Oil extraction poised for big leap but transportation is a concern, says petroleum chief

How many companies are operating in the oil exploration sector and how extensive is their area of work?

Mongolia has delineated 26 exploration blocks and as of today, five of these are actively being worked. Ten others have been approved and licences for all but one of these 26 blocks will be granted this year. Each licence holder will work under a Product Sharing Agreement (PSA) with the Government. The one block remaining will be allotted later but it is quite possible that exploration and then extraction will begin in all the delineated 26 blocks by the end of next year. Among those who have been engaged in active drilling in the last 2-3 years, mention must be made of Petro Matad, a subsidiary of Petrovis, which is operating in Block XX for the second year. Shunkhlai LLC and Magnai Trade LLC are Mongolian companies that this year started exploration in Block XXIII and Block XVII respectively. Sansar Geology LLC is a Mongolian newcomer in the sector and should begin work this year.

As far as I know two Chinese companies have signed PSAs with the Government. Where are the other foreign companies from?

The two you are referring to are Zong Xin LLC, operating in Block XI, and MPI LLC, in Block XVIII. There are several others foreign-based companies. Of them, a Swiss company DWM has signed an agreement for Blocks XIII and XIV and will start work soon. The Australian Central Asia Petroleum LLC has signed a PSA for Blocks IV and V and will launch its operation this year. The Chinese National Petroleum Corporation (CNPC) is the largest oil company in the world with USD334 billion of assets. One of its subsidiaries, Petro China Daqin Tamsag Mongolia LLC, is operating in three blocks in Dornod province - XIX, XXI and XXII. Dongsheng, a subsidiary of the second largest Chinese oil company, Sinopec, is in Zuunbayan. Yet another Chinese company, Gold BC LL, has been working in Block XV for three years now. A Canadian company, Shaman LLC, has also been working for three years, but it is in Block XVI. These are all companies which have begun regular work.

There are others who have just signed PSAs or will be signing one soon. As they start work, one by one, operations will be extended drastically next year. You have to remember one thing. In 1993, one American company, SOCO, and a Canadian company were operating in the oil sector. Finding profits low and our investment conditions restrictive they decided to pack up, but before they left, they transferred their licences to Chinese companies. SOCO was active in Blocks X1X, XXI, and XXII and Petro China secured its licences, while the Canadian company’s rights in Zuunbayan went to Donsheng. That is why these two have been in the extraction stage for several years already. If everything goes according to expectations, most of the exploration work will be completed by 2012 when extraction on an industrial scale is certain to begin at least in certain blocks. We shall by that time also have a clear idea of our total petroleum reserves and shall be counted among nations producing crude oil.

With so much interest in investing in Mongolia, will the Government change its policy? Do you, for example, intend to change the terms of the PSAs? Is there any likelihood of raising Mongolia’s share?

Our Law on Petroleum was adopted in 1991 and has needed no amendment as it is regarded as one of the best ten laws in the world. It reflects the general principles that govern the provisions of the PSA. There are also clear guidelines on how the law and the PSA provisions are to be implemented. The initial period under the PSA is one of exploration and so there is no question of royalty being paid. However, once extraction begins next year, the royalty rates will have to be determined. A royalty clause is included in all our previous agreements. The global average is 2.5% but Mongolia imposed a minimum rate of 8% in its earlier agreements, raising it to 10-12.5% or even 13% in those that were signed later. This is an important source of national revenue. The Government does not have to spend any money of its own in this sector, with the investor bearing the cost of all exploration and extraction. Depending on individual agreements, Mongolia’s share of the profits will be a minimum of 40%, and as the volume of extraction increases, this can go up to 75%.

What do you think of applying similar PSAs to major deposits such as Oyu Tolgoi?

MPs, scholars and many in the public think this to be a good idea. I cannot give you my personal opinion but we provide extensive information to all who approach us to study PSA principles. We think this is very much the right thing to do in our industry.

It has been quite a long time since oil was discovered in Mongolia. What have we done to look for more oil in the country?

Do you remember that the first President of Mongolia, P.Ochirbat, smeared oil on his ceremonial dress when oil was first found in Tamsag? It was indeed a very happy day for the nation. Not many more reserves have been discovered since then, but extraction has been steadily increasing over the years. Last year, total extraction reached 1.2 million barrels which is expected to go up to 2 million barrels this year. Our goal for 2012 is 10 million barrels. A fivefold increase in three years will indicate the rapid progress we are making.

So how much of domestic demand will all this meet?

Based on estimates of production of crude and internal demand, oil extracted at home should be adequate for domestic needs by 2013. The problem is that the oil fields are all in the east of the country, while consumption is concentrated in the central region. Transportation of crude is always a difficult proposition. The quantity is just too much for tankers to handle and only a pipeline is economically effective. Railway transportation is also a good option but we do not have any railway connection between the oilfields and the central region. This is a major concern and the Government will have to take a decision on the best way out.

How valid is the worry that Chinese investment is predominant in our oil sector?

Not much, I would say. For one, several Mongolian companies have joined the field in recent times and we also have Canadian and Swiss companies, as well as an Australia-Mongolia joint venture. Besides, we do not choose an investor on the basis of its country, but look for the most competitive offer and one that offers the maximum benefit and profit to Mongolia. These are our criteria, nothing else. We work for our national interests and considerations like a company’s base country are immaterial. Geopolitical factors do not affect our decisions.

Oil price is again increasing in the world market, Russia has increased its petroleum product export tax and Mongolians are again facing a hard time. How do you see the future?

Ups and downs in global prices will always be there and Mongolia cannot wish away or be protected from the effects of this fluctuation. That is a fundamental principle of the market economy we have chosen to adopt. However, we shall have more leverage once we manage to diversify our sources and reduce captive dependence on one supply source. The Government is clear about this and has been working to achieve that objective. Things will get better once we extract enough oil at home and also have a refinery here. Until then, we can do nothing but accept world trends like everybody else, and maybe take short-term measures to lessen the burden on the consumer. Our priority remains developing extraction but until such time that domestic production meets national demand we have to concentrate on ensuring smooth and uninterrupted import of petroleum products and their supply to customers. We are doing this successfully.