Monday, August 4, 2014

Australian Wolf stalks Mongolian oil opportunities

Mongolia might not be the first place that springs to mind as a potential investment destination for oil and gas players, but one small Australian company is hoping the recent passing of a new petroleum law will open up opportunities in the landlocked nation between Russia and China.

Wolf Petroleum is the only Australia-listed oil and gas company operating in Mongolia. But the industry minnow, capitalized at just A$5.5 million ($5.2 million), claims a position as Mongolia’s largest petroleum acreage holder, with one production block and two exploration areas covering more than 74,400 sq km (18,000 million acres).

The long-awaited petroleum law, which was enacted on July 1, replaced one which had been on the books since 1991.

The new law is designed to boost foreign investment in Mongolia’s petroleum industry and provide among the most competitive production sharing terms in the world, Wolf Petroleum’s Ulaanbaatar-based CEO Bataa Tumur-Ochir told Platts this week via email.

Under the new law, production sharing contracts can be approved by the government within 180 days of request by the developer. Royalty payments are 5% and contractors are exempt from customs duty, VAT in the first five years and income taxes from oil sales.

In addition, exploration, operation, development and production costs can be recovered 100%.

According to Tumur-Ochir, the petroleum industry enjoys huge support within Mongolia, which is keen to reduce its dependence on imported oil from Russia. The country currently imports via rail close to 7 million barrels/year of Russian petroleum products, subject to demand from the mining industry, the CEO added.

The new petroleum law provides Wolf with “easy and transparent procedures” to farm out a stake in its SB block, and “an advantage” on applications for production sharing contracts on its BU and Jinst blocks, Tumur-Ochir said.

The SB block in Mongolia’s east is Wolf’s most advanced project and is currently at drill-ready stage. The block, which is close to the Chinese border and existing infrastructure, has the potential to hold between 462 million barrels and 2.2 billion barrels of recoverable oil, according to independent estimates, Tumur-Ochir said.

Wolf recently opened a data room for potential strategic partners interested in farming into SB. The block could be brought into production within six to 12 months, depending on drilling results, but with Mongolia lacking an oil refinery for now, any output would be exported to China.

“We are receiving interest from potential strategic partners and we are sharing the data we have,” Tumur-Ochir said. “With the new petroleum law in place, the interest in the Mongolian oil and gas industry is steadily increasing. [In addition], the Mongolian mining sector is starting to recover.”

Meanwhile, potential resources at Wolf’s neighboring BU block, located near a producing 2.25 billion barrel oil field operated by PetroChina, are currently being estimated. The company is also in discussions with the government over the PSC terms for the block.

Wolf’s Jinst block in Mongolia’s west is the country’s largest petroleum exploration area, at more than 41,000 sq km. The company has completed initial geological and geophysical programs at Jinst, identifying 12 large sub-basins which Tumur-Ohir said were identical to producing fields in China.

Mongolia has a history of producing and refining its own oil, but the domestic industry shut down in the 1960s. According to the US Energy Information Administration, oil production resumed in a small way in 1998, but did not start climbing significantly until after 2005, reaching 14,050 b/d in 2013.

“PetroChina and Sinopec started their first oil production in 2005 and production has multiplied 25 times within the last nine years,” Tumur-Ophir said. “Mongolia forecast annual production for this year would be close to 7 million barrels/year and by 2016 [it would be] over 10 million barrels/year,”

The EIA put Mongolia’s oil consumption at 23,260 b/d in 2012, with net petroleum imports estimated at 13,330 b/d.

With plans afoot to build a new refinery in the country, albeit one which would use Russian crude initially, Wolf’s extensive acreage position might make it a small player sitting on an interesting opportunity.

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