Interview: D. Enkhchimeg
With its oil exports currently minimal, what is Mongolia’s hydrocarbons potential?
ENKHCHIMEG: Exploration in Mongolia is at too early a stage to make precise assessments of its hydrocarbons potential. Some US experts estimate we may have between 4bn and 6bn barrels of recoverable oil, while the Petroleum Authority of Mongolia (PAM) estimates 870m barrels. These figures are based on preliminary investments, and clearly there is a huge difference between the two estimations.
As of today there are 35 potential petroleum blocks covering 600,000 sq km of land. PAM has already finalised 18 production-sharing agreements (PSAs) with 10 different companies. A further six PSAs are currently under review. The exploration phase is obviously a risky business, but it’s very attractive since Mongolia has been almost entirely unexplored. From 1993 to 2010, only $1.5bn was invested in the sector and only 800 wells were drilled. That is nothing compared with the potential of land available for exploration. So far, only 8m barrels of oil have been produced and almost all were exported to China.
This is a promising sector. The oil fields are part of the same geological basin housing producing blocks in north-eastern and western China with very high hydrocarbons potential. We need more investments in the sector so we can begin to map out and better understand our true reserves and potential.
What regulatory concerns could have an impact on growth in the hydrocarbons sector?
ENKHCHIMEG: Because of Mongolia’s inexperience in regulating hydrocarbons , the legislation enacted so far seem to be having adverse effects. What the industry and investors want is obvious: since exploration is risky, investments must have a risk-balanced reward, and opportunities must be economical, profitable, sustainable and predictable to attract capital. Currently, the Petroleum Law is being redrafted, and discussions are still ongoing. Our knowledge the latest amendments suggests they were not encouraging for investors. Land fees were almost 1000 times more than before while the increase in various taxes and royalties has made exploration and production almost uneconomical.
I believe the government does acknowledge the fact that changes to the draft law will be necessary. The input of industry specialists, companies and advisers is valuable in formulating a more investor-friendly regulatory framework. This sector is already risky. If we add political and regulatory risks, it becomes even more difficult to operate and attract investors for viable projects.
Does the domestic energy sector have the technology and capacity for oil exploration and production, or will it need the aid of foreign firms?
ENKHCHIMEG: Exploration of Mongolia’s hydrocarbons actually began in 1921 by a US geologist, who discovered oil shale here. In 1931 the presence of oil was confirmed and in 1940 the Zuun Bayan oil field was discovered by Soviet geologists. The entire industry was shut down by the 1970s, only to restart again in 1991 with the Petroleum Law.
Between 1970 and 1991, therefore, we saw a drought in terms of investment in know-how, technology and transfer of knowledge. When the sector restarted, it attracted mostly foreign companies. This field is very young in Mongolia, so we do need the knowledge, technology and human resources of foreign companies. On the other hand, investing in this sector involves risks which the government should not bear by itself, so PSAs are an ideal tool to ensure the government continues to have a risk-free return.
We are encouraged to see that the government has started to work with the industry and that it is taking into account the opinions of industry experts as it revises the Petroleum Law. We expect positive results and are looking for a standard, internationally accepted framework applicable to Mongolia.
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