UPDATE: Venezuela and Vietnam Plan Refinery Expansion, Product Sales

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Petroleos de Venezuela SA has agreed with state-run Vietnam Oil and Gas Group , or PetroVietnam , to join a project to upgrade the country’s sole refinery and to work together in selling refined oil products in the Asian market, the Vietnam News Agency reported Friday.

The PetroVietnam – PDVSA refinery agreement is in line with a string of similar multi-billion-dollar pacts seen elsewhere in energy-hungry Asia, where out-of-region oil producers enter local refining projects to get guaranteed markets for their crude and to cash in on rapidly growing Asian demand for refined products.

PDVSA said Wednesday that it aims by the third quarter of 2012 to pump an initial 50,000 barrels of heavy crude oil a day from a joint venture development with Vietnam of the offshore Junin-2 block in Venezuela, with output climbing to four times that volume two years after that.

It said it is looking to work with PetroVietnam to help expand output at the country’s sole refinery by 100,000 barrels a day.

However, in its report Friday, VNA said output from the two companies’ Petromacareo Junin-2 venture would start in the first quarter of 2012, six months ahead of schedule.

A person with direct knowledge of the refinery plan said that a memorandum of understanding to upgrade Vietnam’s Dung Quat complex was first signed more than a year ago, after PDVSA abandoned a project to build a separate refinery in Vietnam.

PetroVietnam had previously said it plans to raise the capacity of Dung Quat to 200,000 barrels a day from 130,000 barrels a day.

In March, PetroVietnam said that it had signed a MoU with Gazprom Neft (GZPFY) in which the Russian company would consider working with PetroVietnam to upgrade Dung Quat. It isn’t clear if Gazprom will be working side-by-side with PDVSA on upgrading work.

Officials at PetroVietnam and PDVSA weren’t immediately able to be reached for comment.

Among other deals signed in Caracas this week was one for PetroVietnam to work with PDVSA in distributing oil products in Asia, VNA said. It isn’t clear whether this will involved selling refined oil processed in Vietnam to buyers elsewhere in Asia.

Vietnam needs to import a large part of the fuel it uses, and is planning a rapid build up of its refining sector to cut its need for costly imports.

However, it will need foreign oil to do this, as Vietnam’s domestic output of crude is far below required levels. PetroVietnam is aiming to produce around 300,000 barrels a day of crude this year, the same as in 2010.

Apart from expanding Dung Quat, two other refineries, each with a capacity of about 200,000 barrels a day are planned, with output starting some time after 2014.

The first is the Nghi Son refinery, to be built in Thanh Hoa province, 170 kilometers south of Hanoi, to be followed by the Long Son refinery in the southern province of Ba Ria Vung Tau.

When operational, Nghi Son and Dung Quat will together be able to meet 50% of Vietnam’s oil products needs, state media cited PetroVietnam chairman Dinh La Thang as saying earlier this year.

Vietnam’s spot imports of gasoline and gasoil in the volatile Asian market fell gradually last year as Dung Quat ramped up capacity.

But frequent operational issues with Dung Quat have forced state-run Vietnam National Petroleum Corp ., or Petrolimex, to keep importing spot cargoes of products like gasoline, gasoil, fuel oil and kerosene to supplement long-term supply agreements.

Following a recent 10-day outage at Dung Quat, Petrolimex sought nearly 600,000 tons of oil products from the spot market for its second quarter ahead of a major two-month shutdown of the refinery starting in July.

Apart from its Vietnam project, PDVSA is in long-running talks to build a large refinery in southern China, with China National Petroleum Corp ., following in the footsteps of other oil producers.

In March, Kuwait Petroleum International finalized a pact with China Petroleum & Chemical Corp . (SNP), also known as Sinopec, to build a $8.8 billion, 300,000-barrel-a-day refinery and a petrochemicals complex in the same region of southern China.

The Kuwaiti company is still negotiating a side deal to sell some of the output in the Chinese market under its Q8 filling station brand.

Similarly, oil exporters Russia and Saudi Arabia have also entered joint-venture refinery projects in China to allow them to move up the oil value chain.

Indonesia, likewise, has been talking to Iran, Kuwait and other suppliers about building a large refinery in Java.

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