STUDY ON THE PROJECT FOR DEVELOPMENT OF NATIONAL STRATEGIC OIL STOCKPILING MEGA-FLOATING SYSTEM IN VIET NAM SUMMARY. February 2012.

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1 STUDY ON ECONOMIC PARTNERSHIP PROJECTS IN DEVELOPING COUNTRIES IN FY2011 STUDY ON THE PROJECT FOR DEVELOPMENT OF NATIONAL STRATEGIC OIL STOCKPILING MEGA-FLOATING SYSTEM IN VIET NAM SUMMARY February 2012 Prepared for: The Ministry of Economy, Trade and Industry Prepared by: 第 1 章 Mitsubishi Research Institute, Inc. 第 2 章 Mitsubishi Heavy Industries, Ltd. 第 3 章 JGC Plant Solutions Co., Ltd. Japan Marine Science Inc.

2 Executive Summary (1) Background and necessity of this project At the first ASEAN plus three Energy Ministers Meeting held in June 2004, a plan of action toward the joint interests of strengthening of energy security, and enhanced sustainability was agreed upon, and the importance of oil reserves was underlined. ASEAN countries, although aware of their importance, have practically no national stockpiles in place at present beyond the extent that private companies are obligated to keep certain meager stockpiles. Due to the unpredictable nature of oil reserves, it is the responsibility of each country to avert crises stemming from serious disruptions to the long term supply of oil. In light of this, the governments of each IEA signatory nations are obliged to put in place official national stockpiles in an amount equivalent to 90 days of net oil imports. Viet Nam is producer of crude oil, however until recently there has not been an oil refinery in the country and 100% of petroleum was imported. In 2009 Dung Quat Oil Refinery, the first of its kind in the country, was built in the central region of the country, however due to recent economic development the increase in demand is not currently being met, and thus the second and third oil refineries for the country are currently being planned. In this respect, a petroleum reserve is necessary in the interest of preventing the risk of disruption to import supply, and an oil reserve in order to prevent the risk of disruption of supply to oil refineries is also essential. On behalf of the government of Viet Nam, a study into international oil supply and demand structure (businesses connected with oil reserves in Viet Nam) was carried out by the Ministry of Economy, Trade and Industry of the government of Japan. Since then, the government of Viet Nam has approved the drawing up of an oil reserve master plan (Prime Minister s decision 1139/QD-TTg, 31 July 2009), which contains commercial reserve for the circulation of petroleum, manufacturing reserves for oil refineries and the production of petroleum, and national reserves for crude oil and petroleum. As for commercial reserves and manufacturing reserves, the planning of a private project has been under way, however with regards to the national reserve, as private organizations are unable to implement, it is anticipated that a concrete plan will be laid out henceforth. The purpose of this study is to propose the necessity of the development of the Mega-Floating System as a National Oil Reserve Base and to analyze the implications involved. iii

3 (2) Various examinations required to define the contents of the Project This study adopts the Mega-Float method for the National Oil Stockpiling Base. In this case it is assumed that the reserve is purely for imported crude oil, which will not be used at times other than emergencies. With this in mind, it is possible to facilitate Prime Minister s Decision No. 1139, of achieving 2,200,000 t of storage by As for the objective, the first 700,000 t will be provided from 2016, with the establishment of the remaining 1,500,000 t to follow from With regards to site selection, as is vital to have an adequate anchorage location for the storage vessel as well as the transportation tanker, an area of deep water is necessary. As the storage vessel floats on the water, it is vital to have calm conditions with regards to wind and waves. As it is a sealed storage container, it need not be located close to an oil refinery. With the above in consideration, the following is proposed. (1) Reserve method: Mega-Float (2) Reserve type: National oil reserve (Imported crude oil) sealed storage container (3) Reserve capacity: 2,200,000 t (first period of 700,000 followed by the second of 1,500,000 (4) Site conditions a) Adequate water depth for storage vessel and transportation taker b) Calm area of ocean c) Not necessarily located close to an oil refinery (3) Project outline The construction of the mega float is as follows. In this study, Van Phong Economic Zone shows satisfactory conditions and is used as a candidate area. <Mega-Float> Oil reserve capacity: 700,000t Oil reserve vessel capacity: Approximately 350,000t X 2 Oil reserve vessel: Main measurements: Length: 350m Width: 74m Depth: 20.8m Draft: 17.8 meters (maximum) Oil pump: 2,500m 3 /h X 2 Water pump: 2,300m 3 /h X 2 Storage vessel anchorage: Cargo mooring dolphin X 2 Mooring dolphin X 3 Oil-proofing: Primary floating oil-resistant dam Floating oil-resistant dam and floating iv

4 Freighting equipment: shock-resistant layer 120,000 DWT grade sea berth Loading arm Oil transfer pipe <Terrestrial installations> Electrical equipment: Substation Environmental protection facilities: Guard basin Oil impregnation water tank Oil and gas processor Water supply facilities Central observation area Non-inflammatory gas supply facilities Firefighting facilities Building (office, pump room etc.) Disaster prevention facilities (as necessary): Captive power generator Drainage processor Fire engine, oil recovery equipment, oil fence Oil recovery vessel Economic and financial analysis The total project cost, adopting the 1 million m 3 Mega-Float, and including the storage vessel, ground installations and construction work is USD 395 million (see following table). Table 1 Phase 1 (1 million m 3 ) project cost breakdown \ 100 million Yen Initial investment in USD million USD of which is denominated in JPY (100 million) of which is denominated in VND (billion VND) Classification Remarks Construction Cost , % local currency, 76% foreign currency Storage vessels and tanks Shipbuilding 20% local currency, 80% foreign currency Based on cost in Japan and considering location factor(lf) Ancillary construction cost % local currency, 72% foreign currency Anchorage dolphin etc. Offshore construction Construction Construction cost estimates based on local construction companies. For Aframax tanker Berth(including pipeline bridge) Construction Construction cost estimates based on local construction companies Reclamation/seasalls/dredging Construction 5ha Construction cost estimates based on local construction companies 1st and 2nd stage oil-resistant dam (West breakwater excluded) Oil-resistant dam Construction Cost based on local production with a new cost saving design 10 buildings Terrestrial buildings Construction Construction cost estimates based on local construction companies Paving, drainage, etc. Terrestrial construction Construction Construction cost estimates based on local construction companies Plant cost (ancillary; utility plant etc.) Terrestrial facilities (see notes for scope) Engineering Based on cost in Japan and considering location factor(lf) Fire boat, Disaster prevention equipment fire engine etc. 10% local currency, 90% foreign currency Construction unit Unit cost per m 3 JPY 32,578 USD 395 Source) Complied from various sources v

5 In this project, the ratio of dept to equity is assumed to be 7:3. The interest rate of the amount borrowed is 0.2% (10 year grace period), and on setting the equity expected rate of interest at 16%, the WACC becomes 4.9%. Therefore, in this project, usage charges are set in order to achieve a Project IRR of 4.9%. As a result, the usage charge becomes USD 38 per m 3. On comparing the financing of the Mega Floating system with the yen loan to that of the Viet Nam government bond (assuming an interest rate of 10%), the usage charge with the STEP yen loan is 38/m 3, and that of the Viet Nam government bond is more than double, at 101/m 3, which is more than double of the STEP yen loan. STEP Yen loan Table 2 Usage charges by finance method IRR 7% case (reference) Viet Nam government bond Loan interest 0.2% NA 10% (Between 9 and 12%) Loan term 40 years NA 15 years maximum (40 years with refinancing anticipated) Remarks Between 8 and 12% for Viet Nam government bonds; between 13 and 16% for interbank rate There is no alternative to the yen loan in terms of the length of finance Grace period 10 years NA 0 years There is usually no alternative to the yen loan in terms of grace period WACC 4.9% 7.0% 11.8% Assuming capitalization rate of 16% on the equity side. Usage charge USD 38/m 3 USD 50/m 3 USD 101/m 3 Environmental and social analysis Environmental and social impact of this project has been compared with that of other oil reserve methods. The results are outline below (the Van Phong candidate site is adopted in this case). vi

6 Table 3 Comparison between Mega-Float, aboveground and underground tank methods Aspect Mega-Float method Aboveground tank method Environmental Able to mitigate vapor Able to mitigate oil spills As the scale of onshore land reclamation is small, there is little anxiety of excessive Social noise, waste emissions, changes to terrain and geographical features or land subsidence due to the pumping of groundwater. The required area of land acquired is small; it is possible to avoid resettlement of residents. Able to mitigate vapor Able to mitigate oil spills The scale of onshore land reclamation is large, and there the effects of noise, large waste emissions and changes to the terrain and geological features are anticipated. The required area of land acquisition is large; the necessity of the resettlement of residents is highly probable. Underground bedrock method Able to mitigate vapor Able to mitigate oil spills The scale of onshore land reclamation is medium, however there is a fear of land subsidence from the pumping of groundwater required for the underground tank. The required area of land acquired is small; it is possible to avoid resettlement of residents. Van Phong was once a designated area for environmental protection, however it was then designated as a tourist destination and the site of an international container terminal. It is therefore showing a trend of shifting from an area of environmental protection, to and area of industrial development. It is extremely difficult to devise an option whose environmental and social impact is lesser than that of the Mega-Float, and these effects are also lower at the currently adopted Van Phong site when compared with other locations. For these reasons, at this stage, the scenario adopted above is the option with the least environmental and social impact, and the modification if this option is problematic in this respect. vii

7 (4) Implementation schedule The following implementation schedule is proposed for the establishment of the oil reserve base. Firstly, a survey of the climatic and oceanographic phenomena is to be followed by the refinement of design requirements. Following this, preliminary design is conducted. Based on this design, the construction of the reserve base anchorage, onshore equipment, sea berth and the construction of the storage vessel is conducted at the shipyard. After the mooring of storage vessel unit 1, tests are conducted to confirm the anchorage conditions. Following this is the overall coordination of the onshore facilities and the commencement of operations. Figure 1 Construction outline Source) Mitsubishi Heavy Industries, Ltd viii

8 (5) Yen loan application / implementation feasibility As the national oil reserve is restricted to usage in emergency and is not otherwise a generator of revenue, it should be provided by national expenditure. The Ministry of Industry and Trade and the Department of State Reserves of the Ministry of Finance of the government of Viet Nam recognize this fact and are of the opinion that it should be financed by the country. However, as the size of investment of large, it is thought that utilizing an ODA from Japan would be appropriate, and the will for a yen loan application is strong. However, at the time of the yen loan application, it is vital to have an accurate idea of the costs involved and a comparison of possible methods. Concrete numbers of costs and comparisons of methods are submitted to the government of Viet Nam in this study. (6) Technical advantages of Japanese company Japan has constructed and is operating two Mega-Floating Oil Reserve Bases at Kamigoto and Shirashima, and therefore has expertise and capability on the construction and operation sides. These facilities have also been used safely. At the time of planning and construction, shipbuilding capability for the construction of large structures, and proficiency in engineering with respect to the climatic and oceanographic conditions are vital. Japan has the capability for all of these necessary requirements, and its expertise in the operation of Mega-Floating reserve bases is a significant advantage. Japan has large scale water tanks to conduct experiments on the oceanographic and climatic conditions for Mega-Floating storage base in order to ensure the safety of construction. Also Japan has design guidelines which focus on safety and is able to design and construct storage vessel which satisfy safety guidelines in the long term. As for marine construction capability, from the manufacture of cassions and mooring dolphins for foundation works on the seabed and precision construction work on sea, Japanese companies have a high level of capability. At for the operation of the Mega-Floating reserve, Japan has the necessary experience with regards to daily maintenance management, and the building of management organizations. It is possible to offer this expertise to Viet Nam. In addition, Japan also makes use of underwater equipment and developed an underwater robot for the maintenance of anchorages: labor saving is possible via these techniques. ix

9 (7) Concrete action plan, schedule and the risk of obstructions Table 4 The concrete action plan is shown in the following table. Action plan ~ 1 MPI longlist submission MPI longlist submitted after this study, JICA cooperation preparation study requested MPI longlist submission, cooperation preparation survey application 2 Policy dialogue Enter as a topic into policy dialogue in 2012 Policy dialogue 3 JICA cooperation preparation survey 4 LA completion 5 DD coordination 6 Construction commencement In the interest of more accurate cost calculation, geographic, oceanographic an climatic research carried out in 2012 From the JICA cooperation preparation survey, complete LA with precise cost estimation. Japan assists with Detailed Design (DD); conducted by consultants in Japan With the above action plan, construction can begin one yeart earlier than determined in the Prime Minister's Decision. JICA cooperation preparation survey LA completion in 2013 Coordination DD implementation in 2014 Construction commences ahead of Prime Minister s Decision In order to implement the cooperation preparation survey, it is vital to raise awareness and submit a long list to the Ministry of Planning and Investment, and work closely with the main organizations involved: The ministry of Industry and Trade Energy Department, the Ministry of Finance Department of State Reserves, and PetroVietnam who would be responsible for construction and management. It is vital to underline the importance of the project for both the Japanese and Vietnamese governments through policy dialogue between the two countries in As the preparatory phase of this study was short, in order to calculate the costs of construction 1EIA 2geological survey, 3 oceanographic survey and 4climatic survey are required, It is necessary to conduct a JICA cooperation preparation survey in 2013, and obtain a clear and precise picture of the costs and provide estimations necessary for the yen loan financing. x

10 (8) Project Site Figure 2 Location of site Van Phong Bay Phu Quoc Source) Prepared from University of Texas Libraries Perry-Castañeda Library Map Collection xi