Friday, April 23, 2004

Wrong Place, Wrong Time
This week's Economist provides an interesting update on a project I had lost track of. Going back to the mid-1990s, the state oil company of Vietnam had planned to build a refinery--the country's first--in the middle of their long coastline at Dung Quat. Despite the departure of all its foreign partners, PetroVietnam apparently won't give up on this idea, and now seems to want to build not one, but two refineries. The Economist correctly points out the dismal prospects of such a facility ever generating a return on its multi-billion dollar cost.

State enterprises have no monopoly on poorly-chosen projects. Several other refineries in the region were built by international companies to excellent designs, but only made sense under the rosiest of forecasts. This was an easy trap to fall into in the boom years of the 1990s, and I bear my own small share of the guilt. But during my time in the energy business in Asia-Pacific, I saw many examples of the pernicious nationalism that the Dung Quat project exemplifies.

Nearly every country in the region at one time or another has wanted a flagship petroleum project. For countries without a lot of oil or gas, that typically meant a refinery. These projects were explicitly tied to national prestige, as well as optimistic demand forecasts. Of course since refineries take a long time to design, fund, and build, your economics have to rely on forecasted demand. However, you cannot ignore forecasts of alternative supply, as too many such projects appeared to do.

Against a backdrop of globalization, refining capacity surpluses in other regions, and a developing surplus of refined products in Asia-Pacific, could the outcome of these projects been other than disappointing? We are talking about the destruction of billions of dollars of shareholder value for the industry, and the creation of large non-performing loans on the books of developing countries. The stigma of having to import your fuel needs from Singapore or Korea can't be worse than that.

This is the reality the PetroVietnam planners--and their World Bank investors--need to face. Isn't this what gives large-scale economic development such a bad name?

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