The Mining Sector and the Issue of Energy Supplies

The prospect of the rapid development expected to occur as Oyu Tolgoi and Tavan Tolgoi become operational, the 1,170 mineral deposits of 80 types of mineral resources, and the 8,000 mineral findings registered in Mongolia, certainly heighten the spirit of Mongolians. But they should not rejoice too quickly as extensive mining production, the nation’s large scale reconstruction and consequent growth will not happen without the resulting need in energy being met with. Mongolians have a saying: before to milk the cow, you have to prepare the buckets. During socialist times, the development of the energy sector was prioritized above everything else. Nevertheless, the bitter truth is that today in Mongolia, this strategically important sector is lagging behind and not prioritized.

The situation

The mining sector alone represents more than 80% of foreign direct investment (FDI) in Mongolia, constitute 30% of the country’s GDP, and more than 85% of its exports. Production starting date at the Oyu Tolgoi mining site - the largest untapped copper and gold deposit has been advanced to 2012. But if the news was welcomed by the general public, it was not by officials in the energy sector. It has been estimated that mining operations’ requirements in electricity and heating – currently met with thanks to 24 MW diesel power station - will reach up to 280 MW when production starts. A question must be asked: How will this demand be met if it requires an amount of energy which is twice superior to the production capacity of the thermal power station No.3? Many examples seem to show that the issue will be resolved by exporting mineral resources to China and importing energy supplies instead - a practice already common.

Coal mining companies, Chinhua-МАK-Nariin Sukhait – a Mongolian-Chinese joint company -, Mongolian Gold Corporation (МАK) and Southgobi Sands are operating in the Gurvantes soum in the Umnugobi aimag. In 2006, 35 kV power lines were imported from China to supply electricity not only to the mining deposits, but also to the Noyon, Sevree, Gurvantes soums in the Umnugobi aimag. However, today, their 35 kV capacity is not sufficient and within the year specialists explain that in such conditions, processing coal and producing value-added products is unthinkable.
MAK hopes to build a coal chemical plant in the future; however, the project will remain unfeasible unless a thermal power station is built in Nariin Sukhait. Consequently, the practice of exporting coal to China in return for energy has been ongoing for quite some time now. Such is the state of the Gobi energy supply network, where operations are ongoing in large-scale mining deposits. Certainly, the best way to resolve the energy supply issue in the region would be for mining companies reliant on energy imports there to provide money and funding for the building of a diesel power station. If only Mongolia’s energy sector functioned properly, the ever-increasing demands of mining sites in energy would be welcomed and seen as financially profitable rather than an issue impeding Mongolia’s development.

What strategy to adopt?

A  Government   plan to supply energy to the Gobi region by building a thermal power station at the Tavan Tolgoi mining deposit does exist. However, experts estimate that the project, which is still at the stage of research, will require 4 to 5 years to be completed. A tender bid was also won by MCS International to lay down 220 kV power lines from the capital city of Ulaanbaatar to Tavan Tolgoi and Oyu Tolgoi. In other words, with the implementation of this project, large-scale mining deposits located in Choir, Mandalgobi, and Tavan Tolgoi, will be supplied with energy produced domestically. But how will the Central energy system, which by the way barely manages to meet with the current demand, provide energy to Tavan Tolgoi and Oyu Tolgoi? Hopefully, the implementation of the first phase of the CHP-5 project by 2015 should answer that question by generating 450 MW of electricity and 500 Gcal of heating.

On the other hand, the power line will also be used to supply energy from the Gobi to the Central region once the Tavan Tolgoi thermal power station has become operational. In short, the Government wants to kill two birds with one stone. Until then, there is no other solution for the Oyu Tolgoi mining site but to import energy from the People’s Republic of China.
In addition, the project of supplying energy to the Tsagaan Suvarga mining deposit from Baganuur to Choir is still in the engineering design process. “This project only will require 70 MW of energy,” Vice President of the Mongolian Gold Corporation G. Tsogt says.  Only after laying 220 kV power lines from Choir can the Tsagaan Suvarga copper-molybdenum mining deposit be operational. According to the concessions agreement, MAK will be in charge of the task. The comprehensive governmental policy is directed to supply energy to the Gobi region through two sources: power lines and power stations.

The private sector steps forward

In recent years, the private sector has made a forceful entry in the country’s energy sector. In-depth analyses revealed that there is no other way for mining companies than to invest into this sector. Energy Resource LLC is ready to put into exploitation an 18 MW capacity power station at the Ukhaa Hudag. MoEnKo Company which conducts mining operations at the Hushuut mining deposit has been authorized to build a 12 MW capacity thermal power station. More private companies face the need to regulate their energy supply issue in order to conduct their operations.
It is also necessary to mention that a policy has just been implemented to support the private sector participation in the energy sector and reduce the Government’s expenses. With the adoption of the Law on Concession last February 2010, a legal environment was created to provide for the growth of the private sector participation in the energy sector, and support foreign and domestic investors in particular. 16 energy supply establishments mentioned on the Government approved concessions list might even be privatized. Within the framework of the concession agreement, a 60 MW capacity station on the Mogoin Gol is being built, and the CHP-5 and the Tavan Tolgoi power station will be implemented. The improvement of the legal environment for renewable energy should not be omitted. For example, the Cleantech Company plans to build a 250 MW capacity wind power park in the Hanbogd soum, Umnugobi aimag.

Finally

Such is the situation of Mongolia’s mining sites and their ever-increasing demand in energy. The Ministry of Mineral Resources and Energy estimated that between 2015 and 2030, energy demand will rise by an additional 3,000 MW - an astronomical number in comparison to the 856.3 MW capacity of Mongolia’s thermal power stations. 

Many good projects were drafted which could fully supply for such high energy demand and even generate profits. For example, the establishment of a 3,600 MW capacity Shivee-Ovoo complex in the Nyalga-Choir region could supply 7.6%, or 273 MW, of the domestic energy demand and export the remaining to the People’s Republic of China. In addition, approximately 300 MW of energy could be used to meet with the need of mining sites in Umnugobi. Unfortunately, nothing has been heard of these projects until now. Meanwhile, discussing the challenges facing the thermal power station No.5 and the Tavan Tolgoi power station will not be necessary. According to specialists, the reasons for such project to be lagging are directly linked to bad policies on energy tariffs and the sector’s unfavorable investment environment. 

The difficulty is that the energy sector requires a tremendous amount of investments and will generate long-term benefits. Investors are also wary of the fact that the Government regulates energy prices. Could investors be interested by an unprofitable sector where production costs exceed selling prices? Nevertheless, experts note that the adoption of the Parliament resolution No.72, adopted on the 9 December 2010 on measures to be undertaken in respect to the fuel and energy sector, has provided the grounds for improving the investment climate in the energy sector. Within the framework of this policy document, energy prices will gradually increase until 2014, and opportunities for energy prices to adopt market principles will arise.
So, the conditions were finally established to change the future of the Mongolian energy sector – putting an end to many years of repealing investors. If the speed is maintained and the investment climate improved, energy officials will probably welcome the increase of mining operations in Mongolia. In the future, the Government will even have the opportunity to export electricity. Only with the realization of this goal Mongolia will achieve the rapid economic development wich has been promised.