could be supplied by the country's two refineries, according to local media reports.
Nguyen Van Trung, vice minister of Vietnam's Planning and Investment Ministry, has said that there is no need to hastily construct a third oil refinery.
In another possible factor in the government's decision, Vietnam's coffers have been depleted by such drains as repaying official development assistance loans and lowering tariffs.
Among other factors, a lack of funds has caused a number of major Vietnamese building projects to fold in recent years. In 2016, a massive refinery that Thai oil and gas conglomerate PTT had planned to build in the central Vietnamese province of Bin Dinh was canceled. The roughly $20 billion facility was set to be among Southeast Asia's largest refineries.
JXTG aims to capture Vietnamese demand even without the refinery by exporting Japanese-made oil products to Petrolimex. But the Japanese company faces pressure to alter its strategy amid the collapse of a series of major plans. It recently shelved plans to participate in a refinery repair business with an Indonesian state-owned oil company.