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

The UB Post - - Front Page - By B.CHINTUSHIG

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.

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