OREANDA-NEWS. Ironic and unusual aptly describe the conundrum facing Vietnam’s sole 130,000 b/d state-owned refinery located in the central province of Quang Ngai.

The refinery has been struggling to sell its oil products since Vietnam’s free trade agreements with ASEAN and South Korea kicked in last year making it cheaper for local petroleum retailers to import oil products instead of buying from Dung Quat.

The reason behind this is a tariff imposed on Dung Quat’s products which are locally referred to as an “import tax”. This tax was originally intended to be at the same level as the tax imposed on imported oil products but as the FTAs kicked in, the tax structure started working against Dung Quat.

A lack of policy coordination has led to this unusual situation, according to an analyst at the Vietnam Petroleum Institute, the research arm of PetroVietnam.

“There are two separate teams in each relevant ministry—one is responsible for FTAs while the other is in charge of tax policies for Dung Quat. They did not cooperate well with each other,” the analyst said.

The results are intermittent tank tops at Dung Quat and strong growth in the country’s oil product imports, which is ironic given that the reason behind Dung Quat’s construction and planned construction of other refineries in the country is to lower reliance on product imports.

Vietnam’s oil product imports rose 19% year on year in 2015 to 10.06 million mt. Supplies from Singapore, Thailand and Malaysia saw a dramatic jump of 48.50%, 164% and 87.40% respectively, data from Vietnam’s customs showed.

In the first two months of 2016, imports have risen 12.3% year on year to 1.69 million mt, while South Korean supplies have seen a 57.60% year-on-year surge in the period.

After several pleas by Binh Son Refining and Petrochemical (BSR), the operator of the Dung Quat refinery, the government earlier this month agreed to implement a second round of cuts to the tax imposed on the refinery’s output. But barring jet fuel, for which Dung Quat enjoys a lower tax rate than imports from ASEAN, the tax rate on Dung Quat is generally still higher.

The table below highlights the tax rates imposed on different oil products produced by Dung Quat and those imported from ASEAN countries and South Korea:

  Dung Quat ASEAN South Korea
Diesel 7% 0 5%
Kerosene 7% 0 5%
Gasoline 20% 20% 10%
Fuel Oil 7% 0 0
Jet Fuel 7% 10% 5%

Notes: The import tax on gasoline imported from ASEAN countries is valid until 2018; import tax on diesel, kerosene, gasoline, and jet fuel imported from South Korea is valid until 2018.

The table illustrates how the tax structure makes importing gasoline from South Korea and importing gasoil from ASEAN countries the best option. Vietnam’s largest retailer Petrolimex expects to import a lot more gasoline from South Korea once some of its existing term contracts expire in the middle of 2016.

No plan to remove domestic tax

According to a local industry source, the Vietnamese government is unwilling to simply remove the tax on Dung Quat because in a low price environment it is keen to maximize its tax revenue. But this is coming at BSR’s cost and at the cost of potential new investment in Vietnam’s refining industry.

Due to the tax disparity, the price of imported South Korean gasoline in January was about $4.78/b lower than Dung Quat’s gasoline, which hit BSR’s sales.

Petrolimex has requested BSR to consider lowering the selling price of gasoline on both a spot and term basis for the second half 2016, so that the refiner’s prices would be equal to South Korea’s State-owned PetroVietnam recently said that if such high disparity in taxes continued for long, Dung Quat might be forced to suspend operations or lower run rates.

Domestic products still have some advantages to imports. For example, Petrolimex does not need to issue letters of credit to Dung Quat, the delivery times are shorter and the parcel sizes can be flexible so some retailers would still prefer to buy from the domestic refinery.

Petrolimex sources said that once the 200,000 b/d Nghi Son refinery comes onstream in late 2017, Vietnam would become fairly self-reliant on oil products but the FTAs would still provide ample incentive to import, which could lead to lower utilization rates at the local plants.

This does not bode well for Vietnam’s refining plans, which not only include new greenfield plants, but also an expansion of Dung Quat for which BSR is already facing difficulty finding a foreign partner in the current low oil price climate.