A sudden surge of 80 MNT to 150 MNT in the retail fuel prices of four large fuel importers shocked the nation. Prices rose despite Cabinet’s explicit action to prevent sudden price surges by reducing petroleum import tax. The Ministry of Mining explained that an increase in the international market price for petroleum ultimately caused domestic retail prices to rise. The unexpected rise in the price of petroleum further highlights Mongolia’s dependence on its two neighbors, specifically in terms of energy. What can Mongolia do to avoid being at the mercy of the international market?

It is reported that Mongolia imports 94 percent of its petroleum from Russia. In 2016, out of 1.2 million tons of petroleum imported from Russia, state-owned Rosneft supplied 800,000 tons. This leaves Mongolia at the mercy of the international market and, more specifically, at the mercy of the Russian government. Any time the Organization of Petroleum Exporting Countries (OPEC), which Russia is a leading member of, makes any changes to its production output, the price of petroleum inevitably fluctuates in Mongolia. This has proven to be an obstacle for ensuring national security. Something as vital as energy has an immediate and direct effect on the financial wellbeing of the entire nation. No matter how friendly our relations are with Russia, depending on another country for something so vital would leave any nation vulnerable. This dependence only enhances the unbalanced relations between the two countries. Since Rosneft is a state- owned company, the threat of cutting off access to fuel, while not likely, still remains in the punitive arsenal of the Russian government.

Cabinet has taken some precautionary steps in hopes of avoiding a major increase in prices, yet those steps have been proven to be ineffective. Small moves, such as lowering the petroleum import tax, are only short-term moves to keep fuel prices down to appease the general public. To their credit, the cabinet has been discussing more long-term solutions to Mongolia’s energy dependence problem. A one billion USD loan was offered to Mongolia by India during Prime Minister Narendra Modi’s visit to Mongolia in 2015. Discussions by Cabinet on how to spend the money led to the proposal of building an oil refinery in Sainshand soum in Dornogovi Province. Studies estimated that such a refinery could generate annual revenue of 1.2 billion USD, and net profit could be as much as 43 million USD. The plan for the refinery includes the capacity to process up to 1.5 million tons of petroleum annually, and producing 560,000 tons of gasoline, 670,000 tons of diesel fuel, and 107,000 tons of liquefied gas meeting Euro 4 and Euro 5 emission standards. Studies estimate that the proposed factory could contribute to a 10 percent increase in the country’s GDP and a two-fold increase in revenue generated by the natural resources processing sector. Some analysts forecast that the factory could result in a one billion USD decrease in the import of petroleum and reducing spending on foreign fuel by 20 percent, which could result in an 18 to 25 percent decrease in the MNT’s currency exchange rate against the USD.

Since its preliminary discussion, no new developments have arisen regarding the proposed refinery. It is possible that Cabinet will focus on the refinery later this year. There are many who believe the proposed refinery should be at the forefront of the government’s agenda, especially now that we have seen what effect surging international market prices for petroleum can have on the country. It is unrealistic to expect the country to immediately meet all of its domestic demands, but building a refinery capable of cutting imports by 20 percent is a good start. According to the Petroleum Authority of Mongolia, Mongolia has proven petroleum reserves of 2.3 billion barrels, and is estimated to have 3.1 billion barrels of oil-in-place. Judging by these reserves, it is possible for at least 50 percent of the nation’s demand to be met domestically in the future. Since Rosneft supplies the majority of Mongolia’s petroleum, there is bound to be at least some pushback from the Russian government on producing fuel domestically. However, with the correct management, the government has the capability of implementing future projects to build up the country’s petroleum industry.

Alleviating dependence on Russia for fuel is an important objective that will help the country avoid falling into the boom and bust cycles it already experiences with the other resources it exports. The construction of an oil refinery would undoubtedly benefit both the economy and national security. Whether the project is carried out with a loan from India or not, the responsibility for stimulating growth in the petroleum industry rests on the government’s shoulders.

 

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