Why PVN can’t buy oil at “bottom price” for reserve?

According to Vietnam Oil and Gas Group (PVN), it is not feasible to buy oil with “bottom price” because we do not yet have mechanisms and policies on risks for this activity (buying oil at “bottom price” leads to losses). On the other hand, at present, in Vietnam there are no national oil reserve depots, while the crude oil storages of Dung Quat and Nghi Son refinery plants can only meet production needs of these plants. It is also not feasible to rent an oil tanker (at least at this time), because of difficulty of our financial potential.

On April 21, PetroVietnam exchanged with the press about the deep reduction to a negative price, for the first time in history, of US light sweet oil (WTI). The exchanged issues were as follows:

1. Press question: In the transaction on April 20, 2020, US light sweet oil price fell below 0 USD/barrel, and for the first time in history the price has reached negative 37.63 USD/barrel. How is opinion of PVN about oil prices and oil supply and demand market in the short and medium term?

PVN Opinion: US light sweet crude oil (WTI) in the contract delivered by May of 2020 in NYMEX transaction (New York, USA) on April 20, 2020 settled at -37.63 USD / barrel. This low price has never been in history by the reason for:

April 21 is the closing date of the May 2020 contract. On this day, the buyers of this contract must make a decision whether or not to accept this batch of oil. If the buyers receive it, they must close the contract and will receive the material oil batch. However, with the sharp decline in global demand for oil due to the current Covid 19 pandemic, the crude oil is still produced while the oil storage depots are full and it is impossible to rent storage depots, or at a very high cost. Therefore, some owners of this contract have decided to “sell off” at all prices at the last 2 seconds of the transaction and the matching price at these last 2 seconds is considered to be the settling price.

It should be noted that: In fact, the price (-) $ 37.63 / barrel is the price dealt between traders on the exchange rather than the price between the crude oil producer and the end user (oil refinery plant). The amount of oil traded at price of (-)37.63 USD/barrel was about 600 thousand barrels.

In the transaction of 21/4, the price of oil on the exchanges for May 2020 has decreased significantly but the price of US light sweet oil delivered in June 2020 in NYMEX still maintained at about 20 USD/barrel and price of Brent oil in the ICE exchange (London) is still at 25.6 USD / barrel.

Therefore, the reduction of WTI price with a local nature in the US (due to the capacity limit and excess of supply over demand) has a strong influence on the market mentality. However, this factor will only affect in the short term. According to the forecasts of well-known forecasting firms (IHS, WM) and US analysts, the crude oil prices go down in the short term and will go up in June, or July 2020.

In the short term, world demand strongly reduces by nearly 30 million barrels per day compared to the same period in the last year, while the OPEC + agree to cut 9.7 million barrels per day in May and June and the agreement takes effect from the beginning of May, so it is predicted that oil prices may drop slightly in April and will stop falling in May.

In the medium term, oil demand will gradually increase after May when the countries around the world especially major oil consumers as the US, China, India and Europe gradually will remove from blockade in combining with decreasing oil supply as the agreement of OPEC+ and that a number of US oil exploiting companies go bankrupt or reduce production due to the oil prices lower than costs, then the supply-demand balance will be improved and oil price will gradually increase. The crude oil price is forecasted at 40 USD per barrel by the end of 2020 and 60 USD per barrel by the end of 2021

In the long term, due to the oil prices will be low in a long time, the petroleum companies will reduce investment in exploring and developing oil and gas fields that leads to supply source reduction. However, in the medium and long term, the market recovery depends a lot on the result of controlling the Covid-19 pandemic (finding a vaccine/drug), the oil prices will increase as the economy of the world, and especially the economy of G20 recovery.

2. Press question:

How will the negative oil price affect the turnover and production efficiency of PVN and its subsidiaries in 2020?

PVN opinion: The oil selling price of Vietnam is based on the average monthly delivery price of the Dated Brent oil set by Platts. Thus, the fluctuation of Brent oil price also affects the turnover of PVN.

According to Platts’s valuation, the price of Dated Brent oil on April 20, 2020 was 19.1 USD / barrel, down 1 USD / barrel compared to April 17. The average price of Dated Brent oil from the beginning of April was about 20.5 USD/ barrel.

The reduction in oil prices during the period from early 2020 to now has greatly affected the revenue and efficiency of PVN and its subsidiaries in all 5 main business spheres of PVN with the different levels.

For oil and gas exploitation sphere, if oil price drops by 1 USD / barrel, the turnover will drop by about 2.2 trillion dong /year. With a price of 30 USD/barrel (compared to the planned price of 60 USD / barrel), the turnover will decrease by about 55 trillion dong / year. The gasoline production and trade activities were also negatively affected by the Covid-19 pandemic and low oil prices when transport and circulation demand decline. Oil refinery plants suffer losses due to backlog of orders, low product price difference (sometimes petrol price is lower than oil price), and the risk of stopping operation due to high inventories. The oil and gas technical services also faced the similar difficulties when investors and contractors tend to cut and optimize production costs.

3. Press question: The crude oil price approved by the National Assembly for 2020 is 60 USD / barrel. So, with the current price of oil, how PVN payment to the State budget will be affected?

PVN opinion: The budget of PVN will reduce by VND 18.6 trillion / year (compared to the planned oil price of USD 60 / barrel).

4. Press question: What solutions does PVN have to cope with unprecedented fluctuation in the history of crude oil market today?

PVN opinion: Defining the “double risk” from Covid 19 pandemic and oil price crisis rightly from the beginning of February 2020, PVN has actively focused to synchronously deploy 5 groups of solutions (as management, investment, finance, market and policy mechanism) to cope with the situations:

Firstly for management solutions as maximally cutting production and business costs (at least 15%), reducing salaries (10-20%), reducing meetings, exchanges …, strengthening optimal cost management, applying instruments and solutions for reducing costs, saving time and enhancing labor productivity.

Secondly, for financial solution as evaluating the impact of cash flow, restructuring capital sources, reducing capital costs and interest expenses, mobilizing loan capital, strengthening debt collection management, restructuring debts and negotiating on loan interest adjustment …

Thirdly, for investment solution as updating, evaluating, classifying and identifying the priority projects, diverging investment, adjusting reasonable progress schedules, delaying or stopping unimportant projects, strengthening control over contracts, looking for investment opportunities to buy the fields with taking advantage of low oil prices …

Fourthly, for the market solution as following close behind supply and demand development, crude oil and product prices for timely solutions, diversifying distribution channels, increasing retail market share, building flexible sales policies, expanding and integrating distribution system to share and reduce costs. PVN also asks the government and ministries and agencies to consider and direct the orientations towards the balance between supply and demand and encourage domestic production, and handle trade frauds, etc.

Fifthly for solution on the policies and mechanisms as asking the government, ministries and agencies to consider adjusting and amending a number of the tax policies to remove the difficulties for PVN.

5. Press question: What specific solutions does the Government need to support PVN to overcome difficulties on the low oil prices and the impact of the current CPVID-19 pandemic?

PVN opinion: Firstly, the Government needs to rightly support PVN and its subsidiaries by the cheap mobile capital loans, delay loans for the projects and enterprises with the financial difficulty

Secondly, the Government to direct the State Bank of Vietnam to allow PVN and its member units to use their deposits at Ocean Bank, or allow them to use this money for payment of obligations to the State budget.

Thirdly, the government to regulate the market for gasoline retail trade, consider temporary stopping gasoline import, gasoline supply-demand balance between domestic production and import, and operate the gasoline prices at a reasonable level for maintaining production and business chain for rescuing economy of the country and maintaining jobs for labors.

Fourthly, the Government to direct to strengthen cooperation between the state groups and corporations as PVN, Petrolimex, Vinachem…which operate the same function as distributing gasoline.

Fifthly, the Government to allow applying VAT exemption for fertilizer and VAT suffering for gasoline processed from crude oil when being exported, and to consider giving up the tax rate in export tax for the fertilizer products.

PV.