Prominent economics professor G.Khashchuluun gives his take on Mongolia’s energy and coal sector

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Dr. Ch.Khashchuluun is a professor at the Department of Economics, a member of the Academic Council and the board of the National University of Mongolia. In addition to his teaching, Dr. Ch.Khashchuluun serves as an executive director of the Mongolia Oil Shale Association and is managing a number of non-governmental organizations and research consulting activities. From 2010 to 2011, he was appointed as the inaugural chairman of the board of directors to lead the establishment of the Development Bank of Mongolia, and from 2006 to 2012, he was a member of the board of directors of the Central Bank of Mongolia.

Dr. Ch.Khashchuluun was awarded a bachelor’s degree in economics by the Moscow State University in 1989, a master’s degree in economics from the Graduate School of Economics of Yokohama City University in Yokohama, Japan in 1996 and a Ph.D in international economics by the Graduate School of Economics of Keio University in Tokyo, Japan in 2003.

The price of coal has increased on the global market. How will this affect Mongolia’s economy?

There is no such thing as a global coal market. Many people misunderstand this notion. They say “we are expanding our coal market”, yet coal consists of two markets. The first is coal for the energy sector or brown coal as it is named. This is a whole different market. Of course, in the end, all of the products are coal. But these markets tend to differ vastly in terms of supply and demand. Brown coal is very abundant globally. China, the USA, India, Indonesia, and Australia are the main five countries that make up around 70 percent of the total global market. It is a very peculiar market in which the largest producer is also the largest consumer.

On the other side of this is the coal that is used for steel production, which is coking coal. In some cases, shale gas can be substituted for coking coal. However, coal is one of the most abundant resources on earth. It has been around 100 years since we have started coal production in Mongolia. Yet, the domestic demand is low and has shown signs of an uptick only recently.

The main customers and consumers of our coal are outside of Mongolia. Our southern neighbor, the People’s Republic of China is our major massive market. There are instances in the sector’s history where we have exported moderate amounts of coal to other countries outside of China. The top coal producers in the country are Erdenes Tavan Tolgoi, Mongolyn Alt (MAK), then SouthGobi Sands LLC, and Energy Resources LLC. Looking at the figures, it is clear that Erdenes Tavan Tolgoi and MAK are the two main exporters of coal.

In the last decade or so, resource nationalistic rhetoric such as those saying that “Mongolia’s wealth is being exploited by outsiders, they will only leave empty holes” has been increasing. What are your thoughts on this issue?

To be frank, our country did not have the capacity or ability to sell and export our coal until 2005. The global demand for coal was also not very high. At that time, potential mines with massive coal reserve deposits were found but without the necessary capital or equipment to make use of it, we were left to ask major foreign mining companies to essentially operate it. Rhetoric around that time seemed to lean towards just giving the mining license to foreign companies in an effort to start production.

In the early 2000’s, one of the largest mining companies in the world acquired the license for Tavan Tolgoi and gave it back to the government, basically saying that the venture would be a pointless one. At that time our Cabinet even offered the mining license to the North Korean government. This situation persisted until around 2006. It only became apparent around 2006 that we had opportunities for export. This is when we began to research more about how we could export the coal. In the Mongolian coal market, there are not many foreign investors. It is unique in that the main players are our domestic companies.

You mentioned that domestic demand for coal is low. Isn’t coal the main source of energy?

The domestic demand for coal is mostly centered on energy. In energy production, six to seven million tons of brown coal is needed. Since coal is so abundant in essentially every corner of Mongolia, there is no need to move coal around. Basically, every province has at least one coal mine. If they don’t have a coal mine in proximity, they bring in some from the neighboring province. So we can see that the main consumer of the coal is our domestic power network system. This system consists of four to five subsections, including the central power grid, the Khangai power grid, the western power grid, the eastern power grid, and the Gobi has a separate substation.

In recent years, all signs point towards the energy consumption of our country increasing even further. Currently, around 90 percent of all power is produced using coal. The remainder is hydroelectric, solar, and wind power. These renewable energy initiatives have been very successful in the western region of the country. We also import energy from our two neighbors. The power needed for Oyu Tolgoi is routed from China and the northern part of the country lives off of power from Russia. We are paying a substantial amount of money to use electricity. The goal of our government is to decrease the amount of energy we buy from other countries and instead focus on supplying Mongolia’s demand domestically.

Mongolia’s power grid is peculiar in that essentially none of them are connected together. The reason is, Mongolia encompasses a vast amount of land and settlements are few and far between. If we wanted to connect them, it will take a massive amount of grids. In simple terms, we will have to erect a lot of electricity poles. This is expensive. In the future, focusing on linking the five stations together to feed off of each other is a long-term project we must focus on.

There are also plans to decrease the amount of coal we use for energy production and instead focus on wind, solar, and other renewable energy. For instance, our country has set the goal to source 30 percent of all energy from renewable sources. That is why projects such as the Sainshand wind farm in South Gobi are being supported. Recently, one was built in Darkhan Province. I hear there are plans to build another in proximity to Ulaanbaatar. In hydroelectric power, there is a lot of push and pull and many moving parts. This has less to do with the electricity and more to do with the water supply.

How does water come into the coal equation?
Water is an essential reserve, especially for Mongolia. The water reserves of the country are being depleted rapidly. We can name a lot of reasons for this including global warming. On top of that, we are losing our water over our borders. We can’t make use of our water reserves. Yet we need water. Two large sectors, mining and agriculture, need water. The 2010 water policy approved by Parliament sought to keep Mongolia’s water reserves within the country. In order to create large reserves of water, we need large water storage facilities. Water storage facilities are usually built along with a hydroelectric power plant. This creates a reserve of water next to the power plant.

In other words, the construction of hydroelectric power plants helps create water reserves for a country. If Mongolia wants to develop its manufacturing sector, a hydroelectric power plant that produces cheap electricity is essential.

There is one prime example of this. Our Selenge River flows into Lake Baikal. Lake Baikal has four major hydroelectric power plants. All four of those are private and not owned by government. They belong to Russian billionaire Oleg Deripaska. His plants produce cheap electricity to supply his own factories.

Therefore, if our country builds a hydroelectric power plant, the thinking is that the amount of water going to Lake Baikal will decrease somewhat. This is not about protecting Lake Baikal. Yet, they say that Mongolia, which has been experiencing increased desertification, cannot use it. We have the right as a nation to keep 10 percent of all water flowing through Mongolia within our country.

Many of our coal producers do not wash or process their coal and instead ship out raw coal. What are your thoughts about this situation?

Mongolia has two coal washing plants. There is a small coal processing factory in Sharyn Gol. The other one is owned by Energy Resources LLC. Coal is mixed with gravel and dirt when it is first extracted. It is necessary to wash coal in order to separate it. They call washed coal, processed coal. There are several companies that do export raw coal in Mongolia. The reason is washing coal requires equipment and water.

Aside from the international disputes regarding hydroelectricity, Mongolia has not been able to build one major power plant. The infamous thermal power station No. 5 is a prime example of this. When do you reckon this station will become operational?

As of right now, the four stations are able to provide enough electricity and heating. However, in the future, the heating the current power grid provides will not be enough. The demand for heating will surpass that of the demand for electricity. This is why there is discussion about building the fifth power station. Currently there are plans to expand the third and fourth power stations to produce heating to go with electricity. In the future, we will need to build a station in Ulaanbaatar, Uvurkhangai, Khentii, Zavkhan, Arkhangai, Dundgovi, Tuv, and Govi-Altai provinces.

All of them will be built in close proximity to a coal mine. Our country has vast amounts of coal. We can use our reserves for thousands of years. In addition, many new mines are being found every day. Mining exploration expeditions have only focused on the central and eastern region of Mongolia. The expeditions have not been able to reach the western parts. We don’t know what lies there. There could be another Tavan Tolgoi or Oyu Tolgoi in the western regions. The exploration efforts are underway. Therefore, it is entirely possible that the current coal reserve of the nation could increase exponentially.

If the product is ready but it cannot be sold or exported, doesn’t it make it an unprofitable sector?

Geographically speaking, Mongolia doesn’t have great export market potential. Russia exports 10 times the coal we export to China. We are in direct competition with our northern neighbors in this aspect. In other words, our two countries have only one market, the Chinese one. It makes no difference to the Chinese companies whether they buy from Russia or Mongolia.

Mongolia’s coal export in 2015 reached 13 million tons. However, this is not that high. Mongolia currently has the capacity to export around 20 million to 30 million tons. We do have a lot of opportunities. Optimistically speaking, Mongolia can export 60 million tons of coal annually. But we mustn’t forget that the market is only singular. If coal prices drop, the demand will fall with it. China has 100 times the capacity to produce coal compared to Mongolia. They themselves have trouble with selling off its domestic coal to Chinese companies.

China has large amounts of pollution due to the fact that it sources most of its electricity and heating from coal power plants. In order to decrease the pollution, there are efforts to decrease the production of coal. Some power plants have been shut down already. Mongolia’s energy coal exports will dwindle eventually. China imports 200 million tons of coal annually. One fifth of this is used for steel production. One fifth of that was provided by Mongolia. The rest was imported from Russia, Australia, and other countries. The market will probably not expand any further.

Our exports have been sharply decreasing in recent years. The price has decreased also. The Mongolian coal sector was able to survive this crisis. But we have entered into a very difficult situation. This same situation has caused many American companies to declare bankruptcy.

For instance, Peabody, which operated in Mongolia, declared bankruptcy. Many mines are being closed in China and Australia. Even though mines are not being close in Mongolia, the export has decreased significantly. This has been ongoing for many years.

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