D.Amar: 21st century is the age of methane

Mongolian Economy Magazine spoke with D.Amar, CEO of Erdenes Methane LLC, about the coal-bed methane (CBM) project in the Tavan Tolgoi coalfields.

-What is the significance of the coalbed methane project?
-Methane is a clean source of energy. Hence, this project is a long-term solution to reduce air pollution and smoke in Ulaanbaatar. Moreover, the coalbed methane project will play an important role in bringing best practices and technologies to Mongolia, especially for the gas industry, in developing infrastructure, in preparing future professionals and in creating more jobs. In other words, the gas industry will become one of the economic drivers.
Currently, there are five companies in Mongolia that have signed Production Sharing Agreements (PSA) for coalbed methane exploration and production. Unfortunately, Erdenes Methan LLC is the only company that is actively operating and the first state owned company entering into PSA.

-When did the project start?
-In 2014-2016, few works related to the extraction of methane from the Tavan Tolgoi coal deposit were carried out. In February 2017, Erdenes Methane LLC entered into a coal bed methane exploration agreement with the Mineral Resources and Petroleum Authority of Mongolia (MRPAM). Only the Tavan Tolgoi coal reserves lying within a depth of 300 meters below the surface of the earth were studied and the further studies were delayed due to high risks involved. This was the reason for the long delay in our project.

I was appointed as CEO of Erdenes Methane LLC in 2018. At that time, it was unclear how the state-owned company would ensure fulfillment of its obligations under the agreement on high-risk methane exploration as the government will not be able to invest in the project. Thus, we took several actions to attract investments. But, we could not attract investors interest due to the geological and financial risks of the coalbed methane project. In the past, several local and foreign investors have agreed to finance our project, but to no avail. The exploration phase of any mining projects is extremely risky. No one can say for sure that the deposit has reserves or not. Therefore, in times of economic hardship, the Government does not invest in projects without a feasibility study.

Attempts to work with the Development Bank of Mongolia and other commercial banks and domestic investors have been unsuccessful. It should be noted that as the methane industry is a relatively new industry in our country, it is difficult to find people with expertise in the field. Therefore, in order to attract non governmental investments, we announced an open tender to find an investor for the coalbed methane project with an aim to ensure the continuity of the project. Australia’s Jade Methane LLC was chosen as the foreign investor to cooperate on the project

-How much was spent on exploration under the contract with Jade Methane LLC?
-According to the plan given to MRPAM, we would have spent 800 thousand USD for the exploration work, but we spent USD 1.1 million or MNT 3.1 billion at the current exchange rate to fulfill our obligations under the contract on exploration.

-Would you mind sharing the results of the exploration?
-The exploration phase is intended for determining the quality of methane and coal beds. To conduct exploration in the Tavan Tolgoi deposits, we drilled 500-900 meters deep holes in eight sites. A methane test on 618 samples and a coal quality test on 853 samples were done to estimate the amount of reserves. In terms of quality, the methane content was 97-98 percent.

-What is the current stage of the methane project?
-Exploration and extraction of coalbed methane is regulated by the Petroleum Law of Mongolia. The Petroleum Law and the Minerals Law are based on two different principles, tax and finance. Coalbed methane exploration is regulated by the Exploration Agreement, while exploration and production are regulated by the Production Sharing Agreement.

We have successfully completed tasks specified in the Methane Exploration Agreement. The results were reported to the MRPAM during the Petroleum and Non-Traditional Petroleum Exploration and Exploration Technical Council’s meeting held in October 2019. Thereby, Erdenes Methane LLC fully fulfilled its obligations under the Exploration Agreement so investors could enter into a PSA.

In May 2020, we signed a PSA with MRPAM, as authorized by Government Resolution No. 143. In accordance with the PSA, an exploration, estimation of reserves and feasibility study will be carried out. If methane is released during the methane exploration phase, we will have to extract it immediately. Therefore, for methane, the feasibility study is prerequisite for the exploration process.

We are prepared to move on to the next phase of the project, exploration. However, at the moment, we are waiting for the Government to make the decision on a transfer of rights and responsibilities under the PSA to the joint venture company which is specified in our investment agreement.

-Could you give us information about Jade Methane LLC? Does the company have a financial capacity to ensure successful implementation of the project?
-Jade Methane LLC is highly experienced in raising funds not only for methane, but also for other mining projects. Mineral exploration is the riskiest endeavor in the mining sector. Big investors are reluctant to invest in mineral exploration. Therefore, it has become a common practice to raise funding through the stock exchange. Our investor Jade Methane LLC has many years of experience in this area. Moreover, the MRPAM’s working group had reviewed, examined and evaluated the professional and financial capacities of Jade Methane LLC beforehand.

-The government is actively supporting the projects implemented by Erdenes Mongol LLC. Hence, the projects are expected to succeed. How long will it take to complete the coalbed methane project?
-From 2017 to 2019 was a risky period for the project from a geological and financial standpoint. In the past two years, we had our hands full as we have had to find an investor for the coalbed methane project, negotiate the terms and conclude an investment agreement.

In 2021 and 2023, we will carry out a well drilling, methane emission measurement, testing a production technology, methane reserve estimation and feasibility study. I hope that the project will begin in the second half of 2023 and start generating revenue from 2025, as planned.

-What are the potential risks involved in the project?
-A precise estimation of coalbed methane has not been done yet. According to preliminary estimation, methane reserves are estimated at 2.3 billion cubic meters at the exploration site or 8-10 billion cubic meters at the Tavan Tolgoi deposit. This is 5-6 times lower than the forecasts.

Also, the technical solution and economic efficiency are not clear yet as the project feasibility study has not been completed. Only after estimating the exact amount of reserves by the feasibility study, many subsequent issues will be addressed such as whether to first solve electricity and heating issues in Ulaanbaatar or to supply for local consumption. We hope that the deposit has enough reserves to meet the energy demand of Ulaanbaatar for the next 50 years.

-There are many coal deposits in Mongolia. How many of them have exploitable methane?
-It depends on the age of deposits. The best quality methane is methane from coal beds formed during the Permian period. Most of the lignite deposits in our country are geologically young which means that the methane content may not be as high as 98% like Tavan Tolgoi’s methane.

There are many Permian coal deposits including the Tavan Tolgoi deposit in the world. Recently, a large deposit of high-quality coal was discovered in the neighboring Xinjiang Uyghur Autonomous Region. They began exploiting methane before coal. Countries with the largest methane reserves are China, Australia, Canada and the United States.

The twentieth century was the age of oil and gas. Now, the age of methane has come. Hence, having enough reserves to meet domestic consumption would be beneficial for Mongolia. It is time for Mongolia to start exploiting methane to seize the opportunity presented in the methane age.