Vietnam Oil And Gas Report Q1 2007

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Vietnam Oil & GasReport Q1 2007Including 5-year industry forecasts by BMI

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Publication Date: February 2007

Vietnam Oil & Gas Report Q1 2007

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary .........................................................................................................................................6

SWOT Analysis.................................................................................................................................................7

Vietnam Economic SWOT...................................................................................................................................................................................... 7

Vietnam Political SWOT........................................................................................................................................................................................ 7

Vietnam Business Environment SWOT .................................................................................................................................................................. 8

Regional Market Overview ..............................................................................................................................9

Asia/Pacific Region .................................................................................................................................................................................................... 9

Table: Asia/Pacific Oil Consumption (000b/d) ...................................................................................................................................................... 9

Table: Asia/Pacific Oil Production (000b/d) ....................................................................................................................................................... 10

Table: Asia/Pacific Oil Refining Capacity (000b/d) ............................................................................................................................................ 11

Table: Asia/Pacific Gas Consumption (bcm) ....................................................................................................................................................... 12

Table: Asia/Pacific Gas Production (bcm) .......................................................................................................................................................... 13

Table: Asia/Pacific LNG Exports/(Imports) (bcm).............................................................................................................................................. 14

Vietnam................................................................................................................................................................................................................ 14

Business Environment Rankings .................................................................................................................16

Vietnam................................................................................................................................................................................................................ 16

Asia/Pacific Region .................................................................................................................................................................................................. 16

Vietnam Business Environment Ranking....................................................................................................18

Economics – Long-Term Risk ................................................................................................................................................................................... 18

Politics – Long-Term Risk ........................................................................................................................................................................................ 18

Oil & Gas Growth .................................................................................................................................................................................................... 18

Oil/Gas Reserves ...................................................................................................................................................................................................... 18

Licensing/Regulation ................................................................................................................................................................................................ 18

Competitive Environment.......................................................................................................................................................................................... 18

Business Environment Overview .................................................................................................................19

Political Risk Summary............................................................................................................................................................................................. 19

Economic Risk Summary .......................................................................................................................................................................................... 19

Business Environment Risk Summary ....................................................................................................................................................................... 19

Legal Code/Corruption............................................................................................................................................................................................. 20

Labour Force............................................................................................................................................................................................................ 21

Foreign Direct Investment (FDI) ......................................................................................................................................................................... 22

Tax Regime .......................................................................................................................................................................................................... 24

Oil Market Outlook .........................................................................................................................................25

Assessing The Risks ............................................................................................................................................................................................. 25

Table: Crude Price Forecasts 2007 ..................................................................................................................................................................... 27

Revised Forecasts ..................................................................................................................................................................................................... 27

Table: Oil Price Forecasts................................................................................................................................................................................... 28

Regional Supply and Demand.......................................................................................................................29

Asia/Pacific............................................................................................................................................................................................................... 29

Table: Oil Production (000b/d) – Asia/Pacific ................................................................................................................................................... 30

Table: Oil Consumption (000b/d) – Asia/Pacific ................................................................................................................................................. 31



Global Picture .................................................................................................................................................32

Table: Global Oil Consumption (000b/d) ............................................................................................................................................................ 33

Table: Global Oil Production (000b/d) ............................................................................................................................................................... 34

Industry Forecast Scenario...........................................................................................................................35

Oil and Gas Reserves........................................................................................................................................................................................... 35

Oil Supply and Demand....................................................................................................................................................................................... 35

Gas Supply and Demand...................................................................................................................................................................................... 36

Refining And Oil Products Trade......................................................................................................................................................................... 37

Revenues/Import Costs ........................................................................................................................................................................................ 37

Table: Vietnam Oil & Gas – Historical Data & Forecasts .................................................................................................................................. 38

Other Energy ....................................................................................................................................................................................................... 39

Table: Vietnam Other Energy – Historical Data & Forecasts............................................................................................................................. 40

Key Risks to Forecast Scenario ................................................................................................................................................................................ 40

Economic Outlook..........................................................................................................................................41

Table: Output & Population ................................................................................................................................................................................ 43

Regional Case Study – ConocoPhillips .......................................................................................................44

Table: Exploration And Production 2005 ............................................................................................................................................................ 45

Table: Commercial Realisation – Refining And Marketing 2005......................................................................................................................... 48

Competitive Landscape .................................................................................................................................49

Executive Summary................................................................................................................................................................................................... 49

Table: Key Players – Vietnam Oil & Gas Sector ................................................................................................................................................. 50

Overview/State Role.................................................................................................................................................................................................. 50

BP – Summary .......................................................................................................................................................................................................... 51

ConocoPhillips – Summary....................................................................................................................................................................................... 51

Petronas – Summary................................................................................................................................................................................................. 51

Table: Key Upstream Players .............................................................................................................................................................................. 52

Mitsubishi – Summary .............................................................................................................................................................................................. 52

Table: Key Downstream Players ......................................................................................................................................................................... 52

KNOC – Summary .................................................................................................................................................................................................... 52

Chevron – Summary ................................................................................................................................................................................................. 53

Others – Summary .................................................................................................................................................................................................... 53

Company Monitor...........................................................................................................................................54

PetroVietnam....................................................................................................................................................................................................... 54

BP Vietnam.......................................................................................................................................................................................................... 57

Petronas Vietnam................................................................................................................................................................................................. 59

Zarubezhneft ........................................................................................................................................................................................................ 61

BMI Forecast Modelling.................................................................................................................................63

How We Generate Our Industry Forecasts ............................................................................................................................................................... 63

Energy Industry ........................................................................................................................................................................................................ 64

Cross checks ............................................................................................................................................................................................................. 64

Sources ..................................................................................................................................................................................................................... 64





Executive Summary

The latest Vietnam Oil & Gas Report from BMI forecasts that the country will account for just 1.13% of

Asia/Pacific regional oil demand by 2010, while providing 4.87% of supply. Asia/Pacific regional oil

demand rose to an estimated 24.74mn b/d last year and should average 25.36mn b/d in 2007, before

reaching 27.64mn b/d by 2010. Asia/Pacific gas consumption in 2006 is estimated at 419bcm, with

demand of 602bcm targeted for 2010. Production last year of 342bcm should reach 490bcm by the end of

the decade. Vietnam’s share of consumption in 2006 was an estimated 1.67%, while its share of

production is put at 1.59%. By 2010, its share of demand is forecast to be 2.82%, with the country

accounting for 3.50% of supply.

For the whole of last year, our preliminary estimates of average prices are US$61.30 per barrel for the

OPEC basket, US$65.03 for Brent, US$66.24/bbl for WTI and US$61.30 for Urals. For 2007, the revised

BMI forecasts are for the OPEC basket to average US$55 per barrel. Based on last year’s typical price

differentials, this implies Brent at US$58.72, WTI averaging US$59.94/bbl, and Urals at US$55 per

barrel. Our central view is that the OPEC basket price will slip from US$55/bbl this year to US$50 in

2008, before settling around US$45/bbl in 2009/2010.

Vietnamese real GDP growth is forecast by BMI at 8.2% for 2006, up from an estimated 8.0% in 2006.

We are assuming 8.2% growth in 2008, followed by 8.7% in 2009 and 8.5% in 2010. Exploration success

is on the rise in Vietnam, with a growing number of international oil companies (IOCs) partnering

PetroVietnam in finding and developing hydrocarbon resources – particularly gas. We are assuming oil

and gas liquids production of no more than 380,000b/d by 2010, although the country is thought to have

pumped 390,000b/d last year. Consumption is forecast to increase by 4-6% per annum to 2010, implying

demand of 311,000b/d by the end of the forecast period. Gas supply and demand is forecast to increase

from last year’s estimated 7bcm to 17bcm by the end of the decade.

In the BMI Business Environment Ranking matrix, Vietnam receives a slightly higher composite score of

31, which now ranks the country joint seventh out of 14 states included in the Asia/Pacific region,

alongside Thailand. The overall business environment can be considered neutral in a regional context,

thanks to a very high level of perceived economic and political risk. These factors are offset partly by the

country’s high oil/gas reserves to production ratio (RPR) and healthy short- to medium-term gas output

growth. Neither Vietnam’s regulatory regime nor its competitive landscape is particularly attractive in a

regional context. IOC spending has been rising, largely in conjunction with the development of the

country’s gas industry.



SWOT Analysis

Vietnam Economic SWOT

Strengths Vietnam has been one of the fastest-growing economies in Asia over thepast decade, averaging growth of 7.4% a year.

The economic boom has lifted many Vietnamese out of poverty, with theofficial poverty rate in the country falling from 58% in 1993 to 29% in 2002.

Weaknesses Increasing regional and international integration of the economy will presentmajor challenges to less competitive areas of the economy.

Opportunities The government is becoming more determined to reform the Vietnameseeconomy, and is pushing ahead with difficult reforms to the state-ownedenterprise (SOE) sector.

Threats Despite a welcome improvement on the current account deficit, credit-ratingagencies are concerned about the speed of domestic reforms, with intrusivebureaucracy and lingering corruption likely to deter some investors.

The fiscal deficit is an ongoing concern, and the government must pushahead with plans to diversify the tax system.

Vietnam Political SWOT

Strengths The Vietnamese government is the most modern in a generation, andappears determined to push ahead with the economic reforms necessary tomake Vietnam into an industrialised country by 2020.

Relations with the US are improving, following the full restoration ofdiplomatic relations in 1995, and the normalisation of trading relations in2001.

Weaknesses Corruption among government officials poses a major threat to thelegitimacy of the ruling Communist Party.

The government recognises the threat that corruption presents to itslegitimacy, and has acted decisively to clamp down on graft among partyofficials.

Threats Continued unrest in Vietnam’s troubled Central Highland region, amid violentprotests by the Montagnard ethnic minority group.

Ongoing disputes over sovereignty of the Spratly Islands in the South ChinaSea, which are claimed by Vietnam, China, Taiwan, the Philippines andMalaysia.



Vietnam Business Environment SWOT

Strengths Ongoing reforms to bureaucracy in Vietnam, in a bid to speed up theapproval regime for foreign investors and make it more transparent.

Vietnam has a significant natural gas resource base and should deliverhealthy volume growth over the short to medium term.

The level of IOC investment has been rising as companies boost explorationefforts and begin to develop gas resources and infrastructure.

Vietnam acceded to the World Trade Organisation (WTO) on 11 January2007.

Weaknesses Vietnam remains one of the world’s most corrupt countries, a major deterrentto foreign investors. The ongoing graft problem is reflected in Vietnam’sscore in the 2005 Corruption Perceptions Index by TransparencyInternational of 2.6, lower than the regional average of 3.9.

Oil volume growth is modest and the country lacks any domestic refiningcapacity.

Opportunities Despite the threat of tariffs, Vietnam’s exports to the US are boomingfollowing the free trade agreement (FTA) signed between the two countriesin December 2001.

Warming ties with the US should offer a further source of loans andinvestment for Vietnam’s growing economy.

The exploitation of gas resources means Vietnam can develop new gas-based industries such as power generation, fertilisers, aluminium andpetrochemicals.

Plans to build two new refineries will provide a local source of petroleumproducts, the basis for exports and for associated industries.

Threats The textile sector will continue to struggle following the phasing out of textilequotas for all WTO members on January 1 2005. Now Vietnam has joinedthe WTO and export quotas have been removed, it will face intensecompetition from China.

Vietnam needs to press ahead with key energy projects such as refinerybuilding and develop new sources of crude production as the Russian-partnered project goes into decline.



Regional Market Overview

Asia/Pacific Region

Thanks to the growth of China and India, the Asia/Pacific region is highly significant in terms of oil and

gas consumption, has a rapidly expanding refining and petrochemicals system, and is a key importer of

liquefied natural gas (LNG). The region features a number of important oil and gas producers, but

volumes are under pressure, resulting in rising imports.

Table: Asia/Pacific Oil Consumption (000b/d)

Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 851 856 884 890 903 917 931 945

China 5803 6772 6988 7355 7723 8109 8514 8940

Hong Kong 289 314 285 288 294 299 305 312

India 2420 2573 2485 2600 2678 2785 2924 3071

Indonesia 1132 1150 1168 1100 1128 1156 1185 1214

Japan 5455 5286 5360 5380 5400 5420 5440 5460

Malaysia 480 493 477 481 490 500 515 530

Pakistan 321 325 353 360 371 386 401 417

Philippines 330 336 314 319 325 335 345 355

Singapore 668 748 826 834 859 885 912 939

South Korea 2300 2283 2308 2315 2330 2345 2360 2375

Taiwan 868 880 884 893 911 929 947 966

Thailand 836 913 946 915 930 953 977 1002

Vietnam 221 236 246 253 263 277 293 311

BMI universe 21974 23165 23524 23983 24605 25295 26050 26836

other Asia/Pacific 715 730 745 752 760 775 790 806

Regional total 22689 23895 24269 24735 25364 26070 26840 27642

e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research.

Oil use of 21.4mn b/d in 2001 reached an estimated 24.74mn b/d last year. It should average 25.36mn b/d

in 2007 and then rise to around 27.64mn b/d by 2010. Vietnam accounted for an estimated 1.02% of 2006

regional consumption, with its market share expected to be higher at 1.13% 2010.



Table: Asia/Pacific Oil Production (000b/d)

Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 624 541 554 540 510 510 505 495

China 3401 3481 3627 3670 3710 3680 3630 3590

India 800 816 784 795 790 790 850 850

Indonesia 1183 1152 1136 1050 1045 995 990 975

Japan 0 14 15 15 14 14 13 13

Malaysia 831 857 827 850 840 840 825 800

Pakistan 51 50 54 54 55 57 60 60

Philippines 20 40 55 56 58 60 60 60

Singapore 0 0 0 0 0 0 0 0

South Korea 0 0 0 0 0 0 0 0

Taiwan 1 1 1 1 1 1 1 1

Thailand 223 220 276 275 270 265 255 255

Vietnam 364 427 392 390 390 380 380 380

BMI universe 7498 7599 7721 7696 7683 7592 7569 7478


Regional total 7928 8034 8134 8088 8056 7946 7905 7798


Regional oil production was just under 8.0mn b/d in 2001, and last year averaged 8.09mn b/d. It is set to

decline to 7.80mn b/d by 2010. Vietnam last year accounted for an estimated 4.82% of regional oil

supply, and its market share is expected to be up to 4.87% by the end of the forecast period.

Oil imports are growing rapidly, because demand growth is outstripping the pace of supply expansion. In

2001, the region was importing an average 13.41mn b/d. This total had risen to an estimated 16.65mn b/d

in 2006 and is forecast to reach 19.84mn b/d by 2010. The principal importers will be China, Japan, India

and South Korea. By 2010, the only net exporters will be Malaysia and Vietnam.



Table: Asia/Pacific Oil Refining Capacity (000b/d)

Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 846 772 772 846 846 846 846 846

China 5487 6289 6587 7100 7500 7500 9000 9000

Hong Kong 0 0 0 0 0 0 0 0

India 2333 2513 2558 2600 2850 2850 3000 3000

Indonesia 1056 1056 1056 1056 1056 1500 1500 1500

Japan 4645 4531 4531 4531 4531 4531 4531 4531

Malaysia 515 515 515 625 625 625 625 625

Pakistan 306 306 306 400 400 500 500 500

Philippines 420 330 330 400 400 400 400 400

Singapore 1255 1255 1255 1255 1255 1255 1255 1255

South Korea 2598 2598 2598 2598 2598 2598 2598 2598

Taiwan 1159 1159 1159 1159 1159 1309 1309 1309

Thailand 860 876 876 876 876 876 1000 1000

Vietnam 0 0 0 0 0 200 200 350

BMI universe 21480 22200 22543 23446 24096 24990 26764 26914


Regional total 22791 23460 23866 24835 25555 26522 28372 28603


Refining capacity for the region was 22.82mn b/d in 2001, rising steadily to an estimated 24.84mn b/d

last year. China and India will account for the bulk of additional capacity growth, with the region's total

capacity forecast to reach 28.60mn b/d by 2010 – ahead of oil demand, therefore implying little need for

net imports of refined products. Vietnam had no refining capacity in 2006, but its market share is set to

rise to 1.2% by 2010 if newbuilds proceed as planned.



Table: Asia/Pacific Gas Consumption (bcm)

Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 26 25 26 28 28 30 31 33

China 33 39 47 56 68 81 97 117

Hong Kong 2 2 2 2 2 3 3 3

India 30 33 37 40 43 47 52 56

Indonesia 33 37 39 41 43 46 48 50

Japan 83 79 81 84 88 91 95 99

Malaysia 32 34 35 36 36 37 37 38

Pakistan 23 27 30 33 35 37 40 43

Philippines 3 2 3 6 10 15 25 35

Singapore 5 7 7 7 9 10 12 13

South Korea 27 32 33 35 37 39 40 43

Taiwan 9 10 11 12 13 14 15 16

Thailand 28 27 30 32 34 36 38 40

Vietnam 2 4 5 7 10 12 15 17

Regional total 335 358 385 419 456 497 548 602




Table: Asia/Pacific Gas Production (bcm)

Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 33 35 37 43 45 48 52 55

China 35 41 50 53 55 58 61 64

India 30 30 30 33 36 38 39 42

Indonesia 73 75 76 80 85 95 100 110

Malaysia 52 54 60 65 70 75 80 90

Pakistan 23 27 30 33 35 37 40 43

Philippines 3 2 3 6 10 15 25 35

South Korea 0 0 1 1 1 1 1 1

Taiwan 1 1 1 1 1 1 1 1

Thailand 20 20 21 23 25 28 30 33

Vietnam 2 4 5 7 10 12 15 17

Regional total 271 291 314 342 372 408 443 490


In terms of natural gas, the region last year consumed an estimated 419bcm, with demand of 602bcm

targeted for 2010, representing the strongest growth globally (43.7% between 2006 and 2010). Production

of an estimated 342bcm in 2006 should reach 490bcm in 2010 (+43.3%), but implies net imports rising

from 77bcm per annum to 112bcm. This is in spite of many Asian gas producers being major exporters.

Vietnam’s share of gas consumption in 2006 was an estimated 1.67%, while its share of production was

1.59%. By 2010, its share of gas consumption is forecast to be 2.82%, with the country accounting for

3.50% of supply.



Table: Asia/Pacific LNG Exports/(Imports) (bcm)

Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 7.1 10.0 11.4 15.0 16.6 18.2 20.7 22.1

China - - - (2.0) (4.0) (8.0) (11.0) (14.0)

India - (2.6) (6.0) (7.4) (7.5) (9.4) (12.7) (14.3)

Indonesia 37.7 36.8 31.5 33.2 35.8 42.5 44.8 51.4

Japan (79.9) (76.9) (76.3) (84.3) (87.7) (91.2) (94.9) (98.7)

Malaysia 18.9 18.9 28.5 27.4 32.2 35.9 40.7 49.2

South Korea (26.9) (31.2) (30.5) (34.4) (36.1) (37.9) (39.9) (41.9)

Taiwan (7.2) (9.1) (9.6) (10.6) (11.6) (12.8) (14.0) (15.3)

Regional total (50.3) (54.1) (51.0) (63.0) (62.4) (62.7) (66.2) (61.5)


Leading gas importers by 2010 will be Japan, China, India, South Korea, with Indonesia, Malaysia and

Australia the principal net gas exporters. Asia is a thriving market for LNG trade, thanks to the distances

between suppliers and consumers making pipeline routes too costly. China is currently signing up LNG

purchase deals, beginning with Australia and Indonesia, and will eventually become a major player in the

regional LNG market. India's LNG import plans are in disarray, but the country is expected to increase

purchases over the medium term. Recent major domestic gas discoveries should increase the country's gas

self-sufficiency over the longer term.

Vietnam

According to the June 2006 BP Statistical Review of World Energy, Vietnam’s proven oil reserves are

3.1bn barrels, although recent published estimates have varied greatly. Oil and liquids production fell to

392,000b/d in 2005. Seven operating oilfields exist and the offshore Nam Con Son and Cuu Long basins

provide the bulk of the oil. Vietnam is a net exporter of crude oil. The country has no oil refining

capacity, however, although the first plant should be operational by 2009. Meanwhile, refined products

imports are in excess of 240,000b/d, with Singapore a major supplier of fuels to the country. Natural gas

production is around 7bcm, building up steadily as domestic demand rises and infrastructure is

established.

Vietnam has 150mn tonnes of coal, mostly anthracite. Production has increased dramatically in recent

years, resulting in higher exports (primarily to Japan) and an increase in coal stockpiles. Electricity

generating capacity is five gigawatts (GW). Hydro-electric power accounts for around 52% of generation,



while thermal power represents the remainder. In September 2002, it was announced that a new 5,000km

natural gas pipeline will pass through Vietnam. The line, which will be built through the Asia-Pacific

Economic Co-operation (APEC) forum's Partnership for Equitable Growth (PEG), will link an Indonesian

gas field with Vietnam, Malaysia, Thailand and China. In May 2004, PetroVietnam and Thailand's state-

owned PTT signed a Memorandum of Understanding (MoU) to conduct a feasibility study to build a gas

pipeline network in southern Vietnam. Some 12 industrial zones covering 250sq km in Ho Chi Minh City

are encompassed by the study, which was scheduled to have been completed by the end of 2005.

It was reported in October 2005 that the Vietsovpetro joint venture (JV) between Russia and Vietnam is

to spend US$245mn on a gas pipeline in southern Vietnam. The 325km line will link the offshore PM3

block with Khanh An village in southern Ca Mau province, where a power station will be located. The

pipeline is to carry 2bcm per annum of natural gas and should be operational by early 2007.



Business Environment Rankings

Vietnam

Vietnam’s overall business environment can be considered neutral in a regional context, thanks to a very

high level of perceived economic and political risk. These factors are offset partly by the country’s high

oil/gas RPR and healthy short- to medium-term gas output growth. Neither Vietnam’s regulatory regime

nor its competitive landscape is particularly attractive in a regional context. IOC spending has been rising,

largely in conjunction with the development of the country’s gas industry.

This is a country that can be expected to make further positive progress in terms of its business

environment. Since the previous quarter, it has clawed its way up from a share of ninth position to equal

eighth, keeping company with Japan, Pakistan and the Philippines. The country certainly has the potential

to challenge Japan. The eventual improvement in perceived political and economic risk will help greatly,

but increased oil investment, exploitation of reserves and some steps towards deregulation and improved

competitive framework are more likely over the short to medium term.

Asia/Pacific Region

Since the previous quarter, there have been relatively few changes in the league table of regional business

environment ratings. Australia and Taiwan continue to occupy the top and bottom slots, although the

latter's score has dropped by one point to just 18 – some 30 points short of Australia’s points haul.

Malaysia has lost its share of second place, falling to third behind India, thanks to a one-point decline in

its composite score. India holds outright second place and has improved its score to 38, but remains 10

points behind Australia. China retains its share of fifth place, which it cohabits with South Korea.

Vietnam is up from equal eighth to a share of seventh, having seen its composite score rise by a point.

New oil and gas discoveries have the potential to move the country still higher over the next several

quarters. Japan's score of 30 has once again held at the previous quarter's level, but the country is down

from a share of eighth place to joint ninth. Also sharing ninth place are Pakistan and the Philippines, both

with unchanged scores. Indonesia will again be disappointed to see that its improved score has failed to

nudge it higher in the league table. It now receives 29 points, but remains in 12th place. Hong Kong’s

score is down by one point, but it remains 13th, and Taiwan continues to hog the foot of the table with its

paltry 18 points.

The strength of energy demand growth remains the key positive factor in the region, with resource

potential only moderate. State involvement is generally high and the regulatory framework poor in

comparison with other key regions. The political and economic environment varies, depending on

maturity. However, the overall trends in most areas are improving. Japan stands out as being particularly

weak in terms of demand growth, while Indonesia is suffering the most from supply growth deterioration

and reserves decline. India and China remain the key countries, and here we expect to see improvements



all around in terms of the overall business environment, although China continues to be hampered by its

high level of perceived political risk.

Table 7: Asia/Pacific Business Environment Ranking

Country Economics

– LT Risk

Politics –

LT Risk

Oil/Gas

Growth

Oil/Gas

Reserves

Licensing/

Regulation

Competitive

Environment

Composite

Score

Regional

Rank

Australia 8 9 3 10 10 8 48 1

India 4 6 7 8 6 7 38 2

Malaysia 7 5 5 7 6 6 36 3

Singapore 10 8 3 1 7 6 35 4

China 6 2 6 7 5 6 32 5=

South Korea 9 5 1 6 5 6 32 5=

Vietnam 1 1 7 9 6 7 31 7=

Thailand 5 5 4 3 7 7 31 7=

Japan 5 10 1 1 7 7 30 9=

Pakistan 2 2 7 7 7 6 30 9=

Philippines 1 4 8 5 7 6 30 9=

Indonesia 4 3 4 6 7 6 29 12

Hong Kong 3 4 2 1 7 7 23 13

Taiwan 7 6 2 1 1 1 18 14

LT Economic Risk: Based on BMI Country Risk Service Long Term economic risk rating. LT Political Risk: Based on BMI Country

Risk Service Long Term political risk rating. Oil/Gas Growth: Based on BMI forecasts for 2006-2010 oil/gas supply growth and oil/gas

demand growth. Oil/Gas Reserves: Based on oil and gas reserves/production (R/P) ratio for last calendar year. Licensing/Regulation:

Based on BMI assessment of upstream licensing framework, regulatory regime and price controls. Competitive Environment: Based

on BMI assessment of number, size and type of oil/gas sector participants; extent of state involvement. Composite Score: Unweighted

total of preceding six scores. Regional Rank: Highest composite score = most attractive energy sector environment within the

Asia/Pacific region; lowest composite score = least attractive. Source: BMI Research.



Vietnam Business Environment Ranking

In the BMI Business Environment Ranking matrix, Vietnam receives a composite score of 30, which

ranks the country equal eighth out of 14 states included in the Asia/Pacific region, alongside the

Philippines, Pakistan and Japan. The component parts of Vietnam’s score are:

Economics – Long-Term RiskUsing the BMI Country Risk Rating Service, the long-term economic rating is 54.8, compared with a

global average of 60.8. In the Asian region, Vietnam has the joint lowest score, alongside the Philippines.

The regional average is 69.3. Vietnam therefore scores one out of a possible 10 in our ranking.

Politics – Long-Term RiskUsing the BMI Country Risk Rating Service, the long-term political rating is 41.0, compared with a

global average of 62.9. In the Asian region, Vietnam has the lowest score, behind Pakistan and China.

The regional average is 61.6. Vietnam therefore scores one out of a possible 10 in our ranking.

Oil & Gas GrowthCountries are ranked by oil and gas output growth and/or consumption growth. Oil production is forecast

to fall 3.1% by 2010, with gas output up 188.5% from a very low base. Oil demand growth is put at

26.4% over the period. This overall growth rate is well above average for Asia and Vietnam is allocated a

score of seven out of a possible 10.

Oil/Gas ReservesCountries are ranked by their RPR, which reflects the life of oil and gas reserves and provides an

indicator of production upside potential. Vietnam’s oil RPR of 22 ranks highest in the region, while the

gas RPR of 45 ranks fourth. The overall score is therefore nine.

Licensing/RegulationThe score is based on the extent of state ownership and the degree of deregulation. There is a largely

benign licensing and production sharing system, partial deregulation and extensive direct state

involvement. The score of five is average for the region.

Competitive EnvironmentThis assesses the extent of competition and the scale of investment opportunity for IOCs. The upstream

oil and gas opportunity for IOCs is reasonable and there is an improving competitive environment, with

significant state involvement. We have therefore assigned the country a score of seven.



Business Environment Overview

Political Risk Summary

The Communist Party of Vietnam (CPV) will maintain its strong grip on power over our forecast period.

This is partly due to sustained economic growth, providing little reason for the public to demand a change

of rule, but also as a result of cautious political reforms, as the government tries to shore up its legitimacy.

However, pervasive official corruption will remain a major challenge facing the government, which could

lead to growing popular disenchantment with the party. Relations with the US are improving, receiving a

major boost from former prime minister Phan Van Khai’s visit to America in 2005, and we expect the US

to grant Vietnam permanent normal trade relations in then near future. Vietnam’s key position in the

international community is likely to be further bolstered by entry to the World Trade Organisation

(WTO), which occurred on January 11 2007.

Economic Risk Summary

Vietnam began its programme of economic renovation, or doi moi, in 1986. While reform has been

gradual, the country will continue to experience strong economic growth, driven in most part by the

dynamic private sector. Entry to the WTO is expected to boost export levels, leading to a narrowing of the

trade and current account over our forecast period. The dong will, however, continue its depreciating

trend with the financial authorities managing the currency to maintain a competitive rate. Despite some

recent progress, more needs to be done in reforming the state-owned enterprise (SOE) sector of the

economy and the inefficient banking sector.

Business Environment Risk Summary

Vietnam remains an attractive place for foreign investors: in 2004 they poured US$1.61bn into the

country. The government is keen to attract foreign investment, and is making continued efforts to improve

the country’s operating environment. Despite significant progress, the government still needs to do more

to reduce red tape, intrusive bureaucracy and corruption among party officials.



Legal Code/Corruption

Vietnam has a two-tier courts system, with courts of first instances and courts of appeal. The court system

consists of the Supreme Court, the provincial People's Courts and the district People's Courts. The

Vietnamese legal code is currently in a state of flux and the authorities are drafting a unified legal

framework for the conduct of business. A new Common Investment Law and a Unified Enterprise Law

are being developed. Most of the legal documents in force relating to business were issued in the early

1990s under market-led reform programmes, however, between 2002 and 2006 Vietnam rewrote almost

all of its laws and regulations affecting commercial activity and judicial procedures. Despite some

progress in protecting intellectual property rights, the overall legal system in Vietnam is regarded as

excessively cumbersome.

Vietnam's judicial system lacks transparency and there are widespread concerns about the independence

of the judiciary. Both local and foreign firms prefer to resort to arbitration or other non-judicial means as

a result of weaknesses in the judicial system – there is a general lack of confidence that the judiciary is

capable of interpreting and enforcing the law.

Vietnam's legal system remains underdeveloped and, largely, biased against foreign entities. The court

system provides inadequate redress for commercial disputes while contracts are difficult to enforce,

particularly if a party is non-Vietnamese. Foreigners also see the commercial arbitration system as weak.

When disputes arise, foreign investors tend to try to negotiate or include dispute resolution procedures in

their contracts – however, even these are far from failsafe.

Foreign and domestic arbitral awards are legally enforceable in Vietnam since it acceded to the New York

Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. Local courts must

respect awards rendered by a recognised international arbitration institution. However, this provides no

assurance that contracts will be honoured. Non-judicial means are therefore frequently used to enforce

debt obligations.

Firms generally avoid the judicial system because the process is lengthy and expensive, decisions are

considered arbitrary and enforcement mechanisms are ineffective. Smaller companies rely on personal

relationships while larger foreign companies may make use of their access to government to ensure

contract enforcement.

The new Uniform Enterprise Law will allow foreign investors to form any type of company instead of

only limited liability companies. In general, foreign companies and the private sector are at a

disadvantage compared to state-owned companies in terms of access to land. Foreign investors can

currently only lease land from the Government or in industrial parks and free zones, though these

restrictions are due to be lifted.



Legislation has progressively enhanced the status of private investor. The 1992 constitution granted

stronger land rights to individuals, including rights over commercial and personal property. Private land

use rights (LURs) may be granted for up to 50 years. Since July 1 2004, the Land Law has allowed local

private companies with long-term LURs to lease land to foreign investors.

Enforcement of intellectual property rights (IPR) is wholly inadequate, with widespread pirating of

products, particularly software, music and videos. The requirements of WTO accession mean that the

government will have to substantially beef up IPR protection. Consequently, in July 2006, a new

Intellectual Property Law came into effect designed to clarify the responsibility of government agencies

charged with protecting IPR – though doubts remain over the effectiveness of its implementation. The

police service is generally slow to act on administrative orders where trademarks have been infringed.

Often violators will seek to extract a payoff in compensation for ceasing the infringement.

Investors see official corruption as one of the biggest hindrances to running a business in Vietnam. Joint

ventures with state-owned enterprises are particularly prone to corruption and abuse, though surveys

indicate that while corruption affecting businesses is quite prevalent, the amounts involved are usually

quite small. However, rapid economic growth provides opportunities for graft to grow more quickly than

government systems can evolve.

One of the best tools in restricting opportunities for corruption has been the expansion of the ‘One-Stop

Shop’ (OSS) network – single agencies that deal with applications for a range of activities, including

construction permits, LUR certificates, business registrations and approvals for local and foreign

investments.

The Law on Corruption Prevention and Control was passed by the National Assembly in November 2005.

A central anti-corruption steering committee is to be established comprising representatives from the

government, the National Assembly, state procurator, court and police, and will be headed by the prime

minister. It will be able to temporarily suspend ministers and chairpersons of people's committees and

people's councils if they are suspected of wrongdoing.

The burden of red tape is amplified by the overlapping of government approvals. Vietnam ranks poorly in

the length of time it takes to close a business. It can take about five years to close a business, compared to

an average of 3.4 in East Asia & Pacific, and 1.5 years in OECD states.

Labour Force

Vietnam’s large, well-educated and inexpensive labour force remains one of the country’s chief draws to

foreign investors. With the labour pool increasing by up to 1.5mn a year, it is growing bigger, while wage

costs remain low. World Bank figures put the economically active population at 54.65mn, equivalent to



65.9% of people aged 15-64. The unemployment rate in 2005 was estimated at 5.5%. Vietnam’s reform-

driven economic growth has resulted in a restructuring of the labour market, with a shift away from

agricultural employment to non-farm employment. A World Bank survey in 2004 put the number of

farmers at 39% of the workforce, with 17% working for private companies, and just over 8% working for

the government and state-owned enterprises.

Managerial talent and skilled workers are generally in short supply, which has the effect of raising costs.

Over-manning is rife, particularly in the state-owned sector, while foreign companies complain of

excessive churn among qualified workers. One recent study showed that over the period from 2001-2003,

the labour turnover rate among foreign companies reached 43.4%. The regulatory burden in Vietnam’s

labour market is higher than the regional average, with an income tax system that is responsible for hiking

labour costs to up to three times’ other Asian economies. There is also a higher minimum wage applicable

to foreign companies (which will be abolished when Vietnam joins the WTO).

The regulatory burden is lightening over time, however. In 2003, legislation was introduced which ended

the requirement for foreign companies to recruit staff via state-owned employment bureaux. However, the

requirement to use employment service agencies continues to apply to branches and representative offices

of foreign companies. One of the main regulatory burdens is the social protection system, which imposes

a compulsory social insurance contribution scheme in which employers must pay in 15% of the salary,

with employees proving 5%. Regulations for hiring workers are significantly more onerous than the East

Asia & Pacific average. Whereas the hiring cost is 17% of the salary in Vietnam, it is only 5% in

Thailand, for example.

Employers are required by law to establish labour unions, which must be a member of the Vietnam

General Confederation of Labour, within six months of setting up. While most factories have trade

unions, many of these do not operate in practice. Trade unions are more active in the public sector and

only one-third of foreign companies have collective agreements with their workforces. Vietnam does not

have a bad industrial relations record. Most work stoppages are in the south of the country, and strikes

only average about 100 a year. Most strikes have resulted from legal or contractual breaches, including

failure to pay wages and benefits, failure to pay social insurance contributions, and failure to pay

severance pay at termination.

Foreign Direct Investment (FDI)

Increased FDI is an integral part of Vietnam’s ambitious economic expansion plans, and with ratings

agencies pushing their grades higher, the country looks like a hardening investment prospect, especially

for manufacturing. In 2004, FDI is estimated to have risen slightly from 2003’s US$1.45bn. The large

inflows of FDI and donor aid continued in 2005. FDI levels have been growing in anticipation of

Vietnam’s accession to the WTO, with the IMF estimating gross inflows of US$2.4bn for full-year 2005.



WTO accession occurred in January 2007. Flows from multilateral donors are also important, having

roughly matched flows from foreign private sources over the last five years. But, as the country tries to

transform from a centralised to a more market-oriented economy, the investment framework is still poorly

developed in many areas, with bureaucracy and a lack of transparency cited among major problems.

Despite ambitious targets for foreign investment as an important source of fuel for economic expansion

plans, a number of barriers to investment remain. An opaque legal system, an inflexible financial system,

corruption, a lack of regulatory transparency and consistency, a ponderous bureaucracy and complex land

purchase procedures are among areas criticised by foreign investors. The government has been

introducing and amending legislation in an effort to remedy these perceived shortcomings. Key

legislation includes:

The Law on Foreign Investment (1989), which has been amended several times to make FDI more

attractive.

Government decree 24 of 2000, which carries a pledge to avoid expropriation and guarantees the right to

repatriate profits. It also outlines the government’s intention to treat private and state sectors equally.

A revised bankruptcy law and a Law on Competition, both passed by the National Assembly in 2004, in a

bid to improve the FDI climate.

The Vietnamese legal code is currently in a state of flux and the authorities are drafting a unified legal

framework for the conduct of business. A new Common Investment Law and a Unified Enterprise Law

are being developed in close consultation with local business and foreign investors. In July 2006, a new

Intellectual Property Law came into effect designed to clarify the responsibility of government agencies

charged with protecting intellectual property rights (IPR) – though doubts remain over the effectiveness

of its implementation.

The main forms of foreign investment are: JV agreements, under which foreign and domestic firms share

capital and profits; Business Co-operation Contracts (BCC), which allow a foreign company to carry out

business in co-operation with a Vietnamese firm through capital investment and revenue sharing, but

without gaining right of establishment or ownership; Wholly Foreign-Owned Enterprises, which are

becoming more common, especially those involving industrial production for export; and Build-operate-

transfer (BOT) agreements, which have a reputation among foreign investors for providing regulatory and

financing problems. Foreign portfolio investment is only permitted in small quantities.

Investments in export processing zones (EPZs), industrial zones (IZs) and high-technology zones (HTZs)

attract tax and other incentives, and offer a ready made operational infrastructure, which may be difficult



to arrange outside. EPZ investments carry 10-12% profit tax. The first established was the Tan Thuan

zone near Ho Chi Minh City in the early 1990s, where over 100 manufacturers currently operate. A

number of others have since been built, though they have not been as successful as hoped, partly because

all produce from EPZs must be exported. IZs are for use by firms in construction, manufacturing,

processing or assembly of industrial products, often food processing and textiles production. IZ firms pay

a 10% profit tax and get refunds if profits are reinvested. IZ firms may produce for the domestic market,

as well as the export market. Most FDI in Vietnam in comes from South East Asia, notably Taiwan,

South Korea, Japan and China/Hong Kong. Canada and the US are the largest non-Asian FDI sources.

Leading sectors for FDI are manufacturing, other industry and oil and gas.

Tax Regime

Since 2003, corporate tax has been charged at a unified rate for both domestic firms and foreign investors.

From the start of 2005, a self-assessment regime has been in effect. The previous tax audit system has

been superseded by a tax investigation system

Corporate Tax: The main rate is 28% for domestic firms and those involving foreign investment.

Resident firms are taxed on global income. Non-resident firms are taxed only on Vietnamese-sourced

income. A surtax of 10- 25% is charged progressively on income from land use rights.

Individual Tax: Levied progressively up to 40%. Different regimes apply to domestic employees and

resident expatriates. The income threshold above which tax is paid is higher for expatriates than for local

employees. Resident individuals are taxed on global income. Non-residents are taxed on Vietnamese-

sourced income only, at a flat rate 25%.

Indirect Tax: The main VAT rate is 10%. A 5% rate is charged on some goods, including computers and

accessories, construction, machinery, chemicals, coal and metallurgy products. The following attract a

zero VAT rate: exported goods and software and services exported to firms in export processing zones.

Registration is obligatory for businesses.

Capital Gains: Usually taxed as income at corporate rate. Gains by foreign investors on the transfer of an

interest in a foreign or Vietnamese enterprise attract a 25% tax. Gains by individuals on the transfer of a

home or on land-use rights are taxed progressively up to 60%.



Oil Market Outlook

Thanks to abnormally mild temperatures in the US, oil prices ended the year with a whimper, rather than

a bang. In spite of inventories falling steadily during the last few weeks of 2006, there was little oil

market response – and even the imposition by the UN of sanctions on Iran failed to attract the speculators.

US prices last year averaged more than US$66 a barrel, representing a near-17% gain during a year of

demand disappointment. Once again, market fundamentals took a back seat to myriad geo-political issues

that kept traders on their toes and ensured the constant presence of ‘hot money’ that concealed a relatively

weak underlying trend. For the new year, a reduction in OPEC capacity utilisation could be the biggest

threat to oil prices, counteracting a likely improved demand trend and the recent reduction in OPEC

supply. Prices look set to emerge lower in 2007, perhaps by as much as 10%, although there remain

several unresolved issues capable of delivering continued volatility.

Assessing The Risks

The key influences this year will be OPEC quota adherence and capacity utilisation, global oil demand

growth, non-OPEC supply expansion, and the political situations surrounding Iran, Nigeria and Iraq.

Addressing them in turn shows an intriguing balance of risk on the upside and on the downside. Firstly,

OPEC has so far delivered around half of the voluntary 1.2mn b/d supply reduction agreed in October.

Having halted the decline in crude prices, but not delivered the expected recovery, the organisation may

have taken more oil out of the market in December. It has now pledged a further 0.5mn b/d of cuts from

February 1. Again, not all members will co-operate, but the overall decrease in supply of up to 1mn b/d

should compensate for weather-related winter demand weakness, and continue the process of inventory

reduction. If OPEC delivers all of the promised reduction, the market will tighten too quickly and prices

could overshoot on the upside during the first quarter. If it fails to reduce supply from the November

level, prices could slip back below US$60 a barrel.

Capacity utilisation for the original OPEC 10 (excluding Iraq) peaked in July 2006 at 93.3% (with oil

prices peaking around the same time), but had slipped to an estimated 89% in December. Even with the

inclusion of Iraq, which has substantial theoretical spare capacity, utilisation in July was some 92.4%.

There is scope for ex-Iraq utilisation of just 85-86% by the end of this year, which must mean a reduction

in support for prices. The recent decision to allow Angola into the oil producers’ club won’t have any

immediate impact on strategy, supply or utilisation issues, as the West African country is producing all of

the oil available to it and there is no talk yet of a restrictive quota or voluntary constraint. It is our opinion

that the lower OPEC capacity utilisation will account for much of the predicted 10% price decline

forecast for 2007.



Oil demand growth in 2006 is estimated to have been 1.1% to 1.3%, barely exceeding that of 2002 –

when the US oil price averaged just over US$26/bbl. China will have accounted for 46% of the total

growth, highlighting a worrying dependency on the world’s fastest-growing energy consumer. For the

current year, the outlook is seen as more bullish. The Paris-based International Energy Agency (IEA) is

forecasting a rise of 1.7% in 2007 oil consumption. The BMI growth forecast is identical, with OECD

demand up just 0.8% and the non-OECD countries consuming 2.6% more oil. However, both BMI and

the IEA admit to risk being on the downside. The global macroeconomic picture is far from clear at this

early stage, with China continuing to be highly unpredictable as an energy consumer. The US Energy

Information Administration (EIA) foresees a more bullish 1.5mn b/d rise in world oil consumption this

year, with OPEC assuming almost 1.6% growth in demand. Given the fragile state of the global economy,

it would be no great surprise to see demand estimates fall as the year unfolds.

In terms of oil supply, we already know that OPEC is sufficiently concerned to have cut its own market

share, making room for increased volumes of non-OPEC oil. Non-OPEC growth could be significant,

with the IEA expecting a rise of up to 3% in supply this year. Comparisons are somewhat confusing, as

Angola now forms part of our OPEC universe, but was still included in the non-OPEC segments of other

parties’ last reports. Our own model, based on the detailed analysis of 61 countries, suggests scope for

1.6% non-OPEC supply growth in 2007 (reflecting in part the reclassification of Angola). We argue that,

as ever, the IEA tends to be over-optimistic regarding the output potential of non-OPEC producers. Given

the well-publicised project delays and cost over-runs relating to equipment shortages and infrastructure

bottlenecks etc, we expect supply to surprise on the downside, thus leaving the market with less of an

imbalance than suggested by current projections. However, OPEC has plenty of spare capacity with

which to cover any shortfall.

The US mid-term elections in 2006 effectively put a halt to any ambitions on the part of the Bush

administration to ‘tackle’ the Iran issue. With the risk of unilateral (or bilateral were the UK to

participate) military action now reduced greatly, only economic sanctions can be applied to the problem

of Tehran’s nuclear persistence. The new measures agreed and implemented by the UN in December may

have irritated Iran, but are unlikely to drive it towards use of the ‘oil weapon’. Equally, the UN is a

million miles away from agreeing tougher measures that could disrupt world oil supply. Another year of

debate and disagreement is inevitable, but the risk of Iranian oil flow being halted is considerably lower

than it was perceived to be last year. While the impact of such an occurrence remains significant,

potentially adding US$10 to the price of a barrel of oil, few believe it will happen. In Nigeria, however,

the appetite for destruction being shown by rebel groups remains considerable. Attacks on facilities, plus

kidnappings and other forms of direct protest seem certain to continue. We are assuming a restoration of

Forcados exports by Royal Dutch Shell in 2007. This is far from certain. Supply risk in Nigeria may not

be on the downside from current depressed levels, but there is considerable risk that export volumes will

not recover quickly.



In Iraq, the execution of former leader Saddam Hussein appears not to be having an extreme effect on the

overall political turmoil. The high level of violence and continued military presence on the part of the US

and UK bodes ill for political reform, stability and rising oil production. Again, our forecasts assume an

improvement in Iraqi oil volumes this year. This looks to be a sensible stance, but there is a clear danger

that the situation will not improve. OPEC can make up the shortfall in both Iraq and Nigeria, but only by

restoring higher levels of production and thus raising capacity utilisation. Significant and sustained supply

shortfalls in Iraq and Nigeria could mean up to US$5/bbl more on average 2007 prices.

Table: Crude Price Forecasts 2007

Q406e Q107f Q207f Q307f Q307f

Brent (US$/bbl) 59.2 58.6 61.0 59.8 55.5

Urals - Med (US$/bbl) 56.4 54.8 57.3 56.1 51.7

WTI (US$/bbl) 60.6 59.8 62.3 61.1 56.7

OPEC basket (US$/bbl) 56.8 54.8 56.9 55.8 52.4

Dubai (US$/bbl) 57.4 55.0 57.5 56.3 51.9

Source: BMI research. e/f = BMI estimate/forecast.

Revised Forecasts

In Q406, we estimate that the OPEC basket price averaged US$56.80 per barrel, down significantly from

the Q3 level (US$65.70), and barely above what we believe to be OPEC’s comfort level of US$55. The

estimated average prices for the main marker blends are US$59.20 for Brent, US$60.60 for WTI and

US$56.40 for Russian Urals (Mediterranean delivery). The typical decline from the third to the fourth

quarter was around US$10/bbl. For the whole of last year, our preliminary estimates of average prices are

US$61.30 for the OPEC basket, US$65.03 for Brent, US$66.24/bbl for WTI and US$61.30 for Urals.

For 2007, the revised BMI forecasts are for the OPEC basket to average US$55 per barrel. Based on last

year’s typical price differentials, this implies Brent at US$58.72, WTI averaging US$59.94/bbl, and Urals

at US$55.

We are now projecting supply expansion averaging 1.7% per annum between 2006 and 2010 (down from

the previous estimate of 1.8%). The average in 2007-2010 is, however, almost 2.2% per annum, which is

a significant increase over recent years and implies some risk of ongoing over-supply. Fortunately, the

non-OPEC element of supply growth is relatively modest, allowing OPEC to regain some market share

and exercise greater control over the market. Demand, meanwhile, is expected to grow at an estimated

1.8% per year (down from the October report’s assumption of 2.0%). Between 2007 and 2010, the annual



average is forecast at 1.9%. This still lags the expected rate of supply growth and suggests a weaker

outlook for prices. Given that surplus capacity is also set to develop among the OPEC nations, providing

a psychological 'safety net' for the oil market, we see scope for further price declines from the lower

levels predicted in 2007.

There is arguably equal risk on the downside in terms of supply and demand projections, given the signs

of some global economic cooling and the apparent inability of the oil industry to bring projects into play

at a rapid rate. If OPEC exercises sufficient production constraint, it can no doubt hold oil prices near

recent levels. Equally, if it expands capacity and shows a willingness to continue over-supplying the

crude market, it will have to live with somewhat lower prices. Our central view is therefore that the

OPEC basket price will slip from US$55/bbl this year to US$50 in 2008, before settling around

US$45/bbl in 2009/2010. Should OPEC defend successfully our presumed ‘target’ price of US$55/bbl

during the challenging months of 2007, then it is reasonable to assume medium-term prices may surprise

on the upside.

Table: Oil Price Forecasts

2003 2004 2005 2006e 2007f 2008f 2009f 2010f

OPEC Basket (US$/bbl) 28.1 35.7 51.3 61.3 55.0 50.0 45.0 45.0

WTI (US$/bbl) 31.1 41.5 56.7 66.2 59.9 54.9 49.9 49.9

Brent (US$/bbl) 28.8 38.2 54.9 65.0 58.7 53.7 48.7 48.7

Urals (US$/bbl) 27.0 33.3 50.2 61.3 55.0 50.0 45.0 45.0

e/f = BMI estimate/forecast.



Regional Supply and Demand

Asia/Pacific

While much of Asia last year saw a marked slowing of demand growth simply because of the rising cost

of fuel, China surprised on the upside with its consistent and considerable consumption gains. The overall

outcome for Asia in 2006 was weak, thanks to several regional governments reducing or abolishing price

subsidies. Indonesia was arguably the clearest case, but estimates for growth in Thailand, the Philippines,

Malaysia etc were all subdued in comparison with earlier years. The Thai coup may have had a further

damaging effect on the economy and energy demand, but full regional demand data are not yet available.

There will have been some distortions. The underlying Japanese oil trend was clearly weak, but the

picture was confused by a higher oil burn in power stations thanks to a shortfall in Indonesian liquefied

natural gas (LNG) volumes.

Our estimates now suggest 7.36mn b/d of Chinese oil consumption in 2006, up from 6.99mn b/d the

previous year. For the current year, we are assuming China will consume an average 7.72mn b/d (+4.9%).

We now see China's oil consumption rising to 8.94mn b/d by 2010 (+21.5% between 2006 and 2010). For

the Asia/Pacific region as a whole, we expect to see estimated demand of 24.74mn b/d in 2006 rise to

27.64mn b/d in 2010 (+11.8%). Of that increase, China accounts for almost 55%. India is another major

contributor to the robust trend. We are forecasting consumption rising from last year's estimated 2.60mn

b/d to 3.07mn b/d in 2010 (+18.1%). Japan and South Korea, with their mature and energy intensive

economies, will be responsible for little of the region's growth.

Supply trends in the region are unlikely to impress, although China's domestic production has tended to

surprise on the upside. None of the key Asia/Pacific producers have the ability to raise output

appreciably, while some are faced with declining volumes and increased imports. For 2006, the region

delivered an estimated 8.09mn b/d. From here, we head lower. By 2010, we expect the region to be

pumping no more than 7.80mn b/d (-3.6%). Significant output declines are forecast in Australia (-8.3%

between 2006 and 2010) and Indonesia (-7.1%). Malaysia, Vietnam and Thailand are all expected to

register significant volume declines, while China and India should hold their ground rather better. For the

region as a whole, the estimated import requirement of 16.65mn b/d last year is set to rise to 19.84mn b/d

in 2010.



Table: Oil Production (000b/d) – Asia/Pacific

2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 624 541 554 540 510 510 505 495

China 3401 3481 3627 3670 3710 3680 3630 3590

India 800 816 784 795 790 790 850 850

Indonesia 1183 1152 1136 1050 1045 995 990 975

Japan 0 14 15 15 14 14 13 13

Malaysia 831 857 827 850 840 840 825 800

Pakistan 51 50 54 54 55 57 60 60

Philippines 20 40 55 56 58 60 60 60

Singapore 0 0 0 0 0 0 0 0

South Korea 0 0 0 0 0 0 0 0

Taiwan 1 1 1 1 1 1 1 1

Thailand 223 220 276 275 270 265 255 255

Vietnam 364 427 392 390 390 380 380 380

BMI universe 7498 7599 7721 7696 7683 7592 7569 7478


Regional total 7928 8034 8134 8088 8056 7946 7905 7798




Table: Oil Consumption (000b/d) – Asia/Pacific

2003 2004 2005 2006e 2007f 2008f 2009f 2010f

Australia 851 856 884 890 903 917 931 945

China 5803 6772 6988 7355 7723 8109 8514 8940

Hong Kong 289 314 285 288 294 299 305 312

India 2420 2573 2485 2600 2678 2785 2924 3071

Indonesia 1132 1150 1168 1100 1128 1156 1185 1214

Japan 5455 5286 5360 5380 5400 5420 5440 5460

Malaysia 480 493 477 481 490 500 515 530

Pakistan 321 325 353 360 371 386 401 417

Philippines 330 336 314 319 325 335 345 355

Singapore 668 748 826 834 859 885 912 939

South Korea 2300 2283 2308 2315 2330 2345 2360 2375

Taiwan 868 880 884 893 911 929 947 966

Thailand 836 913 946 915 930 953 977 1002

Vietnam 221 236 246 253 263 277 293 311

BMI universe 21974 23165 23524 23983 24605 25295 26050 26836


Regional total 22689 23895 24269 24735 25364 26070 26840 27642




Global Picture

Scope For Higher Demand Growth in 2007

Global oil demand growth is now expected to be around 1.7% this year, with Asia/Pacific and the CEE

regions dominating. This is an encouraging rate of market expansion, given a weakening economic

picture and high commodity prices. Our forecast is currently in line with that of the IEA, but both face

risks to the downside once 2007 macroeconomic data begin to flow. However, the demand outlook for the

period to 2010 remains surprisingly healthy, although we are assuming some easing of energy prices to

support the macroeconomic trends. Supply growth is likely to be equally robust over the near-term, but

looks set to fall short of the demand trend later in the decade. Between 2006 and 2010, we see demand

rising by an average 1.8% per annum, with supply increasing by 1.7%. Thanks to the loss of Nigerian

barrels and the feared loss of Iranian exports, prices had until recently remained well above the level

justified by market fundamentals. A high (but falling) level of US inventories and the mild temperatures

experienced in North America and Europe have pushed prices back into a more defensible range, which

may help avoid further demand-side retrenchment.

Our data suggest demand of 85.02mn b/d in 2006 climbing steadily to 91.66mn b/d in 2010. This

represents a slight downgrade from our October projection, with the 7.8% expansion still among the best

seen for decades, implying annual growth averaging 1.8% throughout the period. There continues to be a

distinct divergence of OECD and non-OECD growth trends over the medium term, with much of the

longer-term expansion also restricted to non-OECD countries. The OECD is typically expanding by less

than 1.0% per annum, with consumption forecast to rise from an estimated 43.5mn b/d in 2006 to

45.00mn b/d in 2010 (+3.5%). For the latter segment, annual growth is likely to be nearer 2.8% as

demand climbs from 41.55mn b/d to 46.55mn b/d. By 2010, non-OECD countries will be devouring

almost 51% of the world’s oil, with OECD states accounting for just over 49% of global consumption.

In terms of oil supply, there needs to be corresponding expansion in order to retain some form of 'control'

over prices. A prolonged period of under-investment, starting in 1998, may now have come to an end.

High prices are encouraging oil companies to change their investment criteria. It is, however, apparent

that major oil companies are finding it tough to deliver volume growth. In fact, the unstoppable march of

cost inflation resulting from higher energy costs, commodity prices, labour shortages etc is absorbing

most of the additional expenditure. The impact of higher spending will therefore take a while to come

through, so the market is dependent increasingly on OPEC and a handful of other growing producers such

as Angola, Brazil, Azerbaijan, Kazakhstan and Russia. Higher levels of non-OPEC production growth

may not be experienced until the end of the decade, although OPEC capacity expansion could be

significant over the medium term.



Table: Global Oil Consumption (000b/d)

2003 2004 2005 2006e 2007f 2008f 2009f 2010f

MEA 9748 10232 10708 10864 11084 11347 11631 11912

NW Europe 14118 14218 14176 14225 14295 14390 14472 14556

N America 22165 22980 22896 23115 23367 23622 23879 24140

Asia/Pacific 22689 23895 24269 24735 25364 26070 26840 27642

Central/Eastern Europe 4767 4943 5083 5209 5352 5498 5649 5806

Latin America 6432 6550 6752 6872 7013 7207 7397 7604

Total 79917 82818 83884 85019 86475 88134 89869 91660

OECD 42483 43145 43190 43467 43832 44233 44614 45009

non-OECD 37434 39673 40694 41552 42643 43901 45255 46652

Demand growth % 1.7 3.6 1.3 1.4 1.7 1.9 2.0 2.0

OECD % 1.2 1.6 0.1 0.6 0.8 0.9 0.9 0.9

Non-OECD % 2.3 6.0 2.6 2.1 2.6 2.9 3.1 3.1


We are forecasting global oil and gas liquids supply rising from an estimated 85.53mn b/d in 2006 to

92.30mn b/d in 2010. This implies growth of 7.9%, or an average of 1.7% per annum. On the face of it,

supply will struggle to keep ahead of demand, but the scale of surplus capacity should expand if OPEC

members deliver their promised expansion. Production growth outside OPEC is put at just 3.4% over the

period (to 51.16mn b/d). OPEC supply expansion is probably going to emerge at a somewhat higher

level, if Iraq is included. Expansion of OPEC productive capacity could be nearer 15% during the period,

thus cooling the market to a certain extent. Certainly, over the medium term, there will be a worrying

increase in dependence on OPEC oil. This leaves no room for complacence, as this year’s Nigerian and

Iranian situations confirm. Oil prices look set to ease from 2006 levels, but we see little risk of an average

OPEC basket below US$45/bbl during the forecast period – and with risk on the upside should OPEC

choose to defend successfully a higher price target.



Table: Global Oil Production (000b/d)

2003 2004 2005 2006e 2007f 2008f 2009f 2010f

MEA 31797 33973 35057 34947 35214 36183 36987 37987

NW Europe 6585 6272 5818 5567 5660 5560 5324 5098

N America 10404 10313 9877 10560 10835 10698 10538 10329

Asia/Pacific 7928 8034 8134 8088 8056 7946 7905 7798

Central/Eastern Europe 10645 11578 11982 12410 12890 13569 14318 14918

Latin America 10184 10596 10756 10972 10980 11108 11298 11517

OPEC NGL adjustment 1040 1015 1325 1100 1010 1326 1439 2352

Processing gains 1800 1800 1800 1890 1985 2084 2188 2297

Total 80383 83582 84749 85534 86630 88473 89997 92296

OPEC 10 crude 30306 31961 33257 33080 33240 34220 35050 35885

OPEC, inc Iraq 31645 33971 35077 34980 35390 36520 37550 38785

OPEC 10 inc NGLs 32685 34986 36402 36080 36400 37846 38989 41137

Non-OPEC 47698 48596 48347 49454 50230 50627 51008 51159

Supply growth (%) 3.2 4.0 1.4 0.9 1.3 2.1 1.7 2.6

OPEC 10 (%) 5.9 7.0 4.0 (0.9) 0.9 4.0 3.0 5.5

Non-OPEC (%) 1.5 1.9 (0.5) 2.3 1.6 0.8 0.8 0.3




Vietnamese Crude Oil Production, Consumption & Exports (2000-2010)

050

100150200250300350400450

2000

2001

2002

2003

2004

2005

2006

e

2007

f

2008

f

2009

f

2010

f050100150200250300350400450

oil production, 000 b/d oil consumption, 000 b/doil exports, 000 b/d (RHS)

Source: Historic data - BP Statistical Review of World Energy June 2006; Value data - BMI Research; Forecasts - BMI Research

Industry Forecast Scenario

Oil and Gas Reserves

We are using the latest estimate of 3.1bn barrels for Vietnam’s proven oil reserves, as published in the

June 2006 BP Statistical Review of World Energy. Other estimates, such as that in the December 2006 Oil

& Gas Journal (OGJ) survey, are lower (at 0.6bn barrels). We are assuming a fall in reserves towards

2.7bn by 2011, although there has been a recent upsurge in activity and success in the upstream oil

segment. PetroVietnam hopes to find up to 255mn boe per annum between 2005 and 2010, with partner

companies such as SOCO International and Premier Oil set to make useful contributions through

recent finds. Gas reserves are estimated at 235bcm (OGJ estimate 193bcm), but we see scope for a rise to

an estimated 360bcm by 2011.

Oil Supply and Demand

Oil consumption was last year

estimated at 253,000b/d and is forecast

to grow by 4-6% per annum over the

next few years. Without refineries,

Vietnam cannot consume its own

crude, but exports virtually all

production and imports all refined oil

products. The oil demand growth rate

can be expected to accelerate beyond

2009 as the energy economy develops

on the back of the country’s first oil

refinery. By 2011, we expect oil

demand to average 329,000b/d. Oil

production was an estimated

390,000b/d in 2006. Seven operating oilfields exist and the offshore Nam Con Son and Cuu Long basins

provide the bulk of the oil.

The industry is accelerating its oil and gas exploitation from a range of offshore oil fields. The Bach Ho

(White Tiger) oilfield is the leader, with average daily output of more than 200,000b/d. Steady progress in

oil exploitation has also been reported at the Rong (Dragon), Dai Hung (Big Bear), Rang Dong (Aurona),

Hong Ngoc (Ruby) and Bunga-Dekwa drilling sites. Following the commencement of drilling operations

in the Su Tu Den (Black Lion) crude field in October 2003, PetroVietnam reported rapidly expanding

production volumes. The country is, however, struggling to maintain these higher production levels and

there is little scope for growth to 2011, with output unlikely to exceed 360,000b/d by the end of the



forecast period, although new finds in 2005-2007 provide longer-term output potential. This suggests that

crude oil exports peaked at 427,000b/d in 2004, and could tumble to just 45,000b/d in 2011 as new

refineries comes onstream and begin consuming domestic crude supplies.

A consortium of Zarubezhneft (50%), PetroVietnam (35%) and Japanese refiner Idemitsu Kosan (15%)

in September 2006 claimed to have made a major oil discovery offshore Vietnam. After four years of

exploration, the partners struck oil from an offshore well in Block 09-3, and they now estimate the

block’s potential reserves at 370-515mn barrels. This new discovery is near the country’s largest oil asset,

the Bach Ho (White Tiger) oilfield, which has been developed over the last 20 years through a JV

between Zarubezhneft and PetroVietnam. In 2005, Bach Ho’s output stood at around 220,000b/d, 60% of

Vietnam’s total production. The field’s output is waning, however, and is expected to decrease by an

average 21,000b/d between now and 2014, when it will be closed. Both the Vietnamese and Russian firms

have been increasing their exploration activity in the area in order to compensate for the decline.

Premier Oil in October also tested commercial volumes of oil and of gas from an offshore well Dua-5X. It

has since reported the Blackbird discovery, while SOCO has a series of development projects and

exploration successes in the upstream segment. The Blackbird discovery well (12E-CS-1X) on Block 12E

discovered four oil bearing intervals in the main middle Dua sandstone target, two of which were tested.

The first flowed oil at a sustained rate of 2,177b/d plus modest gas volumes, while the second flowed oil

at a sustained rate of 3,706b/d. The Blackbird discovery is located 21km to the south west of the Dua

discovery announced by Premier in October 2006, for which the commercialisation process has already

commenced.

SOCO’s TGT-5X well in Vietnam had a total combined maximum flow rate of approximately 16,430b/d.

With an 80% drilling success rate on the TGT structure and tests ranging from approximately 9,000b/d to

17,500b/d, activities are now focused on early approval for development of the field. Talisman Energy

of Canada announced in January that it had drilled a prolific oil exploration well off the Vietnamese

coast. The Hai Su Trang well tested at 14,863b/d. The company has a 60% stake in any commercial

discoveries on the block and PetroVietnam has the remainder. The company said it plans to drill another

three exploration wells in the block this year.

Gas Supply and Demand

Natural gas production is on the rise, although there is so far limited domestic demand and infrastructure.

Gas consumption should move in line with rising gas supply. Pipelines are being built with surplus

capacity to accommodate new discoveries and rising consumption later in the decade. The BP-operated

Lan Tay gas fields are expected to produce for 15 years. Gas deliveries commenced in 2002 and rose

sharply in 2003-05. BP in 2005 increased its gas supplies from the Nam Con Son project to around 3bcm.



The group is apparently considering a second Vietnamese gas pipeline to cope with increasing supply and

demand.

In December 2002, a consortium headed by South Korea’s KNOC signed an agreement to install

facilities to be used to pump and supply up to 3.7mn cubic metres per day (mcm/d) of gas, located in the

Rong Doi and Rong Doi Tay fields. This gas will be purchased by PetroVietnam for 23 years. Sales

commenced in 2005. PetroVietnam is in turn expected to sell the gas to Electricity of Vietnam (EVN).

We expect Vietnam’s gas production and consumption to reach 17bcm by 2010.

Premier Oil in October reported that it had successfully completed testing of well Dua-5X on Block 12E,

offshore Vietnam. The well discovered multiple gas and oil reservoirs in the southern fault block of the

Dua structure. Two reservoir intervals were tested. The primary reservoir target flowed oil at a stable rate

of 5,543b/d of oil plus 6.76mn cubic feet per day of gas. The result was substantially better than expected,

pointing to a sizeable accumulation of both gas and oil on the block. The Blackbird discovery by the same

operator also boasts gas and oil potential, as do the SOCO-operated finds.

Refining And Oil Products Trade

The country has no oil refining capacity, although the first plant should be operational by early 2009.

Vietnam is currently a net exporter of crude oil. However, refined products imports are in excess of

200,000b/d. PetroVietnam in August 2004 signed up Mitsubishi of Japan as a partner for its second

refinery. The proposed US$2.95bn Nghi Son petrochemical and oil refining complex will have a

processing capacity of 145,000b/d, and will be located around 175km south of the capital Hanoi. The

refinery is expected to be operational by 2010. The announcement came amid news that Vietnam’s first

refinery, the US$1.5bn Dung Quat complex, is unlikely to commence operations until early 2009 due to

slow progress and a lack of funds. Vietcombank will now lend PetroVietnam some of the cash it needs to

build the US$1.5bn facility in the central Quang Ngai province. Dung Quat will refine 6.5mn tonnes of

oil per year (130,000b/d), producing an estimated 3mn tonnes of diesel, 1.8mn tonnes of gasoline,

400,000 tonnes of jet fuel, among other products such as liquefied petroleum gas (LPG) and propylene.

Vietnam will remove price subsidies on some oil products in mid-2007 and those on all oil and petroleum

products in early 2008, according to January press reports. Vietnam imported over 11mn tonnes of

petroleum products worth more than US$5.8bn in 2006, according to media sources.

Revenues/Import Costs

The value of crude exports, assuming an OPEC basket oil price of US$55.00/bbl this year, US$50/bbl in

2008, and an average US$45/bbl in 2009-11, would be US$7.83bn this year, but falling to just US$0.74bn

by 2011. Products imports of more than 260,000b/d in 2007 could cost Vietnam almost US$8.0bn –



exceeding the revenues from crude oil exports. If the first refinery is functioning by the end of 2008, as

assumed in our forecasts, Vietnam’s crude export revenues will tumble, but product imports could be

reduced to 119,000b/d – or no more than US$3.0bn.

Table: Vietnam Oil & Gas – Historical Data & Forecasts

2004 2005 2006e 2007f 2008f 2009f 2010f 2011f

Proved oil reserves, mn barrels 3100 3100 3000 2900 2900 2800 2800 2700

Oil production, 000 b/d 427 392 390 390 380 380 380 360

Oil consumption, 000 b/d 236 246 253 263 277 293 311 329

Oil refinery capacity, 000 b/d 0 0 0 0 200 200 350 350

Crude oil exports, 000 b/d 427 392 390 390 200 200 65 45

Oil price, US$/bbl, OPEC Basket 36.1 50.6 61.3 55.0 50.0 45.0 45.0 45.0

Value of crude oil exports, US$mn (BMIbase case) 5619 7246 8726 7829 3650 3285 1068 739

Value of petroleum exports, US$mn(BMI base case) 5619 7246 8726 7829 3650 3285 1068 739

Value of crude oil exports, constantUS$30/bbl – US$mn na 4292 4271 4271 2190 2190 712 493

Value of crude oil exports, constantUS$60/bbl – US$mn na 8585 8541 8541 4380 4380 1424 986

Value of petroleum exports, constantUS$30/bbl – US$mn na 4292 4271 4271 2190 2190 712 493

Value of petroleum exports, constantUS$60/bbl – US$mn na 8585 8541 8541 4380 4380 1424 986

Refined petroleum products imports,000 b/d 236 246 253 263 97 113 -4 14

Proved gas reserves, bcm 235.0 235.0 275.0 300.0 330.0 330.0 350.0 360.0

Gas production, bcm 4.2 5.2 7.0 10.0 12.0 15.0 17.0 20.0

Gas consumption, bcm 4.2 5.2 7.0 10.0 12.0 15.0 17.0 20.0

Gas import, bcm na na na na na na na na

Value of gas imports, US$mn (BMIbase case) na na na na na na na na

Value of gas imports, constantUS$30/bbl – US$mn na na na na na na na na

Value of gas imports, constantUS$60/bbl – US$mn na na na na na na na na

e/f = BMI estimate/forecast; na = not available/applicable. Source: Historic, BP Statistical Review of World Energy,June 2006; Forecast, BMI Research.



Other Energy

In March 2004, state power company EVN announced plans to spend US$1.3bn building and

refurbishing power plants during the year with a combined capacity of 1,510MW. The projects included

an add-on combined cycle power plant named Phu My 2.1, the hydro-electric Can Don station, the

thermal Phu My 3 and Phu My 4 plants and Na Duong. In addition to power plants, the Tan Dinh 500kV

power station will be built and the Cai Lay-O Mon section of the Nha Be-O Mon 500kV power

transmission line was erected in 2004. March 2004 saw the government approve the construction of the

2.4GW Son La hydro-electric generator project. One third of the US$2.3bn will go towards relocating

families from the 44,700 hectares to be flooded by the reservoir. Construction was due to begin in

October 2005, with the plant due to be operational in 2015.

Vietnam has entered into agreements to purchase power from China in order to fully meet demand. For

2006, Vietnam is expected to purchase 70MW. Additionally, Vietnam has agreed to purchase power from

Laos starting in 2008. The agreement with China has been undertaken to prevent power shortages in the

north. Electricity demand growth in Vietnam is forecast to accelerate around the end of the decade, rising

by 15%-16% a year. Vinacoal is working to bring seven new coal-fired power facilities online before

2010. Additionally, EVN is planning to add 16 hydro-power plants by 2010. Power generation facilities

are also being built in the south to take advantage of the offshore gas discoveries.

EVN is working on a plan to develop a national electricity grid by 2020, patching together several

regional grids. EVN has been building hydro-power plants in the highland regions. Three hydro-electric

dams, with capacities of between 285MW and 370MW, are planned, and construction of the first at Dai

Ninh began in 2001. Two small gas-fired plants are currently in operation. Construction of Vietnam’s first

nuclear power plant is included in the plan, to be completed by 2020.



Table: Vietnam Other Energy – Historical Data & Forecasts

2004 2005 2006e 2007f 2008f 2009f 2010f 2011f

Coal reserves, mn tonnes 150 150 150 150 150 150 150 150

Coal production, mn tonnes 26.3 32.6 27.0 30.0 30.0 30.0 30.0 30.0

Coal consumption, mn tonnes of oilequivalent (toe) na na na na na na na na

Thermal power generation, terawatthours (twh) 18.5 20.8 23.3 26.1 29.2 32.7 36.5 40.8

Hydro-electric power generation, twh 20.1 21.7 23.4 25.3 27.3 29.5 31.9 34.4

Electricity generation, twh 38.6 42.5 46.7 51.4 56.5 62.2 68.4 75.2

Hydro-electric energy consumption, twh na na na na na na na na

Primary energy consumption, mn toe na na na na na na na na

e/f = BMI estimate/forecast; na = not available/applicable. Source: Historic, BP Statistical Review of World Energy,June 2006; Forecast, BMI Research.

Key Risks to Forecast Scenario

There is clearly risk associated with Vietnam’s oil production level, but the demand outlook is also

unpredictable and there is relatively little chance of a dramatic change in oil export volumes over the near

term. At a US$30/bbl oil price, Vietnam’s 2007 crude export revenues would be approximately

US$4.27bn, while a US$60/bbl oil price would deliver revenues of US$8.54bn – both figures being offset

by refined products import costs.



Economic Outlook

WTO Entry To Sustain Rapid Growth

Vietnam's economy is estimated to have grown by 8.0% in 2006, which is a slowdown from 8.4% in

2005, but still represents another year of rapid growth. Furthermore, we expect a pick-up in growth in

2007 to 8.2%, as inflows of foreign direct investment (FDI) are buoyed by WTO entry. A moderation in

global growth is anticipated in 2007, which will constrain export growth, but a reduction in tariff barriers

against Vietnam's exports will counter this. In the medium term we expect Vietnam to remain on its high

growth path, averaging 8.4% to the end of our forecast period, supported by ongoing economic reform

and foreign investor interest.

The economy expanded 8.67% year-on-year (y-o-y) in Q306, according to preliminary estimates from the

General Statistics of Vietnam, which is up from 7.54% in Q206 and takes average growth for January-

September to 7.84%. The industry and construction sector was the main driver of growth, expanding by

an average of 9.85% y-o-y in the first nine months, with industrial output growth still racing, at 16.8%.

The services sector also maintained a healthy growth rate of 8.03% y-o-y, supported by 10.7% growth in

the transport, communications, and tourism sector. Only the agriculture, forestry and fishing sector

disappointed, expanding by just 3.32% due to unfavourable weather conditions.

On the demand side, exports, which represent 69.0% of GDP, have been the main driver of growth,

expanding by a nominal 24.2% y-o-y in the first 10 months of the year. Textiles have performed

particularly well, growing by 27.2% and high global oil prices have resulted in a 15.9% expansion in

crude oil exports. Meanwhile, investment, which represents 33.1% of GDP, grew by 27.0%.

Despite evidence of a slowdown in the US, Vietnam's largest export market, we expect growth to have

come in at 8.4% y-o-y in Q406, delivering average growth for the year of 8.0%. This is slightly above the

IMF’s forecast of 7.8% and on par with the government's target. We are also optimistic about prospects in

2007. The IMF expects growth to average just 7.5%, compared to our forecast of 8.2%. The government

is even more bullish and believes the economy can grow by 8.3-8.4%.

A major reason for our strong forecast is the potential gains from WTO entry. Vietnam joined the WTO

in January 2007, having received approval on November 7 2006. This will have obvious benefits for

Vietnam's exporters as tariff barriers against Vietnam are reduced, but it may take some time for firms to

break into these overseas markets. Instead, in the near term it will be inflows of foreign investment from

multinational firms looking to take advantage of Vietnam's low-cost environment that will provide the

initial shock to growth. Figures from UNCTAD show that FDI inflows rose by 25.5% to US$2.0bn in

2005, respresenting 3.8% of GDP. We expect this impressive growth rate to be maintained in 2007. Intel,

the world's largest microchip maker, has already decided to more than treble investment in two plants in



Vietnam to US$1bn, with production expected to begin in the second half of 2007. This means that most

of the inflows will show up in the 2006 and 2007 FDI figures.

The Intel project, while highly significant in itself, is important as an example of the attention that WTO

entry will generate for Vietnam. And as large foreign firms establish subsidiaries in the country, there will

be a need for related businesses. This will attract further foreign investment and offer opportunities for

local entrepreneurs, to which we expect them to respond well. In the first three quarters of 2006, private

sector, non-FDI investment increased by 50.0% in nominal terms, demonstrating the vibrancy of

Vietnam's private domestic firms.

Meanwhile, a dramatic reduction in the poverty rate from 61% to 19% over the past 10 years has ensured

considerable entrenchment of consumption growth. The spread of consumerism at higher income levels is

also apparent, with mobile phone subscribers more than tripling between 2003-2005, from 2.8mn to

9.3mn, and sales of sedan automobiles up by 15% y-o-y in January-October 2006.

The major risk to our baseline scenario is a global slowdown. We currently envision a moderation in US

growth to 3.0% in 2007, from 3.5% in 2006. This is still above trend, and would still be supportive of

Asian exports. The World Bank, however, believes growth will come off more dramatically, falling to

2.4%, and it also expects OECD growth to fall to 2.4% from 3.0% in 2006. The percentage of Vietnam's

total exports going to the US has increased from 5.3% in 1998 to 21.2% in 2005, making it Vietnam's

largest trading partner. Meanwhile, the share going to countries in developing Asia has declined to 28.7%

from 39.9% in 1998. Vietnam's exposure to weaknesses in developed countries has undoubtedly

increased, and weakness in the OECD could take some of the wind out of Vietnam's sails. Even exports to

China, one of Vietnam's fastest growing export markets, could falter, since two-thirds of China's imports

are destined for re-export to the OECD. The World Bank estimates that if OECD growth falls as it

expects in 2007, then East Asia will grow at its slowest rate for four years, at 7.3%. A reduction in tariffs

against Vietnamese goods will somewhat counteract the effects of an OECD slowdown on exports, but it

still presents a considerable risk.

Another risk to growth, and one that presents a threat to longer-term growth, would be a lack of progress

in public sector reform. The government has so far been slow to restructure state-owned enterprises

(SOE), with equitised firms representing only 12% of SOE assets at end-2005. Prime Minister Nguyen

Tan Dung has warned that a lack of competitiveness in Vietnam's economy will present a major challenge

as Vietnam integrates into the global economy. Foreign imports and entering firms will squeeze the

available domestic market for Vietnamese firms, and we believe that SOEs could face the greatest

struggle. Issuing equity in these firms will improve their governance, with shareholders providing

effective checks on management. Vietnam's new leaders appear to be, however, committed to the reform

process. We should see progress on the restructuring of SOEs going forward. State-owned commercial



banks (SOCB), which have created problems with non-performing loans through bad lending practices,

will also be restructured, as outlined by a Banking Sector Reform Roadmap that was approved in May.

One area where reform will be slow to have a significant impact is in education. While Vietnam's literacy

rate is reasonably high, at 90.3%, only 1.4% of its population have completed post-secondary education,

which is well below the Asian average of 4.9%. Vietnam lacks the first rate academic institutions that

many of its neighbours boast and this may hold back the development of higher-level industry. Intel, for

example, only intends to package and test chips at its Vietnamese plant.

Overall, though, we expect continued progress on reform and the introduction of foreign competition to

enhance the efficiency of Vietnamese firms and further invigorate the economy over the coming years.

We expect growth to average 8.4% over our forecast period.

Table: Output & Population

2004 2005 2006e 2007f 2008f 2009f 2010f 2011f

Nominal GDP (US$bn) 43.9 52.7 60.2 69.3 79.8 92.3 105.8 120.9

Population (mn) 83.1 84.2 85.4 86.6 87.8 89 90.2 91.4

GDP per capita (US$) 528 625 704.7 800.1 909.2 1037.6 1173.6 1322.1

Real GDP (growth, % y/y) 7.7 8.4 8 8.2 8.2 8.7 8.5 8.5

Industrial production (change, % y/y) 16.1 17.2 15.7 16.5 16.6 16.9 16.4 15.7

e/f = BMI estimates/forecasts; Sources: Ho Chi Minh City Statistical Yearbook, World Bank, BMI.



Share Of Net Crude Production 2005

US44%

European North Sea

33%

Asia Pacif ic13%

Canada3%

MEA7%

Source: ConocoPhillips

Regional Case Study – ConocoPhillips

Timor Player

Headquartered in Houston, Texas, ConocoPhillips is one of the largest integrated energy companies in

the US and operates in more than 40 countries worldwide. Its principal exploration and production (E&P)

assets in the Asia Pacific region are located in Australia, offshore China and the Timor Sea. The company

is also involved in a liquefied natural gas (LNG) project near Darwin, Australia, and has marketing and

retail operations in Thailand and Malaysia. ConocoPhillips is in a good position to exploit growing Asian

demand for oil products, as well as the booming regional trade in LNG.

In the Asia Pacific region, the Timor Sea has been the foundation of ConocoPhillips' recent growth.

Liquids production from the Bayu-Undan field increased significantly in 2005, and peak natural gas

production is expected in 2009.

China

ConocoPhillips has E&P interests in the Bohai Bay

and South China Sea. The firm is carrying out a

two-phase development of the Peng Lai 19-3 area in

Block 11-05 in Bohai Bay, in partnership with

China National Offshore Oil Corporation

(CNOOC). Production from the first phase

development began in December 2002 and is

averaging 38,000b/d. The second development

phase of the Peng Lai 19-3 field, as well as

concurrent development through the same facilities

of the nearby Peng Lai 25-6 field, were approved in

early 2005. Phase II includes multiple wellhead

platforms and a larger floating production, storage

and offloading facility (FPSO). First oil from the

initial platform through the existing facilities is expected in 2007, with production through the new FPSO

in late 2008 or early 2009. Conoco also shares in an high density polyethylene (HDPE) pipe joint venture

(JV) in China with fellow US major Chevron.

Vietnam

ConocoPhillips is the largest US energy investor in Vietnam, having spent over US$800mn to date. The

company holds stakes in six blocks, with its most successful project being a 23.25% stake in Block 15-1

in the Cuu Long Basin, the second largest producing block in Vietnam and the site of the Su Tu Den, Su

Tu Vang and Su Tu Trang oilfields. The Su Tu Den field entered production in October 2003 at an initial



rate of 60,000b/d. Work is ongoing to bring the Su Tu Vang field online in 2008, which will dramatically

increase total production from the block.

The company also has a 36% interest in the Rang Dong oilfield in Block 15-2 in the Cuu Long Basin. The

field has been producing since 1998, with two additional wellhead platforms added in October 2002 and

water injection and gas export facilities completed in October 2003. Output in 2005 averaged 29,000b/d

of oil and 0.2bcm of gas.

Table: Exploration And Production 2005

2005 2004

Net Income (US$mn) 8,430 5,702

Total E&P Proved Reserves (bn boe)* 7.9 7.6

Total E&P Worldwide Production (mn boe/d)* 1,543 1,542

Worldwide E&P crude oil production (mn boe/d) 907 905

Worldwide E&P natural gas production (mn cf/d) 3,270 3,317

Source: ConocoPhillips; * excludes syncrude from Lukoil

Indonesia

Conoco is active in Indonesia's exploration and production sector, with stakes in 16 production-sharing

contracts (PSCs). Crude and gas liquids output averaged 15,000b/d in 2005, while gas production

amounted to 3.1bcm. The company's offshore Belanak development in South Natuna Block B came

onstream in late 2004, at an initial rate of 40,000b/d of crude. Output is expected to rise to 60,000b/d by

2007 and peak at a rate of 100,000b/d of oil, 9.8mcm/d of gas and 23,000b/d of liquefied petroleum gas

(LPG). Investment is expected to total US$1.6bn through to 2007. In November 2006, Indonesia awarded

ConocoPhillips a new PSC for the 9,649sq km Amborip VI block in the Arafura Sea.

Following reports that ConocoPhillips was considering abandoning the Block A gas field in Aceh

province, the company has now decided to sell its 50% stake in the block to a group comprising Medco

Energi, Premier Oil and Japex. A deal should be signed in January 2007. Development of the 28.3bcm

block had been held up by ConocoPhillips and partner ExxonMobil's disagreement over the price of gas

sales to state-run fertiliser company PT Pupuk Iskandar Muda, as well as security concerns over the

volatile Aceh province.



Share Of Net Natural Gas Production 2005

European North Sea

31%

Asia Pacif ic11%

Canada13%

MEA3%

US42%

Source: ConocoPhillips

Back in 2004, Conoco concluded a gas sales agreement with Indonesia's PGN that will lead to Phase II

expansion of the Suban gas field's production, as well as processing facilities and new delivery pipelines.

Conoco will supply 65bcm over 17 years to PGN for industrial markets in West Java and Jakarta. The gas

will be delivered through a new pipeline that PGN will construct from Grissik to Cilegon in West Java,

and a 606km pipeline connecting Grissik to Muara Tawar, east of Jakarta.

The establishment of a dual pipeline system to

customers in Jakarta and West Java will

promote the expanding domestic gas market in

Java. Gas deliveries will commence in first

quarter 2007 at a rate of 4.8mcm/d, and will

plateau at 11.3mcm/d in 2012 until contract

termination in 2023.

Since its acquisition of Gulf Canada, with its

72% interest in Gulf Indonesia Resources,

Indonesia has become of increasing

importance to ConocoPhillips. Current

volumes are set to rise dramatically with new

field development projects, and the company is

now aiming to rationalise its extensive

portfolio. Pipeline gas exports to Singapore are a profitable recent development that provide considerable

upside potential, as well as near-term oil volume growth. ConocoPhillips is likely to leapfrog a number of

established players over the next year or two in terms of its Indonesian volumes and revenues.

Malaysia

E&P assets in Malaysia include a 40% interest in Blocks G and J, offshore Sabah. Downstream,

ConocoPhillips has a 47% interest in a 120,000b/d refinery in Malacca, together with state-controlled

Petronas. Crude oil processed by the refinery is sourced mostly from the Middle East and the local area.

The refinery produces a full range of refined petroleum products and is one of the most economically

competitive plants in the region. It capitalises on ConocoPhillips' proprietary coking technology to

upgrade low-cost feedstocks to higher-margin products. Some of the refined products support

ConocoPhillips' retail marketing operations in the Asia Pacific region with the balance of the light-oil

share being sold in the regional markets. The US firm's share of the refinery output is sold through its

network of 28 ProJET branded retail sites or exported to other Asian markets. The ProJET retail network

is a JV with Malaysian conglomerate Sime Darby Bhd, with stations located in Klang Valley, Senawang,

Melaka and Johor Bahru.



While there is an exploration element to the company's Malaysian portfolio, its main involvement is

based on a share in one of the country's largest refineries and a growing fuels retail presence.

ConocoPhillips therefore appears under-represented in the upstream segment and is a long way from

having an integrated business unit. It is likely that the group will enlarge its JV retail network, while

seeking opportunities to develop meaningful upstream volumes through exploration and acquisition.

Recent moves indicate that the company's future attention will be on the upstream, with either

divestments undertaken or a holding pattern established in the downstream.

A Malaysian newspaper reported in November 2006 that ConocoPhillips is putting its 40 ProJET petrol

stations in Malaysia up for sale, in order to concentrate on its core strategic business. The group is

retaining its investment in the refinery project in Malacca and other upstream projects.

Thailand

ConocoPhillips is present in the Thai retail market, operating a network of 160 service stations under the

JET and Jiffy brand names. Newspaper reports in November 2006 suggested Conoco is putting its 147 Jet

stations in Thailand up for sale.

Australia

Net production in 2005 was 33,000b/d of oil/gas liquids and just 0.4bcm of gas. However, volumes are

rising significantly. The company in February 2005 announced the start-up of liquids production from the

first-phase development of the Bayu-Undan field in the Timor Sea Joint Petroleum Development Area

(JPDA). During the first phase, the Bayu-Undan gas recycling facility will produce and process wet gas,

separate and store condensate, propane and butane, and re-inject dry gas back into the reservoir. Bayu-

Undan holds estimated recoverable reserves of 400mn barrels of condensate and LPG and 96bcm of gas.

With around 40% of its proven reserves derived from gas and gas liquids, ConocoPhillips is a major

global gas producer and supplier and is particularly active in the LNG trade. ConocoPhillips has seven

LNG projects in various stages of production, development and appraisal. The company is also

investigating several possible locations for regasification import terminals.

Following the successful completion of Conoco's first LNG facility in Alaska, the company completed its

second LNG facility in early 2006. The plant, located near Darwin in Australia, liquefies gas from the

Bayu-Undan field for shipment to customers in Japan. Phase II of the Bayu-Undan project involved the

connection of a natural gas pipeline from the offshore facilities in the Timor Sea to the 3.52mn tonne per

annum (tpa) LNG facility near Darwin. The first cargo of LNG was loaded in February 2006. A binding

Heads of Agreement was signed in 2002 with the Tokyo Electric Power Company and Tokyo Gas Co

for the sale of 3mn tpa of LNG over a 17-year period.



Another LNG project, involving ConocoPhillips (30%) and led by Australia's Woodside, has been

proposed for the Greater Sunrise gas field in the Timor Sea. The consortium has announced its plans to

develop the project by building a floating LNG plant with a proposed annual capacity of 6.7bcm.

Production is scheduled to begin in 2008.

Table: Commercial Realisation – Refining And Marketing 2005

2005 2004

Net Income (US$mn) 4,173 2,743

Crude Oil Throughput (mn b/d) 2,420 2,455

Crude Oil Capacity Utilisation 93% 94%

Clean-Product Yield 82% 82%

Petroleum Products Sales (mn b/d) 3,251 3,141

ConocoPhillips



Competitive Landscape

Executive Summary State-controlled oil and gas industry, featuring IOC participation through production sharing agreements (PSAs).

Main government vehicle is PetroVietnam which, with its Vietsovpetro JV, provides around 90% of the country’s

oil production. There are currently no oil refineries in Vietnam.

IOC upstream involvement is significant, in partnership with PetroVietnam. While Russian state company

Zarubezhneft is the biggest foreign oil producer, in the Vietsovpetro JV with PetroVietnam, BP is now the leading

IOC in terms of investment, followed by Petronas and ConocoPhillips.

BP’s key investment is the US$1.3bn Nam Con Son Gas project. Gas is transported to local power plants in Ba

Ria-Vung Tau province. BP has a 35% field interest, operates the gas pipeline and owns a third of the Phu My 3

power plant. BP has several joint ventures in the downstream sector.

ConocoPhillips has stakes in six Vietnamese blocks, including 23.25% of Block 15-1 that holds the Su Tu Den, Su

Tu Vang and Su Tu Trang oil fields. ConocoPhillips also has 36% of the Rang Dong oil field that has been

producing since 1998. The group’s 2005 oil and liquids production averaged 29,000b/d.

Petronas shares in eight blocks, including offshore Blocks 1 and 2 that contain the Ruby, Emerald and Topaz

fields. The company’s other producing asset is Cai Nuoc in Block 46. Petronas operates LPG import, storage and

distribution JVs. It has 50% of a 100,000tpa PVC plant.

Japan’s Mitsubishi is set to build Vietnam’s proposed second refinery. The proposed US$2.95bn Nghi Son

petrochemical/refining complex will have a 145,000b/d capacity. Construction could start in 2006, and the refinery

is expected to be operational by 2010.

KNOC in December 2002 agreed to install facilities to be used to supply up to 3.7mcm/d of gas to Vietnam. The

gas, located in the Rong Doi and Rong Doi Tay fields, will be bought by Petrovietnam for 23 years. Purchasing

began in 2005. The Korean company holds stakes in three offshore blocks in Vietnam.

Chevron/Unocal hopes to start gas sales from its Vietnamese fields by 2008/2009. It has discovered 70bcm of gas

reserves in the Kim Long, Ac Quy and Ca Voi fields. The US firm is planning to invest a further US$1.5bn over

the next five to seven years on various gas and power projects.

UK-based Premier Oil and SOCO International, plus Canada’s Talisman are the most recent companies to make

significant oil and gas discoveries offshore Vietnam, with all three companies testing significant and commercial

volumes during drilling in late 2006 and early 2007.



Table: Key Players – Vietnam Oil & Gas Sector

Company 2005 sales(US$mn)

% share oftotal sales

No ofemployees

Yearestablished

Totalassets(US$mn)

Ownership (%)

PetroVietnam na 100 17000 1975 na 100% state

ConocoPhillips 140e 0.2 na 1995 na 100% ConocoPhillips

Vietsovpetro na na na 1981 na 50:50 PetroVietnam/Zarubezhneft

BP Vietnam 300 na 700 1989 na 100% BP

e = estimate; na = not available/applicable. Source: BMI Research

Overview/State Role

The Vietnamese government controls both the oil and gas upstream and downstream sectors. For

upstream activities, state-owned PetroVietnam is the only firm permitted to conduct petroleum

operations. It can operate in partnership with IOCs. The company accounts directly for 20% of Vietnam’s

oil production and half of its gas. Vietnam has been considering an international public stock offering of a

minority stake in PetroVietnam. For downstream activities, several government-owned companies, such

as Petrolimex and Petec under the Ministry of Trade, PetroVietnam Trading Company (Petechim)

under PetroVietnam, SaigonPetro under Ho Chi Minh City People’s Committee, and Vinapco under

Vietnam Airlines, have been licensed to import petroleum products. Petrolimex is the largest petroleum

products importer. Two refinery projects are at early stages, aimed at providing the country’s first crude

processing capacity in 2009 and 2010 respectively. Some initial contracts for the first refinery were

awarded in August 2005.

During September 2005, the state confirmed that PetroVietnam is to offer two of its subsidiaries to

foreign oil companies. The sale of Petrovietnam Drilling and Petroleum Technical Services should

raise some US$30mn for the parent firm, which will be used for longer-term investment plans. The sale

follows quickly on from an auction in July 2005 of stakes in two separate subsidiaries. The firm appears

to be slowly privatising itself. Rumours of a formal privatisation have been circulating for months, but

there has been little obvious movement.

The Vietnamese government is also considering offering greater tax incentives for foreign oil companies.

The government has issued around 44 investment licences for oil and gas exploration since the industry

was opened to foreign partners in 1998. More than 30 companies, including US, European, Korean, and

Japanese firms, now operate in offshore Vietnam. However, several foreign companies have withdrawn



from their contracts. Reasons include problems with the Vietnamese regulatory framework and

disappointment at recovering smaller quantities of oil and gas than expected.

PetroVietnam claims to have discovered reserves of 296mn barrels of oil equivalent in 2005. It last year

drilled 23 exploration wells. The company hopes to find up to 255mn boe per annum between now and

2010.

BP – Summary

The company’s key investment is the US$1.3bn Nam Con Son Gas project, which involves the

development of the offshore Lan Tay and Lan Do gas fields in Block 06.1. From March 2004, gas has

been transported via a 400km pipeline to the 900MW Phu My 2.1 generation plant and the 716MW Phu

My 3 Power Plant in Ba Ria-Vung Tau province. BP has a 35% interest in Block 06.1. The pipeline is

operated by BP, which also has a 33.33% interest in the Phu My 3 plant. In addition, BP has a 75.9%

interest in nearby exploration Block 05.2, which contains the Hai Tach field. First gas is targeted for

2006. BP has several JVs in the downstream sector, including BP Petco, which markets BP-branded

lubricants, greases and LPG. The venture operates a lubricants plant and an LPG manufacturing and

bottling facility. Castrol Vietnam markets Castrol-branded lubricants, operates a blending plant and two

regional depots.

ConocoPhillips – Summary

ConocoPhillips is the largest US energy investor in Vietnam, having spent over US$800mn to date. The

company holds stakes in six blocks and its most successful project is a 23.25% stake in Block 15-1 in the

Cuu Long Basin – site of the Su Tu Den, Su Tu Vang and Su Tu Trang oilfields. The Su Tu Den field

entered production in October 2003 at an initial rate of 60,000b/d. The Su Tu Vang and Su Tu Trang

fields are being evaluated and development decisions should be taken shortly. ConocoPhillips also has a

36% interest in the Rang Dong oilfield in Block 15-2 in the Cuu Long Basin. The field has been

producing since 1998, with two additional wellhead platforms added in October 2002 and water injection

and gas export facilities completed in October 2003. The Rang Dong 12X well was drilled in late 2001

and a development plan has been sanctioned, with first production achieved last year. Associated gas

sales from the Rang Dong field commenced in October 2003 via the Bach Ho pipeline. Output in 2005

averaged 29,000b/d of oil and 0.2bcm of gas.

Petronas – Summary

Malaysia’s state oil company has interests in the upstream, downstream and chemicals sectors in

Vietnam. Petronas has shares in eight blocks in partnership with PetroVietnam. They include offshore

Blocks 1 and 2, which contain the Ruby, Emerald and Topaz field, with the Ruby field starting up

production in late 1998. The company’s other producing field is Cai Nuoc in Block 46, which is operated

by Canada’s Talisman Energy. Exploration interests include stakes in Blocks 10, 11.1, 01/97, 02/97 and



46/02. Petronas also operates joint ventures that import, store, bottle, distribute and market LPG. In

addition, it has 50% of the Phu My Plastics & Chemical Company that operates a 100,000tpa PVC

plant.

Table: Key Upstream Players

Company Oil production(000b/d)

Market share (%) Gas production(bcm)

Market share (%)

PetroVietnam 75 19 1.25 30

ConocoPhillips 29 8 0.2 na

Vietsovpetro 280 71 na na

BP na na 3.00 70

na = not available/applicable. Source: BMI Research

Mitsubishi – Summary

PetroVietnam in August 2004 signed up Mitsubishi of Japan as a partner for its proposed second refinery.

The US$2.95bn Nghi Son petrochemical and refining complex will have capacity of 145,000b/d and will

be located 175km south of Hanoi. Construction could start as early as 2006, and the refinery is expected

to be operational by 2010. The announcement comes amid news that Vietnam’s first refinery, the

US$1.5bn Dung Quat Complex, is unlikely to commence operations until 2008/09 due to slow progress

and a lack of funds. Mitsubishi will organise a US$950mn loan package from Japan’s JBIC for its

project.

Table: Key Downstream Players

CompanyRefining capacity

(000b/d) Market share (%) Retail outlets Market share (%)

Petrolimex 0 0 na na

Petrovietnam/PDC 0 0 na 75

BP Petco 0 0 na na

na = not available/applicable. Source: BMI Research

KNOC – Summary

In December 2002, a South Korean consortium headed by KNOC signed an agreement to install facilities

to be used to pump and supply up to 3.7mcm/d of gas to Vietnam. The gas, located in the Rong Doi and

Rong Doi Tay fields on Block 11-2 of the Nam Con Son Basin, will be bought by PetroVietnam for 23



years from 2005. KNOC began building production facilities for the gas fields on Block 11-2 in early

2004. The Korean company holds stakes in three offshore blocks in Vietnam – namely Block 15-1

(14.25%), 16-2 (30%) and 11-2 (49%). Block 15-1 is the company’s sole producing asset to date, and the

site of the ConocoPhillips-operated Su Tu Den oilfield. It also contains the Su Tu Vang and Su Tu Trang

oilfields.

Chevron – Summary

US oil and gas producer Unocal is now part of the Chevron group. It is hoping to start gas sales from its

Vietnamese fields by 2008/2009. It has discovered 70bcm of gas reserves in the Kim Long, Ac Quy and

Ca Voi fields located off south-west Vietnam. The US firm has already invested US$190mn on

exploration, and is planning to invest a further US$1.5bn over the next five to seven years on various gas

and power projects. Gas from Unocal’s fields will be sold to local power producers, and the US company

is proposing to construct a pipeline to transport Vietnamese gas to Malaysia and Thailand. Unocal also

intends to construct a gas-fired 750MW power plant in the province of Can Tho in Mekong Delta region.

Others – Summary

Premier Oil, SOCO International and Talisman Energy have all recently confirmed commercial

hydrocarbon discoveries offshore Vietnam that are set to be developed over the next 3-5 years. SOCO is

arguably the most advanced in field appraisal and pre-development work, with the other two explorers

awaiting rigs to appraise their finds fully.



Company Monitor

PetroVietnam

Company Analysis

The state company is on Vietnam’s privatisation list, although timing

is uncertain and the nature of the process has yet to be defined. An

industry partner as a strategic investor would be good for

PetroVietnam, but there is just as likely to be an IPO for financial

investors. Meanwhile, the company is partnering major IOCs in

upstream projects and should shortly begin its first major downstream

ventures with the two refinery schemes. Investment demands are high

and the state group’s financial resources are being stretched by the

heavy demands for cash, but it has been able to arrange financing on

acceptable terms.

SWOT Analysis

Strengths: Dominant domestic oil and gas producer;

Partner to IOCs in most new developments;

Involvement in new refinery investment;

Share of downstream oil segment;

Growing international E&P presence.

Weaknesses: No current refining capacity;

Over-dependence on Russian partner;

Rising investment requirement.

Opportunities: Growth in domestic oil/gas demand;

Plans for new refining/petrochemicals capacity;

Significant untapped reserves/acreage.

Threats: Growing regional refinery over-supply;

Changes in national energy policy.

Address

Vietnam Oil and Gas Corporation– PetrovietnamLevel 2, 22 Ngo Quyen StreetHoan Kiem DistrictHanoiVietnam

Tel: +84 (4) 825 2526

Fax: +84 (4) 826 5942

www.petrovietnam.com.vn

Operating Statistics

Year established: 1975

No of employees: 17,000

Oil production: 75,000b/d direct;140,000b/d through JV (2003)



Market Position

State-run PetroVietnam is responsible for oil and gas exploration and production, storage, processing,

transportation, distribution and related services. The company operates alone or in partnership with IOCs

under joint operating company (JOC) contracts, similar to a PSC, in which a Vietnamese legal entity acts

as an agent on behalf of the contracting parties, with each party contributing staff to the operating

company. However, the state firm said in October 2004 that it would offer IOCs the chance to operate

through PSCs, enabling foreign investors to take over sole operatorship of a field. The Vietsovpetro joint

venture accounts for the bulk of the country’s crude production, operating Blocks 09-1 and 05-2, site of

the White Tiger, Dragon and Dai Hung fields.

PetroVietnam was placed under the control of the Industry Ministry in June 2003, following construction

delays with the Dung Quat oil refinery and the exit of its Russian partner Zarubezhneft in December

2002.

Strategy

The firm appears to be slowly privatising itself. Rumours of a privatisation have been circulating for

months but it was unclear as to how this would come about. Recent auctions of various subsidiaries

suggest the company aims to selectively privatise its assets, keeping the strongest profit-generators under

state-control while oil prices and profit margins remain so high.

Latest Developments

February 2007 saw three foreign companies awarded E&P rights at an offshore block by PetroVietnam.

Block 06/94 covers 4,130sq km and is situated around 350km offshore the southern Ba Ria-Vung Tau

province. The companies, Pearl Oil (Taconite) and Serica Energy, both registered in the British Virgin

Islands, and Lundi New Ventures based in the Netherlands, have agreed to spend US$49.3mn on

exploration in the next three years, with a commitment to drill at least three wells over that time, after

which the contract will be up for renewal.

PetroVietnam Investment and Development Company (PIDC) has said it plans to expand its overseas oil

exploration activities by making new contracts with Cuba and Nigeria in 2007. Few details have been

released on the Nigerian contract but the company plans to have concluded discussions with Cuba by the

end of the second quarter of 2007, according to Le Van Truong, E&P director for PIDC.

November 2006 saw PetroVietnam sign an accord with Russia’s Gazprom to step up Russia’s

involvement in the industry. The deal covers E&P, as well as gas infrastructure projects.

Korea National Oil Corporation (KNOC) and PetroVietnam started producing gas from Block 11.2

offshore Vietnam in November 2006. The US$300mn block covers two gas condensate developments,



Rong Doi (Twin Dragon) and Rong Doi Tay (Twin Dragon West), 280km offshore Ba Ria Vung Tau

province, and has started producing at an initial rate of around 1.34bn cubic metres (bcm), according to a

local newspaper Lao Dong. The gas fields are thought to be capable of producing around 24.2bcm of gas

and 23mn barrels of condensate. Under the terms of a 2002 agreement the gas will be purchased by

PetroVietnam for 23 years, and all the output will be piped to a major power complex.

In September 2006 it was announced that a consortium of Russian state oil company Zarubezhneft (50%),

PetroVietnam (35%) and Japanese refiner Idemitsu Kosan (15%) had made a major oil discovery offshore

Vietnam. After four years of exploration the partners have struck oil from an offshore well in Block 09-3

and they now estimate the block's potential reserves at 370-515mn barrels. This adds to a previous

discovery off the south-eastern coast of Vietnam. Reserves in the discovered Su Tu Trang field - located

within Vietnam’s 700,000b/d 15-1 block – are estimated at 300mn barrels of crude and up to 1.1bcm.

ConocoPhillips holds a 50% stake in the block, equal to PetroVietnam’s share, while KNOC holds

14.25% and SK Corp, South Korea’s largest oil refiner, has 9%.

Vietnam’s first refinery is currently being built at Dung Quat, in Quang Ngai province, 850km south of

Hanoi. The US$2.5bn complex is 100% Vietnam-owned. A consortium comprising France’s Technip,

Japan’s JGC and Spain’s Technicas Reunidas is building Dung Quat, which is expected to begin

operations in early 2009.

Vietnam is also seeking foreign investors to help build its second crude oil refinery. PetroVietnam is

sending a delegation of senior officials to the US in order to gauge potential investment interest, with

talks to be held in Houston, Texas. IOCs will be permitted to own at least 70% of the new refinery, a

significant shift from the country’s previous stance. The new Nghi Son refinery project, to include a

petrochemicals facility, will cost an estimated US$3bn, with start-up targeted for 2010 – which means

partners must be lined up quickly. Media reports suggest that Vietnam is looking at companies based in

the US, Japan and Russia. According to PetroVietnam officials, Mitsubishi and Idemitsu Kosan have

separately expressed interest in a partnership with PetroVietnam.

To be located about 200km south of Hanoi in Thanh Hoa province, the Nghi Son refinery is expected to

have a processing capacity of 140,000b/d. It will be processing crude imported from the Middle East, and

its petroleum and chemical products will be sold domestically. Similarly for the 130,000b/d Dung Quat

refinery, 20,000b/d of crude will be imported from the Middle East, while PetroVietnam will supply the

remaining feedstock. The feasibility study conducted by PetroVietnam suggests that the project has a

break-even period of 12-15 years.



BP Vietnam

Company Analysis

BP has led the new IOC charge into Vietnam, benefiting from the

absence of US companies since the Vietnam War and putting its

emphasis on gas, rather than oil. The integrated gas-to-power project

is proceeding well and should become a useful contributor to the

group, as well as providing a strong strategic base for further

expansion in Vietnam. Should the country’s gas network ultimately be

linked with those of neighbouring countries as a form of regional hub,

BP will be in a good position to benefit.

SWOT Analysis

Strengths: Key role in upstream gas supply;

Ownership of gas distribution infrastructure;

Active participant in downstream segment;

Good relationship with state energy group.

Weaknesses: No upstream oil exposure;

No refining/retail fuels interests.

Opportunities: Growth in local/regional gas demand;

Scope for downstream oil expansion.

Threats: Changes in national energy policy.

Address

BP Exploration OperatingCompany LimitedVilla A15 An PhuDistrict 2Ho Chi Minh CityVietnam

Tel: +84 (8) 899 9375

Fax: +84 (8) 899 9391

www.bp.com



Market Position

BP is active in oil and gas E&P, the production and distribution of lubricants and LPG, the provision of

gas oils and jet fuels and the distribution of chemical and solar power systems. BP currently has a 3%

share of Vietnam’s LPG market and is the country’s largest gas supplier.

The company’s key investment is the US$1.3bn Nam Con Son Gas project, which involves the

development of the offshore Lan Tay and Lan Do gas fields in Block 06.1 in partnership with ONGC

Videsh and PetroVietnam. These two fields contain estimated reserves of 58bcm. Gas from the Nam Con

Son fields is transited via a 400km pipeline to the 900MW Phu My 2.1 generation plant and the 716MW

Phu My 3 Power Plant in Ba Ria-Vung Tau province. BP operates the pipeline in partnership with

PetroVietnam and ConocoPhillips.

Strategy

The UK-based major wants to develop its gas-to-power assets while also supporting downstream

manufacturing and marketing activities. BP is to invest between US$600mn and US$650mn over the next

18 years on the Block 05.2 concession. The company is also to continue increasing gas supplies to the

country’s sole LPG processor Dinh Co Plant. Vietnam’s annual consumption of LPG is 5kg per person,

or one-tenth of the demand in neighbouring Thailand.

Latest Developments

In H105, BP upped gas supplies from the Nam Con Son project by 58% y-o-y to reach 2bcm. Therefore,

since November 2003, the gas project has brought up to 5.3bcm onshore. The project saw its gas supply

rise to 3.2bcm in 2005, representing an increase of 30% from the year before.

The British major also has a 33.33% interest in the Phu My 3 plant together with Singapore’s SembCorp

(33.33%) and Japanese consortium of Kyushu Electric/Nissho Iwai (33.33%).

BP has a 75.9% interest in nearby exploration Block 05.2, with PetroVietnam holding the remaining

interest. The block is located around 370km off the southern coast of Vietnam and contains the Hai Tach

field, with reserves of up to 68bcm of gas. The partners expect to finalise a development plan shortly,

and first gas is targeted for 2006.

BP Petco was formed in 1992 with Petrolimex to market BP-branded lubricants, greases and LPG. The

joint venture operates a US$18mn lubricants plant and a US$10mn LPG manufacturing and bottling

facility. Castrol Vietnam was founded in 1991 as a joint venture with Saigon Petrol and markets

Castrol-branded lubricants, operates a blending plant and two regional depots.



Petronas Vietnam

Company Analysis

Malaysia’s state energy group has a lot to gain from its involvement in

Vietnam. The two countries are close neighbours, share similar

geology and upstream prospects, and have the potential for close co-

operation in oil and gas supply. Petronas has therefore built a string of

businesses ranging from upstream oil to petrochemicals that cements

its relationship with PetroVietnam and makes it a preferred partner for

new energy initiatives. Vietnam could become one of the most

important elements of the Petronas international strategy.

SWOT Analysis

Strengths: Significant upstream oil investor;

Substantial downstream fuels involvement;

Key player in petrochemicals segment.

Weaknesses: Little current upstream production;

No share in refining/fuels retail segment;

Limited direct role in gas development.

Opportunities: Growth in regional oil/chemicals demand;

Scope for petrochemicals expansion/upgrading;

Potential for joint Vietnam/Malaysia projects.

Threats: Changes in national energy policy.

Address

PETRONAS Carigali (Vietnam)Sdn BhdPETRONAS BuildingNo 170 Hai Ba Trung StreetDistrict 1Ho Chi Minh CityVietnam

Tel: +84 (8) 8222 112/15/21

Fax: +84 (8) 8222 095/135

www.petronas.com.my



Market Position

Petronas has interests in the upstream, downstream and chemicals sectors in Vietnam. The Malaysian

firm has interests in eight blocks in partnership with Petrovietnam.

Strategy

The company has been developing a network of deals in Vietnam and looks set to continue in this vein,

accumulating one of its most impressive international portfolios.

Latest Developments

In June 2006 Petronas launched its LPG bottling plant in Dong Nai Province, Vietnam, which was

acquired from ExxonMobil (Unique) Vietnam Co. Ltd. in September 2005. The plant, Petronas’ second

LPG facility in Vietnam, marks its entry into the country’s southern LPG retail market. Petronas also

operates the Thang Long LPG JV in collaboration with PetroVietnam that imports, stores, bottles,

distributes and markets LPG in Vietnam.

In April 2006 Petronas, together with its JV partner Chevron, was awarded a deepwater exploration block

offshore Vietnam, the company’s first deepwater acreage in the country. The PSC for Block 122 was

signed in Hanoi. Block 122 covers an area of about 6,981sq km in Vietnam’s Phu Khanh Basin, and is

located in water depths of between 50 and 2,500 metres. Under the terms of the PSC, equal partners

Petronas and Chevron commit to acquire, process and interpret 3,000km of 2D seismic data, reprocess

2,000km of seismic data and drill one exploratory well in the Block during the first three of the PSC’s

seven-year exploration period. Chevron is the operator of the Block. The partners expect to complete their

proposed work programme for the Block within the PSC’s first three years, after which they will decide

whether to proceed with the remaining phases of the exploration period. The latest PSC marks an

important milestone for Petronas in its exploration activities in Vietnam, particularly in the deepwater

area. Apart from Block 122, Petronas has interests in six other blocks in Vietnam. Petronas operates one

of the six blocks while the remaining five are under joint operation with various partners.

Assets include offshore Blocks 1 and 2, which contain the Ruby, Emerald and Topaz field, with the Ruby

field starting up production in late 1998. The company’s other producing field is Cai Nuoc in Block 46,

which is operated by Canada’s Talisman Energy. Exploration interests include stakes in Blocks 10, 11.1,

01/97, 02/97 and 46/02.

In addition, the Malaysian group has a 50% interest in the Phu My Plastics & Chemical Company Ltd,

which operates a 100,000 tpa PVC plant. Other shareholders in the plant are PetroVietnam Gas Co

(43%) and Tramatsuco (7%).



Zarubezhneft

Company Analysis

The decision by the Russian state-owned firm to abandon Vietnam’s

first oil refinery project was a surprise and may have set back

Zarubezhneft’s relationship with PetroVietnam and the government.

However, the Vietsovpetro JV remains the key to current oil supply

and there have been no signs of any change in commitment. There are

suggestions that the fields operated by the JV could be more cost-

efficient and productive in IOC hands, but the Vietnam/Russia ties

appear to be strong. As new upstream projects enter production, the

gas industry develops and old fields decline, the role of Zarubezhneft

looks set to diminish.

SWOT Analysis

Strengths: Major domestic oil producer;

Long-standing JV with PetroVietnam;

Substantial exploration portfolio.

Weaknesses: No role in proposed refinery projects;

Declining output from mature fields.

Opportunities: Growth in local/regional oil demand;

Significant untapped reserves/acreage.

Threats: Competition from IOCs in new projects;

Changes in national energy policy.

Address

ZarubezhneftRoom 302, DAEHA BusinessCentreDAEWOO Hotel, 360 Kim MaStreetBa Dinh DistrictHanoiVietnam

Tel: +84 (4) 771 9990

Fax: +84 (4) 771 9993

www.zarubezhneft.ru

Operating Statistics

Year established: 1981

Oil production: 140,000b/dthrough JV (2003)



Market Position

Russia’s state-owned Zarubezhneft has been active in the Vietnamese exploration and development sector

since 1981, when it formed the 50:50 Vietsovpetro joint operating company with PetroVietnam.

Vietsovpetro remains the largest oil and gas producer in Vietnam, operating seven fields in the South

China Sea and accounting for around 90% of domestic production.

Strategy

The Russian firm appears committed to the Vietsovpetro joint venture and there is no indication of a

change in strategy as the gas industry develops and oil fields decline.

Latest Developments

In November 2006, PetroVietnam signed an accord with Gazprom to step up the Russian firm’s

involvement in Vietnam’s gas industry. This further cements Vietnam and Russia’s close relationship but

may muddy the waters for Vietsovpetro.

Vietsovpetro’s largest South China Sea fields are the Bach Ho, Rong and Dai Hung fields. The partners

announced the production of their 125 millionth tonne of oil in December 2003. Crude output totalled

13.12mn tpa (260,000b/d) in 2003.

In April 2005, Vietsovpetro struck oil at an exploration well in offshore Block 04-3 at the Nam Con Son

Basin. The Thien Ung 1X well is expected to produce around 1,500b/d of oil. The company plans to drill

additional wells on the block before deciding whether to bring the concession on stream.

In early 2002, Zarubezhneft (50%), PetroVietnam (35%) and Idemitsu (15%) of Japan signed an

exploration contract for Block 09-3 in off Vietnam’s continental shelf, with the first wildcat well drilled

in September 2003.

Zarubezhneft had originally planned to participate in the development of the country’s first oil refinery

Dung Quat, but withdrew from the project in December 2002 over concerns about the project’s economic

feasibility.



BMI Forecast Modelling

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The

precise form of time-series model we use varies from industry to industry, in each case being determined,

as per standard practice, by the prevailing features of the industry data being examined. For example, data

for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries,

there may be pronounced non-linearity, whereby large recessions, for example, may occur more

frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the

use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the

variable’s own history as explanatory information. For example, when forecasting oil prices, we can

include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data

quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a

basis for analysis and forecasting.

It must be remembered that human intervention plays a necessary and desirable part of all our industry

forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,

anomalous data, turning points and seasonal features where a purely mechanical forecasting process

would not.



Energy Industry

There are a number of principal criteria that drive our forecasts for each Energy indicator.

Energy supply

Supply of crude oil, natural gas, refined oil products and electrical power is determined largely by

investment levels, available capacity, plant utilisation rates and national policy. We therefore examine:

• national energy policy, stated output goals and investment levels,

• company-specific capacity data, output targets and capital expenditures, using national, regional andmultinational company sources,

• international quotas, guidelines and projections, such as OPEC, International Energy Agency (IEA),US Energy Information Administration (EIA),

Energy consumption

A mixture of methods is used to generate demand forecasts, applied as appropriate to each individual

country:

• underlying economic (GDP) growth for individual countries/regions, sourced from BMI publishedestimates. Historic relationships between GDP growth and energy demand growth at an individualcountry are analysed and used as the basis for predicting levels of consumption,

• government projections for oil, gas and electricity demand,

• third party agency projections for regional demand, such as IEA, EIA, OPEC.

• extrapolation of capacity expansion forecasts, based on company- or state-specific investment levels.

Cross checks

Whenever possible, we compare government and/or third party agency projections with the declared

spending and capacity expansion plans of the companies operating in each individual country. Where

there are discrepancies, we use company-specific data as physical spending patterns to ultimately

determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand

projections to check the energy balance of each country. Where the data suggest imports or exports, we

check that necessary capacity exists or that the required investment in infrastructure is taking place.

Sources

Sources include those international bodies mentioned above, such as OPEC, IEA, and EIA, as well as

local energy ministries, official company information, and international and national news agencies.

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Vietnam Oil And Gas Report Q1 2007

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