For generations, Mongolia has been depending on Russian fuel and gasoline. As a country develops, the number of vehicles and equipment go up, and thereby, we are burning USD 1,5 billion at this moment which is one-fourth of revenues derived from foreign exchange. In 2015, the commodity price was set in accordance with the Singaporean market price in the contract with Russia, but until then, we had no choice but to pay the price Russia demands. The five-year contract has reached its maturity date; thus the contract extension will be reviewed in the following month. Gasoline is bought in dollars but sold in tugriks, which in return sways exchange rates, trade balance, raises the price of consumer goods and increases inflation rates.
Mongolians have been calling attention to oil refineries in order to become independent from Russian gasoline. The discussions over gasoline were further fueled by the discovery of natural oil reserves in the Dornod province. Narendra Modi, the Prime Minister of India, officially visited Mongolia in May 2015. Subsequently, India began providing discount loans amounting to USD 1 billion for the Mongolian economic development. The government of Mongolia made the decision to use the loan for building an oil refinery in February 2017.
Under consideration of several factors, such as the distance between supplier and buyer of gasoline, the plan is to build the oil refinery in the Altanshiree soum district which is located 18 km northeast of the capital of Dornogovi province Sainshand. This plant is expected to meet the domestic demand by producing in total 1.35 million tons of products: 43,000 tons of liquefied petroleum gas, 340,000 tons of gasoline, 824,000 tons of diesel fuel, 80,000 tons of jet fuel, and 47,000 tons of fuel oil. The crude oil will be transported from Toson Uul XIX and Tamsag XXI blocks in Dornod province.
Project status update
An agency that is responsible for the state-owned oil refinery project was established in April 2017 (www.mongolrefinery.mn ). The agency selected a well-established “Engineers India Limited” (www.engineersindia.com) as a project management consultant to carry out a “Detailed Feasibility Study” in August 2017. Moreover, the project was initiated soon after the Italian company “Kinetics Technology” was chosen as an external auditor. The detailed “Feasibility Study” was completed and approved by the Mineral Resource’s Professional Council of the Ministry of Mining and Heavy Industry in November 2018. From May 2019, they began developing an engineering design for the project.
By November 2019, an infrastructure around the oil refinery was built using the loan amounting to 246 billion tugriks from the Development Bank of Mongolia. Precisely, 17.5 km truck road from Sainshand, 27 km railroad, and 110 kWh electricity transmission lines were built. Currently, 1,5 square km of land is being flattened for the oil refinery, the fences are being installed, and the staff dormitory for 550 households are being built in Sainshand. The sewer pipes will be installed by the following spring. This massive industrial complex includes processing units, storage tanks, facilities for transporting crude oil, and power plants as well.
Transportation
The issue that needs to be addressed immediately is the transportation of crude oil at distances longer than 550 km. The opinion of our authorities is divided between building railroads and installing a pipeline.
The proponents of the railroad construction pointed out the advantage of building a railroad considering Mongolia’s intention to gain sea access through Russia. According to the supporters a solution will require several hundred millions of dollars and, in contrast to a pipeline, a railroad should and can be utilized to carry various types of commodities. On the contrary, the opponents argue with the speed and safety of a pipeline and its guarantee for an uninterrupted transmission of crude oil. A pipeline is the best and the most commonly method because the cost of pipeline construction is three times cheaper, requires less time, and solely used to transport crude oil.
The crude oil from Tamsag is relatively light (0.845 g/cm3), contains lower sulfuric acid (0.11 %), and has a lower fatty acid composition (TAN:0.052 mg КOH/g). Thus, these characteristics could reduce the cost of construction materials for the facilities. However, the paraffin hydrocarbon intensity of crude oil is quite high, which means it freezes at or below 24 degrees, and hence requires either a tank car equipped with a heating system or pipelines with constant electrical heating.
Building facilities for the loading and discharge of 80 tank cars simultaneously is extremely costly. Companies, that have substantial experience in installing oil pipelines with electrical heating, are willing to self-finance an installation, operation, and to hand over the pipelines. According to the Detailed Feasibility Study, a pipeline installation requires approximately USD 350 million, and takes 2 to 3 years to build. On the other hand, a railroad construction requires USD 660 million, but the term is uncertain. With regard to transportation costs, the pipeline costs USD 7 per tons, but for the railroad it costs twice as much. The government needs to turn on the heat if they plan to complete the oil refinery construction by November 2024 and expect the manufacturing process to catch up within 6 months.
Oil reserves
The next issue which is repeatedly asked by the public is whether current oil reserves can meet the demand of the new oil refinery. As registered in the Mineral resource database, only Toson-Uul XIX and Tamsag-XXI blocks together had oil reserves of 332.6 million tons but with guaranteed reserves of 43.2 million tons in 2010. Currently, 8.2 million tons of oil are being extracted, but there is a big room for increasing reserves. A month ago, an oil reserve was discovered in Matad ХХ block, and in a preliminary stage, it is estimated to have 25 million tons of oil. An oil exploration needs to be intensified and expanded, but we are facing an energy and workforce shortage. Furthermore, natural resource exploration or extraction is halted due to serious objections of municipalities and locals.
Nowadays, under the separation agreement, the Chinese companies are extracting crude oil, and one forth of oil sales belongs to the government of Mongolia. In addition, the clause 7.1.6 of the Law of Mongolia on Petroleum stipulates “in the event that a petroleum refinery is installed within the territory of Mongolia, enjoying the right to preemptively purchase at the market price the petroleum allotted to the contractor and the cost oil”. In other words, a contractor bears an obligation to supply the petroleum allotted to him or her first to domestic oil refineries at the market price. Public authorities consider that Mongolia has the necessary legal environment for supplying crude oil to oil refineries.
Nevertheless, Mongolia has stepped on a path to gasoline independency. There is no turning back.
2019.11.28
Trans. by Riya.T and Ariunzaya.M