Private sector opportunities in the oil, gas and coal by jqy64044

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									 PRIVATE SECTOR OPPORTUNITIES IN THE OIL,
    GAS AND COAL SECTORS IN MONGOLIA
                                                  December 2008




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                                              TABLE OF CONTENTS


UNITS OF MEASURE ................................................................................................................ I
ACRONYMS AND ABBREVIATIONS........................................................................................ I
EXECUTIVE SUMMARY ........................................................................................................... II
I. INTRODUCTION..................................................................................................................... 1
II. ENERGY TRENDS IN MONGOLIA ....................................................................................... 3
1. Growth potential for consumption and imports by fuel type ........................................... 3
    1.1 Coal ................................................................................................................................. 3
    1.2 Oil products...................................................................................................................... 5
    1.3 Gaseous fuels.................................................................................................................. 8
2. Current and estimated power capacity .............................................................................10
    2.1 Programme on Integrated Power Energy System of Mongolia .......................................12
3. Current and estimated future electricity consumption ....................................................13
    3.1 Future consumption of electricity ....................................................................................14
III. ENERGY PRICING IN MONGOLIA.....................................................................................16
1. Pricing of major fuel types .................................................................................................16
    1.1 Pricing of coal .................................................................................................................16
    1.2 Pricing of crude oil and natural gas.................................................................................17
    1.3 Pricing of gasoline and diesel .........................................................................................18
    1.4 Pricing of liquefied petroleum gas...................................................................................19
2. Taxes applicable to energy consumption .........................................................................20
    2.1 Import tariffs....................................................................................................................20
    2.2 Value added tax..............................................................................................................20
    2.3 Gasoline and diesel fuel tax............................................................................................21
    2.4 Excise tax .......................................................................................................................21
IV. MAJOR GAS CONSUMING SECTORS AND POTENTIAL CUSTOMERS........................22
1. Commercial and residential use ........................................................................................22
2. Transportation sector .........................................................................................................23
3. Industry................................................................................................................................24
4. Co-generation for power and district heating and distribution of small scale CHP
units .........................................................................................................................................25
V. SUPPLY SOURCES AND TRANSPORTATION..................................................................27
1. Import from Kovykta gas-condensate field, Russia.........................................................27
   1.1 Background to the project ...............................................................................................27
   1.2 Project status and future scenario...................................................................................28
2. Domestic sources ...............................................................................................................29
   2.1 Coal ................................................................................................................................29
   2.2 Crude oil .........................................................................................................................31
   2.3 Coal-to-liquid...................................................................................................................33
   2.4 Coalbed methane gas.....................................................................................................35
3. Current projects and project status...................................................................................35
   3.1 Implemented projects......................................................................................................35
   3.2 Current projects ..............................................................................................................35
4. Transportation.....................................................................................................................41
   4.1 Current situation for logistics and infrastructure in Mongolia...........................................41
   4.2 Infrastructure and logistics outlook..................................................................................44
5. Storage and distribution management in Mongolia.........................................................45
VI. POLICIES AND REGULATIONS ........................................................................................47
1. Policies to encourage consumption of different fuels.....................................................47
   1.1 Minerals Law of Mongolia ...............................................................................................47
   1.2 Petroleum Law of Mongolia ............................................................................................47
   1.3 Millennium development goals-based comprehensive national development strategy
   of Mongolia ...........................................................................................................................48
   1.4 Resolutions by the State Great Khural............................................................................49
   1.5 Government resolutions..................................................................................................50
   1.6 Coal Programme (2007-2020) ........................................................................................51
   1.7 Liquefied Petroleum Gas Programme (2006-2010) ........................................................54
2. Environmental credits ........................................................................................................54
3. Standards and other related technical documentation....................................................55
VI. PRIVATE SECTOR OPPORTUNITIES ...............................................................................58
1. Feasibility of oil, gas and coal-to-liquid in Mongolia .......................................................58
   1.1 Feasibility of oil ...............................................................................................................58
   1.2 Feasibility of coal-to-liquid...............................................................................................58
   1.3 Feasibility of gas .............................................................................................................59
   1.4 Viability of a gas pipeline from the Kovykta gas-condensate field, Russia......................60
2. Opportunities and challenges in the oil, gas and coal sectors.......................................60
   2.1 Opportunities ..................................................................................................................60
   2.2 Challenges......................................................................................................................62
3. Conclusion and recommendations....................................................................................62


                                                            TABLES
Table 1: Oil imports by product type........................................................................................... 6
Table 2: Oil demand forecast by sector...................................................................................... 8
Table 3: Total consumption of methane and other combustible gases......................................10
Table 4: Annual methane and combustible gas consumption ...................................................10
Table 5: Gasoline and diesel fuel tax ........................................................................................21
Table 6: Border-based excise fuel tax rates..............................................................................21
Table 7: Growth of vehicle numbers in Mongolia 1990 – 2007..................................................23
Table 8: Coal resources by basin..............................................................................................29
Table 9: Output by coal mine ....................................................................................................30
Table 10: Projected outcome after implementation of the Coal Programme .............................31
Table 11: Liquid fuels: future production volumes .....................................................................34
Table 12: Estimateed investments for the implementation of the Coal Programme ..................53
Table 13: Standards related to coal and oil...............................................................................56
                                                      FIGURES
Figure 1: Mongolia main indicators ............................................................................................ 1
Figure 2: Development of coal consumption .............................................................................. 4
Figure 3: Estimated future growth in coal consumption.............................................................. 5
Figure 4: Potential trend for gasoline and diesel imports ........................................................... 7
Figure 5: Development of LPG imports and future estimation.................................................... 9
Figure 6: Distribution of energy resources................................................................................ 11
Figure 7: Development of electricity distribution and demand .................................................. 12
Figure 8: Development of electricity consumption.................................................................... 14
Figure 9: Future consumption of electricity............................................................................... 15
Figure 10: Development of coal selling price for major mines .................................................. 17
Figure 11: Comparison of fuel prices for 8 selected countries.................................................. 19
Figure 12: Example of taxes charged on imported diesel fuel.................................................. 20
Figure 13: Development of oil extraction per company ............................................................ 32
Figure 14: Potential oil extraction capacity............................................................................... 33
Figure 15: Development of carried freight by railway and road ................................................ 42
Figure 16: Development plan for the Millennium Road Project ................................................ 45
Figure 17: Petroleum products import by company, 2006........................................................ 46
                            UNITS OF MEASURE

bbl     barrel                                  mcm     million cubic metre
bcm     billion cubic metres                    Mt      million tonne
bcma    billion cubic metres per annum          mtpa    million tonnes per annum
Gcal    gigacalorie                             MW      megawatt
km      kilometre                               MWt     Megawatt thermal
km²     square kilometre                        p.a     per annum
kWh     kilowatt-hour                           Tcf     trillion cubic feet
m³      cubic metre                             TOE     tonne of oil equivalent




                 ACRONYMS AND ABBREVIATIONS

Aimag   province (Mongolia is divided           IPSM    Integrated Power System of
        administratively into 21 aimags)                Mongolia
CBM     Coalbed Methane Gas                     LNG     Liquefied Natural Gas
CDM     Clean Development Mechanism             LPG      Liquefied Petroleum Gas
CES     Central Energy System                   MFEM    Ministry of Fuel and Energy of
CGPU    Coal-gas fired power unit                       Mongolia
CHP     Combined Heat and Power                 MNT     Tugrik (official currency in
CMM     Coal Mine Methane                               Mongolia)
CNPC    China National Petroleum                MRPAM   Mineral Resource and Petroleum
        Corporation                                     Authority of Mongolia
CP      Cleaner Production                      MRTT    Ministry of Road, Transport and
CTG     Coal-To-Gas                                     Tourism
CTL     Coal-To-Liquid                          NG      Natural Gas
DNA     Designated National Authority           NIC     Neft Import Concern
EES     Eastern Energy System                   PIPES   Programme on Integrated Power
ERDC    Energy Research and                             Energy System of Mongolia
        Development Center                      PNG     Pipelined Natural Gas
ESPO    East Siberian-Pacific Ocean             PSC     Production Sharing Contracts
Ger     traditional felt tents                  Soum    district (every aimag is divided
GDP     Gross Domestic Product                          into a number of soums)
GHG     Greenhouse Gas                          STC     Swedish Trade Council
GoM     Government of Mongolia                  TPP     Thermal Power Plant
HOB     Heat Only Boilers                       VAT     Value Added Tax
IEA     International Energy Agency             WB      World Bank
IFC     International Finance Corporation       WES     Western Energy System




                                            I
                               EXECUTIVE SUMMARY


The purpose of this report has been to investigate Mongolia’s energy sector and to establish
private investment opportunities within the oil, gas and coal industry in Mongolia, in order to
diversify it. The study has been conducted by the Swedish Trade Council (STC), as an
assignment for the International Finance Corporation (IFC). The report covers energy supply
and electricity consumption, as well as the production, distribution and consumption of coal,
petroleum products and gaseous fuels.

Currently, coal is the only fossil fuel explored and extracted to any large extent in Mongolia.
Mongolia has estimated coal reserves of about 150 billion tonnes, located in more than 200
coal deposits in 15 major coal basins. The proven reserve of coal is around 20 billion tonnes.
Domestically, the majority of the coal is used as fuel for the country’s thermal power plants. In
2007, over nine million tonnes of coal was extracted in Mongolia. Government proposals are
that this amount is to be increased to 40 million by 2012 and 70 million by 2020.

There is also extraction of crude oil in Mongolia, but so far the country has no domestic
downstream oil industry and close to all crude is exported to China. Consequently all petroleum
products must be imported. Oil extraction in Mongolia has steadily increased and last year
more than 850,000 barrels of crude oil was extracted. The Mineral Resource and Petroleum
Authority of Mongolia (MRPAM) has estimated the capacity of oil production in Mongolia to
reach nearly 4 million barrels in 2015. According to the same authority, it is however not viable
to set up a domestic oil refinery plant until approximately seven million barrels is extracted
annually. According to this estimation, a domestic refinery plant would not be feasible in
Mongolia until around 2025. Until larger volumes are extracted, alternatives include importing
crude oil and refine it domestically.

Due to Mongolia’s dependence on coal and imported fuels, much attention is focused on
diversifying Mongolia’s energy sector and produce different fuels domestically. It is expected
that exploration of oil, coalbed methane gas (CMB) and natural gas (NG) will identify further
domestic resources. Currently, there is no real consumption of any gaseous fuels in Mongolia,
except for Liquefied Petroleum Gas (LPG). LPG is imported in smaller quantities from mainly
Russia and is used as vehicle fuel, as well as household and restaurant cooking gas. Initial
activities indicate a relatively large potential for CBM in the country, but until today no economic
reserves have yet been identified and there is a need for further geological exploration and
surveys.

Another area of focus includes developing coal-to-liquid (CTL) technologies in order to produce
fuels, such as diesel and LPG, from domestic coal resources. Development of CTL production
capacity is one of the strategic targets of the National Coal Programme and this programme
has set 2012 as a date when CTL should be functioning in Mongolia. By this date, CTL
production capacity is planned to produce 400 thousand tonnes of synthetic fuels. Several
government and private CTL research projects and feasibility studies have been carried out in
Mongolia. Yet, CTL plants are associated with a number of challenges such as high capital


                                                 II
investment and operating costs, technical knowledge and infrastructure and rely on a sufficient
supply of water and energy, which can not be guaranteed in Mongolia.

The study has indentified a number of areas providing opportunities for private investments in
the oil, gas and coal sectors in Mongolia.


  Development of CTL and CBM

  Mongolia’s coal basins provide potential for development of CTL and CBM projects. Opportunities include
  for companies to be a part of feasibility studies in cooperation with overseas governments or private
  companies and providing exploration surveys. Further opportunities include financing and establishment of
  CTL plants and CBM extraction operations, as well as supplying technology, equipment and on-site
  training.


  Planning/construction of power resources

  In order to satisfy the demand from sectors such as construction and industry, establishment of new power
  sources will be required. This provides opportunities for financiers, technical consultants, constructors as
  well as for equipment suppliers.


  Implementation of CDM projects

  As a part of the Kyoto Protocol, Mongolia is a potential host country for CDM projects which could diversify
  the country’s energy sector. Potential projects include reforestation of mine lands, the extraction of
  methane gas from coal mines and replacement of petroleum products and coal by gas in the industry and
  power sectors.


  Participation in infrastructural development projects

  Mongolia’s proposed investments in transport infrastructure between 2008 and 2015 are estimated to
  amount to USD 2,945 million. Private construction companies are allowed to participate in selective tenders
  and opportunities could potentially be found within infrastructural development projects, design and
  construction of distribution systems and city planning.


  Development of a downstream industry

  Today, all oil exploration blocks are either in production, at the exploration stage or have an application for
  exploration under consideration. Opportunities, within for example the downstream industry, might arise if
  larger reserves are secured.




                                                        III
                                                 I. INTRODUCTION


Situated between Russia and China and with a total area of circa 1.6 million square kilometres,
Mongolia is not only the world’s second largest landlocked country; the meagre population of
2.6 million also makes Mongolia one of the most scarcely populated nations in the world.
Traditionally, the inhabitants are nomads and herders and about 40 per cent of the total
population still resides in rural areas. The urban population is concentrated in and around the
capital of Ulaanbaatar, Darkhan City and Bayan-Under Soum (Erdenet City), with the vast
majority living in Ulaanbaatar 1 . Due to an increasing urbanisation, the population in
Ulaanbaatar has doubled since the beginning of the 1990s and the ger2 districts surrounding
the capital have grown significantly3.

Mongolia’s economy has developed steadily over the last decade and in 2007 the gross
domestic product (GDP) increased with nearly 10 per cent from the previous year, reaching
USD 3.9 billion4. The GDP per capita has increased correspondingly, but more than 32 per
cent of households are still below the poverty line5 and Mongolia is continuously dependent on
international assistance and support.



    Figure 1: Mongolia main indicators                                       Development of GDP
                                                                             USD billion
    Capital                          Ulaanbaatar                              5                                                3.9
    Land territory                   1.56 million km²                          4          CAGR 32%                     3.19

    Population                       2.64 million                              3                               2.28
                                                                                                      1.61
                                                                               2         1.27
    Population density               1.68 people per km²
                                                                               1
    GDP                              USD 3.9 billion                           0
    GDP per capita*                  USD 1,478                                           2003         2004     2005    2006    2007
    Real GDP growth rate             9.9%                                     Development of GDP per capita
                                                                              USD
    Important industries             Agriculture, mining, hunting
                                     and fishing, textiles, service            2000
                                                                                                                               1,478
                                     and transportation                        1500             CAGR 31%
    Foreign trade                                                                                                      1,056
                                                                                                                 812
    Exports                          USD 1.9 billion                           1000                      639
    Imports                          USD 2.2 billion                                            509
                                                                                   500

                                                                                     0
    *World Bank Atlas method                                                                2003        2004    2005   2006    2007
    Source: NSOM, Golomt Bank of Mongolia 2008




1 National Statistical Office Mongolia (NSOM), United Nations Children's Fund (UNICEF) 2007
2 Traditional felt tents
3 European Commission (EC) 2007, NSOM
4 Golomt Bank of Mongolia 2008
5 United Nations Development Program (UNDP) 2007 (Figure for 2006)




                                                                    1
Along with the important agricultural industry, mining is a central sector and a main contributor
to the economy. In 2007 mining and quarrying represented 27.5 per cent of GDP6. Mongolia is
estimated to have some of the world’s largest reserves of minerals, including coal, copper and
uranium. Amongst the more significant deposits is the Oyu Tolgoi copper and gold mine and
the Tavan Tolgoi coal deposit, both with considerable estimated resources.

In addition to the quarrying of minerals, there is extraction of crude oil in the eastern parts of
the country, as well as prospecting for natural gas (NG) and coalbed methane gas (CBM) in a
number of mining blocks. None of the crude oil is yet refined in Mongolia and currently no other
natural energy resource other than coal is utilised domestically. This has created a 100 per
cent dependency on imports of fuels such as gasoline and diesel, mainly from Russia. With
increasing domestic consumption of such fuels, further exploration and development of
domestic resources and diversification of import sources are of large importance to Mongolia’s
future development. This is also true for the power and electricity network. Given Mongolia’s
extremely long and cold winters, heating is a life necessity and a well-functioning power system
and distribution network is thus essential for future development.

The dependency on imported fuels, along with a growing consumption and pollution caused by
the burning of coal, is creating an increasing need for the development of domestic resources
and cleaner fuel alternatives. It is however uncertain if Mongolia has enough oil and gas to
cover domestic demand. Alternatives include development and utilisation of coal technologies
to produce fuels from coal. These technologies are however still at the initial stage and in
global terms are so far to any larger extent only used by one company, Sasol Ltd., in South
Africa.

The Mineral Resource and Petroleum Authority of Mongolia (MRPAM) has declared that,
although no major discoveries of oil and gas in Mongolia have been made to date, recent
exploration data show encouraging results and according to the Mongolian authorities
development of domestic crude oil production is likely in the future7. For development of such
energy exploration projects Mongolia would, in addition to offering encouraging governmental
incentives, also have to attract significant foreign investments, as well as invest in the
development of necessary infrastructure.

The purpose of this report is to investigate Mongolia’s energy sector and to establish private
investment opportunities within the oil, gas and coal industry in Mongolia, in order to diversify it.
The study has been conducted by the Swedish Trade Council (STC), as an assignment for the
International Finance Corporation (IFC). The report covers energy supply and electricity
consumption, as well as the distribution and consumption of coal, petroleum products and
gaseous fuels.




6   NSOM
7   Mineral Resource and Petroleum Authority of Mongolia (MRPAM) 2007b




                                                                   2
                               II. ENERGY TRENDS IN MONGOLIA


1. Growth potential for consumption and imports by fuel type
When discussing energy trends and consumption of different fuels in Mongolia one can regard
utilisation of resources from three aspects; domestic resources currently utilised, consumption
of imported fuels and also fuels with the potential to be produced in Mongolia.

Currently, coal is the only fossil fuel explored and extracted to any large extent in Mongolia.
There is extraction of crude oil, but so far Mongolia has no domestic downstream oil industry.
Consequently fuels such as gasoline, diesel and liquefied petroleum gas (LPG) must be
imported.

There is exploration for coalbed methane gas (CBM) as well as for natural gas (NG), but so far
neither is extracted domestically or imported. The only gaseous fuel consumed is LPG which is
imported in small quantities, mainly from Russia. Consequently, 81 per cent of Mongolia’s
energy comes from coal and the remaining 19 per cent primarily from petroleum products8.


1.1 Coal
Mongolia’s domestic consumption of coal has been increasing by about 200,000 tonnes
annually since 2005, reaching nearly six million tonnes last year. Domestically, the majority of
the coal is used as fuel for the country’s thermal power plants. Mongolia’s three energy
systems, consisting of six power plants, consume nearly five million tonnes of coal annually,
representing more than 80 per cent of the country’s total coal consumption.9

Coal is also used as a direct heating fuel for homes in Mongolia. Administratively, Mongolia is
divided into 21 aimags10 and every aimag is divided into a number of soums11. Since only 200
out of Mongolia’s 331 soums and settlements are connected to a power system 12, a large
amount of households are dependant on coal for heating and cooking. Even though more than
one million of the total population of 2.6 million lives in Ulaanbaatar 13 , 21 per cent of the
capital’s population resides in the ger districts surrounding the city14. Consequently, more than
450 thousand tonnes of coal was used for heating of communal and private houses and gers in
2007 and of this total, over 375 thousand tonnes was consumed by households alone15. The
dependency on coal in the ger districts surrounding Ulaanbaatar is polluting the city, especially
during colder months, creating a need for alternative cleaner fuels and energy sources.



8 World Bank (WB) 2008d
9 NSOM
10 Administratively Mongolia is divided into 21 provinces or so called aimags.
11 Every aimag (province) in Mongolia is dived into a number of districts also known as soums.
12 Program on Integrated Power Energy System of Mongolia (PIPES)
13 NSOM
14 Batmonkh 2008
15 NSOM




                                                                      3
     Figure 2: Development of coal consumption                             Coal consumption in 2007 by segment
     1,000 tonnes                                                          Percentage

     6000                                                          5,906

     5800                                                  5,691            Thermal pow er
                           5,535                                             stations 84%
     5600                                          5,473                                       Communal
                                                                                               housing 8%
     5400
             5,212 5,189
                                   5,162 5,189                                                              Industry &
     5200                                                                                              construction 3%

     5000
                                                                                                  Other 3%
     4800                                                                                          Transport &
                                                                                                 communications
     4600
                                                                                                      2%
             2000 2001 2002 2003 2004 2005 2006 2007

     Source: NSOM




Apart from the six million tonnes of coal consumed domestically, Mongolia exports about three
million tonnes of coal annually, mainly to China16. China’s coal consumption has been growing
progressively, resulting in increasing imports 17 . According to forecasts by the International
Energy Agency (IEA), in the period from 2004 to 2030 China and India account for 72 per cent
of the projected increase in world coal consumption18. However, due to the global financial
crisis the demand for coal by the industry and the energy sector in China has been decreasing,
causing rapidly falling prices for coal in China. The decreasing demand is predicted to continue
into 2009, leading to a possible surplus of domestic Chinese coal.

1.1.1 Future consumption
Mongolia’s future domestic coal consumption is largely determined by new energy and coal
consuming projects coming on stream, such as the construction of additional coal-fired power
plants and implementation of technologies for coal liquefaction (CTL) and coal gasification
(CTG). If consumption continues at the same speed as in the past, a growth by about eight per
cent can be expected by 2015. However, implementation of new projects will create a different
scenario for Mongolia’s future domestic coal consumption.

According to the development plans for Mongolia, several new coal consuming projects are
planned to be constructed by 2040 (for more information see Chapter V. Regulation and
Policy). The plans allow for a fifth power plant to be up and running in Ulaanbaatar around
2010, using CTG technology to generate electricity. The plant alone is predicted to consume
2.5 million tonnes of coal annually. Additionally there are plans for the construction of a power
plant by Shivee Ovoo, with a consumption of an additional 15 million tonnes of coal per year,
as well as the implementation of CTL and CTG technologies to produce fuel and power.19

16 NSOM
17 National Bureau of Statistics of China (NBSC)
18 International Energy Agency (IEA) 2007
19 Ministry of Fuel and Energy of Mongolia (MFEM) 2008a




                                                                   4
According to estimates by the Ministry of Fuel and Energy of Mongolia (MFEM), annual
production of coal in Mongolia could potentially reach 40 million tonnes in 2012 and increase to
70 million tonnes by 2020. Of this total, 13 million tonnes are expected to be exported in 2012
and 20 million tonnes by 2020, creating a scenario where 27 million tonnes of coal could
potentially be consumed domestically in Mongolia by 2012 and 50 million tonnes by 2020.20

According to the MFEM projected annual growth rate of coal consumption, it is predicted that
by 2020 more than seven times the amount of coal will be consumed compared to if the historic
growth continues.



     Figure 3: Estimated future growth in coal consumption



                                                                              —          Scenario 2
                                                                                       With implementation of several
                                                                                       new coal consuming projects the
                                                                                       domestic consumption of coal
                                                                                       reaches 27 million tonnes in 2012
                                                                                       and increases to 50 million tonnes
                                                                                       by 2020.

                                                                              —           Scenario 1
                                                                                       Consumption continues at the
                                                                                       same rate as in the past. A growth
                                                                                       of about 8% can be expected until
                                                                                       year 2015.
             2007                   2012                   2020


     Source: Scenario estimation by STC based on figures from NSOM and MFEM




1.2 Oil products
The present consumption of oil products in Mongolia is relatively low and the country has a
total dependency on imported oil products. In 2007, the annual import of oil products in
Mongolia reached nearly 780 thousand tonnes, with the majority of the products being imported
from Russia. The imported oil products are consumed by sectors such as transportation,
construction and mining as well as by electricity generators in mainly off-grid aimags and
soums.




20   Energy Conservation and Environmental Consulting Co. Ltd. (EEC): MFEM Coal Programme



                                                                   5
Table 1: Oil imports by product type, 1,000 tonnes
     Product type                           2003        2004     2005         2006         2007

     Petrol                                 259.1       270.1   254.8         280.4        346.2
     Diesel oil                             214.8       258.2   270.9         310          387.6
     Jet fuel                               23.9        22.8     18.9         41.4          39.2
     Mazut                                  12.4        11.1      4.9          4.4          7.6
     Lubricants                              2.7         1.7      1.8          1.5          2.6
     Total                                  512.9       563.9   551.3         637.7        783.2
Source: NSOM



1.2.1 Crude oil
With no domestic downstream oil industry there is currently no direct consumption of crude oil
in Mongolia. As previously mentioned, close to all crude currently extracted in Mongolia is
exported over the boarded to China. In 2007, the amount of home-produced oil still only
represented about 20 per cent of Mongolia’s consumption of petroleum products. Forecasts do
however state that this will reach 50 per cent by 201021.

Consequently, future consumption trends of crude oil depend on the construction of refineries
in Mongolia. If domestic extraction would yield enough oil for a refinery to be feasible, or if other
solutions such as combining domestic crude with imported oil in order to refine domestically
would occur, Mongolia’s consumption of crude oil would increase considerably (for further
discussion regarding prospects for a domestic downstream oil industry see Chapter IV. Supply
Sources and Transportation).

1.2.2 Residual fuel oil
Residual fuel oils such as mazut are imported and used as fuel mainly for Mongolia’s six coal
fired power plants. Even though the total capacity of Mongolia’s six power stations remained
unchanged between 2001 and 2006, their utilisation of mazut declined by about 50 per cent. In
2006, the consumption of mazut by the six power stations was 4,000 tonnes. Even if the
imports of mazut increased during 2007, the volume does not represent even one per cent of
Mongolia’s total petroleum products import during the year. 22 With some new power stations
coming on stream, there might be a growth in the usage of mazut, but imports are unlikely to
grow substantially in coming years.

1.2.3 Gasoline and diesel
With growing urbanisation and industrialisation, as well as an increasing number of cars, there
is a growing demand for fuels such as diesel and gasoline. The number of vehicles in Mongolia
has increased with an average of more than ten per cent annually since 2000, with passenger
cars being the fastest growing sector. Accordingly, imports of gasoline and diesel have been
increasing steadily.23

21 WB 2008d
22 Energy Regulatory Authority (ERA) 2008
23 NSOM




                                                    6
Gasoline and diesel is imported mainly from Russia. Since 2000, imports of diesel have been
growing by an average of 13.3 per cent annually while imports of gasoline have shown a
somewhat slower growth at 5.8 per cent24. Last year, import volumes of gasoline and diesel
reached 346,200 tonnes and 387,600 tonnes respectively25.

With increasing numbers of cars, higher demands on public and city transportation and growing
industrialisation and construction, imports of gasoline and diesel are projected to increase
significantly in coming years. In particular, the demand for diesel is increasing rapidly. The
trend could change with an implementation of CTL (or similar technologies) or if a domestic
refinery were established.



     Figure 4: Potential trend for gasoline imports                   Potential trend for diesel imports
     1,000 tonnes                                                     1,000 tonnes
     800                                                              800

     700                                                              700

     600                                                              600

     500                                                              500
                                                                                                    Potential
     400                                                              400                       implementation of
                                                                                                 CTL production
                                        Potential
     300                            implementation of
                                                                      300
                                     CTL production
     200                                                              200

     100                                                              100

        0                                                                0
               2007        2010        2015        2020                       2007      2010      2015        2020

     Source: Estimation by STC based on historic data from NSOM




1.2.4 Estimated future domestic demand for oil products
There are several projections regarding the future domestic demand for oil in Mongolia.
According to projections made by the Energy Research and Development Center of Mongolia
(ERDC), the total demand for oil in Mongolia increased from 345 thousand TOE in 1995 to 618
thousand TOE in 2004 and is projected to reach nearly 1.4 million TOE by 2020. Oil is mainly
used for industrial and transportation purposes and the transport sector is also expected to
remain the largest oil consumer in coming years. While oil demand in the industrial sector is
projected to increase at an average rate of five per cent annually between 2004 and 2020,
mainly due to expected new mining projects at potential deposits, oil demand for power
generation is projected to decline over the same period. 26


24 NSOM
25 Ibid.
26 EEC: Energy Research and Development Center of Mongolia (ERDC) 2007




                                                                  7
 Table 2: Oil demand forecast by sector, 1,000 TOE
                         Years                                           Growth rate p.a. (%)
                         1990    1995   2004   2010      2015    2020    ’90-‘95     ’95-‘04    ’04-‘20
     Industry             85     50     143    227       281     309      -10.2       12.4       5.0
     Transport           163     50     352    519       669     857      -21.2       24.3       5.7
     Restaurants and.
                          12     11     75     113       139     144       -0.7       23.9       4.2
     companies
     Public and others   833     163     32     49        67      64      -51.4       3.9        4.4
     Power generation     79     54      12     7         6       6        -7.5      -15.5       -4.6
     Heating              26      17     4      0         0       0        -7.5      -15.5       -4.6
     Total               1,198   345    618    915       1,162   1,380    -22.1       6.7        8.0
Source: EEC: ERDC 2007



1.3 Gaseous fuels
Due to the lack of developed domestic resources of CBM or NG as well as high import prices,
there is currently no real consumption of any gaseous fuels in Mongolia, except for LPG.
According to the MFEM, there have been previous proposals to start using LNG, since it could
be transported to Mongolia by train from Russia, but due to a monopolisation of the Russian
market by Gazprom and high prices, these plans were never implemented. Current domestic
exploration of potential resources is still at the initial stage.

1.3.1 Liquefied petroleum gas
Imports and consumption of LPG started during the mid 1990s27. LPG is currently imported to
Mongolia from mainly Russia and in lesser quantities from China. The gas is used as vehicle
fuel, as well as household and restaurant cooking gas. Small amounts are also consumed by
the industrial and tourism sectors. In 2006, there were 11,000 users in Ulaanbaatar and 26,000
users in aimags and provinces 28 . With no distribution pipelines to residential areas or
industries, LPG is picked up at refilling stations by the users throughout the country.

LPG represents only a fraction (0.8 per cent) of Mongolia’s total fuel imports, but import
volumes have nearly doubled year-on-year since 2005. However, opinions differ regarding
future consumption. Mongolian industry forecasts continuous strong growth, with import
volumes reaching 20 thousand tonnes annually within five years29. New potential application
areas are believed to be found within both industry and commercial sectors. The government
on the other hand, predicts continuous growth, but with no new consumer groups entering the
market30. The strongest growth is believed to be found in the vehicle fuel sector.

Currently there are about 160,000 vehicles in Mongolia, 1,000 of which run on LPG. According
to the MFEM, up to 50,000 cars in Mongolia could potentially use alternative fuels, but the

27 Doljintseren 2007
28 WB 2008e
29 Interview material
30 MFEM 2008a




                                                     8
number of cars using LPG is estimated not to reach more than about 10,00031. The usage of
LPG depends on the availability of other fuels, as well as the domestic production of LPG. If
domestic sources of CBM or NG are found and utilised, and combined with domestic
production of different bio fuels, this would of course take priority over imported fuels such as
LPG.

Mongolia has a programme for LPG (Chapter V. Regulation and Policy) but due to its current
import dependency, additional large LPG projects or strong promotion to consumers is unlikely
to be initiated by the government. Even if LPG could be included in the construction plans of
new residential areas, especially with the purpose of reducing the usage of coal, this is not
likely to be encouraged without domestic resources. The price increase of LPG, from USD 200
per tonne in 2004 to about USD 900 today32, also makes it a relatively expensive fuel and LPG
is thus unlikely to replace consumers’ usage of coal for cooking and heating, on any large scale
or without incentives.

Recent import statistics for LPG to April 2008 indicate somewhat declining import volumes33.
Without future domestic production of LPG or encouragement from the government, the rapid
increase in import volumes is likely to ease over time.



     Figure 5: Development of LPG imports and future estimation
     1,000 tonnes
      25                                                    Import volumes of LPG have nearly doubled
                                                            year-on-year since 2005 but opinions differ
                                                  21        regarding future consumption.
     20                                                                LPG providers believe there will be a
                                                                       continuous strong increase of consumption
                                                     15                of LPG in Mongolia, with import volumes
     15                                                                reaching 20,000 tonnes annually within five
                                                                       years.

     10                                    8.5                         The government, on the other hand,
                                                                       predicts a continuous growth but with no
                                  6.2
                                                                       new consumer groups entering the market.
       5                3.5
                                                                       A forecast on LPG consumption based on
              1.7
                                                                       historic import volumes until April 2008,
                                                                       expects import volumes of LPG to reach
       0                                                               21,000 tonnes by 2020.
             2005     2006      2007      2010      2015     2020

     Source: Estimation by STC based on historic data by MRPAM 2008a




31 NSOM, MFEM 2008a
32 Interview material
33 MRPAM 2008b




                                                                  9
1.3.2 Estimation of future domestic demand for gaseous fuels
Table 3 and Table 4 illustrate and estimate the annual consumption of methane and other
combustible gases. According to these forecasts, Mongolia’s annual consumption of gas could
reach 1,200 mcm by 2020.


Table 3: Total consumption of methane and other combustible gases
     Consumer type                      2015                         2020                    2025                  2030

                                                                                      30% of annual total   80% of annual total
     CHP                                   -                            -
                                                                                       heat consumption      heat consumption

     HOB                           100,000 Gcal                 275,000 Gcal            325,000 Gcal          350,000 Gcal

     Private
                               27,000 households            40,000 households         50,000 households     50,000 households
     households

     Apartments                10,000 households            40,000 households         60,000 households     80,000 households

     Cars                            1,000 cars                  10,000 cars             20,000 cars           40,000 cars

Source: EEC: Estimate by Prof. Namkhainyam, Mongolian University of Science and Technology



Table 4: Annual methane and combustible gas consumption, mcm
     Consumer type                                 2015                      2020               2025                2030

     CHP                                             0                         0                 410               1,000
     HOB                                           14.6                      40.5               47.45                51
     Private houses                                37.8                        56                70                  70
     Apartments                                     2.5                       8.6               12.9                17.2
     Cars                                           2.2                        22                44                  88
     Total                                         57.1                      127.1             584.35             1,226.2
Source: EEC: Estimate by Prof. Namkhainyam, Mongolian University of Science and Technology



2. Current and estimated power capacity
With winter lasting from November to late April and with average day temperatures of -20
degrees Celsius, heating is life necessity in Mongolia. Despite this, only 200 out of 331 soums
and settlements are connected to a power system34. Even though between 67 to 75 per cent of
Mongolia’s population has access to electricity, the vast majority of the covered households are
to be found in urban areas35. This is also true for the distribution of heating.




34   PIPES 2007
35   World Bank (WB) / Public-Private Infrastructure Advisory Facility (PPIAF) 2007



                                                                        10
Mongolia has three regional systems for energy distribution:

        •     Central Energy System (CES)
        •     Eastern Energy System (EES)
        •     Western Energy System (WES)

The CES is based on three coal-fired combined heat and power (CHP) plants in Ulaanbaatar
and local coal-fired CHP plants in Darkhan and Erdenet. The CES has a total installed power
capacity of about 782 MW and represents 96 per cent of the country’s electricity supply. The
EES consists of one independent CHP plant in Dornod, supplying the eastern provinces with
heat and power and some isolated diesel generators. The WES is dependant on electricity
imports from Russia.36



     Figure 6: Distribution of energy resources
     MWt
                                                                           Nearly 80% of Mongolia's energy comes from
                      Hydropower plants
                                                                           the country’s six coal-fired CHP plants,
         Diesel power      2.67%        Wind & solar power                 located in Ulaanbaatar, Darkhan, Erdenet and
         stations 4.39%                         stations 0.35%             Dornod. The lion’s share of electricity is
                                                                           produced by the #4 plant in Ulaanbaatar.

     Import 12.83%                                                         Apart from the CHP plants, hydropower, solar
                                                                           or wind power stations are utilised. The
                                                                           hydropower plants are mainly located in the
                                                                           western parts of Mongolia, while solar and
                                                                           wind power stations are distributed
                                                                           throughout Mongolia.
                                                Combined heat and
                                                                           Diesel power stations are also used to cover
                                               power plants 79.76%
                                                                           the power demand in, for example, the
                                                                           eastern provinces of Mongolia.
     Source: MFEM 2008c




Although the situation has improved in recent years, Mongolia’s energy system suffers from
losses in transmission and distribution, as well as high internal consumption of electricity by the
power stations themselves. In 2007, losses in transmission and distribution amounted to 442.4
million kWh and together with the stations internal usage of 614.5 million kWh, they
represented nearly 30 per cent of the total gross generation during this period37.




36   WB/PPIAF 2007, United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) 2007a
37   NSOM



                                                                  11
     Figure 7: Development of electricity distribution and demand
     Mln kWh

     4000                                                             Even if electricity gross generation and
                                                                      consumption have increased in Mongolia
     3500                                                             over the 1995-2007 period, losses in
     3000                                                             transmission and distribution have
                                                                      remained level.
     2500
     2000                                                             The losses have been decreasing in recent
                                                                      years, despite a strong increase in both
     1500
                                                                      distribution and consumption. On average,
     1000                                                             the loss in transmission and distribution
                                                                      decreased by 1.05% year-on-year since
      500
                                                                      year 1995.
         0
             1995 1997 1999 2001 2003 2005 2007                       However, current losses in transmission
                                                                      and distribution together with the stations
                    Gro ss generatio n                                internal usage of electricity still represent
                    Co nsumptio n
                    Statio ns internal use
                                                                      29% of the total electricity generation.
                    Lo sses in transmissio n and distributio n
     Source: NSOM




2.1 Programme on Integrated Power Energy System of Mongolia
Many Mongolians have to spend a large part of their income on heating. This is particularly true
for settlements not connected to the regional distribution systems. Households in the ger
districts, which are dependant on coal burning stoves for heating and cooking, often spend up
to 20 per cent of their income on fuel and heating during the winter months38. In order to
enhance the reliability of power supply and improve efficiency and loss reduction, the
Government of Mongolia (GoM) has developed an energy plan until 2040: the Programme on
Integrated Power Energy System of Mongolia (PIPES) with the intention to form an Integrated
Power System of Mongolia (IPSM). The PIPES is divided into three phases, each coming on
stream somewhere between 2007 and 2040. Implementation and financing will be handled by
both state and local budget sources and loans, as well as private investments from both
domestic and foreign sources39.

During the first phase (2007-2012) the objective is to provide all soums and settlements with a
permanent power supply, from both regional energy systems and renewable energy sources.
Current CHPs will be modernised and improved and a fifth CHP in Ulaanbaatar, with a capacity
of no less than 100 MW, will be constructed. Other projects include the construction of a
hydropower plant on the Egiin River, with a capacity of 220 MW and connected to the CES, a
hydropower plant on the Delger River, as well as the construction of wind parks connected to
the CES. A transmission line will also connect Ulaanbaatar with Oyu Tolgoi in the Gobi region,
in order to provide regional mining projects with sufficient power supply. In the same region a
power plant with a minimum capacity of 300 MW will be built and connected to the CES.40

38 WB/PPIAF 2007
39 PIPES
40 Ibid.




                                                                 12
The second stage (2012-2022) includes further construction of power and electricity sources
and transmission lines. The CES, EES and WES will be connected by high voltage lines in
order to start forming an integrated energy system. There will also be further building of
hydropower plants on the Hovd River and on the Orhon River, utilisation of geothermal heat
and solar power sources and the erection of transmission lines.41

In the third stage (2022-2040) the CES and WES will be connected with a high voltage
transmission line forming an integrated energy system. There will also be further expansion
and implementation of policies to expand usage of renewable energy sources.42


3. Current and estimated future electricity consumption
In 2007, Mongolia’s total electricity consumption reached 2,829 million kWh, with a gross
generation of 3,701 million kWh. Over 60 per cent of the electricity is used by the industry and
construction sectors, including the energy-intensive mining industry. This is followed by
households and communal housing, which jointly represent about 25 per cent of total use.43

Consumption of electricity in Mongolia has increased by an average of 6.42 per cent annually
over the 2001 to 2007 period 44 . However, when estimating the future growth trend over a
longer period, historically increases have not been as rapid as in recent years. Forces behind
the increasing consumption of electricity are a growing GDP, a rising urbanisation as well as
increased usage by several sectors such as transportation, communications, industry, including
mining and construction. Mongolia’s GDP has shown a strong growth and since 2003 the GDP
per capita has increased with an average of 31 per cent year-on-year45. At the same time, a
rising urbanisation has taken place and while the rural areas are showing a marginal decline in
residents, the population in Ulaanbaatar has grown with an average of nearly 40 per cent
annually since 200046.

The construction sector in Mongolia has shown continuous growth and last year it grew by 22.4
per cent compared to the previous year. The consumption of electricity by industry and
construction grew by 7.3 per cent during the same period. During 2007, 115 residential
buildings, including 3,725 new apartments, as well as 104 buildings for industry and service
purposes, were erected in Mongolia 47 . The GoM “40,000 apartments” programme, with the
purpose of providing 40,000 households with new accommodation in mainly Ulaanbaatar, is
predicted to further boost the sector.




41 PIPES
42 Ibid.
43 NSOM
44 Ibid.
45 Golomt Bank of Mongolia 2008
46 NSOM
47 Ibid.




                                              13
     Figure 8: Development of electricity consumption
     Mln kWh                                                                 In 2007, consumption of electricity in
                                                                             Mongolia reached 2,829 million kWh.
     3000                                                                    On average the consumption has
                                                                             grown with 3.33% since year 1995,
                                             CAGR 6.42%
     2500                                                                    with a particularly fast increase in
                                                                             recent years. Since 2001, annual
     2000                                                                    growth has been 6.42%.

     1500                                                                    The majority of the electricity is used
                                                                             by the industry and construction
     1000                                                                    sectors, followed by consumption by
                                                                             households and communal housing.
                                                                             The consumption by the transport and
       500
                                                                             communication sector has increased
                                                                             most, growing with an average of
         0                                                                   4.52% during the 1995-2007 period.
             1995        1997       1999   2001   2003     2005     2007
                                                                             The usage of electricity in the
        Industry and construction           Household and communal housing
                                                                             agricultural sector declined during the
        Other                               Transport and communication
        Agriculture                                                          period 1995-2001, but has since 2002
                                                                             started to increase.
     Source: NSOM




3.1 Future consumption of electricity
In Figure 9, Mongolia’s future consumption of electricity has been divided into three scenarios.
Scenario 1 is based on the growth figures for the period 2000-2007, and indicates that if the
current trend is continuous an increase by 60 per cent in electricity consumption can be
expected by 2020. The calculation demonstrates that even without implementation of any new
major energy consuming projects, Mongolia’s energy consumption is predicted to increase in
the future.

The development of electricity consumption in Mongolia is however inevitably influenced by
new projects within sectors such as mining, construction and transportation. Especially the
mining sector is a central consumer and the development of extensive mining projects in the
South Gobi region will in future require substantial amounts of electricity48. Research predicts
that the electricity and heating demand in Mongolia will increase by higher rates than estimated
in Scenario 1, forecasting annual growth figures of between four to six per cent up until 202049.
Calculating the growth based on estimations on a yearly increase by 4.5 per cent and on 5.5
per cent will inevitably change the scenario for Mongolia’s future electricity consumption. With
an average annual growth of 4.5 per cent, electricity consumption in Mongolia will have
increased by approximately 80 per cent by 2020. An average growth of 5.5 per cent will create
a scenario where twice as much electricity is consumed in 2020 by comparison to today.




48   WB/PPIAF 2007
49   WB 2008b, So 2008



                                                              14
Figure 9: Future consumption of electricity
                                                                          —         Scenario 3
                                                                                 According to electricity outlook for
                                                                                 Mongolia, electricity demand will
                                                                                 increase by an average of 5.5%
                                                                                 from 2004 to 2020.

                                                                          —        Scenario 2
                                                                                 Based on an estimation by World
                                                                                 Bank, where electricity demand is
                                                                                 expected to grow between 4 and
                                                                                 5% annually between now and
                                                                                 2020. The calculation is done by
                                                                                 assuming an annual growth of
                                                                                 4.5%.

   2007        2010        2015       2020       2025        2030         —         Scenario 1
                                                                                 A continuous growth based on the
                                                                                 historic growth rate between years
                                                                                 2000 and 2007.
Source: Scenario estimation by STC based on figures by NSOM, WB 2008b, So 2008




                                                             15
                             III. ENERGY PRICING IN MONGOLIA


1. Pricing of major fuel types
The GoM controls prices for coal and is also involved in the price setting of crude oil and NG50.
The export price of minerals is also regulated by the government, with the purpose of protecting
and securing domestic resources. Pricing of minerals for export shall comply with the Joint
Order of the Minster of Finance and the Minister of Commerce and Industry, number 119/8951,
with a set methodology for setting the sales price of mining export products. The main principle
is to price through comparison and by following relevant international market prices. For
instance, when setting the sales price of gold and silver, the price will be based on the price set
by Mongol Bank, the central bank of Mongolia, for the particular mineral on the date of the
sales or the loading. When setting the sales price for pure copper, zinc, tin and lead, the price
shall be based on the average price of the London Metal Exchange the month of sale or
loading52.

The government is also involved in the selling price of exported crude oil. The prices for refined
petroleum products and gaseous fuels used in Mongolia are however regulated by the seller,
since theses are all imported commodities. The price for such products is thus also affected by
the international oil market price and influences such as increases in export tax and tariffs on
refined products by the country of origin.


1.1 Pricing of coal
The majority of Mongolia’s extracted coal is used for domestic power generation. Coal mines at
Baganuur, Sharin Gol and Shivee Ovoo supply the CES’s power plants in Ulaanbaatar,
Erdenet and Darkhan. The Baganuur and Shivee Ovoo coal mines are mined by state-owned
companies while the Sharin Gol mine is privately owned53.

The domestic price for coal has progressively increased and for some mines it nearly doubled
during the period from 2000 to 2007. Because coal is the main source of energy in Mongolia,
the fluctuation in coal prices has had a large impact upon the cost of electricity production. Due
to an increase in the price of coal from the Baganuur and Shivee Ovoo mines, fuel costs for the
power plants in CES increased by MNT 4.25 billion in 200754.




50 MFEM 2008c
51 Joint Order of the Minster of Finance and the Minister of Commerce and Industry, Number 119/89
52 Ibid.
53 United States Agency for International Development (USAID) 2007
54 ERA 2007




                                                                    16
     Figure 10: Development of coal selling price* for major mines
     MNT/tonne                                                     The major mines selling prices for coal
      18000                                                        has increased progressively. Only the
      16000                                                        Tavan Tolgoi mine has kept a stable
                                                                   price during the period 2000 to
      14000                                                        November 2007.
      12000
                                                                   Of the three mines that supply CES’s
      10000                                                        power plants with coal, the private
       8000                                                        Sharin Gol mine’s price has increased
                                                                   the most. While the coal price from the
       6000
                                                                   two state-owned companies Baganuur
       4000                                                        and Shivee Ovoo increased by about
       2000
                                                                   6.5% respectively between 2000 and
                                                                   November 2007, Sharin Gol’s price
          0                                                        increased by over 10% during the same
                 2001       2003          2005        Nov-07       period.

                 Sharin Gol            Baganuur                Tav an Tolgoi         The quality of coal and the mining
                 Shiv ee Ov oo         Aduunchuluun                                  conditions are some of the assumed
     *Not including VAT
                                                                                     influencers to the price difference
     Source: ERA 2008                                                                between the different mines.




Also the purchase price for coal to private consumers increased and between April 2007 and
April 2008 this rise was nearly 50 per cent in Ulaanbaatar55. This mainly affects consumers in
the ger districts surrounding the city and who are not connected to the grid. About 20 per cent
of households in Mongolia live in apartments with heating, hot and cold water and a waste
water disposal system56. Consequently a large number of households are dependant on coal
as heating fuel and can during winter months spend up to 20 per cent of their disposable
income on fuel and heating57.

To date, almost all coal exported from Mongolia is to the Chinese market. All types of coal for
the purpose of exports are accordingly priced by using the price average of official published
journals and magazines on the China Coal Weekly during the month of the sales or loading as
a benchmark 58 . By adopting a method of comparison when selling coal and other mining
products, the GoM is aiming to comply with the international market prices on export
commodities.


1.2 Pricing of crude oil and natural gas
Similar to the pricing of coal exports, the government is also involved in the price setting of
crude oil and NG. Pricing of the two is stated in the Regulation for Implementing the Petroleum
Law, article 16. As stated in the article “The price of Crude Oil shall be valued at the weighted
average realized price received in arms length transactions for similar quality Crude Oil in the
freely convertible currency in the World Market during the preceding Calendar Quarter and a

55 NSOM
56 Government of Mongolia (GoM) 2006
57 WB/PPIAF 2007
58 Joint Order of the Minster of Finance and the Minister of Commerce and Industry, Number 119/89




                                                                    17
specified market location, grade, quality and other Petroleum physical properties” 59. Moreover,
the administration and the contractor should agree on the method and procedure of the
valuation. Also NG should be valued under these terms, unless other is specified in the
petroleum contract.60

Historic prices of crude oil indicate that the pricing of Mongolian exported oil has followed
global prices and the previously mentioned pricing mechanism. Oil prices have increased
rapidly on the world market. Since all crude oil currently extracted in Mongolia is exported, this
in part affects Mongolia positively. However, Mongolia is also a net importer of petroleum
products. In 2007, Mongolia exported mineral fuels, lubricants and related materials for a value
of USD 88.9 million61. Even if this is an increase of USD 18.5 million from 2006, it is still to be
compared to the total value of imports of the corresponding commodities. In 2007, imports of
mineral fuels, lubricants and related materials reached USD 634.8 million in Mongolia. This is
more than seven times the value of the exports and an increase of USD 200.2 million from the
previous year62.

Domestically, government policies to subsidise oil distribution companies, has kept the market
price for oil stable. However, subject to fiscal sustainability concerns, the government decided
to halt the subsidies in mid March 2008, causing oil prices to increase by an average of 10.5
per cent in the following two months. Although the price increase is not expected to have any
great impact on the economy, since Mongolia’s main source of energy is coal, it is causing
higher transport costs.63


1.3 Pricing of gasoline and diesel
Influenced by the world market, the price for petroleum products has been rising in Mongolia.
Until 2007, the price increases were gradual, after which followed a somewhat more rapid price
growth in the last year. In April 2008, the litre price for gasoline A-80 and gasoline A-93 in
Ulaanbaatar was MNT 1,105 and MNT 1,230 respectively. The price for diesel reached MNT
1,320 per litre during the same period64.

A comparative study of fuel prices in Asia dated November 2006 shows that the retail price for
diesel and super gasoline in Mongolia is higher than in most neighbouring countries. While the
price in Mongolia was USD 0.87 and USD 0.88 per litre for diesel and super gasoline
respectively, the price for the corresponding fuels in China was USD 0.61 and USD 0.69 per
litre respectively compared to USD 0.66 and USD 0.77 per litre in Russia.65




59 Regulation for Implementing the Petroleum Law of the Mongolian Peoples Republic, Section IV, Article 16/1
60 Regulation for Implementing the Petroleum Law of the Mongolian Peoples Republic
61 According to Standard International Trade Classification (NSOM)
62 NSOM
63 WB 2008d
64 NSOM 2008
65 GTZ 2007




                                                                    18
     Figure 11: Comparison of fuel prices for 8 selected countries
     US-Cents/litre

     180                                                165
     160
                                                  133
     140
                                                                      109
     120                                                                                      101
               87 88                                             90                                                     86
     100                                 77
                                                                                  70     75                        73
                               69   66
      80                  61                                                                               64
                                                                                                     54
      60                                                                     45
      40
      20
        0
              Mongolia    China     Russia       South Korea     Japan      Kazakhstan    India     Ky rgy zstan   Lao PDR

                                              Price for diesel    Price for super gasoline
      Source: GTZ 2007




The price for petroleum products in Mongolia is likely to increase at the same rate as the world
market. The GoM has put a request to Rosneft, the main petroleum products supplier to
Mongolia, that they sell their products at a discounted rate. As compensation, Rosneft have
requested the right to set up 100 gas stations throughout Mongolia. The government is not
likely to accept this request since it would violate current Mongolian legislation. Nonetheless,
some measures must be undertaken in order for Mongolia to manage the continuous price
increase of petroleum products.


1.4 Pricing of liquefied petroleum gas
The price for LPG is market driven in Mongolia. There is an association with different LPG
actors as members in Ulaanbaatar, which during frequent meetings sets guidelines for pricing
of LPG. However, as with the situation for other petroleum products, LPG is an import product
and thereby dependant on the price level set by the exporting country, as well as on tariffs and
taxes. The problem with this dependency on mainly Russia is reflected in the fact that the
imported cost for LPG went up from USD 200 per tonne in 2004 to USD 900 per tonne in the
first half of 200866.

Regarding the usage of LPG for residential purposes, the retail price for LPG is currently not
competitive compared to that of electricity or coal for residential use. LPG dealers in Mongolia
have expressed a need for policy change in order to encourage residential usage of LPG. The
incentives could either be aimed directly at consumers or as tax concessions granted to the
dealers67. However, due to the current import dependency, LPG fuel is not likely to be used to
any large extent, in place of domestic resources.


66   Interview material
67   Ibid.



                                                                 19
2. Taxes applicable to energy consumption
The government charges a series of taxes on imported fuels. These can be divided into import
tariff, value added tax (VAT), gasoline and diesel fuel tax, as well as excise tax.



     Figure 12: Example of taxes charged on imported diesel fuel*


                                                                                                      15-48 USD/tonne
                                                                           2,140 MNT/tonne
                                                                                                        Excise tax              Customs
                                                                                                                             clearance price
                                              CIF * (1+10%) * 10%        Gas & diesel fuel tax

                          CIF * 10%                  VAT

                         Import tariff

       CIF Price



     *Does not refer to diesel fuel imported for the purpose of oil exploration, extraction and to be used under a government PSC.




2.1 Import tariffs
In general, a 10 per cent tariff is applicable to the CIF price of imported petroleum products.
However, imported gasoline and diesel fuel for the purpose of oil exploration, extraction and for
use under a production sharing contract (PSC) with the government is exempt from import
tariff. In order to encourage consumption of cleaner fuel mixes, gaseous fuel and gas
containers, equipment, custom built machinery, tools and spare parts are also exempt from
import tariffs.68


2.2 Value added tax
The general VAT rate is 10 per cent on imported, produced and sold goods, work and services.
There is no VAT for exported goods, work and services.69

As with the import tariff, imported gasoline and diesel fuel for use in the oil industry and as
described in 2.1 above is exempt from VAT. In the same way, gaseous fuels and gas
containers, equipment, custom built machinery, tools and spare parts are also exempt from
VAT. This clause was added and enforced in the VAT law of 2004 with the purpose of
encouraging the usage of ‘”cleaner” fuel mixes such as LPG.70




68 Customs Tariff Law of Mongolia 1996
69 Value-added Tax of Mongolia 1998
70 Ibid.




                                                                        20
2.3 Gasoline and diesel fuel tax
All types of gasoline and diesel produced in and imported to Mongolia is subject to fuel tax. Tax
is levied on every tonne and the calculation is shown in Table 5. While the National tax offices
are responsible for the collection of gasoline and diesel tax on fuel produced in Mongolia, tax
on imported gasoline and diesel fuel is levied by the customs offices. 71


Table 5: Gasoline and diesel fuel tax, MNT
     Tax for gasoline and diesel fuel                                     The amount of tax per tonne

     Gasoline
     Up to 90 octane                                                              20,350
     Over 90 octane                                                               25,700
     Diesel fuel (for winter and summer use)                                      2,140
Source: Gasoline and Diesel Fuel Tax Law 1995



2.4 Excise tax
Gasoline and diesel fuels are also subject to excise tax. Excise tax applies to goods produced
in Mongolia as well as to imports. It is calculated either on quantity, or as a percentage of the
value of the dutiable goods. The excise tax rates for domestic produced gasoline are between
USD eleven and USD twelve per tonne, depending on the level of octane, while the rate for
domestic produced diesel is USD 15 per tonne. For border-based imported fuels, the excise tax
rates are as stated in Table 6.72


Table 6: Border-based excise fuel tax rates, USD/tonne
                                                               Gasoline
     Frontier post                                                                             Diesel fuel
                                               Up to 90 octane        Over 90 octane

     1. Tsagaannuur, Yarant, Borshoo,
     Artssuurit, Burgastai, Tes, Gashuun             11                      12                    15
     Sukhait


     2. Hankh, Ulikhn Maikhan                        17                      21                    19

     3. Sukhbaatar, Zamyn -Uud,
                                                     38                      43                    48
     Ereentsav, Altanbulag

Source: Excise Tax Law of Mongolia 1993




71   Gasoline and Diesel Fuel Tax Law 1995
72   Excise Tax Law of Mongolia 1993



                                                          21
                     IV. MAJOR GAS CONSUMING SECTORS AND
                             POTENTIAL CUSTOMERS


As mentioned earlier, there are not yet any stated or secured resources of CBM and NG in
Mongolia. LPG is in small scale use by households, restaurants and as vehicle gas, but as a
relatively expensive fuel, widespread consumption is predictably difficult without government
incentives. Due to high import prices, CBM, LNG or NG are also not yet import commodities.

Since there are no domestic sources of CBM, LPG or NG in utilisation, no central distribution
system has been constructed for these energy sources. The government is encouraging
consumption of “cleaner” fuel mixes and the use of LPG in households and transportation.
Policies on decreasing pollution include:

        •     Converting car engines to using gas.
        •     Gasification of residential areas that are using coal as well as schools and public
              buildings.

However, since there is no domestic output of gas, no large scale projects have yet been
implemented and there the widely held view is that government focus will mainly be on
converting cars into using LPG. The reason for this is likely to be that vehicle petroleum and
diesel are imported and the promotion of LPG will thus not conflict with the usage of domestic
resources.


1. Commercial and residential use
Mongolian households are either reliant on energy being distributed from one of the three
energy systems, or are dependant on coal for cooking and heating. There is also usage of
wood and animal dung, mainly in the countryside, as well as of solar, wind and hydro-electric
power. Due to long periods of cold weather and fierce winters, Mongolians already spend a
large part of their income on heating. Consumption of gas and other imported fuels are thus
unlikely to become widespread for as long as they are uncompetitive or not subsidised by the
government.

The construction sector in Mongolia has shown continuous growth and during 2007, 3,725 new
apartments and 104 buildings for industry and service purposes were erected73. However, due
to the current import dependency on gas, governmental programmes, such as the “40,000
apartments” programme, do not include implementation of distribution pipes for LPG or NG74.
The construction sector in Mongolia might also become affected by the current global financial
crisis, as funds from foreign investors might be tightened.


73   NSOM
74   Action Plan of the Government of Mongolia for 2004-2008




                                                               22
The utilisation of gas resources is also not covered in the PIPES for 2007 to 204075. Apart from
integration of the power system by transmission lines, the programme includes further
utilisation of renewable energy sources and construction of heating plants using geothermal-
sources, but CBM or NG are not mentioned as alternative energy sources76. The LPG industry
in Mongolia believes that there is further potential for consumption of LPG within both industry
and commercial sectors77. The government, on the other hand, doubts that there are any new
consumer-groups for LPG in Mongolia and believes that future growth will mainly come from
usage of LPG for vehicles78.


2. Transportation sector
Despite domestic price increases of gasoline and diesel, with prices nearly doubling in just one
year, the number of vehicles in Mongolia has been increasing by an average of about 10 per
cent annually since 2000. Today, there are more than 110,000 passenger cars and over 50,000
trucks, busses and other special purpose vehicles in Mongolia. The majority of the cars are
registered in Ulaanbaatar and nearly 80 per cent are privately owned.79


Table 7: Growth of vehicle numbers in Mongolia 1990 – 2007
 Type of vehicle        1990     1995     2000     2001          2002     2003     2004     2005     2006     2007

 Passenger cars         7,962    23,975   44,051   53,198        63,224   68,458   79,691   87,792   94,442 110,150
 Trucks                 24,400   25,198   24,671   24,747        24,610   22,975   25,430   27,435   29,389   33,676
 Buss                   2,591    2,790    8,548    10,187        10,841   9,834    10,645   11,067   11,726   13,038
 Tank cars              4,754    2,258    1,683    1,613         1,709    1,320    1,376    1,267    1,355    1,353
 Special purpose
                        4,085    2,207    2,740    3,326         3,421    3,188    3,276    3,623    3,960    3,772
 vehicles
 Total                  43,792   56,428   81,693   93,071 103,805 105,775 120,418 131,184 140,872 161,989
Source: NSOM



About half of all vehicles in Mongolia are 11 years or older and only about seven per cent are
three years or less80. Apart from taxi cars, most passenger vehicles run on gasoline 81 and
according to figures from the MRPAM, imports of gasoline A-80 reached 158,621 tonnes in
2007. Imports of gasoline types A-92, 95 and 98 totalled 110,253 tonnes during the same
year82.




75 PIPES
76 PIPES
77 Interview material
78 MRPAM 2008a
79 NSOM
80 Ibid.
81 Guttikunda 2007
82 MRPAM 2008a




                                                            23
In recent years, Mongolia’s transportation sector has been privatised and most freight and
passenger transportation companies are now privately owned. While the country’s rail freight
transported has gradually decreased, the amount of cargo carried by road is rapidly increasing.
The increase in road freight volumes is clearly demonstrated in development statistics over
Mongolia’s road transportation sector, showing that during 2007 9,207 thousand tonnes of
freight were carried on the road network compared to only 1,480 thousand tonnes in 2000.83

The increasing number of vehicles and road transportation is not only straining the country’s
underdeveloped infrastructure and road network, it is also a source of pollution. If vehicle
numbers continue to increase at the same rate, Mongolia will have over 200 thousand cars,
trucks and busses by 2010. Many of the older vehicles do not meet standards for fuel
consumption or emission and in 2002 they accounted for 80 per cent of the total number in
Mongolia84.

In order to reduce pollution, the government is encouraging use of “cleaner” fuel mixes. About
1,000 vehicles currently run on LPG in Mongolia and potentially up to 50,000 cars could run on
alternative fuels85. The county’s LPG programme includes adapting cars to using LPG and
plans involve converting nearly all taxi cars and public busses to LPG. In Ulaanbaatar this
conversion has already started and the ultimate goal is to convert all public transport86.

Currently only one company in Mongolia is distributing LPG to the transportation sector. Uni-
Gas Co., Ltd., is a Mongolian and Japanese joint venture, and until 2007 it had a five year
exclusive right to distribute LPG for vehicles in Mongolia. Even if the market has now opened
up for competition, no other company has yet entered the sector, due to low profitability and
high costs. Uni-Gas Co., Ltd. bears the cost of converting Ulaanbaatar’s taxis to LPG and each
car currently costs them about USD 400 to fit with the new equipment87.

As previously mentioned, the government is likely to prioritise the promotion of domestic fuel
resources. Today, all vehicle fuel is imported and the main factors for a particular fuel being
favoured are the price of converting cars into using other fuels and the final cost to the
consumer.


3. Industry
In many countries NG usage in industry is progressing rapidly. In many cases NG replaces the
use of petroleum products in sectors such as mineral refining, chemical and petro-chemicals
and pulp and paper. However, in developing countries with NG resources, NG is mainly used
as the fuel for power generation and in the chemical and petro-chemical sectors88.




83 NSOM
84 WB 2004
85 MFEM 2008a
86 Clean Air Imitative for Asian Cities (CAI-Asia) 2006
87 Interview material
88 Asia Pacific Energy Research Centre (APERC)




                                                          24
A way to encourage use of cleaner fuels such as NG in developing countries can be through
implementation of CDM projects. With regard to the use of gaseous fuels in industry, this
involves projects such as replacing the use of coal and petroleum fuels with NG, as well as the
production of clean electricity by NG usage. 89 So far no CDM projects in Mongolia have
involved industries switching from fossil fuels to cleaner alternatives. A great obstacle for such
projects is the lack of current domestic sources of NG, LPG, CBM et cetera. The consequence
of using imported fuels is not just lower profitability, but also an increasing Mongolian
dependency on imported fuels and lack of future fuel security. Yet, if domestic sources were
harnessed and utilised in Mongolia, opportunities could include construction of NG fired power
plants and boilers as well as potential usage of gaseous fuels in industries such as mining and
food processing and in textile and leather production.


4. Co-generation for power and district heating and distribution of
small scale CHP units
The usage of CHPs units has in recent years become increasingly popular in Europe, America
and Asia and is in many countries promoted by the government. The majority of the units are
used by the industry but implementation by the commercial sector and individual households is
increasing90. Mongolia currently has six power plants in operation, all of which are CHP plants.
Future plans include constructions of a fifth power plant using gasification of coal technologies
to make electricity as well as the establishment of a coal briquette plant where the gas from the
production will be used for heating91.

Whilst thermal energy usage in Mongolia has remained fairly constant during the last few
years, the consumption of electricity has shown a steady increase92. A study by the World
Bank, shows that heating is the single largest use of energy in Mongolia, leading to large
expenses for the private and public sectors, as well as for householders. In the education
sector, fuel and heating expenditure together represent more than 30 times the cost of
textbooks93. As this study indicates, the consumption of electricity in Mongolia is also projected
to keep on growing in coming years.

Mongolia’s growing demand for energy, large heating expenses and mounting air pollution
creates a potential for the distribution and implementation of medium and small scale (micro)
CHP units. Implementation of CHP units in industry and commercial buildings can reduce
expenditure on heating in buildings with high energy costs, as well as reduce emission. The
industry and construction sector is today the largest consumer of electricity in Mongolia and the
second largest user of thermal energy. By the implementation of on-site CHP units in industry,
costs for heating could be reduced while creating increased energy capacity. There could also
be potential for using CHP systems in refineries, which potentially could be constructed in
Mongolia.

89 United Nations Framework Convention on Climate Change (UNFCCC)
90 IEA 2008
91 MFEM 2008a
92 NSOM
93 WB/PPIAF 2007




                                                              25
Since only two thirds of all soums and settlements are connected to a regional power system94,
both micro-CHP units connected to the regional energy system as well as stand-alone CHP
units could have potential in Mongolia. Nearly 80 per cent of the inhabitants in Mongolia live in
gers or private houses95 and many are dependant on coal as heating and cooking fuel. A step
to reduce the pollution in Mongolia could be an implementation of micro-CHP units in
residential areas. New buildings could also be fitted with CHP units. During 2007, 81 buildings
for trade and service purposes were erected in Mongolia, 15 of which were hotels96. Energy
consuming buildings such as these, as well as other new construction projects such as the
“40,000 apartments” programme, could create opportunities for the implementation of micro–
CHP units.

There are however some large barriers associated with the implementation of small- and
medium-scale CHP systems in Mongolia. The price for micro-CHP units is still relatively high
and most CHP systems are reliant on gas or diesel as fuel. Even if the cost of the systems will
decrease as large scale production starts, Mongolia is still dependent on imports of both gas
and diesel. New CHP systems with fuel cells using NG are also increasing in popularity97 and
according to the IEA, a key factor for the development of CHP for the industrial market is the
price of NG98. Since NG is not utilised domestically in Mongolia and is regarded as expensive
to import, large scale implementation of systems using NG might consequently not be feasible
in Mongolia until domestic recourses are available.




94 PIPES
95 GoM 2006
96 NSOM
97 IEA 2006b
98 IEA 2008




                                               26
                V. SUPPLY SOURCES AND TRANSPORTATION


1. Import from Kovykta gas-condensate field, Russia
For many years, imports from Russia, China and South Korea have been vital in order for
Mongolia to satisfy its domestic market demand for gas. Northeast Asia is a large market for
Russian gas, putting Mongolia in a rather beneficial geographic position. Proposals regarding a
pipeline drawn from the Russian Kovykta gas field, passing through Mongolia and into China
have been on the agenda for quite some years. The Kovykta gas field is one of the largest in
Russia. With a total license area of 10,300 km2, estimated reserves of two trillion cubic metres
of gas and more than 83 million tonnes of condensate99, it is larger than the total gas findings of
Canada100. The field is located 450 km northeast of Irkutsk City and 110 km east of Lake
Baikal, not too far from the Mongolian border. Since the discovery of the gas field in 1987, a
number of initiatives regarding the transit line have been proposed.


1.1 Background to the project
When the discussions concerning the building of a gas pipeline from the Russian Kovykta gas
field started in the 1990s, a transit route through Mongolia appeared as the most beneficial
from an economic perspective. In 1997, an agreement was signed by Russia’s Ministry of Fuel
and Energy and China National Petroleum Corporation (CNPC) with the purpose of bringing
the Kovykta gas line from Irkutsk via Ulaanbaatar to Beijing, a total distance of 3,364 km. In
1998, a memorandum of understanding was signed by Russia, China, South Korea, Japan and
Mongolia to complete a feasibility study.101

However, the relatively small Mongolian demand for gas compared to that of China, and also of
Korea and Japan, put Mongolia in a relatively weak bargaining position. From a Chinese point
of view, fewer governments involved meant less political risk. After Chinese officials managed
to persuade their Russian counterparts to choose the route avoiding Mongolia during an inter-
governmental meeting in Beijing in 2002, the plans were put on hold102. Despite the fact that
the Trans-Mongolian route was deemed the most efficient from an economic perspective, it
was abandoned by China due to domestic concerns103.

Soon after the cooperation agreement between Russia and CNPC was signed, the decision to
include Kogas, South Korea’s main NG company, was taken and in late 2003104. After three
years of negotiations, the new feasibility study was finalised. The study found the project
commercially viable105. The new projected gas pipeline would start from Irkutsk, pass south of
Lake Baikal then run along the Mongolian border to the Chinese city of Manzhouli. In China,

99 TNK-BP 2008
100 Ahn & Jones 2008
101 Ibid.
102 Blagov 2002
103 Ahn & Jones 2008
104 EIA 2006
105 Paik 2008




                                                27
the pipeline would take two routes: Beijing and Dalian, the latter from which a pipeline would
connect with the Korean city of Pyongtaek across from the Yellow Sea106.

In 2002, Gazprom the Russian gas corporation, responsible for the operation of all of Russia’s
gas sales to Europe, was also appointed to coordinate gas exports to the northeast Asian
markets107. In June 2007, Gazprom acquired the major shareholder of the Kovykta project and
the plans for the pipeline through China seemed increasingly unlikely to commence108.

In September 2007, Gazprom decided to go ahead with a plan referred to as the Eastern
Programme. The new plan proposed the construction of the Kovykta pipeline should follow the
East Siberian-Pacific Ocean (ESPO) oil pipeline and consequently the prospects for a possible
Trans-Mongolian route darkened significantly.109


1.2 Project status and future scenario
The demand for energy in northeast Asia is growing more rapidly than is the cooperation
between the northeast Asian countries. In spite of Mongolia’s willingness to adopt very
favourable legislation and taxation frameworks for a Trans-Mongolian pipeline, it is
overshadowed by China’s strong bargaining power110. Despite China’s strong influence, little
progress has been made during the past decade and consequently, in an effort to diversify its
imports of gas, China has been active in securing energy supplies from other sources. One
example of such initiative includes the agreement between China and Central Asia’s Oil and
Gas Corporation111. Fearful of missing out on Chinese market demand, this agreement might
put pressure on Gazprom to speed up the process.

By providing opportunities for diversification of energy imports, the Kovykta project will have
large-scale impact on the countries in northeast Asia. The aim was originally set to distribute
30-35 bcm per year to China and South Korea starting from 2008-2010, although, according to
new data, export of gas from Kovykta gas field is not likely to fully commence before year
2017.112

While several uncertainties still remain, it is difficult to foresee the final outcome of the Kovykta
project, but within the short- to middle-term Mongolia is unlikely to be considered a transit
country. The future could however open up for gas imports to Mongolia via rail and road
transport, although this would require investments in transport and infrastructure. Another
possibility includes building an extended branch from the main pipeline from Kovykta to
Nakhodka through Mongolia, a plan that according to Mongolian officials, could commence
possibly after 2015113.



106 Ahn & Jones 2008
107 Osipov 2006
108 GASPROM 2008
109 Paik 2008
110 MRPAM 2006
111 CNPC 2008
112 Ahn & Jones 2008, Paik 2008
113 MAPAM 2008a




                                                 28
2. Domestic sources
Due to its coal and imported fuels dependency, much attention is focused on diversifying
Mongolia’s energy sector and producing different fuels domestically. It is expected that
exploration of oil, CMB and NG will identify domestic resources. Other possibilities are
development and utilisation of CTL and CTG technologies in order to produce fuels, such as
diesel and LPG, using domestic coal resources.


2.1 Coal
Mongolia has estimated coal reserves of about 150 billion tonnes114, 20 per cent of which is
coking coal and 80 per cent lignite or steam coal. The reserves are located in more than 200
coal deposits in 15 major coal basins115. The proven reserve of coal is about 20 billion tonnes.
This can be compared to proven recoverable reserves of neighbouring countries; 157 billion in
Russia, 114.5 billion in China and 31.3 billion in Kazakhstan116. Mongolia has on the other hand
4,629.6 tonnes of proven reserves per capita compared to 1,094.1 tonnes of proven
recoverable reserves per capita in Russia and 87.6 tonnes per capita in China117. The majority
of the coal deposits and occurrences are located in the eastern, central and southern regions of
Mongolia.


Table 8: Coal resources by basin, Mt
                                                        Coal reserves
  Coal basin, region
                                                               Explored                  Forecasted     Total
  1    Kharkhiraa                                                172.5                    4,592.7      4,765.2
  2. Mongol Altay Basin                                           49.0                    10,040.6    10,089.6
  3. Altayn Chandakh region                                        2.1                    3,821.4      3,823.5
  4. South Changay Basin                                           4.2                    1,221.9      1,226.1
  5    Big Bog;yn Basin Oil                                        5.2                     1950.0      1,955.2
  6    Ongiyngol Basin                                            42.6                    1,471.1      1,513.7
  7. Orkhon -Selenge region                                      408.8                    7,295.3      7,704.1
  8    South Gobi Basin                                        15,960.0                   10,070.0    26,030.0*
  9    Coir-Nialga Basin                                        5,932.0                   14,401.1    20,333.1
  10 Middle Gobi Basin                                           104.1                    13,117.2    13,221.3
  11 Sukhebator Basin                                             68.0                    4,190.2      4,258.2
  12 Choybalsan Basin                                            213.2                    14,699.2     14,912.4
  13 Tamtsag Basin                                               190.0                    31,803.0    31,993.0
  14 East Gobi Basin                                              N/A                     23,534.0    23,534.0
  Total                                                        23,151.7                  142,207.7    165,359.4*
Source: Based on figures provided by EEC: MFEM, Coal Department (with adjustments by STC)
 * The figures have been adjusted by STC due to apparent calculation mistake

114 MFEM 2008a
115 MFEM 2008a, PIPES
116 World Energy Council (WEC) 2007 (figures for 2005)
117 WEC 2007, NBSC, Russia Federal State Statistics Service (RFSSS) (figures for 2005)




                                                                   29
In 2007, over nine million tonnes of coal was extracted in Mongolia118, which was an increase
of more than one million tonnes over the previous year. Historically, the main focus has been to
supply the country’s CHP with low-cost coal. To minimise transport costs, most coal production
is thus located along the railway and where it can be carried by rail to the power stations.


Table 9: Output by coal mine, 1,000 tonnes
      No Name                  2000      2001      2002         2003      2004      2005      2006     Sep. 07

      1      Nalaikh           10.2      11.3      15.1         12.3       8.7       7.1       6.2        -
      2      Shariin gol      709.0     703.0     698.2        664.9     678.8     710.0     505.0     343.7
      3      Tevshiin govi     18.0      20.1      21.0         20.1        -       15.4      15.1       4.7
      4      Aduun chuluun    238.6     241.8     221.4        213.9     184.4     226.1     241.3      140.2
      5      Taliin gal          -         -         -            -         -       36.5      38.5      20.6
      6      Nuurst Hotgor     54.2      29.6      27.3         28.0      31.6      43.7      37.9      23.1
      7      Bayan teeg        40.0        -         -            -         -       43.7      26.0      15.3
      8      Har tarvagatai    28.2      41.5      36.0         35.0      35.0      36.0      36.0      13.0
      9      Eldev               -         -         -         251.6     281.6     407.1     477.2      206.7
             Export              -         -         -            -         -      169.2     197.2      110.4
      10     Tavantolgoi       26.0      38.8      34.0         38.5      64.2     404.6     787.1     1,275.4
             Export              -         -         -            -       26.4     360.7     705.5     1,146.4
      11     Mogoin gol        13.8      12.9      12.8         10.9      11.8      13.5      16.6       9.1
      12     Hushuut             -         -         -            -         -       13.5        -         -
      13     Chandgana tal     30.7      33.3      31.4         24.4        -       29.2        -         -
      14     Baga huur        3,066.0   2,873.9   3,093.2      3,045.7   2,711.0   2,811.4   2,804.4   1,826.1
      15     Shivee Ovoo      603.3     856.7     931.8        941.3     1,308.7   1,200.3   1,306.7   1,054.4
      16     Nariin Sukhait                                    429.4     1,534.5   1,724.3   1,554.9    743.8
             Export              -         -         -            -         -      1,724.3   1,554.9      -
      17     Other            229.3     499.8     396.7        145.9     149.0      42.9      11.0        -
  Total                       5,067.3   5,362.7   5,518.9      5,861.9   6,999.3   7,765.3   7,863.9   5,676.1
Source: Based on figures provided by EEC: MFEM, Coal Department



2.1.1 Estimation of possible future coal production volumes
Even if the Mongolian coal industry has made progress in recent years, it has still been faced
with challenges and a lack of strategic planning for the long term exploitation of resources. For
this reason, the MFEM developed the National Coal Programme, which has not yet been
approved by the parliament, with the intention to secure the Mongolian fuel and energy sector.
With the programme the MFEM has the aim of securing stability for coal extraction and for the
coal-processing industry by considering new advanced technologies and by defining an outlook

118   NSOM



                                                          30
for long term development of the sector. The coal programme estimates that expected coal
production after implementation of the programme will reach 70 million tonnes by 2020.


Table 10: Projected outcome after implementation of the Coal Programme
  Items                                            Unit                    2012 он      2020 он

  Coal production                                  Million tonnes              40            70
  Coal processing                                  Million tonnes               5            10
  CTL production                                   Thousand tonnes            400          1000
  Smokeless briquette                              Thousand tonnes            300           500
  Coke production                                  Million tonnes               1             5
  Coal export                                      Million tonnes              13            20
  Coke export                                      Million tonnes               1             5
  Total electricity production                     Billion kWh                 25            70
  Export of electricity                            Billion kWh                 20            60
   Raw material for following chemicals:
  - Bitumen                                        Thousand tonnes             40           100
  - Polymer                                        Thousand tonnes             80           400
  - Benzyl                                         Thousand tonnes             70           300
  - Naphtali                                       Thousand tonnes             20           160
  - Cresol                                         Thousand tonnes             15           140
  - Ammonia                                        Thousand tonnes             10            50
  - Sulfur                                         Thousand tonnes             30           200
Source: EEC: MFEM Coal Programme



2.2 Crude oil
Crude oil has been extracted in Mongolia since the late 1940s. During the 1990s, a total area of
614,000 km², with potential for petroleum extraction, was divided into 25 exploration blocks119.
Today, all of the 25 blocks are either in production, exploration stage or has an application for
exploration under consideration120. An appraisal dated 2000 estimates the original oil-in-place
at 13 major basins in Mongolia to be 10.7 billion barrels 121 . The Tamsag Basin alone is
assessed to have reserves of 4.4 billion barrels122.

Petro China Daqing Tamsag /Mongol/ Co., Ltd and Dongsheng Gazriin Tos /Mongol/ Co., Ltd
are currently pumping oil in the eastern regions of Mongolia. Oil extraction in Mongolia has
steadily increased and last year these two companies produced a total of more than 850,000
barrels of crude oil123. Petro China Daqing Tamsag is the main producer of oil. According to
published news from the MRPAM, the company has declared plans to increase its investment
in Mongolia by USD 350 million during 2008, thereby increasing its production by one million

119 MRPAM 2007a
120 Ibid.
121 Appraisal by Tatnefti in 2000 (MRPAM 2007a)
122 Estimation by PGS Reservoir Consulting Company in 2002 (MRPAM 2007a)
123 MRPAM 2008b




                                                               31
barrels124. Currently, none of this oil is refined in Mongolia, but it is exported directly over the
border to China.

Oil production data for Mongolia to end of May 2008 indicates increased production so far this
year. During the first five months of this year, more than 420,000 barrels of crude oil were
extracted and MRPAM has estimated the total figure for the year will reach about 1.5 million
barrels.125



      Figure 13: Development of oil extraction per company
      1,000 barrels
                                                                                                      From year 1998 to May
      900                                                                             850.2           2008 a total of 2.637 million
                                                                                                      barrels of crude oil have
      800                                                                                             been extracted in Mongolia.
      700                                                                                             Out of this 2.477 has been
                                                                                                      exported to China.
      600
      500                                                                                     420.4
                                                                                                      More than 66% of the oil has
      400
                                                                              376.5                   been produced by Petro
                              CAGR 28.9%                                                              China and the rest by
      300                                                                                             Dongsheng.
                                                      183.1 197.7 200.3
      200                                     139.2
                      71.8    65.5 82.8
                                                                                                      Oil extraction has been
      100     49.5
                                                                                                      increasing year-on-year and
         0                                                                                            growth has been especially
             1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 May-                                   high in the last few years.
                                                                08                                    Between 2006 and 2007
                                                                                                      growth more than doubled.
                                         Petro China       Dongsheng

      Source: MRPAM 2008b




2.2.1 Estimated future oil production volumes
According to the MRPAM, it is not viable to set up a domestic oil refinery plant until one million
tonnes of crude oil (approximately seven million barrels126) is extracted annually in Mongolia127.
The same authority has estimated that the capacity of oil production in Mongolia will reach
3.965 million barrels in 2015128. This amount will not fulfil even half of the minimum quota
required for a refinery plant. Using the same growth rate, a prolonged projection, would set
somewhere around 2025 as a feasible time for establishing a domestic refinery plant.

Due to the dependency on imported fuels, development of the petroleum sector is strongly
encouraged and promoted by the GoM. Companies such as the China Golden Sea Petroleum
Exploration Corporation Ltd., Petro Matad Ltd. and the Canadian Shaman Resources Ltd. have
signed PSCs for petroleum operations in different blocks. Currently they are all carrying out oil

124 MRPAM 2008c
125 MRPAM 2008b
126 1 barrel of crude oil is equivalent to 0.1364 tonnes of crude oil.
127 MFEM 2008a
128 MRPAM 2008b




                                                                         32
exploration, but if crude oil is found possibilities include signing contracts for oil extraction.
There are also feasibility studies underway for establishing a refinery with a capacity of
producing one to two million tonnes of petroleum products129.



      Figure 14: Potential oil extraction capacity
      1,000 barrels                                                                         Extraction of crude oil in Mongolia
                                                                                            has increased steadily over the
      8000                                                                        7,505.2
                                                                                            years, reaching 150,000 barrels in
                                                                                            2007.
      7000
                                                                        5,734.7
                                                                                            An outlook for oil extraction by
      6000                                                                                  MRPAM estimates that in year
                                                                                            2008, 1.5 million barrels of oil will be
      5000
                                                                                            extracted annually in Mongolia. This
                                                                3,965
      4000                                                                                  figure is estimated to nearly double
                                                                                            by 2012.
      3000
                                                        2,189                               However, according MRPAM, a
      2000                                      1,500                                       domestic refinery plant will not be
                                                                                            viable until circa 7 million barrels of
      1000                          376.5
                 65.5   139.2 197.7                                                         oil is extracted annually. Taking the
           0                                                                                continuous increase based on the
               2000 2002 2004 2006 2008* 2010 2015 2020 2025                                estimated development between
                                                                                            year 2008 and 2015, this volume will
                                                                                            not be reached until around 2025.
      *Actual figure until 26th of May
      Source: Based on historic data and estimates from MRPAM with long-term forecast by STC




2.3 Coal-to-liquid
Mongolia’s dependency on imported fuels and large coal resources has put emphasis on
domestic development and implementation of CTL and CTG technologies. Development of
CTL production capacity is one of the strategic targets of the National Coal Programme and
this programme has set 2012 as a date when CTL should be functioning in Mongolia. By this
date, CTL production capacity is planned to extract 400 thousand tonnes of oil products; a
volume which is to be doubled by 2020. In accordance with the programme the MFEM has
written a project proposal for a CTL plant by the Chour-Nyalga coal basin. The project is to take
place between 2008 and 2013 and will have a capacity to produce 800-1,000 thousand tonnes
of liquid products from coal. The total project investment is estimated to USD 700-1,000
million130.

According to a request by the MFEM, the American company Axens is also preparing a
feasibility study of coal liquefaction in Mongolia. The results of the study will provide a more
detailed estimation of profitability of CTL project in Mongolia.131



129 WB 2008d
130 EEC: MFEM project proposal for CTL plant by the Choir-Nyalga coal basin
131 EEC




                                                                     33
The objective of the feasibility study is to132:
   • Provide initial screening of Mongolia coals for application in Axens’ direct coal
        liquefaction technology.
   • Prepare a conceptual design and financial plan for a 25,000 barrel per day CTL
        commercial plant using the preferred domestic feed to produce finished gasoline and
        diesel fuel products at a location in Mongolia.
   • Provide recommendations for future laboratory testing and commercial project
        development.

2.3.1 Coal-to-liquid forecast of possible production volumes
Mongolia has potential to produce CTL and several government and private CTL research
projects and feasibility studies have been carried out. One recently presented study is the
Industrial Corporation Mongolia LCC’s Mongolia Coal-to-Gasoline Project by the Tugrug Nuur
lignite deposit. A feasibility study has been carried out by the German company Uhde GmbH
and was presented in Ulaanbaatar in June 2008133. In March the same year, Headwater Inc.
and some Mongolian companies proposed to carry out a feasibility study for a 40,000 barrels
per day CTL project in southern Mongolia. This project will have a time frame of 4-6 years.
Research on CTL has also been done at the Baruun Naran coal mine in the South Gobi.

The estimation in Table 11 is based on existing information from current and proposed CTL
projects.


Table 11: Liquid fuels: future production volumes

                         Coal resources to         Future production      Coal consumption for
  Coal mine              produce liquid            volumes of liquid      production of liquid         Remarks
                         fuel, mln tonnes          fuel                   fuel, mln tonnes/year


                                                                                                  Investigation is
  Baruun Naran                    155              1.78 mln tonnes/year            3.3            made by Nexant
                                                                                                  Company

                                                                                                  The project will be
                                                                                                  implemented by
  Tugrug Nuur                     300               18,000 barrels/day             5.0
                                                                                                  ICM Company
                                                                                                  Mongolia
                                                                                                  Headwater Inc,
                                                                                                  USA carried out
  Southern Gobi                   N/A               40,000 barrels/day             2.0
                                                                                                  some studies on
                                                                                                  coal liquefaction




132   EEC
133   Uhde GmbH 2008, Industrial Corporation Mongolia (ICM) 2008



                                                                   34
2.4 Coalbed methane gas
Currently there are no utilised sources of CBM gas in Mongolia and the country has so far not
had the capacity to implement CBM or coal mine methane (CMM) projects. Some research and
exploration on the country’s CBM resources has been conducted and there are project
proposals to estimate the country’s CBM resources as well as the potential for methane
recovery from both the MFEM and the Mongolian Nature and Environment Consortium 134 .
Since 2008 there is also a budget allocation from the GoM to develop CBM resources135. If
discovered in Mongolia, it will be used for heating and as vehicle fuel in order to reduce
pollution.

2.4.1 Forecast of potential future coalbed methane gas production volumes
Since Mongolia has not had the capacity to implement CBM projects, the exact volume of
available methane resources is not yet determined. However, some preliminary estimates show
that there is potential for recovering CMB in the country. During exploration in 2004 and 2005,
the Storm Cat Energy Corporation estimated the potential CBM resource of the Nariin Sukhait
area to range from 0.6 to 1.2 Tcf. Even if this indicates relatively large potential resources, no
economic reserves were however identified136. Other areas with estimated potential for CBM
are the Nalaikh mine area and the Nuurst Hotgor coal mine. While the Nalaikh coal mine, which
is a single underground mine located near Ulaanbaatar, is estimated to hold 100-200 mcm of
available methane, the Nuurst Hotgor mine, located in the western parts of Mongolia has 2,550
mcm of preliminary estimated reserves of methane137. Other estimates state that the Tavan
Tolgoi alone holds a potential of 12 bcm of CBM138.


3. Current projects and project status
In the section below, implemented and current projects relevant to this study are presented.

3.1 Implemented projects
      3.1.1 Coal-gas fired power plant in Bukhmurun sum
      3.1.2 Coal gasification plant in Darkhan Metallurgical Factory

3.2 Current projects
      3.2.1 Installation of a high quality coke and coal gas production plant
      3.2.2 Tugrug Nuur coal to gasoline project
      3.2.3 Baruun Naran coal project
      3.2.4 Noyon coalbed methane exploration project
      3.2.5 Tsaidam coalbed methane exploration project
      3.2.6 Eldev coal semi-coking project
      3.2.7 Oil refinery in Darkhan city

134 EEC
135 MFEM 2007a
136 Business Wire 2005
137 EEC
138 MFEM 2008a




                                                 35
3.1.1 Coal-gas fired power plant in Bukhmurun sum
 Project name           Coal-gas fired power plant

 Responsible            Ministry of Fuel and Energy (MFEM)
 organisation           Energy Research and Development Center (ERDC)

 Objective              To supply electricity and heat to Bukhmurun in Uvs province

                        • The experimental power plant was built by ERDC in cooperation with Eco-coal Co.,
                          Ltd. in 2005 in Ulaanbaatar city.
                        • The installed capacity of the power plant is 200 kW (2x100 kW).
                        • The coal gasification equipment was imported from China and the electricity
 Short description of     generator and other parts from Russia.
 the project            • The coal-gas fired power plant was supplied with coal from Baganuur coal mine.
                        • This demonstration project proves that small capacity coal-gas fired power plants can
                          operate economically in remote areas with no connection to the central grid.
                        • The MFEM decided to move this experimental power plant to Bukhmurun in of Uvs
                          province.
Source: EEC: MFEM, ERDC



3.1.2 Coal gasification plant in Darkhan Metallurgical Factory
 Project name           Coal gasification plant in Darkhan Metallurgical Factory

 Responsible
                        Darkhan Metallurgical Factory, Mongolia
 organisation

 Objective              To replace the usage of oil with gas from coal

                        • Constructed during 1993-1994, Darkhan Metallurgical Factory is the first metallurgical
                          enterprise in Mongolia.
                        • The raw feed material is steel and iron scrap and the plant has an annual capacity of
                          100,000 tonnes of steel rolled products.
 Short description of   • The preheating furnace was originally designed as oil fired furnace. The management
 the project              of the factory decided to substitute the oil with gas from coal in order to reduce cost
                          of fuel for preheating the furnace.
                        • In 2004 the factory built a coal gasification plant with Chinese technology.
                        • The capacity of the coal gasification plant is 4,000 m³/h with a coal consumption of
                          1,200 kg/h.
Source: EEC: Darkhan Metallurgical Factory




                                                        36
3.2.1 Installation of a high quality coke and coal gas production plant
 Project name        Installation of a high quality coke and coal gas production plant

 Responsible         Ministry of Fuel and Energy (MFEM)
 organisation        Energy Research and Development Center (ERDC)

                     Installation of a high quality standard coke fuel plant with a thermal processing line. The
                     annual capacity of the plant will be not less than 200,000 tonnes and the plant will be
                     installed on the basis of facilities of the existing thermal power plant (TPP) #2, which is a
 Objective
                     state-owned joint-stock company. The key objective is to reduce air pollution in
                     Ulaanbaatar by burning smokeless (coke) fuel. The gas coal will be used for electricity
                     and steam generation at the TPP#2.

                     Gas produced during the process is designed to be used for steam and electricity
 Outputs             generation. Relevant modification of existing TS-35 and BKZ-75 boilers installed at
                     TPP#2 will be done.

                     The tender process is underway. Key works related to the contract agreement to be
                     signed with successful bidder:
                          I. Preparation of feasibility study of the coke fuel plant.
 Present situation       II. Preparation of drawings and design of the coke fuel plant.
                        III. Supply of facilities and equipment.
                       IV. Installation of the coke fuel plant and commissioning.
                         V. Labour training.
Source: EEC: ERDC



3.2.2 Tugrug Nuur coal to gasoline project
 Project name        Tugrug Nuur coal to gasoline project

 Implementation
                     ICM - Industrial Corporation Mongolia
 organisation

 Objective           To build a coal to gasoline complex at the Tugrug Nuur lignite deposit.

                     • A Feasibility study prepared by Uhde, ThyssenKrupp, and was presented in
                       Ulaanbaatar on June 3rd, 2008.
                     • Capacity of the complex is:
                        ― 18,000 barrels of gasoline per day
 Short description
                        ― 270 tonnes of LPG per day
 of the project
                        ― slag for cement and construction materials
                     • Consumption of the complex: 675 tonnes per hour of lignite (before drying)
                     • Location: Tugrug Nuur lignite deposit, Bayan soum, Touv aimag
                     • Current reserves: 210 million tonnes

                     Forecast of required investment:
                         • Coal to gasoline complex           USD 3 billion
 Project financing
                         • Power plant                        USD 800 million
                         • Mine                               USD 200 million




                                                      37
                             • Others                           USD 300 million
                             Total                              USD 4.3 billion

                        •   To receive grants from GoM
                        •   Strengthen the project management
                        •   Attract strategic investors
 Future activities
                        •   Make agreement on product sale
                        •   Find construction company
                        •   Find financers of the project
Source: EEC: ICM www.icm.mn



3.2.3 The Baruun Naran coal project
 Project name           The Baruun Naran coal project

 Implementation
                        QGX Ltd., Canada
 organisation

 Objective              To study the possibility of CTL from Baruun Naran coal

                        The project site is located in Tsogt-Tsetsii Soum in the South Gobi region. The site is
                        approximately 500 km south of Ulaanbaatar and 200 km north of the Chinese-Mongolian
                        border, close to the coal mines Tavan Tolgoi and Naraan Sukhait. The Baruun Naran
                        coal deposit consists of bituminous and metallurgical coal.

                        In February 2007, QGX presented a CTL study on the Baruun Naran coal, prepared by
                        Nexant Inc. The study had the following results:
                         • Coal at Baruun Naran is suitable for gasification and for production of methanol and
 Short description of
                            methanol-derived products.
 the project
                         • If blended to provide an even-ash feed, run-of-mine coal from the deposit is suitable
                            for the operation, mitigating the need for a wash plant.
                         • The study pictures the development of CTL plant with a capacity of 1.78 million
                            tonnes per year of methanol.
                         • The development would be done step-by-step with an initial start-up plant at one-
                            third the final size.
                         • The plant would require an annual feedstock of 3.3 million tonnes of coal over a 30-
                            year period.
Source: EEC: QGX Ltd. www.qgxgold.com




                                                       38
3.2.4 Noyon coalbed methane exploration
 Project name        Noyon coalbed methane exploration

 Implementing
                     Storm Cat Energy Corporation, Canada
 organisation

 Objective           Determining the potential CBM resources for the project area.

                     In 2004, the Storm Cat Energy Corporation signed a five year PSC with MRPM. Under
                     the agreement, the company has a minimum work commitment on the project of USD
 Conditions
                     4.8 million over the five year contact period. The agreement was ratified by the GoM in
                     May 2004.

                      • The company estimated the potential CBM resource of the Nariin Sukhait area to
                        range between 0.6 and 1.2 Tcf, with a best estimate of 0.9 Tcf.
                      • The projection is based on the amount of coal estimated to exist at depths shallower
 Outputs                than 1,500 metres drill depth, in combination with the average gas contents acquired
                        from desorption analyses.
                      • Even if the potential resources are comparatively large, no economic reserves was
                        identified.
Source: EEC: MRPAM, Storm Cat Energy Corp. www.stormcatenergy.com



3.2.5 Tsaidam coalbed methane exploration
 Project name        Tsaidam coalbed methane exploration

 Implementing
                     Storm Cat Energy Corporation, Canada
 organisation

 Objective           Determining the potential CBM resources for the project area.

                     In 2004, The Storm Cat Energy Corporation signed a PSC with the MRPAM for a USD
 Conditions          300 thousand CBM exploration project. The Tsaidam coalbed methane area is 22,407
                     km² and located about 200 km from Ulaanbaatar.

                      • Through initial drillings at the area an essential coal samples was attained and
                        analysed for coal rank and adsorption capacity.
                      • On the block, the company conducted geological and geophysical as well as drilling
 Outputs
                        of three exploration wells of 600 metres depth to test the coalbeds.
                      • Observations were that the Tsaidam coal had similarities to the Powder River Basin
                        coals in rank, absorption capacity and depth and potentially thicker coals.
Source: EEC: Storm Cat Energy Corp. www.stormcatenergy.com




                                                    39
3.2.6 Eldev coal semi-coking project
 Project name           Eldev coal semi-coking project

 Implementing
                        MAK Company, Mongolia
 organization

 Objective              Production of semi-coke and coal tar production from Eldev coal

                        Eldev coal mine is located in Dalanjargalan soum of Dornogobi province, 330 km
                        southeast of Ulaanbaatar. A 21 km improved dirt road connects the deposit to the Olon
                        Ovoot railway station and a 1.5 km branch line and a terminal has been built by MAK at
                        the station. The deposit has estimated total reserves of 51million tonnes of bituminous
                        coal.

 Short description of
                        MAK has conducted two stages of trial production for semi-coke and coal tar production
 the project
                        from Eldev coal in Chinese semi-coking facility:
                         • In April 2006, a first trial production of semi-coke from 100 tonnes of coal was
                           performed The trial showed good adaptation of Chinese semi-coking technology for
                           the coal.
                         • In April 2007, a second trial production was done on 300 tonnes of low ash Eldev
                           coal, confirming previous results on technological feasibility.

                        • Coal processing capacity: 461,000 tonnes per year.
                        • Annual production:
                           ― 180,000 tonnes lump grade semi-coke
 Project outputs
                           ― 120,000 tonnes smokeless briquettes
 /products.
                           ― 46,000 tonnes coal tar
                           ― 300 mcm by-product gas: 40% will be used for internal heating and the
                                remainder for a 15 MW steam turbine for power generation.

 Project economics      Required investment: USD 15 million
                        Pay back period: 3.5 years

 Implementation         •   January 2006 - Preliminary lab tests on semi-coking behaviour of Eldev coal.
 schedule               •   April 2006 - Trial production of semi-coke from 100 tonnes of Eldev coal in China.
                        •   December 2006 - Briquette test on fine grade semi-coke in China.
                        •   April 2007 - Second trial production of semi-coke from 300 tonnes of Eldev coal to
                            check technological parameters and reach stable thermal process.
                        •   November 2007 - Briquette production and burning tests of briquettes and lump semi-
                            coke in Ulaanbaatar.
                        •   November 2007 - Detailed investigation on Eldev coal tar in Japan and China.
                        •   2008 - Market Study for coal tar and semi-coke.
                        •   January to March of 2008 - Feasibility study for the project is planned to be
                            performed by MAK’s project staff jointly with a Chinese engineering company.
                        •   April to September 2008 - EPC contract services.
                        •   October 2008 - Plant commissioning.
Source: EEC: MAK Eldev coal semi-coking project introduction, Dec. 2007




                                                       40
3.2.7 Oil refinery in Darkhan city
  Project name               Installation of an oil refinery in Darkhan city

  Responsible
                             Mongolsekiu LLC, Mongolia and Toyo Engineering Corporation, Japan
  organisation

  Objective                  To supply Mongolian market with gasoline and diesel oil.

                             • Annual raw oil processing capacity: 2 million tonnes
  Outputs
                             • 44,000 barrel per day of liquid oil products

                             The developers of the project are going to start the project in spring 2009 and finish in
                             2012. The raw oil will be imported from Kazakhstan by pipeline and rail. The feasibility
                             study has been done by Toyo Engineering with the conclusion that one problem might be
  Present situation          adequate water resources.

                             Required investment for the project is USD 1.2 billion and will be financed with soft loans
                             from the Japanese government and the Japanese Bank of International Cooperation.
Source: EEC: Daily news, Mongolia, Oct. 2008



4. Transportation
A country’s ability to move goods within and over its borders in a sufficient and reliable way is
essential in order to participate in and benefit from trade. As a natural transit country for trade
between Russia and China and with export dependent industries such as mining representing
nearly one third of GDP139, the development of Mongolia’s infrastructure and transportation
sector plays an important part in the country’s future economic development. Most mining and
exploration areas are located in remote areas throughout the country and in areas with
inadequate infrastructure.


4.1 Current situation for logistics and infrastructure in Mongolia
Mongolia’s total volume of freight transportation has increased from 10.64 million tonnes in
2001 to more than the double in 2007. The vast majority of goods are transported on the road
and rail network, with rail carrying more than 60 per cent of freight140.

Unfortunately Mongolia’s infrastructure and logistics sector is seriously underdeveloped. In a
logistics evaluation of 150 countries, carried out by the World Bank in 2007, Mongolia ranks
136141. Areas such as logistical competence and timeliness were found particularly weak. The
logistics inadequacy is also identified by companies operating in Mongolia and the country’s
transportation services are described as limited, costly and unreliable 142 . According to
estimates by the World Bank, transportation of goods to the nearest port is nearly twice as
expensive in Mongolia compared to many other central Asian landlocked countries such as

139 NSOM
140 Ibid.
141International Bank for Reconstruction and Development (IBRD) / World Bank (WB) 2007
142 In the 2004 World Bank Productivity and Investment Climate Survey, transport services were mentioned as a major problem (WB 2007)




                                                                   41
Kazakhstan, Uzbekistan and Kyrgyz Republic143. Compared to other landlocked countries in
East Asia and South Asia, the cost of border crossings and time spent at the border are also
high in Mongolia.



      Figure 15: Development of carried freight by railway and road
      1,000 tonnes
      18000                                                                             Mongolia’s infrastructure is of great
                                                                                        importance when considering the
      16000                                                                             future development of the country. The
      14000                                                                             road structure and railway system is
      12000
                                                                                        still largely underdeveloped and in
                                                                                        order to handle an increasing
      10000                                                                             industrialisation   in     need      of
       8000                                                                             improvements.
       6000
                                                                                        The total amount of carried freight in
       4000                                                                             Mongolia grew by 12.64 million tonnes
       2000                                                                             between year 2000 and 2007. The
                                                                                        fastest increase has been in the road
           0
                                                                                        transportation sector, explaining some
               2000 2001 2002 2003 2004 2005 2006 2007                                  of the declining amounts of goods
                                                                                        transported on the national railway.
                                     Railway            Road
      Source: NSOM




4.1.1 Road
Including both state and local roads,144 Mongolia’s road network totals 49,250 km, connecting
21 major cities and towns as well as 160 villages145. Just about 12 per cent of the network is
paved with the rest being gravel or dirt roads146. Only one paved road leads to a border; the
road from Ulaanbaatar to the Russian border. A paved road connecting Zamyn Uud to the
Chinese border is under construction147. With the city of Zamyn Uud as a connecting point for
freight transports from China to Mongolia, Russia and Europe, there is a great need for a paved
road connecting this city to Ulaanbaatar and Russia148.

The amount of freight carried by road has steadily increased and today even bulky items, such
as mining commodities, are carried on the road network. Since 2000, the number of registered
vehicles in Mongolia has nearly doubled, with almost three quarters of all vehicles currently
registered in Ulaanbaatar149. The growing number of vehicles, together with the poor network


143 Estimates by the World Bank show that transporting costs for moving a twenty-foot equivalent unit (TEU) container to the nearest port for
Kazakhstan, Uzbekistan and Kyrgyz Republic is about USD 0.37 per kilometre. The price for moving the same size container in Mongolia is
USD 0.61 per kilometre (WB 2007)
144 State roads are those connecting Ulaanbaatar to provincial centres (aimag centres) and towns and boarder crossings of importance. Where

there is a lack of state roads, local roads connect the provincial centres (aimag centres) to each other and to district centres (sum centres).
(UNESCAP 2006)
145 UNESCAP 2006, Prosser 2007
146 Prosser 2007
147 WB 2008c
148 Asian Development Bank (ADB) 2008
149 NSOM




                                                                      42
and roads as well as the inadequate infrastructure and traffic appliances, is not only causing
heavy traffic congestion but is also raising concern for road safety150.

While the Ministry of Road, Transport and Tourism (MRTT) is in charge of just over 11,000 km
of state roads, local authorities are responsible for the remainder151. Construction of state roads
is mainly financed through Mongolia’s Road Fund, including funds from the state budget, fuel
taxes and vehicle registration fees152. Although road construction is privatised and contractors
selected through competitive tenders, routine maintenance is restricted to local state-owned
companies with direct contracts with the MRTT153.

4.1.2 Railway
Rail transportation has become the main method of moving heavy and bulky freight in
Mongolia. However, largely due to the rapid growth in road transport, the amount of freight
transported on the country’s rail network has decreased somewhat in recent years. Today, the
country’s single main-line track railway is competing with more than 6,000 road haulage
companies154. However, because of rising fuel prices it is becoming increasingly expensive to
transport goods by road. This affects for example mining companies transporting commodities
by road. The development of the railway sector thus plays an important role in the future of key
industries such as mining in Mongolia.

As of today, Mongolia’s current rail network consists of 1,815 km of broad gauge track,
including a 1,110 km main line, linking Sukhbaatar on the Russian border with Zamiin Uud on
the Chinese border, a separate Eastern Mongolia network of 238 km, with its own link to the
Russian railway, and 477 km of branches from the main line155. Service and infrastructure is
handled by Mongolia’s only rail operator, which is a JV with equal equity share between the
Mongolian and Russian governments156.

Most rail freight consists of coal transports to the power stations in Ulaanbaatar157, with just
below 50 per cent of all transported freight being international freight. Mongolia is also a rail
transport transit country, mainly for oil and timber transports from Russia and China158. With a
handling capacity of 3 million tonnes of crude oil per year, the Trans-Mongolian railway has
been the main way of transporting crude oil from Russia to China. Yet, just as with the total
amount of freight transported by rail, the amount of rail transit cargo has also decreased in
recent years159. In 2006, 1.3 million tonnes of crude oil was transported from Russia to China
through Mongolia, which is a decrease by 50 per cent from the previous year160. In 2007, the
transports halted due to the bankruptcy of the Russian Yukos oil company161.



150 WB 2008c, Manduul 2008
151 WB/PPIAF 2007
152 UNESCAP 2006
153 WB/PPIAF 2007
154 Ibid.
155 WB 2008c
156 WB/PPIAF 2007
157 Ibid.
158 Ibid.
159 NSOM
160 MRPAM 2007b
161 Ibid.




                                                43
4.2 Infrastructure and logistics outlook
The GoM gives high priority to the development of the country’s transportation sector. Several
projects and actions to improve the infrastructure sector, encourage investment and develop
inter-urban and rural connections, are included in the Action Plan of the Government of
Mongolia for 2004-2008 162 . With no seaports, it is essential that Mongolia’s exit points to
neighbouring countries and their connecting routes are able to cope with existing and future
demand and exploration. Mongolia is also a natural transit country for transportation between
Russia and China and a corridor connecting Asia to Europe.

With the aim of improving the national infrastructure, the Mongolian National Transport and
Trade Facilitation Committee was established in 2007. Chaired by the Minister responsible for
Road, Transport and Tourism, the committee consists of 25 members from relevant ministries,
government agencies and private sectors. Several international road transport and transit
agreements have been signed with other countries and the committee has drafted a Transit
Mongolia Programme, including a number of future infrastructure projects in the road and rail
sectors.163

According to the World Bank, the GoM has proposed investments in transport infrastructure of
a total value USD 2.945 billion between 2008 and 2015. The figure equates to about 9.8 per
cent of Mongolia’s expected GDP for the same period and is considered to ambitious to
achieve. The majority of the investments are aimed at improving the country’s railway.164

4.2.1 Road
The Transit Mongolia Programme includes construction of several Asian highway routes in
Mongolia. Some of the larger infrastructural investments include completion of the Millennium
Road and the road from Ulaanbaatar to the Chinese border, as well as four additional north-
south roads linking Russia to China165.

The Millennium Road Project was implemented by the GoM and approved by the Parliament in
2001. The purpose of the project is to connect Mongolia to neighbouring countries and sea
ports, in the shortest possible way. The highway will stretch across the country, together with
five vertical arterial roads, and is supposed to be implemented within 11 years. It has been
criticised for the high costs related to the project and the difficulties to see any actual benefits
accruing from it166.




162 Action Plan of the Government of Mongolia for 2004-2008
163 Mongolian Ministry of Road, Transport and Tourism (MRTT) 2008a, MRTT 2008b
164 The figure is based on investment proposals, inferred from the intentions of the different transport agencies with the cost of each investment

based on assessment by independent experts. (WB/PPIAF 2007)
165 WB/PPIAF 2007
166 Ibid.




                                                                       44
Figure 16: Development plan for the Millennium Road Project




Source: MRTT, 2006



4.2.2 Railway
The majority of the proposed investments in transport infrastructure are aimed at improving the
country’s railways. Investments are mainly focused on maintenance and an upgrade of the
existing railway but also new routes are under consideration. A programme of repairs and track
upgrading is underway and effort will be made to increase transport capacity167.

The main investments under consideration include a new rail line linking the north of Mongolia
to the south, as well as new railway lines in the south of Mongolia. The new north-south railway
is proposed to be built along the existing line, with the purpose of improving the existing route.
The purpose of the intended railway network in the south is to ease access to the promising
mining industry in the South Gobi area. Deposits such as Ouy Tolgoi and Tavan Tolgoi are
projected to require infrastructural investments of more than USD one billion in the next five
years168. In total, the length of the railway in the Gobi region is estimated to total about 1,455
km with necessary investments of USD 2.3 billion169.


5. Storage and distribution management in Mongolia
In 2006, there were 36 privately owned companies importing petroleum products to Mongolia.
Until 1990, the government owned Neft Import Concern (NIC) handled about 80 per cent of all
petroleum imports, but the company was acquired by the privately owned Petrovis in 2004170.




167 WB 2008c
168 MFEM 2008d
169 MRTT 2008c
170 ADB 2004




                                               45
      Figure 17: Petroleum products import by company, 2006
      Percentage of total import

          Magna Trade
                Petrovis
      Mongolian Railway
                    NIC
                  Others
                Shunkhai
                    Altjin
                    Just
             Sod Mongol
                Alkhana

                             0%     5%           10%          15%    20%          25%

      Source: MRPAM 2007a




Petroleum is mainly trucked into Mongolia from Russia, and in some smaller quantities from
China and Kazakhstan171. Some of the companies retail petroleum through own storage and
gas station networks, while other mainly do wholesale; selling petroleum to big clients, such as
mining companies or to smaller petroleum retailers172. Altogether there are 1,089 gas stations
in Mongolia 173 , operated by either private petroleum products companies or by private
individuals.

For oil exports, the lack of pipelines forces the oil companies to use the road network for
transportation of its products into China. Petro China Tamsag Company is trucking produced oil
while Donshen Oil Company is using vagon cisterns for transportation of extracted oil174.

Similar to that of gasoline and diesel supply, LPG distributors handle imports, storage and
distribution privately. In 2007, there were more than ten licensed national entities in Mongolia
engaged in the business of wholesale and retail trade of LPG175. The distributors import LPG
from mainly Russia by train or tank wagons. The gas is kept in storage tanks, normally near the
border, to finally be distributed by truck to gas depots throughout Mongolia. The government
issues business licenses and carries on supervision and inspection of companies to make sure
standards are complied with.




171 MRPAM 2007a
172 Interview information
173 Business-mongolia.com 2008
174 WB 2008d
175 MRPAM 2007a




                                                     46
                      VI. POLICIES AND REGULATIONS


1. Policies to encourage consumption of different fuels
Compared with the efforts to encourage mining and oil exploration, such as tax relief for oil
exploration and custom duty exemptions for consumer goods used by oil workers, few policies
in Mongolia promote the direct consumption of oil and gas. One main reason is Mongolia’s
dependency on imported fuels.

Since CTL and CTG technology as well as NG and CBM are not utilised domestically, there are
no current regulations or policies to encourage usage of these fuels. There is a formation of a
law for gas products including NG, LPG, bio gas et cetera. The law will cover transportation,
storage, distribution and licensing and is estimated to be ready 2009176.

Given Mongolia’s large coal reserves it is expected that coal will continue to be the main source
of energy. Government objectives are to start using coal in a more efficient and cleaner way
and the policy agenda includes production of liquid fuels from coal in Mongolia between 2012
and 2015177.


1.1 Minerals Law of Mongolia
The Minerals Law regulates prospecting, exploration and mining of all mineral resources,
except water, petroleum and natural gas, within the territory of Mongolia. The law was first
introduced in 1997 and then amended by the GoM in July 2006. With the new Minerals Law
mineral deposits are categorise into Strategic Mineral Deposits, in which the government has
the right to acquire up to a 34 per cent interest. While the old law did by many represent
international best practice and largely contributed to attract an increasing number of foreign
companies to the mining sector, the new law is in many ways regarded as a step in the wrong
direction178. The newly established Ministry of Mineral and Energy has however announced
that one of the first actions of the new government will be to review the Minerals Law in order to
improve conditions for foreign investors179. An English version of the law is found on
www.miningmongolia.mn/download/mineralslaw.pdf


1.2 Petroleum Law of Mongolia
The Petroleum Law regulates domestic and foreign involvement in the petroleum sector in
Mongolia. The law covers exploration of petroleum as well as processing, transportation,
storage and marketing of petroleum originating in Mongolia. Under the law companies can
perform exploration of oil up to five years, with two possible extensions for two years each time.

176 MFEM 2008a
177 WB 2008d
178 WB 2007
179 EEC




                                               47
The period for oil-field development is 20 years, with a possible extension if infrastructure, such
as a processing plant or a pipeline, is constructed. An English version of the law can be found
on http://mit.mit.pmis.gov.mn/en/download/laws/petroleum_law.pdf


1.3 Millennium development goals-based comprehensive national
development strategy of Mongolia180

5.2.1. Industrial development policy
5.2.1.1. Development policies for geology, mining and minerals and heavy industry
Phase one (2007-2015)
Strategic objective 1. Mineral deposits of strategic importance shall be exploited. Pursue a
policy that enables the state to hold over 51 per cent of the share of those mineral deposits,
geological surveys and proven reserves of which were financed by the government:
     • Start processing coking coal.
     • Master the technologies for extracting fuel and petroleum from coal.
5.2.1.2. Policy of processing industry development
Phase one (2007-2015)
Strategic objective 1. Expand production of end products competitive in international markets:
     • Extract oil products from combustible schist and coal.
Phase Two (2016-2021)
Strategic objective 1. The share of knowledge-intensive, advanced technology-based
production shall be strengthened and increased:
     • Manufacture a variety of end products for export, developing chemical industry,
         mastering the technology to complete the processing of coals.

5.3.2. Energy sector development policy
Phase one (2007-2015)
Strategic objective 2. Electric power supply to soums, settlements and herder households shall
be improved:
    • In soums and settlements located in the vicinity of coal deposits, build and start
        operating small electric power plants, which use gas fuel from coal.

5.3.3. Fuel sector development policy
Phase one (2007-2015)
Strategic objective 1. Small-size power plants shall be supplied with gas fuel produced from
coal:
    • Build small-size plants to produce smoke-free fuel from coal.
    • Build and operate medium and large-size industrial complexes, which produce liquid
        fuel from coal.

Strategic objective 2. Coke-chemistry and coal, energy, chemical industrial complexes shall be
built and put in operation:

  Based on “Millennium Development Goals-Based Comprehensive National Development Strategy of Mongolia”, Annex to State Great Hural
180

Resolution No12, 2008



                                                                48
         •     Based on coking coal deposit at Tavan Tolgoi, process coal, set up and operate a coal
               chemistry research laboratory centre.
         •     Produce petroleum products from coal.

Phase two (2016-2021)
Strategic objective 1. A large capacity power plant using clean coal technology shall be built
and reach full industrial capacity to produce petroleum products from coal:
    • Build a fuel, energy and coal chemistry complex at Choir-Nyalga coal deposit.
    • Obtain new kinds of fuel from coal such as hydrogen, methanol, dimethyl and others.
    • Reach full capacity in coke-chemistry production and export not less than million
        tonnes of coke annually.


1.4 Resolutions by the State Great Khural
1.4.1 About some implementing measures for decreasing air pollution181
2.1.c Project proposals and measures about implementing issues of limiting raw coal
consumption for the purpose of firewood in the city of Ulaanbaatar, developing smokeless
briquette or gas production which meets the quality and standard requirements, is safe
economically, is eco-friendly, is harmless to human health and is processed with thermal
methods based on infrastructure, capacity of production technique and technology and human
resource and providing customers with it.

2.4 To take measures about decreasing air pollution caused by vehicle smoke with definite
stages and in first stage, to transfer fuel usage of public transportation means into gas usage.

1.4.2 About funding resources of some implementing measures about decreasing air
pollution182
1. From state budget:
     1.2 To establish “Complex of producing electricity with smokeless briquette and gas that
         are processed by thermal methods” on the base of State Propertied Company
         “Thermal Station 2”.
2. From soft loan:
    2.1 To implement the project “To establish Pure Ecological Fuel and Electricity Complex”
        by “Baganuur”.
    2.2 To support the activities carrying out production of smokeless briquette production
        which meets the coal smoke and standard requirements and is processed with thermal
        methods.
    2.3 To implement the project designed for introducing liquefied combustible gas to public
        transportation means, to build gas accepting and distributing facilities and increase the
        number of stations that have a capacity of charging vehicles with gas.
3. From foreign loans and grants:
    3.1 To build a factory of producing electricity with smokeless briquette that is processed by
        thermal methods.

181   Based on “About some implementing measures for decreasing air pollution”
182   Based on “2nd Annex, Resolution #46 dated in 2007 by the State Great Khural”



                                                                      49
    3.2 To develop the production of stoves for smokeless briquette and gas that is processed
        by thermal methods.
    3.3 To initiate gas heating system for consumption.


1.5 Government resolutions
7.2.1 Proposed implementing measures for introducing liquefied combustible gas to
consumption, September 17, 2003, Number 208.
To take measures of transferring the consumption of small-size power stations in larger towns
as Ulaanbaatar, Darkhan, Erdenet and etc, households and public transportation means into
the consumption of liquefied combustible gas usage in the year of 2003-2005 with definite
stages.

7.2.2 About supporting private sector investment into the infrastructure, February 04, 2004.
In the frame of related laws and regulations, to organise the works to involve private sector
investment to the above service on the base of contracts by building public utility centres,
electricity, water supply, information and communication lines with own expenses for the rural
population and for the suburb customers that are not connected to centralized engineering
network, to rent them out to basic owners of the network or to compensate the investment after
definite terms or with the condition of taking commission instead of service using buildings and
facilities.

7.2.3 About adopting a list, July 14, 2004.
A list for gas, gas bucket, equipment, special purpose-vehicles, technique and tools that are
involved in tax-exemption is adopted with annex.

7.2.4 About adopting draft contract of stability, February 02, 2005.
Amount of first investment by the foreign investor to Mongolia is more than USD 10 million or in
TNG equal to it and the draft contract of stability during more than 15 years is adopted with
annex.

7.2.5 About adopting regional development programme of the city of Ulaanbaatar, August 16,
2006.
First stage.
Leading purpose 1. Orientation of implementing activities.
     • To establish fifth eco-friendly resource of electricity in the city of Ulaanbaatar. To
         introduce new technology of producing electricity and energy by gasifying coal.
Leading purpose 2. Orientation of implementing activities.
     • To support the production of smokeless briquette and gas.

7.2.6 About adopting cooperation plan, October 11, 2006.
Operational plan of cooperation of Mongolia with other member countries and international
agencies in the frame of Programme for Central Asian Regional Economical Cooperation.
Three. Problems in the electricity sector.




                                              50
      1. To study the issues about the cooperation in passing through the electricity
         transmission line, the petroleum and natural gas pipe and vehicle road from Russia to
         PRC, Republic of Korea and Japan through the territory of western Mongolia.
      2. To conduct complex research in the frame of coal export from western region of
         Mongolia to neighbouring countries, gasifying the coal, coal processing, building power
         station on the base of the coal deposits in western region and exporting electricity.


1.6 Coal Programme (2007-2020)
Due to the environmental issues related to coal consumption, a number of policies addressing
the effort to decrease the impact on air pollution have been implemented. MFEM has created a
Coal Programme with the aim to develop the coal industry in Mongolia in an environmentally
friendly and efficient way. The programme, which has not yet been approved by the
parliament 183 , addresses issues such as the development of technologies for efficient coal
exploration, production and development, and the utilisation of coal processing and
environmentally friendly technologies. It will be implemented in two stages between 2007 and
2020 and has the aspiration that 50 per cent of all Mongolia’s liquid fuel supply will originate
from coal by 2020. By the same year, 27 soums are to be powered from gasified coal energy
sources and five million tonnes of coking chemistry products will be produced and utilised
domestically. 184

1.6.1 Background to the Coal Programme
During the last decade, the Mongolian government has seen the development of its large coal
resources as a priority task. The GoM has conducted a comprehensive programme for
development and utilisation of these resources. The programme includes renovation of main
coal mines and a master plan study for coal development and utilisation until 2010, as well as
the technical upgrading of domestic coal mines. 185

The National Coal Programme is the strategic document intended to provide security to the fuel
and energy sector of Mongolia as well as stabilising the coal extraction and coal-processing
industry, taking it to a new advanced level by identifying the prospects for the next 20-30
years.186

1.3.2 The mission of the Coal Programme
The main target of the programme is to provide rapid development of the coal industry in
Mongolia, to expand production capacity of present coal mines by introducing environmentally
friendly technology, to explore new coal deposits by establishing infrastructure for its
exploration and to promote a national coal industry which is viable to process raw run-of-mine
coal into a range of clean, graded and uniform coal products suitable for the domestic market
and for export to Northeast and Southeast Asian regions. 187


183 MFEM 2008a
184 Doljintseren 2007
185 Based on “Brief Introduction of the Coal Programme”, Coal technology division, Ministry of Fuel and Energy, Mongolia
186 Ibid.
187 Ibid.




                                                                     51
The strategic targets of the Coal Programme include188:

Task 1.              To implement policy, regulation and an improved legal framework aimed at raising
                     coal mining and coal processing sector efficiency.

Task 2.              To meet the internal demand of oil products by developing CTL. CTL production
                     capacity is planned to produce 400 thousand tonnes by 2012, and increasing its
                     production to 800 thousand tonnes by 2020.

Task 3.              To improve energy supply of isolated regions by building coal-gas fired mini- scale
                     power units (CGPU). In the first stage of programme to build CGPUs at the Zeegt,
                     Shinejinst, Hushuut, Nuursthotgor coal mines and in the second stage at Har-
                     tarvagatai, Bayanteeg and Mogoingol coal mines.

Task 4.              To create a coal processing and testing laboratory and build improved human
                     resources capacity. Plans include establishing a coal chemicals research and
                     experimental centre and coal processing facilities at the Science and
                     Technological University of Mongolia. Future intentions are to direct research
                     activities to produce new energy sources as hydrogen, methanol, dimethyl and
                     LPG from coal.

Task 5.              To reduce the air pollution in Ulaanbaatar by developing clean coal technology and
                     ecologically clean fuel production. A 400 thousand tonnes coal thermal treatment
                     plant is to be built with the aim of reducing air pollution in the city. A future aim is
                     also to produce new clean fuel sources from coal.

Task 6.              To establish a coal reserves information database intensifying coal geological and
                     CBM surveys. It is intended to prove 150 billion tonnes of probable resources of
                     coal by spending two per cent of the State budget and to determine CBM reserves.

Task 7.              To develop step by step energy, coke and coal-chemical complexes at Tavan
                     Tolgoi and other large coal reserves. It is planned to start the mining at Tavan
                     Tolgoi coking coal deposits and to build a new power station meeting the Gobi
                     region’s power need. Further plans include production of not less than five million
                     tonnes of coke, coal chemical products per year by 2020.

Task 8.              To build large scale coal-fired power plants in order to increase electricity for
                     export. Plans include construction of a 3,600 MWt power plant at Shivee Ovoo coal
                     deposit and to build two additional power stations of the same capacity at other
                     two coal deposits increasing export capacity to 10,800 MWt.




188   Based on “Brief Introduction of the Coal Programme”, Coal technology division, Ministry of Fuel and Energy, Mongolia




                                                                        52
Table 12: Estimated investments for the implementation of the Coal Programme
                                                                                                 Investment
 No    Implementation measures                                                         Years
                                                                                                 USD mln

 First Stage 2006-2012

       2.1.1 Preparation of Feasibility Study for CTL possible mines, selection of   2007-2008            1
 1     mines and construction industry
       2.1.2 Construction of first stage CTL industry /10,000 barrels per day/       2009-2012          699
       3.1.1 Establish project implementation unit for implementation of Tavan
 2     Tolgoi coal project.                                                          2006-2012        1,000
       3.1.2 Construction of energy and mining complex
       3.2.1 Preparation of Feasibility study for construction of Power plants in
 3     coal mines.                                                                   2006-2010        3,000
       3.2.2 Construction of power plants
       4.1. Small capacity coal gasification power plants:
       4.1.1 Preparation of feasibility study for small capacity coal gasification
                                                                                     2007-2012            3
       power plants in Zeegt, Shine jinst, Nuurst Hotgor.
       4.1.2 Construction of Small capacity coal Gasification power plants
       4.2 Medium capacity coal gasification power plants:
       4.2.1 Preparation of feasibility study for small capacity coal gasification
 5                                                                                   From 2010           35
       power plants in Khar tarvagatai, Bayan teeg, Mogoin gol.
       4.2.3 Construction of Small capacity coal Gasification power plants
 6     5.1 Construction of smokeless briquette plant                                 2006-2012           20
 7     6.1.2 Construction complex laboratory for coal chemical technology.           2007-2009          150
 8     6.3 Capacity building                                                         From 2007            5
 Summary first stage                                                                                  4,913

 Second Stage 2013-2020

 9     3.2.2 Construction of major power plants                                      2013-2020        6,000
       3.1.1 Commissioning of Tavan Tolgoi Coke-Chemical complex for
 10                                                                                  2013-2020        1,000
       exploitation in full capacity
       3.2 Energy, coke-chemical complex:
        • Construction of energy, coke-chemical complex in Choir-Nyalga.
        • Construction of energy, coke-chemical complex in Kharkhiraa,
 11
            Mongol Altai.                                                            2013-2020          500
        • Construction of energy, coke-chemical complex in Aduun Chuluun,
            Chandgana tal.
       Construction of clean coal Technology based power plants with big
 12    capacity:                                                                     2015-2020        1,000
       Coal Gasification power plant with big capacity.
 13    6.1.1 Construction of coal chemical technology in regions.                    2015-2020          200
 14    6.1.2 Capacity building for coal processing industry.                         2013-2020           10
 Summary second stage                                                                                 8,710

 Total investment                                                                                    13,623

Source: EEC: MFEM




                                                          53
1.7 Liquefied Petroleum Gas Programme (2006-2010)
The GoM strongly encourages the usage of LPG as a relatively clean fuel mix. The LPG
Programme was adopted by the government in 2006 and is aimed at promoting the usage of
LPG in the household and transportation sectors and to introduce necessary safety standards
and regulations.

In the transportation sector the goal is to get a 90 per cent usage of LPG by taxis and 20 per
cent for private cars. For households and catering, the aim is to increase a level of use of LPG
of up to 40 per cent and 80 per cent respectively189. Measures have been taken in the form of
import duty and VAT exemptions on LPG equipment. There is also a draft of a government Gas
Supply Law by with the aim to further promote LPG consumption and its safe and efficient
usage190.


2. Environmental credits
The Mongolian government ratified the Kyoto Protocol in year 1999 and can thus participate in
the trading of excess emissions between countries, in what is known as the “carbon market”191.
Under the Kyoto mechanism developed countries, with a greenhouse gas reduction
commitment, are allowed to invest in Clean Development Mechanism (CDM) projects to reduce
emissions in developing countries in exchange for carbon credits.

Within mining there are possibilities to earn carbon credits from for example reforestation of
mine lands192, or extraction of methane gas from coal mines. An international example of the
latter is the China Methane Recovery Fund, aimed at extracting methane gas from coal mines
in order to generate electricity193.

Despite a small population and economy, Mongolia’s greenhouse gas (GHG) emissions are
relatively large, due mostly to climatic factors. Per capita emission is 6.05 tonnes per year
compared to the world average of 3.9 tonnes. In order to be able to formally approve and
register CDM projects, the Mongolian government established a Designated National Authority
(DNA) under the Ministry of Nature and Environment (MNEM) in November 2004. Within the
Kyoto mechanism Mongolia the DNA has implemented CDM projects within hydropower and
heating.194

Some work has also been initiated by local industrial and international organisations to promote
environmentally friendly projects. For example, since 1999, the Mongolian National Chamber of
Commerce and Industry (MNCCI) has been working with international organizations and donor
countries in acquiring finances and implementing projects aimed at reducing industrial
effluents, environmental waste and promoting Cleaner Production (CP).195

189 WB 2008e, Doljintseren 2007
190 Tsevegmid 2007
191 United Nations Framework Convention on Climate Change (UNFCCC) 2008
192 United States Environmental Protection Agency (USEPA) 2004
193 Man Investments 2007
194 EEC
195 Mongolian National Chamber of Commerce & Industry (MNCCI) 2008




                                                              54
3. Standards and other related technical documentation
MRPAM has the responsibility of providing evaluations and recommendations with respect to
technology and equipment used in the mining industry and implementation of mining
technology policies 196 . The authority also has the responsibility for the technical rules of
petroleum and petroleum products operations.

Crude Oil
Any company who may wish to apply for contract areas are requested to submit an application
to MRPAM. In the application form, the potential contractor shall submit the documents of
evidence showing applicant(s)’s methods, experience and expertise of undertaking petroleum
operations197.

Petroleum Products
Until 2003, petroleum products supply was regulated by the NIC company, which was a State-
owned enterprise. Government responsibility for the regulation of petroleum products supply
was transferred to the former Petroleum Authority of Mongolia, after NIC was privatised198.

Currently, MRPAM is the governing body for petroleum refining and products supply. The
MRPAM is responsible in matters of import, production, sales, transportation and storage of
petroleum products. MRPAM drafts rules, regulations and procedures in order to meet
requirements for technical, technological operations and to ensure the safety engineering in
connection with importation, production, sales, transportation and storage of petroleum
products.

Liquefied petroleum gas
There are developed standards for transportation and storage of LPG and there is an
inspection office in charge of controlling that these are followed. There are standards for
obtaining two different licenses; 1) for cars and 2) for industries, restaurants and households.




196 Minerals Law of Mongolia, Article 11
197 Regulation for Implementing the Petroleum Law
198 MRPAM 2007a




                                                    55
Table 13: Standards related to coal and oil
 Name of Standards       Code of Standards

 COAL
 MNS 0415 : 1989         Classification of lignite coal deposits
 MNS 0427 : 1989         Classification of bituminous coal deposits.
 MNS 0889 : 1991         Coal from Tavan Tolgoi mine. Technical requirements
 MNS 0891 : 2006         Coal from Local mines. Technical requirements
 MNS 1745 : 1973         Coal transport by Rail way. Technical requirements
 MNS 4905-1 : 2000       Coking coal. Technical requirements
 MNS 5680 : 2006         Briquette fuel. Technical requirements
 OIL
 MNS 0216 : 2006         Diesel oil. Technical requirements
 MNS 0217 : 2006         Gasoline. Technical requirements
 MNS 0218 : 1988         Oil and oil products Sampling method
 MNS 4628 : 1998         Substation of Fuel distribution Technical requirement to construction and
                         equipment



A. The Standards, Regulations and technical norms applicable to store, transport, distribution
    and exploitation of Liquefied Petroleum Gas
   1. "Safety regulation of Liquefied Petroleum Gas”, Resolution of Infrastructure Minister,
       14 September, 2001, Number 258.
   2. “LPG Technical operation manual”, Resolution of Infrastructure Minister, 3 December,
       2001, Number 343.
   3. “Gas Supply 42-01-04” Resolution of Infrastructure Minister, 1 March, 2003, Number
       38 (Construction norm and regulation)

State Standards
    1. “Liquefied Petroleum Gas- Auto transport fuel – Technical requirements” MNS 5084 :
        2001
    2. “Liquefied Petroleum Gas- Communal and household fuel – Technical requirements”
        MNS 5083 : 2001
    3. “Liquefied Petroleum Gas- Method of Identification of sulphur hydrogen contents" MNS
        ISO 8819 : 2001
    4. Commercial Propane and Butane –chronographic testing method" MNS ISO 7941 :
        2001
    5. “Liquefied Petroleum Gas- Corrosion of copper-Copper plat testing" MNS ISO 6251 :
        2001
    6. “Liquefied Petroleum Gas- Method of sampling" MNS ISO 4257 : 2001
    7. “Liquefied Petroleum Gas- Identification of Steam pressure" MNS ISO 4256 : 2001
    8. “Liquefied Petroleum Gas- Identification of remained oil " MNS ISO 13757 : 2001




                                                  56
Following rules and regulations are to be strictly complied with during gas supply service.
    a. To equip trucks, cars and public transportation means with liquefied oil gas balloons
        and experiment of gas system after equipping.
    b. Instruction for gas dangerous work:
    c. Operational instruction for working with the buckets containing liquefied inflammable
        gases:
    d. Operational instruction for funnelling the liquefied inflammable gases from railway
        tanker:
    e. Operational instruction for the pump and compressor of liquefied inflammable gases:
    f. Operational instruction for gas charging into balloons
    g. Operational instruction and rules for working with 3-output tap in gas containing
        buckets.
    h. Operational instruction for using gas compressor.
    i. Operational instruction for checking the gasification in workplaces and in facilities of
        gas pumping station.
    j. Operational instruction for the staff that work with gas reserving containers and tankers
        by filling them with gas.
    k. Operational instruction for using air ventilation system protecting from fire and
        explosion at gas pumping stations.
    l. Instruction for checking alerts in the usage of gas mask, safety-belt, belt-lock and
        fasten.
    m. Production instruction for observing in personal safety tools, safety rules and first aid
        assistance.
    n. Operational instruction for performing repair in workplaces and in reserving containers
        with danger of explosion, fire and with other hazard.
    o. Instruction for the receiver of balloons.
    p. Instruction for the posts of gas and electric welders.

B. Resolutions from State Great Hural and Government of Mongolia
   1. “Proposed measures to implementation Liquefied Petroleum Gas in use” Government
      Resolution, 17 September, 2003, Number 208
   2. “Proposed changes and additions to Value Added Tax Law” Law of State Great Hural,
      22 April 2004
   3. “Proposed changes and additions to Customs Law” Law of State Great Hural, 22 April
      2004
   4. “Proposed changes and additions to Income Tax Law” Law of State Great Hural, 22
      April 2004

C. Special Permission to take activities regarding Liquefied Gases
   1. “ Law about Special Permissions” , Law of Mongolia, 1 February 2002
   2. Regulations to allow, extend the term, cancel and control the Special Permission for
      use of Liquefied Petroleum Gas, Resolution of Infrastructure Minister, 20 September,
      2004, Number 185




                                              57
                  VI. PRIVATE SECTOR OPPORTUNITIES


1. Feasibility of oil, gas and coal-to-liquid in Mongolia
As demonstrated in this study, Mongolia’s growing demand for energy and fuels is not likely to
change in the near future. Nor is the country’s dependency on coal as the most cost-efficient
and convenient fuel source. Fluctuating world oil prices are making the cost of oil imports a
burden to the Mongolian economy and this provides a considerable incentive to develop
Mongolia’s coal resources efficiently and to diversify the energy sector by the further
development of the domestic oil and gas sectors.


1.1 Feasibility of oil
There are feasibility studies underway for the establishment of an oil refinery plant in Mongolia,
but if the level of extracted oil increases at its current rate such plants will not be feasible until
around year 2025. The amount of produced oil represented about 20 per cent of Mongolia’s
consumption of petroleum products in 2007, but estimations indicate this is to reach 50 per cent
by 2010. According to estimation, Mongolia’s gasoline and diesel consumption will have
exceeded 900 thousand tonnes by that time.

Until larger volumes are extracted, an alternative could be to import crude oil and refine it
domestically. This alternative would enable Mongolia to divert to a different import sources, but
it would still make the country dependant on oil imports. With current fluctuating oil prices, it is
also still unclear if such a plant would be economically viable. Another alternative could be to
establish a joint-venture refinery operation on the Chinese side of the border, combining
Mongolian and Chinese oil and transporting refined products back into Mongolia.


1.2 Feasibility of coal-to-liquid
In order to develop and diversify the energy sector and to meet the domestic demand for
petroleum products, development of technologies such as CTL and CTG could provide
substantial benefits to Mongolia. Implementation of CTL projects in Mongolia could potentially
replace imports of petroleum products and contribute to lowered vehicle petrol costs, create
new jobs and contribute to the development of economic zones. Development of the sector is
highly promoted by the government and a part of the long-term development strategy for
Mongolia.

The number of completed and ongoing feasibility studies in the sector confirms the interest in
establishing CTL technology in Mongolia. Yet, the full viability for constructing CTL plants in
Mongolia is still not proven. Not only do CTL projects require large accessible amounts of low-
cost coal, but they are also associated with high capital investments and operating costs.
Projects such as these are also dependent on investments in equipment, technical knowledge
and infrastructure and rely on a sufficient supply of water and energy. In particular, the current


                                                 58
infrastructural circumstances and adequate water resources might prove an obstacle and delay
a potential development.

The domestic market in Mongolia is relatively small, but with estimated coal reserves of 150
billion tonnes and with neighbouring oil consuming countries close at hand, CTL projects could
potentially not just cover the domestic demand for petroleum products, but also become a
substantial source of export income. Both China and Japan are currently amongst the world’s
largest importers of crude oil, providing great potential for the export of Mongolian petroleum
products.

The current immaturity of the CTL sector makes it difficult to estimate the feasibility for
implementation in Mongolia. Earlier studies do show some encouraging results. For example
the ICM estimates the cost of synthetic gasoline produced in their Tugrug Nuur project to 350
Euro (USD 520) per tonne, which is almost half the price compared to the recent price for
gasoline in Mongolia199. According to the ICM, the return on investment period would be six
years200. The expectation is that further studies, such as the by MFEM requested feasibility
study of CTL, will provide more detailed information regarding appropriate country-specific
technologies and project arrangements.


1.3 Feasibility of gas
EIA predicts the price for oil to remain high, which will increase the demand for NG globally201.
To date, no NG sources have been discovered in Mongolia. Due to the fact that the price of NG
is higher than for example LPG, it is currently not imported either. The domestic demand is
believed to be so low, that earlier discussions concerning the construction of a transit pipeline
from Russia to China through Mongolia is no longer entertained to any larger extent by the
GoM.

The usage of LPG to fuel vehicles has been increasing and its usage is promoted by the
government. According to the LPG Programme, there should be work on the gasification of
residential and public areas, but in contrast to the work on converting cars to LPG use, no such
large scale projects have yet been implemented. The main reason for this is likely to be that
vehicle fuels are import commodities, while LPG for residential use is replacing domestic coal
and electricity. In discussions with the government, LPG for residential use was said not to be
encouraged until there is domestic production. Any greater development of the sector is
consequently unlikely until LPG is produced in Mongolia, either in a domestic oil refinery or by
using CTL technology, or subsidised and priced competitively to compete with coal and
electricity.

Currently, CBM seems to be the gas with the highest extraction potential in Mongolia. Based on
coal age, type, reserves and structures of the deposits, Mongolia should potentially have CBM
resources 202 . Initial activities of foreign investment companies indicate a relatively large

199 EEC
200 Ibid.
201 EIA 2008
202 EEC




                                               59
potential for CBM in the country. However, no economic reserves have yet been identified and
there is a need for more intensive geological exploration and surveys.

As with fuels produced using CTL technology, CBM could potentially also become an earner of
export revenue for Mongolia. Estimation shows that CBM recovered from the Nariin Sukhait
area alone could potentially cover Mongolia’s total demand for gas, as well as provide any
excess volumes for export203.


1.4 Viability of a gas pipeline from the Kovykta gas-condensate field, Russia
Even though Mongolia is located close to the NG rich regions in Russia, there are no
transportation pipelines to, through or within Mongolia for such fuel. North East Asia is a fast-
growing market and a target for sales of Russian gas and oil. Total potential sales of gas to the
Asia-Pacific region (China and Korea) could equal 140 bcma by 2020, which is comparable to
the current gas sales to Europe204.

The possibility of an NG transit pipeline from Russia to China through Mongolia was discussed
very actively in Mongolia between 1999 and 2001. However, in recent years no official state
documents, i.e. action plans, government programmes or national development strategies,
have made any reference to a gas pipeline from Russia to China through Mongolia. One
reason is that the demand for NG in Mongolia is still very low. There is a possibility of the laying
of a spur from the planned Kovykta pipeline after 2010, or a branch pipeline between 2015 and
2020205.


2. Opportunities and challenges in the oil, gas and coal sectors
The purpose of this study has been to investigate Mongolia’s energy sector in order to identify
private investment opportunities within the oil, gas and coal sectors. The aim has been to find
opportunities that can be beneficial both from a private investment perspective, as well as
diversifying Mongolia’s energy sector.


2.1 Opportunities
Areas of interest to further develop include development and implementation of coal
technologies to process liquid fuels from coal, further development of the oil sector, such as the
development of a downstream oil industry in Mongolia, and extraction of CBM. All of these
sectors are however still in the initial stage in Mongolia and future commercial viability is thus
hard to predict. Other areas to take into account are the development of the power sector and
participation in infrastructural development projects as well as the further implementation of
CDM projects.


203 EEC
204 Ibid.
205 MRPAM 2007b




                                                60
Development of CTL and CBM

Mongolia’s coal basins provide potential for development of CTL and CBM projects. Additional exploration
is however required to ensure viable commercial development. Lacking technical knowledge within these
areas also creates a need for foreign know-how and investments. Opportunities include for companies to
be a part of conducting feasibility studies in cooperation with overseas governments or private companies
and providing exploration surveys. For CTL, it could be of interest to compare conducted studies already
done on CTL in Mongolia or perform comparative studies with different technologies and at different
locations throughout the country in order to establish the best in-country specifics. If found viable, further
opportunities include financing and establishment of CTL plants and CBM extraction operations, as well as
supplying technology, equipment and on-site training. Also ongoing projects, such as the Tugrug Nuur coal
to gasoline project, may provide future opportunities for investors and construction companies.


Planning/construction of power resources

Forecasts predict an increasing demand for electricity and power in Mongolia. In order to satisfy the
demand from sectors such as construction and industry, establishment of new power sources will be
required. In addition to improvements to the current energy system, PIPES includes the construction of
several new energy sources and transmission lines throughout Mongolia. Implementation and financing will
be handled by both state and local budget sources and loans, as well as private investors, from both
domestic and overseas sources. For companies, opportunities include maintenance and upgrading of
existing, and construction of new, CHP plants and transmission lines. This creates a need for financiers,
technical consultants, constructors as well as for equipment suppliers. Especially the mining sector is a key
consumer of energy and projects in the South Gobi will require substantial amounts of electricity.
Developments in the Gobi desert could potentially not only supply energy to mining operations, but also
provide possibilities for the export of excess energy to China. Outside the scope of this study, further
opportunities include development of renewable energy sources including hydro-electric, wind and solar
power.


Participation in infrastructural development projects

Mongolia’s proposed investments in transport infrastructure between 2008 and 2015 are estimated to
amount to USD 2,945 million. Even if this figure is predicted to be difficult to achieve, several infrastructural
investments will have to be financed by the mining sector, as part of mining development licences. Several
projects are also included in the Action Plan of the Government of Mongolia for 2004-2008. Private
construction companies are allowed to participate in selective tenders and bearing in mind the criticism of
costs and the doubtful benefits associated with the Millennium Road Project, foreign know-how could be
necessary within road planning and construction. The city of Ulaanbaatar is also in need of logistical
restructuring and proper town planning in order to handle its increasing traffic levels.


Implementation of CDM projects

Mongolia is a potential host country for CDM projects which could diversify the energy mix. Apart from
CDM projects within renewable energy sources, potential projects include extraction of methane gas from
coal mines, reforestation of mine lands, the construction of combined coal and gas CHP plants as well as
implementation of gas fired boilers. Especially those coal mines located in areas with currently insufficient



                                                       61
      energy supplies could use extracted methane to generate electricity for mining operations, as well as for
      nearby settlements. If domestic sources of gas are secured, other potential projects could include replacing
      the use of coal and petroleum fuels with gas in industries such as mining, food processing, textiles and
      leather.


      Development of a downstream industry

      Today, all oil exploration blocks are either in production, at the exploration stage or have an application for
      exploration under consideration. Opportunities, within for example the downstream industry, might arise if
      larger amounts of oil are discovered. There might also be of interest to further explore the possibility of a
      plant combining domestic crude with imported oil or a joint venture plant in for example China.




2.2 Challenges
Besides providing several opportunities, the development of the oil, gas and coal sectors in
Mongolia is also associated with a number of challenges. The challenges can be divided into
three areas; supply/demand challenges, knowledge challenges and structural challenges.

      Supply/demand challenges

       •     Underdeveloped infrastructure and logistics.
       •     Lacking infrastructure for gas distribution.
       •     Limited domestic market.


      Knowledge challenges

       •     Lack of domestic technology and technical expertise.
       •     Lack of domestic pilot projects to demonstrate economic return on investment and viability.


      Structural challenges

      •     Lack of clarity with regard to legal and regulatory issues, especially for foreign investors
      •     Lack of financing or capacity to obtain financing.




3. Conclusion and recommendations
As shown in this study, development of the coal and oil industries is of great importance to
Mongolia and a priority for the new parliament and government is to attract foreign investments
to the mining industry. The newly established Ministry of Mineral and Energy has announced
that the first action of the new government will be to review the Minerals Law in order to
improve conditions for foreign investors206.



206   EEC



                                                              62
The development of mining projects throughout the country is however also largely dependant
on satisfactory infrastructural progress in Mongolia. The development of the country’s
infrastructure is as a key issue for future economic development, which is why the sector is
highly prioritised by the GoM. Presently, Mongolia’s road and railway network is not sufficient
enough to handle an increasing demand from its domestic industry or external parties. With
Russia; its resource-rich neighbour to the north and China; a country continuously in search of
energy resources to boost its economic development, to the south, Mongolia’s location makes
it a natural transit country for freight movements. Trade between Russia and China has been
increasing steadily and between 2000 and 2006, year-on-year exports from Russia to China
increased by an average of 17 per cent. During the same period exports from China to Russia
increased by an average of 39 per cent annually, reaching a total value of USD 15.8 billion in
2006207. An earlier joint goal is that trade between Russia and China is to reach USD 60 billion
(and possibly USD 80 billion) by 2010208. So far the increase is not reflected in any Mongolian
transit transport statistics, which indicates declining volumes in recent years. However, with the
development of the infrastructure sector, Mongolia could potentially take part of the growing
trade between its two neighbours, as well as trade between Asia and Europe in an efficient
way.

Mongolia’s transportation sector is also in need of improved vehicles. Historically most vehicles
were imported from Russia, but currently Mongolia is a market for used cars from South Korea,
Japan and Europe. About 50 per cent of all vehicles in Mongolia are eleven years or older and
many do not meet the current standards for fuel consumption or emissions. Since an increasing
amount of freight is trucked within Mongolia and the country already has high GHG emission
volumes, it is important that road safety and emission control is implemented within this sector.
Some measures have been taken by the government and since January 2000 the excise law
dens to know the date of manufacture of the vehicle when importing vehicles into Mongolia209.
Consequently, importing a vehicle older than 10 years will give rise to a tax amount of USD
2,000 compared to USD 500 for a car manufactured three years prior to its import. With the
implementation of CTL and the production of synthetic diesel, there might also be a need for
converting cars into using such fuel since, apart from taxis, most passenger vehicles in
Mongolia currently run on gasoline. Such an implementation might also create a growing
demand for diesel vehicles, especially within the transportation industry.

The goal of having domestic CTL plants producing synthetic fuels by 2012 puts a large focus
on this sector in Mongolia. At present, the main CTL project in operation is a CTL plant in South
Africa, run by Sasol Ltd. There is construction of CTL plants in China, the United States and
Indonesia as well as planned projects in Australia, the Philippines and New Zeeland210. Several
of these projects will be developed by foreign investors. Since research is carried out in
Mongolia, these projects will provide the GoM with an opportunity to observe the development
and assess different technologies and investors. Successful projects and techniques might be
tested for their viability in Mongolia.



207 NBSC
208 RIA Novosti 2007
209 Excise Tax Law of Mongolia 1993
210 EIA 2007




                                               63
Another aspect of CTL technology with importance to Mongolia is the emission of any
pollutants associated with these projects 211 . Since Mongolia’s GHG emissions are already
relatively large, it is of great importance that future projects do not worsen the situation, and
instead work towards decreasing domestic pollution. Hence, the ability to adequately handle
related emissions must be secured in light of a possible implementation of CTL technology, and
a legal framework for these issues should preferably be in place prior to project establishment.
In regards to emissions caused by the usage of coal, another area with importance is the
further implementation of clean technology solutions. Mongolia’s climate provides opportunities
for environmental technologies such as wind and solar energy, and this is an area with great
potential for lowering current emissions and to further diversify Mongolia’s energy sector and its
growing demand for energy.

Other fuels that could potentially diversify the sector are CBM and NG. If sources of NG or
CBM were secured in Mongolia, a way of utilising these could be through the implementation of
CDM projects. Through the further implementation of CDM projects, Mongolia could attract not
only foreign investment, but also technical know-how, which is currently lacking within areas
such as CBM. Regarding methane gas extraction, projects in for example China could be used
as pilot studies prior to implementation in Mongolia.

With the further development of the coal sector, implementation of new technologies and
exploration of additional resources, new business opportunities will be generated for the private
sector in Mongolia Further development and investments in these areas by the private sector,
as well as by the GoM, can potentially also alleviate the country’s dependence on imported
fuels, diversify Mongolia’s energy mix and create opportunities for further economic
development.




211   IEA 2006b




                                               64
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Interviews in Mongolia with representatives from:
Asia Pacific Investment Partners
Azaa Tuvkhun Co., Ltd.
BDSEC Inc.
BHP Billiton Mongolia LLC
Dashvaanjil Gas Co., Ltd.
Energy Resources LLC
European Bank for Reconstruction and Development
Golomt Bank
Gorgas LLC
Government of Mongolia Foreign Investment and Foreign Trade Agency
Ivanhoe Mines Mongolia Inc. LLC
Just Oil LLC
Khan Bank
Magnai Trade LLC
MCS Group
Mineral Resources and Petroleum Authority of Mongolia, Mining Department, Petroleum
Department
Ministry of Fuel and Energy Mongolia: Department for Energy Policy and Coordination, Division
of Fuel Technology, Energy Policy Division, Fuel Policy and Regulation Department
Ministry of Nature and Environment Mongolia
Ministry of Trade and Industry Mongolia
Mongas Services LLC
Mongolia Energy Regulatory Authority: Licensing Department
Mongolian Academy of Sciences
Mongolian National Chamber of Commerce and Industry
Mongolian National Mining Association
MT Group
National Statistical Office of Mongolia: Public Administration and Management Department,
Foreign Relations Division
National University of Mongolia
Newcom LLC
Oil Way Co., Ltd.
PetroChina Daqing Tamtsag (Mongolia) LLC
Petro Matad Ltd.
Shaman (Mongolia) LLC
The Business Council of Mongolia
Trade and Development Bank of Mongolia
UniGas LLC
XacBank

Laws and programmes
About some implementing measures for decreasing air pollution, June 28, 2007, Number 46
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Gasoline and Diesel Fuel Tax Law, June 2, 1995
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Excise Tax Law of Mongolia, January 21, 1993 http://www.investmongolia.com/law27.pdf
Joint Order of the Minster of Finance and the Minister of Commerce and Industry, May 7, 2007,
Number 119/89 http://www.miningmongolia.mn/download/ref/j119.pdf
Minerals Law of Mongolia (Amended Law), July 8, 2006 (Official Translation 2006-10-30)
http://www.miningmongolia.mn/download/mineralslaw.pdf
Millennium Development Goals-Based Comprehensive National Development Strategy of
Mongolia, Unofficial translation from Mongolian, Ulaanbaatar, 2008
Petroleum Law of the Mongolian People’s Republic, January 18, 1991
http://mit.mit.pmis.gov.mn/en/download/laws/petroleum_law.pdf
PIPES (Program on Integrated Power Energy System of Mongolia), Appendix to the resolution
of the State Ikh Hural of May, 2007 No 10
Regulation for Implementing the Petroleum Law of the Mongolian Peoples Republic
http://www.investmongolia.com/law17.pdf
Value-added Tax Law of Mongolia, July 1, 1998
http://mit.mit.pmis.gov.mn/en/download/laws/vat_law.pdf

								
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