Vietnam’s Power Crunch and the U.S. Commitment to the Indo-Pacific: Towards Sustainable Energy Cooperation

Introduction

Vietnam is widely regarded as a star in the sphere of emerging markets.1 In 1986, the government introduced “Đổi Mới,” a series of economic and political reforms based on several key tenets: to embrace trade liberalization, to institute domestic reforms through deregulation and lowering the cost to do business, and to initiate a movement to increase overall investment in human capital.2 These reforms culminated to influence sustained economic growth for several decades, with GDP growth remaining consistently high, peaking at over 8% growth just before the onset of the 2008 global financial crisis.3

Vietnam’s GDP growth year-on-year has averaged 6.95% since the third quarter of 2018, excluding a contraction in the first quarter of 2020, which was unseasonably low because of the COVID-19 global pandemic and consequent global economic slowdown.4 Behind Vietnam’s recent economic performance is an unlikely promoter: the advent of the US-China trade war and subsequent global supply-chain restructuring. To circumvent the security concerns of some Chinese inputs, especially in the tech industry, and bypass escalating trans-industrial tariffs from both China and the US, multinational corporations began looking elsewhere to satisfy their manufacturing needs. Indeed, in the first nine months of 2019, US imports from Vietnam jumped 34.8% year on year, accelerating a mere 5.8% gain in 2018, while US imports from mainland China shrank 13.4% year-on-year in the January to September period.5 In addition, the Vietnamese Ministry of Planning and Investment announced that FDI increased by nearly 70% year-on-year in the first five months of 2019, the highest such increase since 2015, much as a result of decoupling between the US and China.6 It is clear that Vietnam has since risen as one of the top destinations of American supply-chain diversion amid the increasing geopolitical uncertainties of the US-China trade war. 

Vietnam’s economy is in an early stage of development, meaning that besides its reliance on the export of agricultural products, Vietnam’s economy is heavily reliant on energy-intensive manufacturing and has not yet made the transition to high value-added industries in the service sector that require less power input.7 Compounding these structural economic inefficiencies are long-standing artificially low prices for power, which compel many indigenous firms to aggressively substitute energy for comparatively costly capital.8 Vietnam’s cheap power inputs are also a legacy of the low operating costs of the country’s historical reliance on hydropower, and indirect subsidies provided to state-owned enterprises in energy production by way of low interest credits, lax environmental regulations, and low cost access to land, labor, and primary inputs.9

Since the advent of the US-China trade war and the arrival of new manufacturing diverted from mainland China, Vietnam’s power issues have grown to a heightened significance. Highlighting the pressing need for energy security, in 2019 Vietnamese Prime Minister Nguyễn Xuân Phúc urged officials to speed up stalled plant projects, warning that power shortages could come as soon as 2021, which would be especially devastating to Vietnam’s energy-intensive manufacturing.10 This pressing realization forced the Vietnamese government to begin searching for energy lifelines to save its growing manufacturing, which seems to be drowning in supply insecurity. 

Although current energy demand is met by indigenous Vietnamese production- although the country’s largest fields are set to decline and stop production entirely by 2030- projected future economic growth also adds to the necessity to secure energy supply.11 Since demand for energy and economic expansion go hand-in-hand, Vietnam’s GDP growth, projected by the International Monetary Fund (IMF) to continue at 6.5% year-on-year through 2023, further pressure will be put on Vietnam’s capacity to either supply or procure energy.12 According to a May, 2019 study by Dutch consultancy firm KPMG International, power demand could grow by 11% annually through 2023, although the Vietnamese government estimates this figure to be lower, around 9%.13  In terms of meeting inevitable hikes in power demand, the same study by KPMG International speculates domestic gas production will still rise in a range of 13-17bn m³/year in 2021-25 and 17-21bn m³/year in 2026-35, growth coming despite the closure of several of the country’s largest existing fields because of a recent surge in natural gas exploration and discovery.14 This leaves remaining import requirements of 1-4bn m³/year in the former period and 6-10mn m³/year in the latter.15

Seeking Energy Security in Vietnam

A country in its early stage of economic and regulatory development, supply chain restructuring and Vietnam’s manufacturing boom illuminates several key aspects of the nation’s manufacturing climate that parallel Southern China’s manufacturing boom in the 1980s. Vietnam’s transition from central planning to a market economy involved many of the same dynamic changes in regulatory environment and investment mechanisms that allowed the Middle Kingdom to become a true economic superpower. Consequently, many argue that current supply-chain decoupling will escalate into a long-term global movement that will have the Southeast Asian nation simply replace China as the world’s manufacturing center. For example, the news outlet Quartz characterized “the country’s recent development trajectory as a kind of China in waiting, making everything from furniture to consumer electronics,” pointing out a parallel in the two countries’ manufacturing capabilities.16

However, it is shortsighted to assume that Vietnam will single-handedly replace southern China’s prolific manufacturing environment for several reasons. First, as Vietnam is less populous than China’s Guangdong province, the birthplace of Chinese special economic zones in 1979,  it lacks China’s deep workforce, especially in the realm of skilled workers.17 Second, the investment is rapidly raising real estate prices and taxing the country’s already weak infrastructure, meaning infrastructure development projects are becoming more expensive, which could create some opposition to a push to further expand Vietnam’s manufacturing.18 Finally, the capital involved in Vietnam’s manufacturing remains a decade behind southern China in both quality and energy efficiency.19 As such, Vietnam’s aspirations must remain realistic: becoming the leader of a small group of countries poised to collectively replace China in global supply chains. Still, Vietnam must capitalize on the opportunity to capture shifting global supply chains by ensuring that its power supply can support its growing manufacturing capacity. Given Vietnam’s domestic power production will require the nation to begin aggressively importing energy to support growing manufacturing.20

Vietnam and ASEAN: Meeting Growing Power Demand. Vietnam is not the only member of the regional cooperative group Association of Southeast Asian Nations (ASEAN) struggling to meet growing energy demand. In fact, since 2000, ASEAN member nations have had to grapple with a 60% increase in their collective energy demand.21Together, the group accounts for a substantial share of global demand for energy. As countries in Southeast Asia modernize, their demand for goods like modern appliances and infrastructural upgrades increase alongside growing demand from expanding manufacturing capacity, further straining a regional energy supply that is very dependent on renewable energy.22 Further complicating efforts to meet skyrocketing demand, ASEAN states will suffer from a regional decline in production, particularly in oil and coal, while significant new investment in fields like the Natuna gas field must be made to just to keep gas production steady at its current level.23

ASEAN is an important producer of coal and natural gas, but coordination efforts in energy among this diverse group of nations is becoming increasingly difficult. The ASEAN group’s generation capacity is highly concentrated in Malaysia and Indonesia, meaning that states like Vietnam will have to search outside their borders to meet growing demand.24 The transition of some ASEAN states to become net energy importers is well summarized by Dr. Frank Umbach, a senior fellow at Singapore’s S. Rajaratnam School of International Studies: 

Indonesia and Malaysia are currently accounting for 70 per cent of the regional proven gas reserves of 8.1 trillion cubic meters (tcm) and two-thirds of the regionally produced 220 bcm in 2016. As a result, many ASEAN member states need to import oil, gas, coal and electricity from neighboring countries and outside the region. These imports will increase in the coming years as indigenous production will decline while the overall demand grows.25

For those ASEAN countries in the pre-resource endowment stage of their energy production, it can be assumed that overall imports will rise significantly to meet higher demand. However, it is unclear whether regional cooperation on extremely expensive energy infrastructure can graduate past the extremely introductory stage in which it currently finds itself. 

While member states with particularly high indigenous production actively participate in regional energy coordination, major regional projects become less likely as domestic demand for power in exporting countries rises uncontrollably. Notably, leading natural gas exporter Indonesia’s Ministry of Energy and Mineral Resources announced in November, 2019 that it planned to halt piped gas sales to leading importer Singapore from its Sumatra gas field by 2023, and divert the gas to meet its rising indigenous demand.26 In addition to the decrease in exports, Indonesia also plans to broadly expand its LNG import capacity as it targets 50% LNG power share by 2025.27 As skyrocketing demand impacts most ASEAN member states, important regional suppliers such as Indonesia that act as the cornerstone for regional power projects in will have to divert exports to meet domestic demand.

The discontinuation of the longstanding Sumatra-Singapore gas pipeline casts significant doubt in the true potential of reaching effective regional cooperation on energy through optimistic projects like the Trans-ASEAN Gas Pipeline (TAGP). Currently, the pipeline is only comprised of a small handful of bilateral gas pipelines, pipelines that, while already minimal, risk to be closed or diverted as regional demand growth puts significant stress on domestic production.28 In addition, southeast Asian states, and ASEAN member states in particular, each find themselves with extremely incompatible production and consumption patterns, making symbiotic coordination difficult in the region.29Because regional energy exchange networks remain underdeveloped, with prospects for expansion looking grim as a result of rising domestic demand for key regional exporters, Vietnam must consider importing energy from outside the ASEAN block to fulfil its own rising demand. 

Building the Case Against Coal. With longstanding power issues stemming from a manufacturing sector that has been rapidly expanding since the mid-1980s, in July 2011, the Vietnamese Ministry of Industry and Trade (MoIT) released Power Development Plan VII (PDP VII), which sets the strategic course for power development through to 2030.30  Proposing a short-term solution to rising power demand, PDP VII plans to expand coal generation from its 2019 level of 34% share of the country power mix to a mighty 53% by 2030.31 Reviews of the planned expansion of coal-to-power projects are mixed, with Fitch Solutions, a business intelligence company, projecting an assured growth in coal burning “due to relatively slow supply growth from traditional sources of energy such as hydropower and natural gas,” and because “it is cheaper and more reliable at present.”32 While these short-term positives are apparent, the long-term feasibility of relying on coal for power must be considered. 

While increasing coal usage is surely a quick fix to a looming disaster, it offers only short-term benefits as global pressure to transition away from especially unclean fossil fuels will soon phase out coal-to-power projects from financial feasibility. Infrastructural projects in the coal industry require large capital investments which often require external financing from foreign capital which is becoming increasingly reluctant to support the expansion of high-polluting coal plants, even in their most efficient form. Notably, the World Bank announced in 2019 that it would end its support of coal-fired power plants, a move that came with almost universal acceptance among developed nations that their own banks were to follow suit in disavowing the expansion of coal-to-power projects.33  Indeed, UK Export Finance, Britain’s export credit agency, has already denied several bids to expand coal-burning plants in Vietnam while China’s Oversea-Chinese Banking Corp and Asian Infrastructure Investment Bank, both regional leaders in financing infrastructure projects, each categorically shut the door on all future contracts for coal-to-power initiatives.34 As China’s largest banks follow the lead of Europe’s largest financiers in transitioning away from coal projects, Russian banks remain some of the only entities willing to back coal-burning projects, such as the expansion of the Long Phu 1 plant backed by Vnesheconombank (VEB).35 This displays a global transition away from coal, one of the highest polluting fossil fuels, simultaneously exposing Russia’s prioritization of opportunities for FDI, regardless of their climate implications. With willing investors in coal-projects becoming more and more scarce, Vietnam should avoid committing its necessary power expansion to coal power, as opportunities for external financing will decrease over the decade-long timeline of Vietnam’s PDP VII and future iterations of the PDP.

LNG to Fill the Gap in Vietnam’s Power Generation. LNG offers a strong alternative to coal as a means of filling the gap in Vietnam’s power supply. A fossil fuel nonetheless, natural gas emits 50% less CO2 than coal, and far less emissions of Sulfur Dioxide (SO2), Nitrogen Oxides (NOx), and other particulates.36  In addition, a study done by the National Energy Technology Laboratory found that LNG expansion in Asian markets will not increase Greenhouse Gas emissions when compared to regional coal extraction and the expansion of coal-burning plants.37   As regional exporters of oil and piped gas divert energy exports for their own use, giving way to the rise of intense resource nationalism, LNG offers an attractive means of marrying distant regional gas markets into an expansive and global marketplace, uninhibited by fixed pipelines.38  

Vietnam is slowly beginning to import LNG from abroad, although contracts are currently very few and limited. Pushing to capitalize on a booming LNG market, in October, 2019, Vietnam started construction on its first LNG terminal in the Ba Ria-Vung Tau province in Southern Vietnam.39 The facility is scheduled to be completed by the third quarter of 2022, and should help mitigate the effects of gas production declines.40 However, for Vietnam to become a significant importer of LNG, it must invest heavily in more LNG receiving terminals, pipeline distribution network, and associated facilities so that the country can welcome a greater volume of natural gas to accommodate its growing demand for power.41

Considerations for Importing LNG

When deciding from where to source future LNG imports, an obvious partnership comes to mind for Vietnam: its ASEAN-affiliated neighbor Australia, who also overtook Qatar in 2019 as the world’s largest exporter of LNG.42Australia’s geographic proximity to Vietnam as well a­­s its well established LNG export infrastructure makes it an attractive supplier for Vietnam as they look to raise their LNG imports.  

Systematic LNG partnership between Australia and Vietnam is in an extremely early stage, with only several deals entering negotiation. Leading the charge is Australia and Houston, Texas based LNG Limited, which landed a 20-year deal in September, 2019 to supply 2 million metric tons of LNG per year to a gas-fired power plant in Bac-Lieu province, originally intended as a coal-powered plant.43 Australia’s Prime Minister Scott Morrison said in late 2019 that the LNG Ltd. deal is the first of many between Australia and Vietnam, as he expects his country to be a leading source of Vietnamese LNG imports set to begin in 2020.44  In fact, it is rumored that Australia’s petroleum exploration and production company Woodside Energy might begin exporting LNG to Vietnam as early as 2021, with chief executive Peter Coleman saying he expects the tendering process to begin in early 2020.45 Accelerating LNG imports from Australia could lay the groundwork for future collaboration in the energy sector between the two countries, as geographic proximity greatly simplifies some of the complex logistics of large scale energy transfers. 

However, there is another partner to potentially supply Vietnam’s planned increase in LNG imports, but for different reasons than the partnership with its anglophone neighbor to the southeast: increased cooperation with the United States. Although not quite as prolific an exporter as Australia, the US still holds the number three rank in the world in total LNG exports, coming in slightly behind Qatar.46 The US is especially well positioned to fill Vietnam’s import needs because of a significant wave of new supply recently coming online, and due to overall competitive pricing, according to David Lewis, the chairman and CEO of asset management firm Energy Consultancy Vietnam (ECV).47However, the complex and sometimes tense relationship between the US and Vietnam often complicates any significant and high-level cooperatives between the two countries, driven in no small part by the legacies of the American military presence in Vietnam in the 1960s and 1970s.48

Despite these historical intricacies, the US has recently led several trade missions and diplomatic approaches seeking a greater US role in Vietnam’s future energy security cooperatives as the country inevitably expands its demand.49 A few of the prominent trade missions to Vietnam have been the US Department of State and the Ministry of Industry and Trade (USDTA) “energy security dialogues” that have occurred sporadically since March 2019, and another trip by the USDTA to Vietnam to offer state-run Vietnam Electricity (EVN) a US$1.4 million grant to support a feasibility study on an LNG import terminal project.50 Bilateral efforts culminated in the October, 2019 signing of a Memorandum of Understanding (MoU) between representatives of the Vietnamese Ministry of Industry and Trade (MoIT) and the US Department of State, a document that establishes a clear collaboration framework that should accelerate partnerships between American LNG export firms and Vietnamese import firms, with the final goal of ensuring a sustainable energy transition.51  Although current cooperation on LNG between the US and Vietnam is limited only to an LNG-to-power project developed by Arlington-based company AES and  a procurement and construction deal with Houston and Paris-based oilfield service company TechnipFMC for the second phase of PetroVietnam’s Nam Com Son 2 project, both agreements completed in early October 2019.52  While cooperation on both LNG-to-power projects and on the direct supply of US LNG to Vietnam is limited, the high frequency of recent meetings between public-sector leaders in both countries’ energy suggests the prospects of future collaboration on LNG are positive. 

Forging significant partnerships with US LNG firms also checks a box for Vietnam as it seeks closer diplomatic ties with the US, especially in the face of greater aggression from China over disputed claims in the South China Sea. In a transition to a multipolar world with the US and China as economic and military hegemons, there are very few prospects for Vietnam’s convergence with China given the incompatibility of their territorial claims in the South China Sea, which stem to disputes of resource ownership and the proliferation of suspect economic activities such as illegal fishing by both the Chinese and Vietnamese fishing fleets.53  54  As Vietnam consistently seeks support from countries like the United States in international forums to highlight what the country perceives as predatory advances by the People’s Republic of China (PRC), it must seek out opportunities such as those presented through accelerated LNG cooperation to cement a strong diplomatic relationship with the US. In addition, importing US LNG and equipment to support LNG imports would help balance Vietnam’s US$46.98 billion goods deficit with the US.55  56 The trade imbalance between US and Vietnamese imports is likely to expand further as supply chain restructuring away from China continues its course in favor of the PRC’s neighbor to the Southeast. 

Both Australia and the United States could step up as significant lifelines to save Vietnam’s energy security as it risks power blackouts that could significantly hamper the country’s growth as a global manufacturing center. However, a prerequisite to Vietnam increasing their LNG imports is a significant push to fast-track Vietnam’s plan to build ten LNG import projects by 2030.57 In the resolution of this issue exists another potential realm for transnational cooperation. 

Upside for an Energy Partnership with Vietnam, the American Perspective

In June 2019, American President Donald Trump named Vietnam as the “single worst abuser of everybody,” as the US faces a widening trade deficit with Vietnam, now up to a staggering US$46.98 imbalance.58  59  As such, proactively seeking the means to facilitate exchanges between American LNG exporting companies and potential importers in Vietnam could provide the platform to remedy such an imbalance in trade between the two countries. By expanding upon several positive trade dialogues with Vietnam in late 2019, and especially by continuing to develop the institutional framework first outlined in the October 2019 MoU between the US Department of State and Vietnamese MoI, the US government can expedite LNG exchanges between its producers, expected to lead the charge in production growth through 2024, and their importing counterparts in Vietnam.60  Besides the benefits of a more balanced trade deficit, there are other benefits for Washington seeking closer ties with Hanoi that extend past the balance sheet. 

China is accelerating its geopolitical activities in Southeast Asia, in part aiming to displace the United States as the leading hegemon within the strategically sensitive region, and more broadly, in a world transitioning to a multi-polar order.61 To counter this seemingly unfettered expansion, the United States must solidify ties with Australia, the Republic of Korea (RoK), Japan, and other key allies in the Indo-Pacific and proactively seek out new partnerships within the region with countries like the Philippines and Vietnam.62  The pressing issue of revitalizing US presence in the Indo-Pacific region has been central in several American presidential administrations, most recently under President Obama’s “Rebalance to the Pacific” and under President Trump’s “Free and Open Indo-Pacific” strategy.63  64  

Trump and the Indo-Pacific. Under President Trump’s overall foreign policy, Asian leaders increasingly question the credibility of overall American commitment to the region.65 Particularly, the withdrawal from the proposed 12-nation Trans-Pacific Partnership (TPP) trade agreement, the application of unilateral tariffs on longstanding regional allies including Japan and the RoK, comments and policy moves by the Trump administration that further damage important US alliances in the region, and the President’s tendency to quickly change his policy positions all significantly weaken the US’s presence in the increasingly important Asia-Pacific region.66

Washington’s relationship with Hanoi under the Trump administration follows a similar downward trajectory, as American inaction towards Vietnam’s many cries for help in the South China Sea cast significant doubt on the US’s commitment to the Southeast Asian nation and to countering China’s aggressive expansion in the region.67 Experts point to a specific instance of Chinese aggression towards Vietnam in 2017 as a key point of deterioration of ties between the two countries as China’s advance was, again, met with silence from the US. In mid-June 2017, Talisman Vietnam began drilling a deep-water appraisal well on South China Sea Block 136-03, a gas field well within Vietnam’s drilling rights under the UN Convention on the Law of the Sea (UNCLOS).68 As China disputes Vietnam’s claims to the Block, the Chinese Foreign Ministry acted swiftly, threatening military action unless Vietnam stopped drilling and agreed never again to drill in Block 136-03.69 As Vietnam implicitly turned to the US for backing as it attempted to stand up to its bully to the North, America’s complete and utter silence on the matter greatly weakened Vietnamese confidence in the US as a trustworthy partner, especially on issues of countering China’s aggressive rise.70 The US, and especially the Trump administration, must seek opportunities to increase Vietnamese confidence in the US as a valuable and attentive partner to counter years of inaction on issues of high importance to the whole of the Asia-Pacific region.

Re-Focusing on Vietnam. Deliberately seeking out opportunities for partnerships with Vietnam in the energy sector could partly offset some of the damage done to the US-Vietnam relationship over US inaction and silence in the face of Vietnamese cries for help. As mentioned earlier, a potential avenue for greater collaboration in the energy sector is increasing deals involving the sale of US LNG to Vietnam. Additionally, as Vietnam seeks to increase its LNG import capacity, the US can play an especially key role in financing extremely capital-intensive LNG-to-power projects, of which Vietnam currently has ten scheduled to come online in 2030.71

The AsiaEDGE initiative is a whole-of-government initiative that furthers the Trump administration’s vision for a “Free and Open Indo-Pacific,” focusing on improving utility modernization, increasing the deployment of energy technologies, fulfilling transparent procurement, and seeking to accelerate regional energy trade and integration.72According to USAID administrator Mark Green, one of the partner agencies to AsiaEDGE, the initiative succeeds in “helping Asian countries leapfrog decades-old infrastructure and modernize their energy sectors”, and that these projects will “require the kind [of high-tech solutions] that US companies are uniquely placed to provide.”73 Accordingly, a partnership between the US and Vietnam to develop the latter’s LNG importing infrastructure under the umbrella of the AsiaEDGE initiative would prove mutually beneficial for both countries.

AsiaEDGE is a whole-of-government initiative that involves several partner agencies, including the US Departments of State, Commerce, Energy, and Treasury, the Export-Import Bank, the US Trade and Development Agency, and the Overseas Private Investment Corporation.74 The US government, under the umbrella of the AsiaEDGE initiative, can leverage the financing power of the Export-Import Bank and the Overseas Private Investment Corporation to negotiate terms of investment to develop the necessary infrastructure for Vietnam to become a regional leader in LNG imports. Providing fair and attractive terms for financing LNG import projects in Vietnam not only provides an avenue to deepen energy-sector collaboration between the US and Vietnam, but also increases the country’s LNG import capacity so that it can welcome further LNG transfers outbound from the US’s deepening LNG production. 

Conclusion

As the aftershocks from the trade conflict between the US and China encourage multinational companies to restructure their supply chains and move production from China to other low-cost countries, Vietnam has received an influx of foreign direct investment, adding to a boom in manufacturing that was already putting intense pressure on the country’s power supply.75  Because rising power demand, the Vietnamese Prime Minister signaled impending power blackouts as soon as 2021 if the country cannot significantly remedy waning power supply.76 If the United States wants to encourage further supply chain restructuring away from China, it must ensure that manufacturing alternatives such as Vietnam can safely and adequately power the influx in production. Financiers in the US and elsewhere should also facilitate the transition away from high-polluting power such as coal, and toward cleaner burning fuel such as natural gas. 

As Vietnam seeks to increase its imports of LNG, the US is uniquely positioned to supply LNG from its growing resource endowment, to finance LNG-to-power projects through agencies like the Export-Import Bank and Overseas Private Investment Corporation, and to provide the technology needed to complete those projects. Through high-level initiatives such as AsiaEDGE that lay necessary groundwork for international energy exchanges, the US government can facilitate private sector exchanges between energy sectors in the US and Vietnam as an avenue to promote the Trump administration’s vision for a Free and Open Indo-Pacific.  By increasing its commitment to Vietnam, the United States could effectively re-capture the lost confidence of important partners in the Indo-Pacific region that are increasingly necessary to counter China’s growing influence in the region. 


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Jacob Koelsch