Deputy Minister of Mining addresses potential fuel price increases and comments on Oyu Tolgoi
As reported by the Authority for Fair Competition and Consumer Protection, some fuel importing companies have been limiting fuel sales at certain stations. A committee comprised of representatives from the government, fuel companies, and civil organizations determine the price of fuel on a collaborative basis.
Deputy Minister of Mining D.Zagdjav is the chairman of the committee and oversees the whole process. He recently gave an interview regarding the recent controversy of fuel companies deliberately limiting sales.
The excise tax was increased as part of the IMF program that Cabinet is implementing. The decision to increase the tax was postponed two times. There had been discussion leading up to the new year that the excise tax would increase in 2018. Will the excise tax on fuel increase?
We are starting to see some encouraging signs in the Mongolian economy. As likened to by the prime minister, Mongolia is like a person who is sick and on life support and we need to work fast to recover from this. In order to accomplish this, Cabinet is implementing the extended fund facility with IMF. In accordance to the program, the decision was made to reverse the tax discounts that had been provided for fuel on July 1, 2017 and October 1, 2017.
In November 2015, the excise tax per ton of gasoline was 400,000 MNT and 520,000 MNT for diesel. In 2016, after the new Cabinet was formed, the tax was decreased to 260,000 MNT for gasoline and 280,000 MNT for diesel. Again in November 30, 2016, the excise tax per ton of gasoline was lowered to 160,000 MNT and 180,000 MNT for diesel fuel. Eventually, the excise tax on gasoline was lowered to 50,000 MNT per ton and 70,000 MNT for diesel fuel.
After the approval of the IMF program, it was decided that the cuts in the excise tax would be reversed stage-by-stage. The excise tax is not being increased at all. It is only a matter of reversing what had been cut before. IMF recommended that we reverse the tax discounts on July 1, 2017 and October 1, 2017.
The fuel price committee was supposed to convene before this year but the meeting was postponed due to the absence of most of its members. Was the excise tax discussed by the committee?
There is a unified committee comprised of representatives from the government, public sector, and civil organizations that is mandated to organize and regulate the stability of the price and supply of petroleum products. The issue of the reversal in tax cuts was discussed in the committee several times. For instance, the committee proposed to postpone the decision to reverse the tax cuts on July 1, 2017.
Also on October 1, 2017, the committee recommended Cabinet to postpone the reversal. The committee convened twice to draft a recommendation to be sent to companies and several relevant agencies to influence the policy of price on the global market of petroleum. Previous cabinets have taken steps to provide discounted loans and exchange currencies for cheaper rates as part of the price stabilization efforts when the price of petroleum was relatively cheap on the market. The committee proposed taking steps to influence prices on the global market. For example, it was possible to establish agreements with large petrol companies competing on the global market to supply petroleum at global market prices in Mongolia. Most of the petroleum imported into Mongolia is from the Russian Rosneft and some cooperate with Chinese petrol companies. We looked at ways to not influence the price of fuel imports for the largest importers.
The ministry and other relevant agencies have said that fuel reserves have not been depleted and prices have not increased. In reality, A-92 octane gasoline is being limited and some places are not even selling it. Why is this?
Mongolia has around 80 companies importing fuel. Nationally, the fuel reserve stands at 38 days. The price of fuel did not increase nor did it decrease. Rosneft completed a renovation on its petroleum processing factory in Angarsky this past summer. Currently, the factory is up and running and back to normal. Supply is stable. There are no external factors that would cause a shortage in reserves. There is probably a shortage due to the internal management and organization of companies.
The government is saying that the reserve is enough and prices will not be increased while the companies on the other hand are saying that reserves are depleted and that is the reason for the shortages. The companies are also saying that the price of fuel will likely increase? Who is telling the truth here?
Some fuel importing companies delegate their representation in a unified manner. However, all decisions are made on a collaborative basis. My personal view is that the legal environment of the petroleum industry was scraped together in a hurry. However, the government is cooperating and collaborating with private businesses and civil organizations. The price committee was supposed to convene before 2018 but was not able to. A meeting will be called soon and the issues surrounding the sector will be discussed.
Who has the authority or the final say in the committee? When the decision was made on a collaborative basis, why are some companies going off on their own to limit sales and increase prices?
Traditionally, representatives from the government, private sector, civil organizations, fuel importing companies, and those representing the interests of citizens and business owners get together to draft a recommendation that is sent to Cabinet and other relevant agencies. As reported to me by the Authority for Fair Competition and Consumer
Protection, there have been no increases in fuel prices.
There were reports that fuel prices would increase in Russia. Understandably so, there has been concern that this might have an effect on the price of fuel in Mongolia. Do you think this will come into fruition?
In July 2017, the price of petroleum on the border was around 45 to 50 USD per ton. Now it is 66 USD. In order to prevent this, we opened up many opportunities for private companies to establish price stabilizing contracts. All sides must work to maintain prices. If the price of important commodities such as fuel increases, the standard of living for citizens and the country’s economy will be negatively affected. Therefore, we must be very careful and responsible in handling this situation. The price committee will ultimately decide the issue of increasing fuel prices.
When the price of fuel on the global market increases, it increases the prices in Mongolia and we have had to adapt to this. What action must be taken in regards to establishing petroleum refineries in Mongolia and supplying domestic demand?
Mongolia uses one million tons of petroleum annually. We have the opportunity and the resources to fully supply domestic demand in Mongolia. Since 1990, our oil fields have been extracting and exporting millions and millions of barrels of petroleum to our southern neighbor China. At that time, there was no legal mechanism allowing us to establish a production sharing agreement, nor do we have that capability now. There is an underlying need for us to improve upon the agreement with China regarding the oil fields. In early 1990’s, Russia ratified its law on production sharing agreements and China did so in the mid 1990’s. Today, our Parliament approves many laws that are not enforced in real life. But they have still not approved a law on production sharing agreements, a critically important matter. Cabinet has set forth a goal to develop and operate refineries and processing factories. As a part of this, with a one billion USD credit line from India, a petroleum refinery is in the process of being developed. We could have the capability to supply all domestic demand if we build refineries such as this one. Mongolia neighbors two large superpowers that own around 70 percent of the natural resources in the world. It is our own fault that we are this poor next to neighbors that rich.
You recently said during a Cabinet meeting that the operations of Oyu Tolgoi need to be halted. Can you explain your reasoning for this?
The profit that Oyu Tolgoi makes is not reaped by the Mongolian public nor the country’s economy. In the relatively short past, Oyu Tolgoi has exported around three million tons of copper concentrate. More than 600,000 of pure copper was exported. All of this amounted to 1.2 billion USD. Mongolia is not seeing any of this. Recently, Rio Tinto raised 5.4 billion USD using Oyu Tolgoi and Mongolia’s name. One billion USD of this was invested into Oyu Tolgoi and 4.4 billion USD were distributed to shareholders excluding Mongolia as dividends. The loan and interest of Mongolia as a 34 percent stakeholder amounts to around two billion USD. Why did they not invest this two billion USD? This was a huge potential reason for a standstill in the operation of Oyu Tolgoi. Mongolians had no idea about this. This is a very unfortunate situation. This is why I said that the operations of Oyu Tolgoi need to be halted during a Cabinet meeting. There is a limit to patience. My patience and the patience of the Mongolian people is running low.
You are a representative of Cabinet. What policy is Cabinet abiding by when it comes to Oyu Tolgoi? Will the policy change in the future?
It is unfortunate that we are losing our natural resources to a third party when we are located between two nuclear superpowers with permanent seats on the UN Security Council. Therefore, I believe that in stopping its operations and changing the agreement to be more profitable for Mongolia is correct. The world’s biggest copper mine is in Indonesia. Around 50 percent of this mine is owned by the United States and 20 percent is owned by Rio Tinto. Indonesia has started to resist and put up a fight against Rio Tinto. We must research this case. Depending on the geographic location, geopolitics, and the development of a country, many countries tend to get pushed around by multinational corporations.
Deputy Minister of Mining D.Zagdjav