Oyu Tolgoi considering forgoing Tavan Tolgoi power project to build its own plant
In response to recent discussion and controversy surrounding the power supply to Oyu Tolgoi and the recent cancellation of the Power Sector Cooperation Agreement (PSCA), Oyu Tolgoi LLC published a clarification saying that the Tavan Tolgoi power plant will likely not be operational within four years due to a lack of a lead investor.
On February 15, Turquoise Hill, majority stakeholder in Oyu Tolgoi announced that it was seeking a new domestically sourced power solution after the government canceled the PSCA. Turquoise Hill said the signing of the PSCA was a sign of commitment to the obligations agreed upon in the 2009 Oyu Tolgoi investment agreement.
Minister of Energy Ts.Davaasuren explained that Cabinet annulled the agreement because it considered it to be an illegal agreement made by the previous administration in 2014.
Article 7.3 of the Oyu Tolgoi investment agreement established in 2009 states that Oyu Tolgoi must purchase power exclusively from domestic sources within four years of commercial production. Oyu Tolgoi was supposed to begin sourcing all of its power domestically by July 2017. The “illegal” PSCA helped push that deadline back indefinitely according to Cabinet.
The reason Cabinet considers the PSCA to be illegal is that it was never discussed or approved by Parliament. The 2009 investment agreement was ratified by Parliament in 2009 but the PSCA was only a Cabinet-level agreement, which technically means that it cannot override the original investment agreement.
As such, the current Cabinet officially annulled the PSCA, signaling a move to pressure Oyu Tolgoi to source its power domestically within four years beginning in February.
Oyu Tolgoi LLC explained in its statement that the PSCA laid out a framework for cooperation between the government and Oyu Tolgoi LLC to deliver a comprehensive energy plan for the Umnugovi region. According to the company, the government’s primary intention when signing the PSCA in 2014 was to develop the Tavan Tolgoi power project, a new independent power plant at the Tavan Tolgoi coal fields, with Oyu Tolgoi as off-taker rather than owner.
The signing of the PCSA, prioritization of discussions and evaluation of TTPP, and the explicit request by the Mongolian government resulted in the suspension of Oyu Tolgoi’s plans to start construction its own power plant in 2012.
“It also suspended Oyu Tolgoi’s obligation under the 2009 investment agreement to source power from within Mongolia by 2017 because it was recognized by the government that the Tavan Tolgoi power plant process would take longer than four years,” the statement read.
Energy Minister Ts.Davaasuren framing the PSCA as illegal resulted in Oyu Tolgoi having to clarify that the previous government explicitly asked the company to suspend its plans to construct an independent Oyu Tolgoi-based power plant. In turn, the government in 2014 suspended Oyu Tolgoi’s obligations to source all power domestically within four years.
Immediately after the cancellation of the PSCA, Turquoise Hill and Rio Tinto restated their commitments to fulfilling all requirements under the investment agreement and said it is continuing to evaluate all viable power options, including construction of an Oyu Tolgoi-based power plant.
Oyu Tolgoi will be evaluating three potential sources of domestic power including a Oyu Tolgoi-based power plant, a power plant built by a third party, or a local power station.
The cost of a power solution for Oyu Tolgoi is not included in the company’s 5.3 billion USD expansion capital project estimate for the development of the underground mine. Any costs and means of financing this will be finalized between shareholders, Rio Tinto stated.
However, Rio Tinto said it has already allo- cated 250 million USD a year for the development of a power station in Mongolia in its 2019 and 2020 capital expenditure forecasts. It will, however, continue to review capital expenditure forecasts. Oyu Tolgoi spends around 160 million USD annually importing power from China.
According to Rio Tinto, which holds a 51 percent stake in Turquoise Hill, under section 1.3 of the canceled PSCA the cancellation of the agreement indicates that the Tavan Tolgoi power project is no longer a viable option.
However, according to the Project Manager of the TavanT olgoi power project D.Batbileg, the feasibility study of the power plant has been completed and the project is ready to begin construction.
“If the main customer of the proposed Tavan Tolgoi power project, Rio Tinto provides a guarantee for the project, we can commence construction within 2018. On June 28, 2017, Cabinet signed an investment agreement with MCS and Japanese Marubeni. The power plant will take four years to build and will have a capacity of 450 MW. The total cost of the project is one billion USD,” said D.Batbileg.
D.Batbileg said that Japanese and Chinese banks have stated their willingness to provide funding and negotiations are in progress.
“Rio Tinto has not rejected our proposal to build the Tavan Tolgoi power plant. We are cooperating with Rio regarding this issue,” added D.Batbileg.
Oyu Tolgoi conceded that while the Tavan Tolgoi project is moving forward and despite considerable efforts by the government, implementation unit, MCS, Oyu Tolgoi, and Rio Tinto, its development has been slow due to limited investors and lenders appetite.
“Tavan Tolgoi power plant currently lacks a lead investor to develop a viable technical and commercial proposal for Oyu Tolgoi to consider and it is unable to secure financing without a credible lead investor. Extensive negotiations and lender due diligence would still be required once those key issues are resolved. TavanTolgoi power plant would therefore not be operational within four years.”
While the Mongolian side would prefer for Rio Tinto to act as the lead investor and provide a capital guarantee on the project, Oyu Tolgoi cited the lack of investors as the biggest obstacle to the power project.
Due to this, Oyu Tolgoi will not be banking on the TavanTolgoi project to ensure its power is fully sourced domestically within four years.
“Oyu Tolgoi has been reviewing other options that can be implemented within the fouryear time frame, including refreshing previous plans to develop its own power plant at the Oyu Tolgoi mine site. In this context, Oyu Tolgoi will be engaging with the Minister of Energy to ensure the necessary permits and approvals are in place, including the application of permits that were submitted for renewal in January 2017, but which have not been granted, and to ensure overall alignment on the way forward,” the company stated.
As such there has been a disconnect between what the Mongolian government perceives to be preferable and what Oyu Tolgoi and Rio Tinto considers to be realistic.
In the absence of future negotiations to potentially extend the current four-year deadline, Rio Tinto will most likely look to develop a Oyu Tolgoi-based power plant to ensure its full obligation to the investment agreement. The heavy politicization and complexity of the Tavan Tolgoi power project only further helps push away Oyu Tolgoi from the project.
Rio Tinto has seen how quickly things change under a new administration, signified by the many roadblocks the Oyu Tolgoi mine has experienced in its path and most recently the cancellation of the PSCA. All signs now point to Oyu Tolgoi forgoing the tedious Tavan Tolgoi power project for a more reliable on site power plant.