With the lion’s share of current coal exports unprocessed, the government is eager to build a domestic coal value chain that could jump-start Mongolia’s mid-stream segment. By 2014 the government had approved feasibility studies for two coal-to-liquid (CTL) projects and signed a memorandum of understanding (MoU) with Sinopec for synthetic natural gas plants.
Looking to Diesel
In total, four CTL projects have been tabled since 2008, two of which will aim to produce diesel using the Fischer-Tropsch process and the other two will produce gasoline using methanol-to-gasoline technology. Two approved projects are focused on diesel and petrol, respectively. Baganuur Energy, a joint venture between MCS and Posco Energy launched in April 2013, is backing a $2bn project, with a capacity of 456,000 tonnes per annum (tpa) of diesel and 100,000 tpa of dimethyl-ether gas. In April 2014 the government approved the Baganuur Power Plant concession agreement with the China Nuclear Industry 22nd Construction Company for nearly $1bn. The plant will source coal from the Choir-Nyalga deposit and have a capacity of 700 MW.
While feedstock supplies are not yet fixed and MCS is planning to employ its own captive mine, the feasibility studies are based on supplies of 4.2m tpa of unprocessed coal from MCS’s Baganuur coal mine or 3m tpa of washed coal from Mongolia Mining Corporation’s Ukhaa Khudag mine. If financial close is reached by mid-2015, production of Euro-VI diesel could start by 2018. “The fact that Russia is moving towards EuroV standards by 2018 means Mongolia will be forced to have higher environmental standards for its domestic fuel,” T. Munkhtur, MCS Energy’s CEO, told OBG. However, despite such factors, the country would naturally shift to higher-quality petroleum products given wider trends in the sector.
Gasoline
The second project backed by Mongolyn Alt Corporation (MAK) plans capacity of 400,000 tpa of petrol, 17,000 tpa of liquefied petroleum gas and 23,000 tpa of sulphur. The $2.8bn project would draw its 10m-tpa feedstock from MAK’s Aduunchuluun coal mine located near Choibalsan. Given tighter financing conditions, MAK’s project is progressing more gradually, with financial advisers to be appointed in 2015 and 2019 set as the target date for completion. “We are giving priority to the cement and copper projects, although the CTL and associated power plant projects are progressing gradually,” N. Tselmuun, MAK’s vicepresident, told OBG. While both projects appear viable, the key concern is Russian dumping of refined fuel on the Mongolian market to preserve market share. Investors in the CTL projects have sought government guarantees of a domestic price benchmark, although the breakeven point for CTL is $50 per barrel, lower than Canadian tar sands’ $80 or US shale oil’s $90.
Gasification
While CTL projects primarily aim to bolster Mongolia’s energy security, authorities also seek to leverage coal resources to become a net gas exporter. Although the Ministry of Mining (MoM) has been in talks with Germany’s ThyssenKrupp to develop a coal-gasification plant since 2009, China’s state-owned firms have been more successful. Under discussion since an October 2013 MoU, the MoM and Sinopec signed a preliminary contract to establish two coal-gasification plants during President Xi Jinping’s state visit in August 2014. At a cost of up to $30bn the project would require roughly 60m tpa of coal from two coal deposits at Dundgobi and Dornogobi to produce some 15bn cu metres of gas starting in 2019.
While the political impetus for using low-value unprocessed coal to develop refined fuel production is there, progress in long-mooted coal-gasification projects will depend on receiving the relevant permits, scoping the necessary coal resources and reaching financial close. Government-to-government deals like Sinopec’s will prove easier to finance, although implementation may face anti-Chinese sentiment. Progress on privately backed projects will depend on the financial capacity of investors, with MCS and Posco Energy’s venture closer to financial close than that of MAK.
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