Own oil refinery only way out of Russian pressure

By S.Bold-Erdene

Last year, when Ukraine failed to pay $20 million it owed for gas, Russia threatened to cut off supply, leading to another fierce argument between the two countries. A year earlier, too, their disagreement over similar payments had resulted in supply to about 20 European nations being disrupted, or even completely cut off, as gas  from Russia reaches them through Ukraine. Russia’s usual response to any disagreement over price is to cut off supply. Mongolia knows this to its cost, as it is 100 per cent dependent on Russia for its petrol supply. This dependence has been there ever since Mongolians began using petrol 92 years ago.

Yet, it does not have to be so. Oil reserves, even if small, were found in Mongolia in 1949, and in the 1950s, Mongolia produced crude and processed it into four products: petrol, diesel, mazut and cox. Between 20 per cent and 30 per cent of the domestic demand was met this way for 20 years until the Zuunbayan reserve was exhausted, and Mongolia reverted to 100% dependence on its Russian brothers for oil.

When Leonid Brezhnev visited Mongolia in the mid-1960s, our leaders asked for help in oil exploration but the Russian leader refused, arguing that there was an abundance of oil in Siberia, and there was no need for fresh investment in Mongolia. With petrol consumption increasing, Mongolian leaders pleaded many times in the next two decades for help in oil exploration and production and in building a refinery in Mongolia. Russian geologists always said Mongolia did not have any significant oil reserve while Soviet leaders never agreed to build the refinery. The idea clearly was to keep Mongolia dependent.

A key part of the Russian strategy to retain control over countries in the former Soviet bloc has been to keep a right grip on oil and gas supply to them. Mongolia and other eastern European countries have suffered from this. There is no need to go beyond the last three years to see how Russia has used the enforced dependence to its advantage. Every time Russia turns off supply, whether because of price increase or domestic shortage, the Mongolian economy gasps for breath. The President or the Prime Minister flies to Russia to beg them to lower prices or not to interrupt supply. The Russians agree, but soon afterwards they send a letter repeating an old request to be allowed to build 100 petrol stations in Mongolia. This much is public knowledge, but nobody knows for sure why they want these stations, and what steps they plan after they get a foothold..    

Our southern neighbour received a very special guest when Prime Minister Nouri al-Maliki of Iraq paid his first official visit to China from July 17 to 21. Iraq needs an enormous amount of money to reconstruct the war-torn country and the visit revealed Maliki’s hope for Chinese help in this. China was ready to oblige but only if Iraq would raise its oil output and allow China to buy more. This is just one example of how China is successfully hunting for oil throughout the world. CNOOC, the Chinese state controlled company, recently purchased OPTI, a Canadian oil producer, for $2.1 billion. Flush with money, Chinese companies are busy making deals with oil producing countries in the Middle East and South America, and, of course, Russia.       

China itself has a substantial oil reserve, and is one of the 15 oil richest countries. But its output is comparatively small and it does not export much. That is why Chinese media expressed surprise when our minister D.Zorigt signed an agreement to import 10,000 tons of petrol every month from China. The Chinese policy is to diversify the supply source of oil and other mineral products. For example, when they found some oil in the Tamsag basin of Mongolia after investing $1.5 billion, they disregarded the smallness of the reserve, and have continued to drill the oil and take it to China. Since 1996, Petro China Dachin Tamsag and Donshen have together produced 821,500 barrels of oil and exported 795,000 barrels to China.      

While China makes use of whatever it gets wherever, Mongolia does not use what it has, apparently because it is not too much. An oil refinery using Mongolian crude may not produce enough to meet all domestic demand, but it can certainly supply the needs of industry. The real gain, however, would be to reduce reliance on Russia. This consideration becomes even more important as we get ready for an economic boom, which can be sustained only if we are assured of supply of key inputs. Our economic independence cannot be held hostage to Russian wilfulness of supply. 

Without a refinery of our own, the tradition of our leaders flying to Russia will never end, and construction, manufacturing and mining will be at the mercy of foreign interests. A new era of development cannot make progress if the road is blocked by others’ strategic interests. Once we have the Sainshand industrial complex, can we afford to have a fuel shortage engineered by Russia? Every European country is seeking ways to break free of its dependence on Russia for oil and gas, and, faced as we are with the same erratic supply source,  we need to do the same.        

Mongolia’s petrol consumption will increase every year. In 2010, we used over 800,000 tons of oil products and it will be one million tons this year, 1.5 million tons by 2015, and 2 million tons by 2020. How will the demand be met? The Ministry of Mineral and Energy plans to build oil refineries in the next two or three years to provide 70 per cent of domestic consumption in 2015. The Mongolian Mineral Reserve Foundation has recorded 200 million tons of oil reserve, enough to provide 20-30 years of domestic consumption. Mongolia has agreements on importing crude from Kazakhstan and Kuwait so the fundamentals of a refinery are already established.

But exactly when will the work begin? Already 21 years have passed with our leaders offering silly excuses for inaction. Since 1997, 17 permissions have been granted to build an oil refinery, but none of the 17 proposals got off the ground. This year alone, 4 companies have been issued permission, according to the Ministry of Mineral and Energy.
One of them is Khet, which proposes to build a refinery with American technology in Choibalsan city of Dornod province.

The refinery will have a capacity of 121,000 tons and is to be operational by 2013. Before Naadam this year, the Government decided to establish a joint venture with Khet, calling it Dornod Oil. 

The next one is Mongol Sekiu, a joint venture of Japan and Mongolia. This refinery will come up in Darkhan, at a cost of $600 million. Our Government will guarantee repayment, and the Japanese side will bear all the costs, T.Namjim, director of Mongol Sekiu, said. The refinery will be commissioned in 2014, reaching full capacity the next year, when it will produce one million tons of diesel and 600,000 tons of petrol. Since state of the art Japanese technology will be used, 90 per cent of the crude will end up as some petroleum product. At full capacity, this refinery will meet the entire domestic demand.  The company has signed an agreement with a company in Irkutsk, Russia, to purchase crude oil in the initial period but in the course of time, the refinery will receive more domestic crude. It will employ 600 Mongolians, produce MNT700 billion worth of value added products and pay MNT260 billion in tax to the state.      

The two others are Mon Oil Gas LLC whose proposed refinery would come up in Zuunbayan of East Gobi province, and the Sod Mongol Group. The latter’s refinery would be in the industrial complex to be built in Sainshand and will have a capacity of 0.5-1.5 million tons.  

Alternatives under study

According to many, global oil reserves will be exhausted by 2050. If that indeed happens, what will be the alternative?  At present, liquefied coal and shale oil are being used. Estonia has a large shale oil reserve and supplies 17 per cent of European petrol consumption and 90 per cent of their own. However, shale oil technology is much more expensive than what is needed to produce petrol, and will be economically viable only when oil prices skyrocket. If the technology is available, Mongolia does not have to worry about exhaustion of crude reserves, as it has 200 billion tons of coal and 20 billion tons of shale oil. Feasibility studies of producing petrol from the coal in five major deposits have already been made. A Petrovis study found that $3.3 billion will have to be invested to get 2 million tons of petroleum end-products from the Baganuur coal mine. That kind of money is not available in Mongolia right now.

Shale oil prospects in Mongolia began to be studied as early as the 1940s when Russian geologists found the first reserve in the border area between Central and Middle Gobi provinces. Since then, about 50 rich shale oil deposits have been identified across Mongolia. The studies are at a preliminary stage but this much is certain that economical viability of shale oil depends on the gum concentration in it. The MAK tests in the Eedemt deposit, one of the gest in Mongolia with 487 million tons of reserve, are yet to find enough gum there.     

We still do not have a consensus on whether there should be one large oil refinery for the nation or if it will be more effective to have several small ones to meet regional needs. Many also feel that the refinery, or refineries, should be totally in Government hands, given the strategic importance of oil for the economy. It also has to be ensured that foreign collaborators do not pass off dated technology, taking advantage of our haste to get a refinery. There is also an influential lobby which sees no need for a refinery and feels everything will work right only if the State takes over the job of importing petrol, taking it out of the hands of private importers.