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Vietnamese LNG works on politics and price

Hanoi needs energy security. But US LNG can also tick some boxes for its relationship with Washington

Vietnam will select future LNG suppliers for a projected spike in gas import demand based on geopolitics as well as economics, according to asset management firm Energy Capital Vietnam (ECV), which is dealing closely with the Hanoi government.

The country’s demand is expected to rise to 31bn m³ by 2035, from 10bn m³ in 2019. Current demand is met from indigenous production, but its largest fields are set to decline and to stop production entirely by the late 2020s to mid-2030s, consultancy IHS Markit estimates.

While there is the potential for new domestic reserves to be brought on stream, there is risk of delay, due in part to slow government permitting processes, but also to Chinese territorial claims on Vietnamese waters in the South China Sea. According to a May study of the country’s energy market by consultancy KPMG, commissioned by ECV, domestic production will rise, but in a range of 13-17bn m³/yr in 2021-25 and 17-21bn m³/yr in 2026-35, leaving import requirements of 1-4bn m³/yr in the former period and 6-10mn m³/yr in the latter.    

“For Vietnam, energy security trumps everything else,” Lewis, ECV

The US LNG industry is well positioned to capitalise on this growing import requirement, says David Lewis, chairman and CEO of ECV, due to “competitive prices” and “the US wave of supply coming online”.

“This is as about diversification of supply and energy security. For Vietnam, energy security trumps everything else—it is the same as national security,” says Lewis, noting that “US government policy under the Indo-Pacific Strategy seeks to enhance stability and open cooperation among regional interests throughout the South China Sea”.

Powering up

The power sector is the major driver for gas demand growth. Power demand jumped by 10.7pc pa over 2012-18 to 220TWh in 2018, with peak demand growing at a comparable rate.

Based on its relationship with GDP, which is forecast by the IMF to grow at 6.5pc pa to 2023, the KPMG report estimates that Vietnamese power demand could grow by c.11pc pa, both for overall consumption and for peak demand, although the Vietnamese government expects peak demand growth to be more moderate at 9pc pa.  

The country’s existing installed capacity is 40.5GW, according to the electricity regulatory authority of Vietnam (Erav). KPMG’s research suggests 10GW of new installed capacity is expected to be added between 2019 and 2022. But its report concludes that significant additional conventional plant capacity will be needed by as soon as 2021-22. And, given these time constraints, it is unlikely that longer lead-time coal-fired plants can fill this gap, meaning gas-fired stations are one of few options.

53 GW Vietnam’s demand by 2022

The World Bank also projects that Vietnamese electricity sector investment will need to increase dramatically, to c.$8-12bn annually for the period 2016-30, requiring that Hanoi tap into private capital markets. ECV signed a memorandum of understanding with the government in September that confirmed plans for a 3.2GW semi-offshore power project near Mui Ke Ga in Binh Thuan Province, to come into operation by 2026. It is partnering with South Korea’s Kogas and expects to use US-sourced LNG as the plant’s fuel supply—which could “help reduce the trade deficit between the two countries”, Lewis notes.

Tariff fears

Hanoi is keen for LNG imports to play a role in lowering Vietnam’s trade deficit with the US, hoping to avoid the fate of countries such as China that have had punitive sanctions placed on their imports to the US. In June, President Donald Trump described Vietnam as "almost the single worst abuser of everybody". The US goods trade deficit with Vietnam was $39.5bn in 2018.

US generation firm AES received final approval from the Vietnamese government in November for a $1.7bn project, also in Binh Thuan, to develop a 2.2GW combined cycle gas turbine (CCGT) plant. And the country has six gas-fired power plants due to come online by 2026, with total capacity of 7.5GW by 2028 (see FIG 1.).

Hanoi will focus on price as well as geopolitics, says Lewis. “This is the first time that Vietnam will be exposed to global prices via imported gas and LNG. The US LNG network is capable of delivering molecules to market cheaper, faster and more efficiently than anywhere else.” 

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