Vietnam’s success in attracting investment, generating growth and adding jobs is under threat from looming shortages of what keeps modern economies running: electricity.

The risk of shortages took a turn for the worse last week when state-owned Vietnam Oil & Gas Group said talks with Chevron Corp. (CVX) to develop a natural gas field had failed due to price disputes, which will delay supply of the fuel to electricity generators. Consultant IHS Energy said last month that demand in the country may exceed gas supply by 2015.

“The main problem is that Vietnam has a cumbersome consensus-based decision-making system that slows down the whole process of getting new power projects up and running,” said Graham Tyler, the Singapore-based manager of Southeast Asian gas and power at energy consultant Wood Mackenzie.

While the government is raising electricity prices to make power projects a more attractive investment, they may not be in time to prevent shortages in southern Vietnam. The region is home to the country’s largest city, more than half of the biggest listed companies, and industries from garments to oil.

Part of the problem is retail electricity prices are not attractive enough to draw investors to the power industry, said Minister of Planning & Investment Bui Quang Vinh. Vietnam is looking to foreign investment to help revive the country’s $153 billion economy, which grew last year at the slowest pace since 1999.

“When you have such low retail power prices, it will lure investment into industries that consume lots of electricity, such as cement and steel plants,” said Vinh. “So we are in a situation in which we can’t attract electricity producers while there are more and more power consumers coming in, and that has worsened our power shortage.”

Non-alignment

Failure of the deal with Chevron more than a decade after plans to develop the field were announced is emblematic of the hurdles Vietnam faces in tapping its gas fields, the biggest in East Asia after China, Indonesia and Malaysia.

Developing natural gas requires a complicated dovetailing of interests from the company at the well head to the end user to “make sense,” said Duncan van Bergen, a Singapore-based general manager for global gas and liquefied natural gas market development for a unit of Royal Dutch Shell Plc.

“That’s why some gas projects take quite a bit of time,” he said. “These are complex value chains, where a lot of parties have to be aligned.”

Price cap

In Vietnam, the alignment would include the foreign company developing the field; Vietnam Oil & Gas, known as PetroVietnam; state utility Vietnam Electricity, which operates power plants; and the government, which sets what consultant IHS Energy calls a “tightly controlled power price.” That ties PetroVietnam’s hands in negotiations with companies like Chevron.

“What we offered Chevron is the highest we could give, under Vietnam’s regulations,” said PetroVietnam Chairman Phung Dinh Thuc. “They wanted to increase the price but due to limits in the Vietnamese rules, that’s impossible and that’s why the deal didn’t work out.”

The average price paid by retail consumers for electricity in Vietnam is about 7 cents per kilowatt hour, according to Franz Gerner, the Hanoi-based energy sector coordinator at the World Bank. Vietnamese Prime Minister Nguyen Tan Dung last month approved an increase in the tariff to a maximum of 1,835 dong (9 cents) per kilowatt hour by 2015.

The new pricing will make Vietnam’s energy market more attractive to foreign investors, Thuc said.

Huge investment

The failure of the agreement with Chevron, which took over the $4 billion project when it bought Unocal Corp. in 2005, will delay gas-to-power production plans in the southern Mekong Delta city of Can Tho, according to Do Van Hau, chief executive of PetroVietnam.

That’s a blow to plans to increase the share of gas in Vietnam’s energy mix. In 2005, the World Bank said gas accounted for about 38 percent and the government had plans to increase the figure to 40 percent by 2015. The bank now says that share may fall to as low as 15 percent by 2020.

While Vietnam has a relatively modern north-south high-voltage power transmission grid, the network needs “huge” investment, according to Gerner. He estimates about $5 billion a year for the next two decades to expand electricity generation, transmission and distribution to meet demand growing at about 10 percent a year.

India and South Korea are two other Asian economies with price controls on electricity. That’s led to losses at utilities and in turn a lack of investment in new capacity, which then caused power shortages. India last year was hit by the world’s biggest blackout and South Korea imposed power-saving rules.

Doorstop answer

At least in Vietnam’s case, part of the answer to its electricity quandary is sitting on its doorstep. The country has natural gas reserves estimated at twice that of Thailand, which competes with Vietnam for export markets, yet production is less than a quarter of its regional rival. Gas output also trails Myanmar, which has less than half of Vietnam’s reserves.

Despite the failure of the Chevron pact, exploration continues, with a group led by Exxon Mobil Corp. (XOM) finding gas reserves that Hau of PetroVietnam estimates at 6 to 8 trillion cubic feet.

That would represent about a third of Vietnam’s current proved natural gas reserves of 21.8 trillion cubic feet, and is close to Thailand’s total reserves of 10.1 trillion cubic feet, based on BP figures.

A venture operated by Eni SpA (ENI), Italy’s biggest oil company, is drilling in the Cua Lo area in northern Vietnam, which Canaccord Genuity Group said is “highly promising” with the potential of as much as 14 trillion cubic feet of gas.

The question, given the Chevron experience, is whether Vietnam will be able to close an agreement with Exxon Mobil, or with Eni if their group confirms a commercial discovery.

“This is a huge issue for the large industrial and manufacturing sector in the south,” said Gerner at the World Bank. “There’s no doubt that unless more generating capacity is brought on line this could have a significant adverse impact on growth.”