By S.Bold-Erdene
A draft petroleum law was submitted to Parliament almost a year ago, and it is surprising that our lawmakers have not yet had the time to discuss it. It was sent to the standing committee on the economy to make it ready for discussion in the Autumn session, but nothing moved and it is unlikely that even the Spring session will see it debated. Itis not just that the excitement over the“Double Deel” law pushed it to the back burner. Our members of Parliamentalsoappear to need more time to make up their mind on issues covered in the petroleum law and to resolve divisions in their ranks.
The companies in the sector have responded generally favourably to the provisions in the draft, except for the one proposing a review of the production sharing agreements presently in force. They are strongly opposed to any such possibility of revision. Altogether, however, they are happy with the draft.
Some MPs are keen to give the law retrospective powers so that all current production sharing agreements can be reviewed and changed, if necessary.The two companies to lose most from this are both Chinese, and as of now, they are the only oil extractors in Mongolia. They have invested over $2 billion in their operations and are totally against any change in the agreement under which they work.This is mainly where and why the draft law is stuck.
There are the inevitable political factors also. MP Kh. Bolorchuluun, head of the working group appointed by Parliament to make the law ready for final discussion, is working hard to achieve a consensus on other contentious issues. One of them is related to royalty. The draft has left this open, by making it mandatory for product sharing agreements to be clear about how taxes and profits will be shared between the contractor company and the state, and being silent on questions of royalty. The draft fixes royalty at between 5 and 15 percent. Both the mining ministry and the companies feel that with the government getting not less than 50% of the extracted oil free, it will not be fair to charge an additional 5%-15% royalty.
One influential MP who does not agree is Bolorchuluun himself, who insists on Dornod, the province that elected him, getting more revenue from oil exploration. He also wants an end to the present practice of the royalty first accruing to the state budget under the Finance Ministry and then being shared with the provincial government. However, the final decision rests with Parliament.
According to the present revenue sharing system, 10 per cent goes to the soum where the oil is actually extracted, 20 per cent to the province, and the remaining 70 percent stays with the state. Dornod is demanding 30 percent of the royalties to be directly paid to it, but the Ministry of Finance wants the entire royalty to come to the state budget, as it now does. Dornod province is also making the impossible demand that it be paid 10 times ger an amount than what it now receives from the Local Development Fund. If this is conceded, Umnugobi would claim a larger share of coal and copper royalty. Mongolia is not a federal state, so such concessions to some provinces will be against the Constitution, which defines the country’s underground wealth as belonging to all Mongolian people, and not to particular soums and provinces. Indications are that Dornod province may settle for 10% more of royalty receipts than other provinces, but the Ministry of Finance will not accept this, too. The difference shows no signs of being resolved. As far as the companies are concerned, while the royalty rate concerns them, they are not interested in who gets how much of it.
Incidentally, the petroleum law is the only Mongolian law never to have been amended since its adoption after the democratic transition. This is why there is so much interest in how MPs deal with the present efforts to bring it closer to changed times. Let us see how exactly this is sought to be done.
To start with, the rights and duties of the parties involved have been defined more clearly. Then, the term ‘fuel’ has been defined and explained more realistically. At present,“fuel” includes natural gas, coal, both hard and liquefied, and hydrocarbon compounds. The draft divides fuel into two categories -- conventional and non-conventional. Natural bitumen and shale oil, oil sands, coal bed methane -- these are all categorised as non-conventional fuel and will be regulated under the petroleum law, unlike the present situation where there is no legal control over exploration and extraction of shale oil and coal bed methane.
Regulating the shale oil sector is particularly important as investors have shown interest in it. The draft proposes granting such companies a prospecting licence to begin with,and if any reserve is found, change it into an extraction licence. Some would, however, prefer to restrict the job of the exploration company to finding a reserve. They are for the state to keep its ownership of the find, and then to auction off extraction rights.
The draft proposes that foreign and domestic workers in the same job will have similar wages and incentives, with same legal rights.All financial investment and sales revenue transactions will be done through Mongolian banks and financial organisations.This and other such provisions are based on understanding of and need to correct past mistakes.
The draft law has as many as 32 provisions setting out fines and penalties for failure to follow regulations and breach of contract terms. Some of these are stringent. For example, for certain acts of dereliction, a prospecting licence holder can be fined as much as 250-300 times the minimum wages,which could be around MNT60 million. That is not all. An extraction licence holder who fails to supply raw material to the domestic processing plant could end up paying a fine 400-450 times the minimum wages.
Local authorities have been given more real power in the draft. A Citizens’ Representative Khural will be able to deny permission to exploration in any block after discussing the project proposal. On the other hand, the draft prohibits putting any pressure on investors to make any kind of donation or support outside the agreement.
Another special thing about the draft bill is its thrust on transparency related to the provisions in a production sharing agreement. Many of the presently active agreements are objects of suspicion as their terms have never been revealed to the public. The move would be helped by the fact that royalty rates would no longer be a matter of negotiation between the Petroleum Authority of Mongolia and individual investors. Once the rates proposed in the draft are made into law, every production sharing agreement will have to follow them, and people will have no reason to suspect any corrupt deal.
No growth without more prospecting
There is much talk in Mongolia about its growing oil sector. It is true that production, export and import figures have all been rising, as also prices, but it is consistently overlooked that there is very little new exploration. We have people in important positions claiming from time to time that our oil fields in Tamsag and Zuunbayan have as much reserve as Saudi Arabia, but nobody talks about supporting fresh prospecting work and attracting investment. Also, little real information is available on the results of the present work in the sector.
Except for the two Chinese oil extracting companies, the other operators have not had much success. Eight companies invested some $210 million and but only 5 of the 59 holes they drilled proved to have promise. With so many dry holes, as they are called in the industry, it is no wonder that no new economically viable reserves have been found.
Let us see a fuller picture. Altogether 16 companies are at present operating in 21 blocks under product sharing agreements, but of the total $2.5 billion they have invested in the past 20 years, 81 per cent or $2.03 billion came from Dachin Oil Fields Ltd alone, and 9.4 percent or $235.5 million from Donshen. These two companies have been responsible for drilling 95 per cent or 1,143 of the total 1,202 holes drilled. This is the ground reality in oil prospecting.
Of the 14 companies who have invested $223 million or 9 percent of the total, seven are Mongolian, four Chinese, and the other three are from Australia, Switzerland, and Canada. Eight of these companies drilled 29 holes, and found oil outcrop in five of them. The four Chinese companies invested $119.6 million or 54 per cent of the total, and drilled 39 holes.
The most successful of these four is Zon Hen Yun Tian LLC, which has a product sharing agreement on Galba-XI Block. It invested $36.7 million between 2009 and 2012 and drilled 14 holes, finding oil in three, and later extracting 1,517 cubic metres of oil, according to the Petroleum Authority of Mongolia.
The gest investor was Golden Sea Petroleum which spent $61.2 million between 2007 and 2013 on drilling 21 holes in Tariach-XV Block. However, none of these found oil and the company has returned the block to the state.
Petro Matad Ltd is the gest investor in oil prospecting among Mongolian companies and comes next to Golden Sea Petroleum in terms of amount invested, having spent $57.5 million on three blocks through two subsidiary companies, Petro Matad LLC, and Capcorp Mongolia. Petrovis is a major shareholder in Petro Matad, which got a loan from the EBRD and raised $45 million through its IPO in the London Stock Exchange. Incidentally, Petro Matad was the first Mongolian company to have an IPO in London.
It spent $42.8 million on Matad-XX Block, drilling 12 holes, and striking oil in six of them. However, further work in five of these did not suggest economic viability. Capcorp Mongolia spent $14.7 million on Bogd-IV and Ongi-V blocks. 2D seismic study was made in a 2,448-sq km area and two holes were drilled. Plans for further drilling are on hold because of lack of money. Petro Matad’s case is a clear example of how difficult and risky oil prospecting in Mongolia can be.
Other Mongolian companies in the exploration business, such as Shunkhlai Energy, MCS Petro Limited, Sansaryn Geology Khaiguul, Magnai Trade, and MAK, are among the gest in the country, but all of them have been held back by lack of financial resources. Only MAK among them could make a small investment last year.
Prospects appear to be dim this year also. T. Amarzul, CEO, Petro Matad, says investors in general have no faith in Mongolia, and even the few who show interest are loath to proceed in the absence of a proper and updated petroleum law.“The continuing delay in enacting a law leads to more and more uncertainty. Stoking investors’ interest would be a little easier once the law is approved,” Amarzul said.
Australia-listed Wolf Petroleum is in a similar situation. It holds an exploration licence in Sukhbaatar-XXVII Block and is ready to drill two holes, to ascertain that the block has between 462 million and 2.2 billion barrels of oil. However, it has so far failed to ensure investment.
According to information with the Petroleum Authority, the current year should see Mongolyn Alt spending $5.8 million in prospecting in Tukhum -X (South) Bock, which already has a production sharing agreement. Another likely investment will come from Sansaryn Geology Khaiguul LLC, which is joining up with Zon Hen Yun Tian, to spend $26.8 million in Nomgon-IX Block.
A major reason of the stalled progress, affecting Mongolian companies in particular, is the absence of a new law. Only a revamped law will strengthen the investment environment and widen the field beyond the few players now in action. Leaving the field to foreign prospectors is not good policy, especially when we have capable national companies.