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Oxford Business Group

Oxford Business Group

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Mongolia Investing Nearly $1 Billion To Develop Downstream Capabilities

The proposed refinery, to be located in the Sainshand soum (district) in the province of Dornogovi, is forecast to cost around $700m, with a further $264m to be spent on pipelines needed to bring crude to the plant from local fields.

A decent proposal

According to the proposal, which was approved by the Cabinet at the end of last year, the facility will have a yearly processing capacity of 1.5m tonnes. Its output is projected to comprise 560,000 tonnes of petrol, 670,000 tonnes of diesel and 107,000 tonnes of liquefied natural gas.

This should meet all of Mongolia’s petrol and diesel needs for the immediate future, with a heavy emphasis on diesel production reflecting a reliance on heavy-duty vehicles, particularly in the extraction sector, which accounts for close to 20 percent of GDP and more than 80 percent of exports.

In late December, the government announced it was seeking approval from the Import-Export Bank of India to utilize a $1 billion loan for the construction of the refinery and associated infrastructure.

The credit, agreed upon last year during a visit to Mongolia by Indian Prime Minister Narendra Modi, was extended to help develop the country’s rail network and general infrastructure.

Security of supply

One of the driving forces behind Mongolia’s plans to develop local refining capacity is a broader concern
about energy security. Related: Oil Prices Continue Plunging As Speculators Rush For The Exit

Although Mongolia produces around 8m barrels of crude a year – most of which it extracts from the Dornod fields in the east of the country – it does not have any significant refining capacity. As such, virtually all of the current output from Mongolia’s operational oil fields is exported to China, and the country fulfils 97 percent of its processed hydrocarbons needs via imports, mainly from Russia.

Last year Mongolia imported 1.2m tonnes of petroleum from the country, of which 800,000 tonnes was supplied by Russian state-owned firm Rosneft, according to official figures.

In addition to saving as much as $1 billion a year in import costs, the new refinery could help boost Mongolia’s GDP by 10 percent, according to statements from the Cabinet. Initial projections put the facility’s turnover at $1.2 billion per year, with extra tax revenues and net profits expected to reach $150m and $43m per year, respectively.

Feedstock for the refinery is expected to come, at least initially, from the Dornod fields, located 545 km to the north-west of the site of the proposed plant, though other reserves will have to be developed over time to maintain supply while still meeting export commitments to China.

Upstream meets downstream

The development of a major hydrocarbons processing facility could have broader implications for Mongolia’s industrial development. According to the Ministry of Finance, up to 30 separate manufacturing lines, ranging from rubber products and plastics, to cosmetics and pharmaceuticals, could be established if a domestic refinery were in place.

The presence of a downstream facility could also spur investment in Mongolia’s upstream sector, which experienced a drop-off in interest following the fall in crude prices in the late 2000s. With a ready domestic market for refined products, more of Mongolia’s fields could become financially viable in the future.

Mongolia has identified 332m tonnes of oil reserves; however, only 42.6m tonnes are technically available for extraction, according to data from the Ministry of Mining and Heavy Industry.

Long in the pipeline

The plan to build an oil refinery is by no means new, with similar proposals mooted since the 1990s. More recently, there was a scheme to develop a refinery at Darkhan-Uul aimag (province) in northern Mongolia with an annual capacity of 1.7m tonnes of crude and an output of petrol, diesel and aviation fuel. Related: Is The Oil Price Plunge A Turning Point? 

A feasibility study for the for the $1.5 billion refinery was completed in November 2013; however, in early 2014 Mongolia’s National Security Council struck down the plan due to its expected reliance on feedstock imports from Russia.

As the latest refinery initiative includes plans to build a pipeline connecting it to Mongolia’s native crude supply in Dornod, a need for foreign imports should not be a sticking point.

While a refinery could help Mongolia fulfil its own basic fuel requirements, expansion of its industrial base will increase the need for more advanced products, such as lubricants and additives. Unless additional production lines are established at the proposed Sainshand refinery, Mongolia will still have to rely on imports for some oil-based products.

By Oxford Business Group

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