Turquoise Hill announced on February 15 that Oyu Tolgoi is seeking a new domestically sourced power solution after the government canceled the Power Sector Cooperation Agreement (PSCA).
According to Turquoise Hill, the PSCA, signed in 2014, was intended for the exploration of a Tavan Tolgoi-based independent power producer. The agreement provided a framework for long-term strategic cooperation between the government and Oyu Tolgoi to deliver a comprehensive energy plan for the South Gobi region.
Turquoise Hill said the signing of the PSCA was a sign of commitment to the obligations agreed upon in the 2009 Oyu Tolgoi investment agreement.
However, according to Cabinet and Minister of Energy Ts.Davaasuren, the PSCA was an “illegal” agreement approved by the previous administration in 2014. Article 7.3 of the Oyu Tolgoi investment agreement established in 2009 states that Oyu Tolgoi must purchase power exclusively from domestic sources within four years of commercial production.
Minister Ts.Davaasuren explained that even though Oyu Tolgoi was supposed to begin sourcing all of its power domestically by July 2017, the “illegal” PSCA pushed that back indefinitely. In addition, while the investment agreement was ratified by Parliament in 2009, the PSCA was never approved by Parliament when it was supposed to, making it illegal according to the current Cabinet.
Speaking to the media in a press conference on February 20, Minister Ts.Davaasuren clarified that Cabinet only canceled the PSCA, extending the four-year requirement to source power domestically.
Due to the cancellation of the agreement, long-term power for Oyu Tolgoi must be domestically sourced within four years. Turquoise Hill and Rio Tinto have restated their commitments to fulfilling all requirements under the investment agreement and are continuing to evaluate all viable power options, including construction of an Oyu Tolgoi-based power plant.
Oyu Tolgoi will be evaluating three potential sources of domestic power including a Oyu Tolgoi-based power plant, a power plant built by a third party, or from a Mongolian power station.
The cost of a power solution for Oyu Tolgoi is not included in the company’s 5.3 billion USD expansion capital project estimate for the development of Hugo North Lift 1. Any costs and means of financing this will be finalized between shareholders, Rio Tinto stated.
Rio Tinto said it has already allocated 250 million USD a year for the development of a power station in Mongolia in its 2019 and 2020 capital expenditure forecasts. It will, however, continue to review capital expenditure forecasts.
“Cabinet is only making sure that OyuTolgoi meets its obligation to purchase all of its power domestically. We have met all of our obligations,” said Minister Ts.Davaasuren.
Currently, OyuTolgoi spends around 160 million USD annually importing power from China. By ensuring that the mine sources all power domestically, Cabinet believes that around 200 million USD in revenue annually will be created in Mongolia.
According to Rio Tinto, which holds a 51 percent stake in Turquoise Hill, under section 1.3 of the canceled PSCA the cancellation of the agreement indicates that the Tavan Tolgoi power project is no longer a viable option.
However, according to the Project Manager of the Tavan Tolgoi power project D.Batbileg, the feasibility study of the power plant has been completed and the project is ready to begin construction.
“If the main customer of the proposed Tavan Tolgoi power project, Rio Tinto provides a guarantee for the project, we can commence construction within 2018. On June 28, 2017, Cabinet signed an investment agreement with MCS and Japanese Marubeni. The power plant will take four years to build and will have a capacity of 450 MW. The total cost of the project is one billion USD,” said D.Batbileg.
D.Batbileg said that Japanese and Chinese banks have stated their willingness to provide funding and negotiations are in progress.
“Rio Tinto has not rejected our proposal to build the Tavan Tolgoi power plant. We are cooperating with Rio regarding this issue,” added D.Batbileg.