Vietnam's sole operating oil refinery sets surprisingly low profit target for 2017

Vietnam's sole operating oil refinery sets surprisingly low profit target
for 2017

Binh Son Refining and Petrochemical Company Limited (BSR), the operator of
Dung Quat Refinery, has set its pre-tax profit target at VN1.68 trillion
($73 million) for 2017, which is a lot lower than its actual pre-tax profit
of VND5 trillion ($219.45 million) in 2016.

Less revenue, more profit

BSR surprised industry-watchers by setting its profit target at one third of
the number of 2016. However, looking at the activities of BSR from 2013 to
2016, there is a marked tendency of revenue decreasing significantly but
profit increasing.

The revenue has been on a trend of steady decrease. In 2013 BSR's total
revenue was VND154.32 trillion ($6.78 billion), the pre-tax profit was
VND2.97 trillion ($130.2 million), in 2015 the corresponding numbers were
VND96 trillion ($4.2 billion) and VND6.37 trillion ($279 million); in 2016
the numbers were VND75.2 trillion ($3.3 billion) and VND5 trillion ($219.45
million).

The amount of money that BSR paid to the government budget decreased from
VND28.4 trillion ($1.245 billion) in 2013 to VND12.41 trillion ($543.9
million) in 2016.

At the January review conference of Vietnam National Oil and Gas Group
(PetroVietnam), BSR CEO Tran Ngoc Nguyen revealed that 2016 was a harsh year
for the company because despite producing domestically, its prices have to
factor in the import tax, ending up in some cases 10 per cent higher than
imported oil and gas products.

The prices of Dung Quat's products are calculated as the sum of the price of
similar imported products and the applicable tariff rate.

When the Vietnam-Korea Free Trade Agreement was signed, Vietnam halved the
import tariff on South Korean gasoline, to 10 per cent, effective since
December 20, 2015. Meanwhile, Dung Quat's products are still subject to an
import tax of 20 per cent. According to PetroVietnam and BSR's earlier
claims, this disparity forced a number of their local consumers to switch to
imported sources.

Earlier, the company said that because of the tax policy, its clients turned
to buy foreign petrol, leading to BSR's products piling up, overloading its
warehouse, putting further burdens on the refinery's operations.

However, Decision No.1725/QD-TTs from Prime Minister Nguyen Xuan Phuc in
early September 2016 allowed BSR to set its own price, which gave the
refinery a fighting chance by evening odds and clients started coming back.

Therefore, on November 9, 2016, BSR completed 100 per cent of its 2016
production goal, 52 days earlier than the original plan. Actual 2016 income
also surpassed the plan by 7 per cent. Remarkably, the after tax profit of
BSR was VND2.3 trillion ($100.2 million), which equals 285 per cent of the
goal.

According to PetroVietnam's assessment, the profit of BSR was 2.8 times as
much as the annual target, which was the result of the vast difference
between the price of the final product and the price of raw oil.

In 2017, BSR set the production goal lower than in 2016 to carry out an
overall maintenance from June 3 to July 5, 2017.

Nonetheless, Nguyen emphasised that the goal is to finish five to seven days
early. Additionally, after the maintenance, the factory will be able to
raise the production level by 15-20 per cent of the designed capacity.

Expansion and equitisation still on the table

By the end of 2017, Dung Quat Refinery will be the only refinery running
commercially in Vietnam. To help the refinery recover its initial
investments, the government gave it a lot of preferential policies.

BSR is currently on the list of 106 state-owned enterprises in which the
government is going to hold less than 50 per cent of the chartered capital
after equitisation, according to Decision No.58/2017/QD-TTg of the prime
minister.

2017 is also the year when BSR plans to finish its equitisation process.
PetroVietnam has already approved the choice of BIDV Securities Company and
UHY ACA Ltd. as the consulting companies to valuate the company and draw up
the equitisation plan.

In late December 2016, the company's valuation was completed and the
equitisation plan is expected to be available in March 2017.

However, the official release of the company's valuation and equitisation
plan is to be decided by the State Audit and the Ministry of Industry and
Trade.

Alongside the equitisation process, BSR is also carrying out a project to
expand and upgrade the capacity of Dung Quat Refinery from 6.5 million
tonnes to 8.5 million tonnes per year, equivalent to 192,000 oil barrels a
day. The total capital for the project is approximately $1.82 billion.

The success of the expansion project would help the equitisation.

However, this is not going to be easy because until now, BSR still has not
been able to find a strategic foreign partner that is willing to buy 49 per
cent of the chartered capital and also take part in the project.

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Link to Original Article:
http://www.vir.com.vn/vietnams-sole-operating-oil-refinery-sets-surprisingly
-low-profit-target-for-2017.html

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com