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Mongolia Diversifying Energy Sources

Looking to diversify its energy sources, Mongolia is stepping up efforts to expand the value-added content of its coal industry through developing a coal-to-liquids capacity, a move that could reduce energy import costs and provide cleaner fuel.

On August 25, South Korean steelmaker POSCO announced it had formed a joint partnership with Mongolia’s MCS Group to develop a $2bn coal-to-liquids plant in Ulaanbaatar’s Baganuur district. The development has been in the pipeline since 2010, after POSCO and MCS commissioned a feasibility study from Hatch, a Canadian coal-to-liquids plant engineering company, followed by the signing of a memorandum of understanding to pursue the project in August 2011.

Under plans laid out by Won Kang-hee, the head of POSCO’s Mongolian division, the joint venture (named the Baganuur Energy Corporation) would build and operate a plant to produce annually 450,000 tonnes of diesel and 100,000 tonnes of dimethyl ether, a clean-burning propane-like gas.

Won said POSCO was optimistic for the prospects of the project, and its potential to lead to further developments in the sector. “Once the coal to liquid plant is up and running, Mongolia will become a bridgehead for us to expand toward the world in the new energy resource area,” he said.

However, critics of the project have pointed out that it will require a significant amount of capital, water and energy to be feasible, suggesting that Mongolia may be better off focusing on its available thermal coal to meet its current and near-term energy demand.

The coal-to-liquids plant will be just one arm of POSCO’s foray into the Mongolian economy. The firm’s POSCO Energy holds a 30% stake in a consortium that has been named as the preferred bidder for the construction and operation of $1.34bn power station. The consortium – which also includes France’s GDF Suez (30%) and Japan’s Sojitz Corp (30%) – has been awarded a 25-year build-operate-transfer contract for the 450 MW coal-fired station.

While the coal-to-liquids project has been in the development stage for three years, neither MCS nor POSCO has announced a clear timeline on when ground will be broken on the project, or a start date for production.

The MCS-POSCO joint venture is not the first of its kind in Mongolia; German giant ThyssenKrupp Uhde struck an agreement with the government in April 2012 to undertake a coal-to-liquids development, based on previously-completed feasibility studies. The agreements foresee ThyssenKrupp Uhde contributing proprietary technologies to both the coal-to-liquids project and to a heat-recovery coke-making plant, with the German firm also acting as general contractor. The project will be conducted in cooperation with the Industrial Corporation Mongolia, the country’s largest industry-based holding.

Mongolian officials had been in talks with ThyssenKrupp over a coal-to-liquids project since 2009, when then-prime minister S. Bayar visited Germany, although ThyssenKrupp had been conducting preliminary studies as far back as 2007.

The need for Mongolia to develop a domestic fuel industry is becoming increasingly pressing. The country imports around 1m tonnes of diesel a year, a figure that will rise with industrial and transport demands set to grow in the coming years. Oil consumption has been forecast to rise from 800,000 tonnes in 2012 to 3.5m tonnes by 2020, and demand for oil derivatives is projected to climb at a similar rate.

It is estimated that Mongolia has at least 2.4bn barrels worth of proven oil reserves, though it will require a long time, and extensive investments, to exploit most of the identified deposits. With one refinery in operation, and with much of its output exported to China, further downstream investments will be needed before Mongolia’s conventional oil reserves are to ready to reduce pressures on the domestic market.

With diesel representing around 60% of Mongolia’s fuel consumption, experts have suggested that three or more coal-to-liquids plants, with a capacity equal to that planned by POSCO and MCS, will be needed to meet the economy’s requirements in the medium term. As global coal prices are far less volatile than those for either oil or gas, the cost of the basic feedstock for such plants should remain relatively steady.

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