The construction of an oil refinery at Altan Shiree soum of Dornogovi Province is set to commence in April of 2018, financed with a one billion USD loan from India. The progress of the project has been encouraging for many who are hopeful that the refinery will offset a certain amount Mongolia’s fuel dependence on Russia.

Despite the optimism, there has been a lot of skepticism, rightfully so. An oil refinery has been an elusive objective for Mongolia for decades. Since the transition into a democracy in 1990, Mongolia has for the most part, been able to maintain the integrity of its political security, dictating its own foreign policy.

What Mongolia has not been able to do is fully ensure its economic and energy security. China is Mongolia’s biggest trading partner and largest buyer of its exports. Previously, the predecessor of the Russian Federation, the Soviet Union filled that role for Mongolia. In the 1990s, due to Russia being caught up in its own internal issues, it saw a significantly reduced role in Mongolia’s economy. Where Moscow has been able to make up for that loss is in the fuel sector.

Mongolia is essentially 100 percent dependent on Russia for fuel. Russia, in particular the state-owned Rosneft, is the largest exporter of fuel to Mongolia, accounting for 94 percent of fuel imports in 2016. In 2017, Russia accounted for up to 98 percent fuel imports to Mongolia. The almost absolute dependency of Mongolia on Russia and the fact that the Mongolian government considers fuel a strategic commodity helps maintain some influence of Russia on Mongolia’s economy.

The oil refinery financed by India is part of Prime Minister U.Khurelsukh’s Cabinet’s efforts to ensure that Mongolia produces food, energy, and fuel internally. The sentiment to alleviate Mongolia’s dependence on its two neighbors is not new and the construction of an oil refinery has been discussed for two decades.

The first real discussion regarding construction of an oil refinery began under the first President of Mongolia P.Ochirbat. In 1997, the president marked his white deel with the “black gold” discovered at Tamsag in Dornod Province.

Since then, many administrations have approved several different projects to build an oil refinery, none of which has been successful.

In the absence of an oil refinery, the Mongolian government subsidizes the price of fuel, maintaining prices almost 30 percent lower than the global market prices. This was mainly done through the excise tax on fuel, with the government modifying the tax where needed to manipulate prices.

Just in the last decade, five different oil refinery projects were approved by four different administrations. The most recent one outside of the proposed oil refinery in Dornogovi Province was the one planned to be built in Khentii Province in 2016 by the Ch.Saikhanbileg Cabinet.

On February 3, 2016, former Prime Minister Ch.Saikhanbileg and then Ministry of Industry D.Erdenebat announced the decision to build an oil refinery at Bor-Undur soum of Khentii Province.

In 2011 and 2013, a proposed oil refinery in Darkhan City, Darkhan-Uul Province was approved by two different Prime Ministers, Su.Batbold and N.Altankhuyag. In addition to the refinery in Darkhan, Su.Batbold approved the project for another refinery in Dornod Province in 2011.

All five oil refinery projects approved by different administrations were set to begin construction in spring but never reached that stage. In 2013, former Prime Minister N.Altankhuyag approved a refinery with the capacity to produce two million tons of petroleum. According to the plan, the refinery was supposed to become operational by 2015, but just like all the others, it failed.

The consecutive failures of different oil refineries have caused some to be suspicious of Russian obstruction in its interest to maintain a fuel monopoly in Mongolia. Seeing as Rosneft maintains dominance on the Mongolian market, it would be naive to think that the state-owned Rosneft, as an extension the Russian government, would not try to preserve its monopoly.

While it is hard to imagine that Russia would not be heavily involved in Mongolia’s fuel sector, it is more plausible that funding, specifically the lack thereof, instead of Russian obstruction was the main culprit in halting the aforementioned oil refinery projects.

Now that India has essentially guaranteed financing, the biggest obstacle in building an oil refinery has been addressed. In addition, the prime minister has said that a joint task force from the General Intelligence Agency, Independent Authority Against Corruption, and the General Police Department will ensure full implementation of the project step by step.

Once operational, the refinery in Dornogovi will have a processing capacity of 1.5 million metric tons of oil per year and will annually produce 560,000 tons of gasoline and 670,000 tons of diesel fuel, as well as 107,000 tons of liquefied gas.The refinery could boost Mongolia’s gross domestic product by 10 percent, officials have said.

Engineers India Limited has developed the detailed project report of the refinery while Mongolian Oil Refinery will work as the focal agency of the project. The contractor of the project has not been selected yet, but it is expected to be an Indian company. Mongolian Ambassador to India G.Gabold has said that the government will discuss announcing a tender in both India and Mongolia with the Export-Import Bank of India.

With backing and funding from a regional and increasingly global superpower, India, Mongolia is on pace to finally capture that elusive goal of fuel independence.

Published Date:2018-02-11