Oil auction may not be enough to resolve Vietnam's fuel crisis

Hanoi

THE Vietnamese government recently announced that it will auction 100 million litres of oil from its national reserves to help ease supply woes in the South-east Asian nation.

Of late, Vietnam has suffered from both fuel price hikes and shortages as rising prices - combined with retail price regulation by the Ministry of Industry and Trade (MoIT) - have come into direct conflict.

In some instances, some petrol stations in the country have been forced to sell fuel at below cost. Last week, the price of Vietnam's popular RON92 gasoline increased by almost 4 per cent to reach US$1.12 per litre, well above its one-year low of US$0.74 recorded at the same time last year.

While the announcement was met with some relief, analysts are sceptical of how much of an impact it can have.

"I would imagine this is a classic buffer stock type release aimed, along with cutting excise taxes, at stabilising retail petrol prices," Bob Baulch, a professor of economics at the School of Business and Management, RMIT University Vietnam, told The Business Times.

"I believe the capacity of the petroleum reserve is quite limited, which obviously limits the potential for releases or auctions to stabilise petrol prices," he said.

Similarly, economist and data scientist Toan Nguyen, who is currently a research fellow at the Australian National University, told BT that the impact of the government's oil auction would likely only be relative to Vietnam's overall fuel usage.

"The capacity of Nghi Son refinery was 6.7 million cubic metres of fuel last year but the auction from the national reserve is just about 100,000 cubic metres. So it will help a little bit, but not much because it's a very small amount compared to the shortage," Nguyen said.

But Oliver Massman, a partner at law firm Duane Morris Vietnam, said the announcement itself is already having an impact.

"Information about the upcoming auction has slowed down the increase in fuel prices, so it will positively affect the entire fuel market," he said in an email.

The auction is expected to start at 14,058 Vietnamese dong (S$0.84) per litre, although the official starting price will be set by MoIT and will include a number of pre-vetted bidders.

But Massman said that although the auction may work in the short term, any government intervention should be discouraged in the longer term.

"Vietnam must follow the law of the market economy. If the government interferes too much, it will drag the economy back to the previous subsidy period," he said.

Nguyen added that this is only a stop-gap measure and that there are underlying issues that need to be addressed in order to achieve long-term price and supply stability. "The root cause is the production cuts at the Nghi Son oil refinery," he said.

The refinery, located in Thanh Hoa province about 200km south of the capital Hanoi, accounts for 34 per cent of domestic supply and can produce up to 10 million tonnes of petroleum per year.

It has been reported that the refinery is only running at between 55 per cent and 60 per cent of its full capacity because imported crude did not arrive until the end of February. The refinery is also saddled with some financial problems.

"Nghi Son has a plan to increase its capacity to 85 per cent from Mar 15 and reach full capacity in April, but it is not clear what will happen after May because they have posted a loss of US$2.8 billion in three years, they have negative equity, and they owe a debt of US$3.3 million in raw materials," said Nguyen.

"It's not easy to overcome this situation and have a sustainable situation in the future if they don't have a clear plan to restructure the company," he added.

With the conflict in Eastern Europe escalating and subsequently pushing up fuel prices Nguyen said the government needs to "act decisively" in global markets to support importers and help to stabilise fuel prices.

Petrol imports jumped significantly in February to 803,000 cubic metres from a monthly average of around 500,000 cubic metres.