Ulaanbaatar /MONTSAME/ The oil refinery project which had been an unachieved goal of Mongolia, has started and is progressing successfully at the moment. A couple months ago, the Government of Mongolia completed its obligation to construct the infrastructure of the plant worth over MNT 120 billion with its own money and labor. Minister of Road and Transport Development B.Enkh-Amgalan emphasized that the infrastructure has been built at thrice cheaper cost with the use of domestic workforce. The Government of India is disbursing funding for the project as scheduled. In other words, the most favorable conditions for realization of the project are here today. The only thing to hope is that the project will continue even when the government changes.

Gas price can be maintained at MNT 1000

The commissioning of the 27 km railroad, 17 km road, and 110 kV power transmission line connecting the oil refinery in Altanshiree soum of Dornogobi aimag and Sainshand city of the aimag opens up an opportunity to transport equipment and materials to the construction site to begin the construction works.

The construction of the non-technological facilities of the refinery with an initial estimated cost of USD 1.2 billion will start in the spring of 2020 and the crude oil processing facilities in 2021. In case the works are done promptly and stably, the plant will open in 2023 and Mongolia’s total production will increase by 30 percent, GDP by 10 percent. In addition, it is expected to bring many positive changes such as annual budget contribution of USD 150 million, 20 percent drop in the exchange rate of USD against MNT, 20-30 percent decline in foreign exchange outflows and creation of over 600 jobs. Most importantly, when Mongolia starts producing gasoline domestically, gas price will fall to around MNT 1000 per liter or even MNT 800 with the government’s support. Furthermore, the price could go down from MNT 800 once the plant’s capacity reaches 2 million tons.

Mongolia’s gas consumption reaches 1.8 million tons a year during its peak time and the country spends about USD 1 billion on this. Mining and agriculture, the main economic sectors, account for 60-70 percent of the total consumption. Statistics show that the consumption decreases to 1.2 million tons when mining is stagnant. It is anticipated that the refinery will produce 400 thousand tons of A-95 gasoline, 600 thousand tons of diesel fuel, 40 thousand tons of aviation fuel, 20 thousand tons of mazut and other petroleum products and satisfy at least 70-80 percent of the domestic demand.

Should raw materials be supplied at extraction cost or market price?

There are 33 petroleum exploration blocks in Mongolia. One million tons of oil is annually extracted from three of these blocks, namely Tamsag XXI, Toson Uul XIX located in Dornod aimag and Zuunbayan XIV in Dornogobi aimag, and exported to China. The oil in place of these producing blocks was estimated at 332 million tons and their total proven reserves at 43 million tons, which means only 15 percent of the total oil reserves can be extracted. There is almost no country in the world that extracts all of its oil in place as the allowed extraction volume depends on the energy in the ground layer. The more this energy is, the more oil can be extracted. For instance, in Russia, up to 80 percent of the oil reserves can be extracted in some blocks.

It is planned to extract 1.5 to 1.6 million tons of oil from the abovementioned three blocks each year between 2015 and 2039. Coming into operation of the oil refinery will enable to supply to it the entire crude oil extracted in Mongolia. However, should it be supplied at market price or the cost of extraction? Regarding its shares, the Chinese side will obviously go for market price.

According to a Production Sharing Contract that expires in 2032, 25-30 percent of the total extracted oil is allotted to Mongolia. If the Government successfully creates an opportunity to purchase its share of crude oil at extraction cost, it will hugely support the economy of the plant, highlighted D.Altantsetseg, CEO of the Mongolian Oil Refinery state owned company. It is because raw material costs make up 85 percent of the total production costs of an oil refinery and operational and other costs account for the remaining 15 percent.

Railroad considered to be more efficient than pipeline

It is planned to supply raw materials to the plant from the Toson Uul XIX and Tamsag XXI blocks. It had been thus decided to build an oil collection center in and a pipeline starting from Tosol Uul XIX as the block is 90 km closer to the refinery than Tamsag XXI, which is located 640 km away from the refinery. However, the Government of Mongolia concluded that establishing railroad instead of pipeline would be an optimal choice for developing railroad infrastructure in the eastern region. Even though it would be economical to use pipeline transport, construction of a pipeline itself costs USD 350 million. The construction of a railroad between Tamsag XXI and Sainshand soum also requires the same amount of funds needed in building a refinery. Nonetheless, refinery authorities support this position of the government, emphasizing that pipeline transport and railroad transport basically have no difference.

The necessities of proving oil reserves and intensifying exploration

8 million of the 43 million tons of total proven oil reserves of Mongolia has been extracted and exported and what is left now is 35 million tons of oil. Therefore, the refinery will have an annual capacity of 1.5 million tons. Intensifying oil exploration and increasing oil extraction are crucial to exporting products after fully meeting the domestic demand.

Within the goal, Mongolian geologists have actively carried out explorations and thus far discovered oil reserves from three blocks. Specifically, a number of wells drilled in the blocks Galba XI, Khukhnuur XVIII, and Matad XX in Dornod aimag contained oil. In 2018, 1500 tons of oil have been extracted from Galba XI on trial and exported to China. From the now relinquished block Khukhnuur XVIII, approximately 35 tons of oil has been extracted. Two of the three wells that are planned for this year have been drilled in the relatively active block Matad XX. According to a primary exploration report, one of the two wells contains oil.

1.75 percent interest loan to be repaid from seventh year

During his visit to Mongolia in 2015, Prime Minister of India Narendra Modi agreed to give Mongolia a soft loan of USD 1 billion for its infrastructure development. The year after, the government decided to build an oil refinery with the loan. A feasibility study then estimated that USD 1.2 billion would be needed for the construction of an oil refinery. The sides agreed to increase the financing of the oil refinery establishment project by USD 236 million during Mongolian President Kh.Battulga’s state visit to India in September this year. Minister of Finance Ch.Khurelbaatar and General Manager of Exim Bank of India Shri Saroj Khuntia signed an agreement on the additional financing on October 9.

As agreed, the repayment of the Indian 20-year soft loan with an interest rate of 1.75 percent will start seven years after the first disbursement. It is expected that the plant will cover its cost within the first five to eight years of operation. The project consulting service fee of USD 73 million in the detailed feasibility study equals not the usual 10 but 5.8 percent of the total project cost. Authorities of the Mongolian Oil Refinery company underlined that feasibility studies offer cost estimates within -20 to +20 percent accuracy and that efforts are being put to cut the cost.

Mongolia has previous experience in domestic gas production

Geologists of Mongolia and Soviet Union embarked on an oil expedition in the 1940s. Mongolia first started extracting oil from a well drilled in Choibalsan I block in Zuunbayan and Tsagaan Els oilfields of Dornogobi aimag in 1949. The country has extracted 490 thousand tons of oil every year from 1949 to 1969, producing A-76 and diesel fuels through its refinery. In 1969, when large blocks were emerging in Russia, the plant was put out of operation due to an accident.

Later in the 1980s, Mongolia had its oil blocks determined by the British Petroleum company from UK through research works of Mongolian and Soviet geologists, surface samples, and biochemical research. 24 oil blocks were classified in 1991 and the first Production Sharing Contract (PSC) was signed for Toson uul XIX and Tamsag XXI blocks in 1993. Then 1998 saw the first trial export of crude oil to China. Oil exploration activities took place between 1994 and 2010 and oil extraction intensified in 2012. This is the history of Mongolian oil exploration. It is commendable that now the time is nearing to have an oil refinery and gain almost complete oil independence from our neighbor in the north, Russia.

Published Date:2020-02-12