One of the world’s last onshore frontiers for oil exploration

Mongolia turns in the majority of its trade revenue from mineral exports of copper and coal, with other minerals such as gold and iron ore accounting for important albeit less significant exports. As such, both exploration and production for these commodities has developed relatively rapidly in the last century or so. One underground resource that has not been overlooked but underdeveloped is crude oil. Minimal exploration of crude oil resources has led to Mongolia being considered one of the last frontiers for onshore oil exploration.

Most of the onshore oil deposits in the world have been explored and are currently in production. The new frontier has been offshore drilling, but as seen with mass scale disaster such as the Piper Alpha disaster in the North Sea and the Deepwater Horizon explosion, it has the potential to be catastrophic. As such, onshore oil drilling still accounts for 70 percent of all oil production globally, according to Norway based oil consultancy firm Rystad Energy. Many of the global players in oil are moving away from offshore drilling in exchange for shale oil.

This is evidence that Mongolia could potentially expedite development of its underwhelming oil industry rather quickly. Previous governments have been in talks with major players such as Shell and BP to evaluate the oil resource in Mongolia. At the conclusion of this evaluation, BP said that Mongolia’s oil fields had similar potential to that of its neighboring Chinese provinces. According to the Oxford Business Review, the nearby Erlian basin over the border in China had produced a total of 550 million barrels by the start of 2011.

"There is no difference between the geology (compared with neighboring prolific oil basins in China), but the exploration history is different. Everybody knows the geology is the same, but no-one has been able to prove it by producing at a commercial rate,” Mike Buck, CEO of oil explorer Petro Matad, has said in the past.

The reason that Mongolia’s copper sector is relatively more developed and its oil sector is not has everything to do with the Soviet Union’s interests in the 20th century. An abundance of oil and gas reserves in the Soviet Union meant that exploration of oil in Mongolia was less prioritized and took a backseat to copper and gold exploration. Erdenet Mining Corporation was essentially founded because there was demand for copper in the Soviet Union. Looking at historical records, exploration was mainly limited to small Soviet teams in the southern-eastern part of the country.

Since gaining full sovereignty in 1990, Mongolia has tried to get the oil sector on its feet. But this has mainly resulted in ongoing exploration by a few oil explorers and production to be limited to only crude oil, which is mainly exported to China. The National Council of Mineral says Mongolia currently has a proven resource of 332 million tons, with over 43 million tons of oil already extracted. Further exploration is likely to increase the tonnage on Mongolia’s indicated oil reserves.

In the first nine months of this year, Mongolia exported 4.8 million barrels of crude oil worth 316.1 million USD. Similar to the country’s other major commodity exports, crude oil is not processed and mainly sold to China. While exporting millions of barrels of crude oil to China, Mongolia also imports almost two million tons of fuel from its only other neighbor, Russia. In 2017, national demand for fuel totaled 1.49 million tons and that number is only expected to increase with the current trajectory of increasing vehicles.

Being almost fully dependent on Russia for fuel and increasing demand for fuel does not bode well for Mongolia’s energy independence. As a result, India is helping to offset that dependence through a one billion USD credit line to finance an oil refinery capable of processing 1.5 million tons of crude oil per year. Planned to be completed in 2022, the refinery will be small for international standards but is a crucial foundation for the development of Mongolia’s oil sector. Now is the perfect time to set the basis for the growth of a domestic oil sector. According to experts such as Professor of Geology and Mining School of the Mongolian University of Science and Technology J.Tseveenjav, the benefits of building a refinery was not as clear cut as it is today.

“Establishing a petroleum refinery between 1990 and 2010 was not beneficial due to low oil reserves, but reserve estimations have been increasing for the past years and is expected to increase more in the future, which means a greater attention is needed to implement the refinery project,” J.Tseveenjav said.

Now that at least the basis for a comprehensive oil sector is set to be up and running in 2022, it is the job of the government in conjunction with the private sector to build on what India has provided. India has vast expertise in the oil sector and Indian technology will undoubtedly be a big boost. As oil exploration and production ramps up even more, more refineries will be required to accommodate growing demand and there will undoubtedly be more demand moving forward. Despite what has been dubbed the EV (electric vehicle) revolution, the world on a large scale and Mongolia will be dependent on fuel for the foreseeable future. We will only likely see major changes decades down the line.

IHS Markit, London-based global information provider, has said that EV sales will likely be going up to 30 percent of new car sales by 2040 from the one percent now. As such, there will be significant demand for motor fuel for the foreseeable future.

The development and potential oil sector shares a common obstacle with most other sectors in Mongolia, infrastructure. The lack of transport infrastructure hinders development as off-road vehicles and heavy trucks are used to transport most materials. Crude oil, is shipped by road tankers, as there is currently no pipeline to the blocks in production. Moving forward, more will need to be done in terms of infrastructure development but that is expected to come as the sector matures. The lack of a professional labor force is also a key issue and must be addressed moving forward. As a result, human resources challenge is inevitably one of the biggest issues.

The bottom line is, fuel demand will only increase as the economy expands. In order to accommodate for this, all stakeholders spearheaded by the government must work together to build on the progress that the new oil refinery will provide and ensure that Mongolia is able to source at least half of its fuel domestically. This is not only a decision that has economic ramifications but one that concerns sovereignty and security.