Petroleum Law Enhances Investment Clarity

BMI View : More clarity on Mongolia's regulatory regime for the oil and gas industry could enhance business security for investors as the country seeks to boost domestic oil production for fuel security. However, more upstream exploration is needed to further de-risk participation in Mongolia.

Mongolia's parliament passed a bill to amend the country's Petroleum Law on July 1 2014, promising to bring more clarity to the regime governing Mongolia's oil and gas industry. This is the first amendment to Mongolia's Petroleum Law since its inception in 1991. Some of the key changes include:

  • Extension of exploration period from five to possible eight years;

  • Weaker Growth Puts Pressure On Regulatory Revisions
    Mongolia - Real GDP % Chg

BMI View : More clarity on Mongolia's regulatory regime for the oil and gas industry could enhance business security for investors as the country seeks to boost domestic oil production for fuel security. However, more upstream exploration is needed to further de-risk participation in Mongolia.

Mongolia's parliament passed a bill to amend the country's Petroleum Law on July 1 2014, promising to bring more clarity to the regime governing Mongolia's oil and gas industry. This is the first amendment to Mongolia's Petroleum Law since its inception in 1991. Some of the key changes include:

  • Extension of exploration period from five to possible eight years;

  • Promises for further clarification of the differences between conventional and unconventional exploration and production (E&P). For example, royalties for conventional production will be 5-15%, while unconventional investment will see a lower rate of 5-10%;

  • Clarification of the government's share in production sharing contracts (PSC): the state is to take no less than 60% of total profit after expenses have been taken into account;

  • Crude oil produced can be exported, though producers are obliged to reserve supplies for the domestic market when requested;

  • Reiteration of state commitment towards the construction of a domestic refinery.

Supporting Local Needs

The amended Petroleum Law is one of several government moves to woo foreign investors back to Mongolia. Our Country Risk team holds a downbeat view of the country's economic growth in 2014 and 2015, on the back of a deteriorating economic outlook, high levels of sovereign debt and significant downward pressures on the Mongolian togrog. This is due in large part to disagreements with key mining investors such as Rio Tinto that have weakened investor sentiment particularly into the country's important mining sector ( see 'Oyu Tolgoi Delays Fuel 2015 Growth Downgrade', June 26).

Weaker Growth Puts Pressure On Regulatory Revisions
Mongolia - Real GDP % Chg

Although Mongolia is only a marginal oil producer, a better operating environment created by the amended Petroleum Law could invite greater investment flows into the underexplored country and help the country diversify away from its income dependence on the mining sector. Building up its domestic oil industry also promises to reduce landlocked Mongolia's reliance on Russia on fuel imports, supplies which the country often has to negotiate in advance for. This has backed the government's push for a 2mn tonnes per annum (tpa) - about 40,000b/d - domestic refinery to be located in the Darkhan-Uul province which it had hoped to build by 2016.

However, crude oil feedstock for this refinery will be a challenge. In 2013, domestic crude oil production only came in at about 14,100b/d, much of which is contributed by PetroChina's Tamsag project. There are no clear signs that Mongolia will be able to pump out 40,000b/d to meet its proposed refinery's needs by 2020, which will likely keep the country reliant on Russia for crude oil imports.

Growing, But Still Not Enough
Mongolia - Crude Oil, NGPL & Other Liquids Production ('000b/d)

Farm-In And Unconventional Prospects

The upstream production terms under the revised law is comparable to terms in Asia, though the appeal of Mongolia will ultimately depend on its below-ground potential. There is little data available for the country, where drilling has been contained to the south and west of the country. Petro Matad, one of the most active private players in Mongolia, is exploring the Central-Western areas for oil potential. Although its most recent seismic survey results of Blocks IV and V hint at some oil presence, it stated as well that the structure of the formation makes it 'relatively high risk'. Greater clarity provided by the amended Petroleum Law could help Petro Matad find a farm-in partner to help fund its exploration. It is looking into airborne full tensor gravity gradiometry (FTG) to better ascertain the blocks' potential, which the support of a partner will help finance.

More significantly, better terms for unconventional E&P could draw more players to explore oil shale in Mongolia, which the chief executive of Mongolia Shale Association is optimistic could make the country 'among the top ten oil shale producing countries' in the world. Nonetheless, below-ground exploration results will ultimate be crucial if the country wishes to draw more interest into developing its oil shale resources. Eyes would be on Genie Energy's activities, as it was the first company to sign an agreement for oil shale exploration in 2013.

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Related sectors of this article: Oil & Gas
Geography: Mongolia
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