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“Oil price rise will bring in new investment”

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S.Bold-Erdene talks to Ch.Chuluunbat, Head of the Fuel Policy Department in the Mining and Heavy Industry Ministry, about amendments to the product sharing agreement, extraction of crude oil, consumption and investments. 

The price of crude oil is increasing. What is now the expected export revenue? Any disruption to budget plans? 
The price of crude oil in the world market has been fluctuating in 2016. Brent crude oil price moved from $27.88 a barrel on January 20 to double that amount, $55.69, on December 12. 

At meetings of crude oil exporter countries (APEC) in September and November of 2016 in Algeria and Austria respectively APEC member countries agreed to reduce crude oil extraction amount by 1.2 million barrel per day. Also, after a recent meeting with APEC’s President, non-member producer countries agreed to reduce the extraction amount by 0.558 million barrel per day. These agreements will reduce the total amount of crude oil extraction per day by 2%. The crude oil price in the world market was affected by these decisions, which has resulted in a price increase by over $10 in the past half month.

Mongolia extracted 35.5 million barrel or 4.8 million tons of crude oil from 1996 to 2015 and exported around 4.8 million tons to China. MNT953 billion from the export revenue to China was allocated to the State budget. 

Expected figures in 2016 are 1.05 million tons of crude oil extraction and 1 million tons of export. Based on the world market price we planned to allocate MNT123 billion to the State budget from crude oil sales and the goal seems achievable. For 2017 we are planning to extract and export 1.1 million tons of crude oil and allocate MNT176 billion to the State budget. 

The crude oil sector has a huge impact on the State budget. Are there any issues that affect the extraction and exports? Did the Chinese increase their border tariffs?
Crude oil exports pass through Bayankhoshuu of Dornod aimag and Bichigt port of Sukhbaatar aimag and there are no changes in the tariffs. 

However, we are facing some issues in the extraction work, which our Ministry is working to resolve. For example, the delay in resolving issues related to the labor force resulted in a delay of some planned activity. Usually, if labour issues are resolved by spring, technological work to improve and stabilize the extraction, such as drilling, stimulation, maintenance and services, are completed between April and November. As for this year the labour disputes persisted until well after August, and because of this, we shall not reach the planned extraction amount of 1.36 million tons. This means a decrease in the revenue allocation to the State budget and negative effects on our next year’s extraction plan. Therefore, we are planning to resolve the 2017 labour force issues within this year. This would reduce the risks and issues related to the delay in extraction, revenue failure and regime loss of extraction technologies. Our Ministry and the Mineral Resources and Petroleum Authority of Mongolia will support our contractors in all ways within the legal framework. 

Another issue is related to energy. Two areas of Petrochina Dachin Tamsag’s projects are using 16-17MW of energy and 24MW during the peak time. Also, mining projects are starting in Dornod aimag. Huge energy consumers as Shini Shini LLC’s mine and Aduunchuluun mine are coming up. Dornod aimag’s power plant has a capacity of 36MW. The issue of expanding the capacity to 50MW had been discussed for years and last year the Government decided during the parliament session in August on investment on this. The project with a total investment of $90 million will be completed in 2019. Until then we are facing a question on how to manage energy related issues. Currently we have imposed some restrictions. Power supply to some operations in Toson-Uul XIX and Tamsag XXI areas and in some wells have been disconnected as the new restrictions do not allow consumption over 14MW. 

Petrochina Dachin Tamsag has proposed to import power from China for two years. We shall soon make a decision on this. They are negotiating with a crude oil extraction company in Khailar basin located just behind the border to import energy. As the importing line’s capacity is 5MW it should be reasonable in terms of timing and costs. The company will cover all the costs. 

Quite some time has passed since amendments were made to the Law on Petroleum. What are the ongoing works in this scope? 
The Law on Petroleum was approved in 1991 and then adjustments were incorporated through administrative orders. Some of these contradicted other legal provisions in terms of timing, and amendments were approved by the parliament in 2014. Works related to the legal documents in terms of approval and registration of accompanying rules, regulations and contract models of the law are almost completed. Furthermore, according to the new articles of the law, the product sharing agreement (PSA) made under the previous law and its regulations are currently being reviewed based on the revised law and newly adopted model of the PSA. Overall 21 contractors are undertaking crude oil extraction and operation works in 25 areas under the PSA. From those 3 agreements, which are transferred to the operational period and more than 10 agreements in their extraction period are considered to be updated. Currently 4 agreements operating in the extraction period have been updated. 4 new PSAs have been created according to the new amendments to the law and its regulations. 

Petrochina Dachin Tamsag and Donshen Oil Mongolia in their operation phase have been operating under the PSA for a long time. I assume there are a lot of issues related with the changes. How are the negotiations going?
As I mentioned earlier, according to the 130th resolution of the Government, the PSAs should be updated based on the new model without making any changes in the main conditions. Some amendments and updates based on the revised law and accompanying legal documents need to be incorporated to the currently active PSAs after the negotiations with the contractors. 
The very first PSAs are Toson Uul XIX in 1993, Tamsag XXI in 1996 and the PSA97 in 1997; the rest of the PSAs were established after 2005. 4 new PSAs were established after the changes in the law in 2014.

The first 3 agreements do not specify the royalty amount of Toson Uul XIX area, while the other 2 do. Updates will be made to have uniformity. According to Article 45.1 of the Law on Petroleum the amount of royalty shall be decided based on the agreements with the contractor. 

But for Toson Uul XIX area the royalty amount was not specified, mentioning only that the mineral oil share of the Mongolian Government includes both the royalties and the mineral oil amounts. The time when this agreement was established was different from the current period, described as a beginning of a time of the second recovery of Mongolia’s crude oil sector and as a time of welcoming foreign and domestic investments. Even though the royalty is not specified in the agreement it doesn’t mean that it is missing out totally. That means we are negotiating with the contractor to agree on the amount, which has to be incorporated into the agreement according to the amount stated in the law. As from the contractor’s side, since the beginning they were sharing their willingness to negotiate in such condition when their legal and economic interests won’t be affected in any ways. We had a number of meetings with the contractor since the approved revision of the law. According to our Minister’s order a new working group was established following changes in the Government structure. The working group held a meeting with the contractor this month and came to an agreement on specific issues. There are also issues we haven’t agreed on. Either way we believe the negotiation were productive. The next meeting will take place very soon.

There were discussions on building an oil pipeline. Were any decisions taken?
Exploration period of Tosol uul XIX area expired in 2010, of Tamsag XXI area and White Sand deposit’s of Zuunbayan in 2012 and the reserves were transferred to the Minerals Council. The deposit’s mining plan was approved and the extraction plan was prepared for the period of 2039-2042.

Our proven reserves is 332 million tons of which the operating proven reserves amount is 42.6 million tons. We will talk about exports after we clarify our reserves. Currently we are exporting by road through Bichigt and Bayankhoshuu ports. Petrochina Dachin Tamsag offered a proposal on pipeline transportation in 2012. This issue is clearly stated in the revised Law on Petroleum and the Government shall make a decision on the construction of crude oil pipeline. Also, according to the National Security Council’s recommendation in 2014 Mongolia shall build a crude oil processing plant based on the local raw materials. Oil pipeline can be built. Recently, the Government has made a decision on the construction of crude oil processing plant with the $1 billion loan from India. A plant of 1.5-2.3 million tons of crude oil processing capacity will be built in Sainshand. The raw material of the plant planned to be supplied from Tamsag deposit. This could allow us to build Tamsag-Sainshand pipeline. Based on the final feasibility study the route and the length of the pipeline will become clear. 

Foreign investors have shown interest in the crude oil sector. What was been the trend of such investment? More specifically, what have been the changes in the last 2 years? 
In late 1990s, the first crude oil company was founded. The second recovery of the Mongolian crude oil exploration and mining is considered to have started as the Law on Petroleum was approved in 1991. Since the establishment of the Production Sharing Agreement (PSA) in 1993 until now, foreign investment has been increasing consistently. Currently, out of $3.36 billion of total investments, $2.8 billion was invested in Petrochina Daichin Tamsag activities. 

When crude oil prices reached their peak of $147 a barrel in 2008, a lot of oil exploration companies were interested in Mongolia; therefore, the record PSAs were signed in 2009. Unfortunately, due to both intrinsic and extraneous factors, the proposed investments have started to halt. The sharp price drop to $40 a barrel in 2009 was the biggest factor for the decrease in investment. When the price started to increase, discussions around the necessary amendment to the Law on Petroleum began. The works on the amendments were not completed in a short period. Only after passing 2 parliaments and 2 Governments the amendments were incorporated in 2014 coinciding with the steep price drop - from $110 to $27 a barrel in January 2016.

The long process of the law revision made foreign investors cautious. As time passed, while investors were waiting on how the law will change, the crude oil price started to drop. Despite the approval of the law, the price drop has frozen the exploration investment flows. 

Two operating companies have been proceeding normally with their operation and investments. One or two exploration companies have tried to function normally. Mongolia Gladwill Uvs Petrolium LLC has established a PSA with the Government and has drilled 2 wells. This year, the company started 520 sq km of siesmic exploration campaign. The first 100 sq km went successfully; but the company faced local protest during the completion of the remaining 420 sq km.

Capcorp LLC made a seismic exploration in Bogd IV and Ongi V exploration areas. However, British Gas LLC, the investor of the project, was sold to Shell LLC and Shell has abandoned the project.  The Government has approved the decision of transferring all the rights to Capcorp LLC. The company will continue their exploration starting from 2017.

No other exploration and evaluation works were completed after 2014, except the NPI LLC’s pilot exploration in Khukh Nuur XVIII exploration area and few geophysical explorations.

All the PSAs will be updated according to the law. Formerly, the main exploration period was 5 years, which could be extended by 9 years. Now, the main exploration period is 8 years with an extension of 4 years. The extended main exploration period creates some advantages to the investors. From now on, the Government will require the company to fully complete exploration works according to the PSAs. An increase of oil price to a certain level will affect positively the exploration investments. 

The Mongolia Gladwill Uvs Petroleum LLC operating under the PSA in Uvs aimag has stopped work. What was the reason?
The Mongolia Gladwill Uvs Petrolium LLC established a PSA in Uvs I crude oil exploration area on May 4, 2015. According to the company’s exploration work plan approved by the Mineral Resources and Petroleum Authority of Mongolia (MRPAM), 520 sq km seismic, gravitational, and magnetic field exploration works were planned to be completed in Naranbulag, Tes, Zuungobi soums of Uvs aimag. Magnetic and gravitational field studies were conducted in those three soums from June to September 2016 and 100 sq km seismic exploration study was conducted in Naranbulag soum. During the last 420 sq km seismic exploration works in Tes, Zuungovi soums the company started facing a number of local protests, hence the exploration works could not continue.

There are a lot of reasons. There has been little effort to make a proper presentation of the project to the local people. On the other hand, black PR and propaganda to the public were seen as a part of the local election. The PSA is not the same as issuing a mineral license. According to the Law on Petroleum, the exploration area is announced to the public in an open way. Selection is made from the companies that submitted their proposals, then votes are collected from the ministries, followed by the discussion in the parliament and the PSA is established under the Government’s resolution. In the law, rights and responsibilities of the company, local authorities, applied agencies, ministries and the Government are indicated in detail. In the case of Uvs I exploration site, the local authorities did not fulfil their obligations stated in the law. This might be related to the local elections. In 2015 local authorities were supporting drilling 2 wells. As a result the only exploration company expected to operate this year has done only a partial work and faced the winter. 

The Government and MRPAM are considered to have failed to meet their obligations. It is not just a general company that was issued with a license from the MRPAM; it has established an agreement with the Government. Mongolian Government owns the results of the exploration works. In other words, it takes the results after the exploration is completed by the company. The company takes all the risks and the Government does not spend any investments. If the exploration results identify oil reserves, it will be transferred to the extraction stage. Since the oil extraction starts and the first oil is pumped, the Government takes the share according to the PSA. Overall, the company investing to the exploration of crude oil takes a huge risk. 

Would the PSA continue operating normally? If not, what is the likely outcome? 
According to the Law on Petroleum and the PSA, the Government has an obligation to provide  investors with conditions and opportunities to complete the extraction activity as stated in the agreement. Rights and responsibilities of the local authorities are clearly stated under Article 10 of the law. Since the PSA was established with the company in Uvs I area and the Government issued the company the rights to complete the extraction, this PSA will continue its implementation. However, the issues related with locals should be resolved within the legal framework and promoted among the local public. 

Pilot extraction has started in Umnugovi aimag. Have the reserves there been approved? 
China’s Zon Xen Yu Tian LLC established PSA on Galba XI area in 2009 and undertook active exploration works in 2010-2011. 14 wells were drilled in the boundary of Khanbogd and Khatanbulag soums of which 13 wells had oil shows. It became clear that there is crude oil. However, the reserves amount is still to be identified and evaluated. We want the company to hasten this process. 

Also, NPI LLC drilled 5 wells in Khukh nuur XVIII area located 100km north from Choibalsan city. Some wells had oil shows. The work is being delayed due to the failure of solving the labor force issues this year. 

Lastly I would like to say that the Government will support and assist the contractors in scope of the legal framework. It will issue related approvals, resolution and decisions on time and monitor the implementation.


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