PetroVietnam scratches head over a loss compensation worth US$2 billion to loom

The Nghi Son petrochemistry and refinery complex which is being implemented in Nghi Son Economic Zone in Thanh Hoa province with the huge investment capital of US$9 billion will operate at big losses under the current context.

The project is a joint venture of four partners and PetroVietnam is the only Vietnamese partner contributing to 25.1 percent of total capital.

Under the agreement signed between the government and the joint venture, Nghi Son not only can set its wholesale prices at the same levels with import prices, but also can add a 7 percent import tariff on petroleum products and 3 percent on petrochemical products (polypropylene and benzene) to the selling prices.

According to this agreement, if the Government, within in 10 years, reduces import taxes lower than the above preferential prices, PetroVietnam will bear responsibility for compensating the amount of the difference for this plant.

In fact, based on the integration roadmap, the current tariff on oil imports from ASEAN (0%) is lower than the preferential price for this plant. Therefore, if this plant is put into operation, PetroVietnam will have to spend billions of dollars on compensating losses for this plant.

Specifically, according to a recent calculation, with oil prices of US$45, 50 and 70 per barrel, PetroVietnam is expected to compensate US$1.54, 1.8 and 2 billion for Nghi Son project respectively.

In short, within 10 years when this plant is put into operation, PetroVietnam may have to spend US$1.5-2 billion on loss compensation.

Meanwhile, the profit from investment in this project is much lower than the losses PetroVietnam has to compensate for this "super project".

According to calculations, within 10 years if oil price is US$45 per barrel, PetroVietnam is expected to get profits of US$716 million, equivalent to VND1,600 billion per year. If the oil price of US$50 per barrel, PetroVietnam is expected to get profit about 1,400 billion per year.

Thus, basically when this plant is put into operation, PetroVietnam has to compensate an average loss of US$ 80-110 million/year, equivalent to about VND1,800-2,000 billion/year.

The prospect has also been fully evaluated by PetroVietnam in a report submitted to the Government by the end of 2015. Accordingly, PetroVietnam has proposed some petitions to compensate the losses for this plant such as establishment of a fund formed from the petrol consumption charges, which are collected at the plant gate when products are sold to customers.

Recently, representatives of the Ministry of Finance have worked with PetroVietnam to exchange, clarify and calculate the total compensation cost for this plant.