May 18, 2023 [Nikkie Asia]- The company running Vietnam’s largest oil refinery is at risk of defaulting on debt as soon as November, raising the specter of a shutdown as talks to bring the government on board with a restructuring plan remain stalled.
Nghi Son Refinery and Petrochemical, operator of the refinery in the northern province of Thanh Hoa, is a joint venture led by Japanese oil major Idemitsu Kosan along with Kuwait Petroleum Europe, Mitsui Chemicals and state-run Vietnam Oil and Gas Group, also known as PetroVietnam.
The Nghi Son refinery, which opened in 2018, is designed to process 200,000 barrels of crude oil daily. It is operating about 10% above that capacity. The facility supplies 30%-40% of Vietnam’s gasoline, and a shutdown would lead to severe shortages.
The $9 billion project also serves as a symbol of economic cooperation between Japan and Vietnam.
“We would like further support from the Japanese and Vietnamese governments,” So Hasegawa, general director of NSRP, told visiting lawmakers from Japan’s ruling Liberal Democratic Party on May 7.
NSRP seeks an extension on a project finance loan from a group of banks led by the state-run Japan Bank for International Cooperation.
When sales slumped during the pandemic, the company redirected operating capital toward repaying debt, leaving it strapped for cash. Though demand has recovered, the jump in crude prices sparked by Russia’s invasion of Ukraine has driven up the refinery’s procurement costs. And the company’s interest burden is expected to rise, squeezing finances further.
NSRP makes debt payments every May and November. It has secured the $375 million needed for this month, but the $277 million for its next payment will be difficult. The refinery is set to shut down for two months starting in August for regular maintenance, cutting off the company’s income stream.
In anticipation of a cash crunch, NSRP and its lenders are negotiating a debt restructuring plan. The banks have proposed extending repayment of roughly $2 billion in loans for more than three years.
But all four investors in NSRP need to agree on the proposal, and PetroVietnam has not done so, arguing that the Ministry of Industry and Trade must sign off on it.
Other investors including Idemitsu have sent a letter to Vietnam’s government seeking its approval. But Hanoi remains negative on the extension proposal, with talks at an impasse. Vietnam appears aware that the Japanese side cannot afford to let Nghi Son shut down, given the likely economic and diplomatic consequences.
One insider speculated that some in Vietnam’s ruling Communist Party want to pin the resulting turmoil on political opponents, or that officials are trying to avoid responsibility.
Nghi Son, together with Dung Quat refinery in the central province of Quang Ngai, serves around 70% of Vietnam’s demand for petroleum products. While Nghi Son is struggling for Hanoi’s support, Dung Quat, operated by PetroVietnam, is making strides toward boosting output.
On May 5, Deputy Prime Minister Tran Hong Ha approved an estimated $1.25 billion plan to expand production 16% at Dung Quat by 2028. PetroVietnam also plans a new refinery in the southern province of Ba Ria-Vung Tau.
Foreign stakeholders and Vietnam’s government have struggled to get on the same page over Nghi Son for some time. The refinery was nearly forced to halt operations last year as it struggled to afford the surging price of crude oil. It halved output that February, leading to a shortage of gasoline in Vietnam.
PetroVietnam last year also hesitated to put more money into the refinery, though all four shareholders eventually agreed on an emergency funding plan to avert a stoppage. A similar deal may be reached this time around.
Still, speculation suggests that Hanoi ultimately hopes for a frustrated Idemitsu and Kuwait Petroleum to sell their stakes in Nghi Son to PetroVietnam.
Vietnamese Prime Minister Pham Minh Chinh apparently suggested rebalancing the refinery’s ownership in a January meeting with Japanese Finance Minister Shunichi Suzuki.
Idemitsu faces over 90 billion yen ($659 million) in losses tied to the project. Its woes could lead other Japanese companies to reevaluate the risks of doing business in Vietnam.
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