The progress of the project to construct a grass root oil refinery plant with crude oil supply pipeline is moving forward. Since the commencement of the infrastructure project in June, 2018, a great progress has been made on the construction of road, railway, power transmission lines, and substations under short period of time. The project to establish an oil refinery plant, which has been discussed for many years, was decided to be implemented under US$1 billion soft loan extended from India. The groundbreaking ceremony was held on June 22nd, 2018 at the refinery plant location in Altanshiree soum, Dornogovi province. The infrastructure projects are now on schedule, due to be completed by October 2019, at point which the construction of the oil refinery plant will commence. Oil refinery plant with 1.5 MMTPA capacity and around 600 km long crude oil supply pipeline is planned. We had the opportunity to interview the person who has been a leading figure in this mega project, the Chief Engineer of Mongol Refinery State Owned LLC, D. Altantsetseg (Ph.D).
The recent report shows that the infrastructure construction work is well ahead of its schedule. As a leading person of the project, please briefly provide us with more information on the progress of the project.
The establishment of infrastructure network for oil refinery plant is an important issue. The infrastructure is required to transport heavy and oversized technology units, equipment, machinery, goods and products, construction materials, and man power to the refinery plant site, and enable us to do the construction work for the refinery. In November, 2017, after the start of the development of the Detailed Feasibility Study (DFS) of the refinery project, the extended team from the Ministry of Foreign Affairs of India, Export-Import Bank of India, and Engineers India Limited company, which is selected as the DFS-Consultant, paid a formal visit to Mongolia, and met the officials of various Ministries and government organizations of Mongolia. During this visit, discussing the works ahead, Indian side emphasized the importance of commencing the construction infrastructure as soon as possible to have the network in place before the construction of the refinery plant. The Government of Mongolia took rapid measures to decide on the financing of the infrastructure projects and start the construction works.
The feasibility studies of the infrastructure projects, including the construction of road, railway, power transmission line, and substations were all completed by January, 2018, and with the groundbreaking ceremony on June 22nd, 2018, the infrastructure construction officially launched.
Since then, within the period of only 4 months, the completion of groundwork for railway is at 40%, road is at 60%, and the construction of the power transmission line as well as substations is at 90%. I believe that the progress of these works has proven us how fast and efficiently we Mongolians can work and what we can achieve in such little amount of time. It is also important to note here that our Government under the Prime Minister U. Khurelsukh has been playing a major role to the fast progress of this project through close cooperation with Project Implementation Company, exchange of information on regular basis, and taking of the necessary measures rapidly. Essentially, the government authorities seem well unified and integrated on the intent of implementing of this project. Especially, the Minister of Mining and Heavy Industry has been fully committed to the implementation of this project and works hard for that purpose.
In accordance with the schedule, we were planning to complete the DFS within the third quarter of 2018, but due to certain reasons, it has been pushed back up fourth quarter. However, the subsequent stages of the project, such as basic design and technical projection works should proceed as planned. I would to like to emphasize here that our Contractors in charge of completing the infrastructure works including Ministry of Defense, Ulaanbaatar Railway, and National Power Transmission Network state owned company has been working with high professionalism.
What is the reason behind the delay of the DFS report?
Considering the size and magnitude of such large project, I can understand such delay. Oil refinery plant is not a small manufacturing plant. The draft report of the DFS was first submitted to us on February 19th, 2018. Obviously, we are not able to instantly accept such a large study document of the currently most important project for Mongolia. There are several things in the DFS which needed to be double checked and revised in order to adjust to the specific requirements and conditions of Mongolia. For the only refinery plant in this country, there are many details that need to be addressed and carefully planned. The selection of the refinery configuration cannot be solely based economic profitability. It is important to find the intercepting point between engineering, technology, economy, and environmental considerations, not at least the development policy of the country. This is not the 5th refinery plant of one country. This will be the first and only refinery plant solely supplying the market demand. To find that intercepting point, our government and company worked intensively with the Indian Consultant company. Engineers India Limited, an Indian state owned company, is a highly experienced and well reputed company. They have studied many possible technological configuration options in the DFS. With months of exchanges, meetings, and talks not only with Engineers India Limited, but also with the government organizations, including Ministry of External Affairs of India and Exim Bank, we were able to resolve many of the remaining issues in the DFS. It is important to applaud the level of cooperation and patience that Indian side have shown us during this important phase.
During his visit to India, Minister D.Sumiyabazar had talks with the Indian side regarding the cost related issue?
He did. The estimated capital expenditures for the refinery in the DFS have come up higher than we expected. This has been one of the major concerns. We have had continuous talks with the Indian side to reduce the capital expenditure of the refinery. The Minister, D. Sumiyabazar visited New Delhi in June, 2018 to have talks with the officials of the Ministry of External Affairs of India, Exim Bank, and Engineers India Limited on addressing the cost issues and the selection of final technological configurations. Also, during the visit by the Minister of the Home Affairs of India, Rajnath Singh, D. Sumiyabazar met the leading authorities of Engineer India Limited to finalize the cost related issues. As a result of recalculations, the total cost of the refinery was reduced slightly, but it did not fit within US$1 billion, in other words, within the soft loan. We understand that in conjunction with the commodity price increase, the cost of the materials and equipment is also increasing. However, we agreed to work on reducing the cost in latter stages of the project through high economic efficiency.
As I already mentioned, we are aiming to plan a refinery plant with most suitable and advanced technology with the economic efficiency. In terms of the technology as well as product output from the refinery, all must adhere to Mongolian standards and be suitable to Mongolian harsh climate and environmental conditions. We must also take into account that this refinery can be extended in the future to produce other value added products such as lubricants, waxes, and bitumen.
Thus, we are carefully considering every little aspect and details for the planning. The establishment of this refinery will obviously have significant impact on Mongolian economic development and will allow our government to regulate its energy policy, especially on fuel issues.
I think we have the answer to the question as to why the cost has gone up to US$1.7 billion. Will there be further increase in the cost in future?
Refinery is a very complex industry consisting of many different units as well as auxiliary and offsite facilities. Because most of the required materials and equipment, even skilled man power needs to be sourced from abroad, the estimated cost over US$1 billion does not seem to be too overestimated.
Recently, I had the opportunity to visit the cement plant established by Mongolian Alt Corporation with the Danish technology. I was informed that the project cost was around US$340 million. A refinery is much more complex than this plant, comprising of many auxiliary facilities. Indian side has comprehensively and carefully calculated the cost, and they believe that its estimation is realistic. During his visit to India, the Minister D.Sumiyabazar also discussed with the officials of Exim Bank the possibility to increase the sourcing of the non-Indian content in the project. This could allow room for further decreasing the expenses by certain amount, as it will facilitate the involvement of local companies and specialists.
As a member of the Professional Council for the Mineral Resources of Ministry of Mining and Heavy Industry, I have not encountered a case that the capital expenses of large scale industrial projects being less than US$2 billion. I remember the cost of the projects from the past such as the coal to liquid, oil shale to fuel, copper smelting plant ranged between US$2-US$4 billion. Again, the importance lies not in the issue of fitting the cost within US$1 billion, but in the decision to utilize the soft loan for the construction of refinery plant.
Some experts believe that the infrastructure project should have commenced after the approval of the DFS. MNT250 billion from Development Bank of Mongolia was approved for the financing of these projects.
As mentioned before, we need to complete the infrastructure projects on time before we launch the construction of the refinery plant. The infrastructure project is a time consuming process, which needed to be commenced with or without the approval of the DFS. Considering this fact, the Government of Mongolia took rapid measures to decide the source of funding and commence of the constructions works as soon as possible to have the infrastructure in place in order to start the construction works of the refinery.
Has the Indian company made any revisions and changes in the DFS in relation to the comments and suggestions made by Italian Consultant Company, Kinetics Technology?
To improve the overall DFS, we have been also working closely with the Consultant company, Kinetics Technology and its subcontractor, Prometheus from Italy, hired as Owner’s Engineer of Government of Mongolia. Especially, the technology and optimization related issues of the DFS have been carefully analyzed by our Owner’s Engineer company. We have collaborated with these companies as one team, working closely to identify and revise the shortcomings in the DFS. I would like to express my deepest gratitude to our Indian DFS Consultant company and Owner’s Engineer for their cooperation and dedication.
It is common practice that the Project Management Consultant firm is selected from the lender country. But the firm must pass through certain qualifications and filtering by both Exim Bank and Mongolian side?
The next phase of the project is the selection of the Project Management Consulting (PMC) company. Conditions of the Lines of Credit Agreement made with Exim Bank rules that the PMC must be an Indian registered firm and the most of the works, goods, and services must be sourced from India. PMC will be in charge of the overall project management from the point DFS is completed to the point of commissioning of the refinery plant. Through pre-qualification tendering process in India, EXIM Bank will shortlist the participating companies, and submit the shortlist to Mongolian side, from which we will select PMC firm in accordance with our tendering laws. Generally, in my opinion, we commit too much time to tendering process. For instance, I was involved in developing the scope of work for selecting of the Owner’s Engineer company last year. From this time until the final selection of the company, it took 4-5 months. I believe there must be a solution to bypass the complicated and time consuming process of tender, especially on nationally important projects.
Will Mongolian side take over the responsibility of operating the refinery plant once PMC service ends?
The obligations of PMC firm will end after the project is completed, and Mongolian side will take over. However, this could prove to be difficult. So, we are having talks with Indian side in regards to extending their support beyond the completion of the construction of the refinery. Although we have many graduates who are specialized in petroleum mid and upstream sector, we still lack sufficient knowledge, experience, and human resource in petroleum downstream industry. There will be demand for various engineering fields. Thus, we are planning to utilize the people with basic engineering background, and professionalize them in the field of refinery technologies abroad.
The crude oil supply pipeline project is estimated to cost over US$300 million. Is it covered in the financing from India or is it financed from different source?
The pipeline construction costs were initially included in the DFS of the refinery. In fact, the title of the DFS is “the construction of oil refinery plant with crude oil supply pipeline in Mongolia.” There were two reasons for us to reject the technology option suggested by the Indian company on the pipeline. First, the cost calculated by Indian firm is beyond our previous estimation. Secondly, the insufficient availability of infrastructure in the region, namely power supply, will present major challenges.
Although there were interests in using technology that uses large amounts of chemical additives, it was ruled out due to the uncertainty in the feasibility. Thus, we are currently looking for other alternatives most suitable to our conditions and requirements.
Many think that Mongolian crude oil is heavy and low in quality. But this is not the case. In fact, Mongolia has light and sweet crude oil. Sulfur content is the main factor for determining crude oil quality. Compared to other types of crude oil commonly sold on the global market, Mongolian crude oil is considered low sulfur oil. The paraffinic nature of the oil brings different challenges. Due to its high percentage of paraffin hydrocarbons, it has high pour point, which will cause transportation problems. However, there are advantages. For instance, cetane number of diesel from crude distillation unit is high.
It is estimated that the crude oil will be transported via 600km oil supply pipeline from XIX and XXI oil fields.
The crude oil supply pipeline is estimated to be around 550-640 km long. We have two main oil fields currently producing crude oil: Toson-Uul XIX and Tamsag XXI oil fields. XIX oil field is located 540 km from refinery location, whereas, the XXI oil field is located 640km away. Therefore, we must decide on which oil field the pipeline will run to.
The proven reserve is 336.6 million tonnes and recoverable reserve is 43.3 million tonnes from Toson-Uul XIX, Tamsag XXI, and PSC-97. Is this enough to keep the refinery going?
We officially became the crude oil producing country only since 2010. Before this, the possibility to process our crude oil was not there. In 2010, the proven reserve for the three oil fields altogether was estimated to be 336.6 million tonnes. In fact, this estimation is merely a production plan, drawn by one company. I think we shall not limit our crude oil capacity and potentials, due to the single source estimation. Rather, I am highly confident that we have enough reserves to feed the refinery.
We have potential oil exploration fields, on which the geological exploration and testing works needs to be accelerated. There are four more years until the construction of the refinery plant is completed. 1.5 MMTPA refinery capacity is considered to be very low, compared internationally. Thus, in the latter stages of the project, the possibility to increase the processing capacity to 2 MMTPA can be sought after.
What are the technology configurations planned in the DFS?
The main subject is the selection of the conversion technology, considered to be the heart of the refinery. During the past few months, we have had continuous discussions with the Indian side on the different views of the suitable technology configuration. Deep conversion processes are performed to make chemical changes in the hydrocarbon composition by breaking up larger molecules into small one to meet the demands for the quantity and quality of desirable products. Then, we have the technology licensors for each technology. Each of these technologies will be selected through tendering process.
Besides RON-92, RON-95, and Diesel, what type of products will be produced from the refinery plant?
We are always seeking to improve the quality of the products. Therefore, we are aiming to produce more RON-95 for Mongolian market, foreseeing at least 10 years ahead. The quality standards will only continue to improve, not decline.
The main output from the refinery will be diesel, with planned production of 800,000 tonnes per annum. The demand for diesel will continue to rise, as the main sectors of the national economy, agriculture and mining will continue to facilitate for this demand. As for the gasoline market, the upcoming trend for electric and liquefied gas automobiles will obviously have certain level of impact. Therefore, the predictions point out that the demand for gasoline will not increase in same level as the increase in demand for diesel. In addition to the gasoline and diesel, we are planning to produce LPG, jet fuel, and small amount of fuel oil. And, of course, our goal is to supply the end user with high quality products at relatively low price.
Thank you for the interview.
