Mongolia launched construction of its first oil refinery on Friday, a long-awaited project that is funded by India and designed to end the country's dependence on Russian fuel. Friday's ground-breaking ceremony was attended by Minister of Home Affairs Rajnath Singh and the Mongolian Prime Minister Khurelsukh Ukhnaa.

The refinery, in southern Dornogovi province will be capable of processing 1.5 million tonnes of crude oil each year, said Mongol Refinery, the state-owned company building the project, in a press release. That is about 30,000 barrels per day (bpd).

The refinery will be small by international standards, with most Chinese facilities each processing hundreds of thousands of barrels of crude per day, and India's Reliance Industries running one refinery at a record 1.2 million bpd.

Still, Mongolia's new refinery, planned for completion in late 2022, will meet all of the nation's demand for gasoline, diesel, aviation fuel and liquefied petroleum gas (LPG). “By establishing this strategically important oil refinery, the national economy will become independent from energy imports, and fuel and commodity prices will be stabilised,” said Mongol Refinery in its statement. The project is expected to boost Mongolia's gross domestic product by 10 per cent, it said.

Mongolia imported almost 1.5 million tonnes of oil products last year, virtually all from Russia. That amounted to 18 per cent of all of Mongolia's imports, according to official data.

Mongolia, a large landlocked country wedged between giants China and Russia, has a population of just 3 million. Almost half its people live as nomadic stock herders, and the country's oil demand is growing only very slowly.

“From a national security perspective, we do need to diversify our sources of oil products from the current single source, Russia,” said Munkhdul Badral Bontoi, chief executive of Mongolia-based market intelligence group Cover Mongolia. The cost of the refinery is estimated at $1.35 billion, and it will include a pipeline and its own power plant.

The refinery will process Mongolia's own crude oil, which is now sold to China. Mongolia produced 7.6 million barrels of oil last year, about 21,000 bpd, amounting to 6 per cent of its total export earnings. The country's petroleum industry regulator is expecting its crude oil output to rise over the years prior to the refinery's start-up.

Mongolia's big southern neighbour China produces around 3.8 million bpd of crude, and imports more than 9 million bpd, according to official government data.

IS IT VIABLE?

A Mongolian oil refinery has been discussed since 1997, but while several projects were approved, none have been completed. The refinery's financing is part of a $1-billion credit line agreement between Mongolia and the Export-Import Bank of India, made during a 2015 visit by Prime Minister Narendra Modi.

“The Indian guarantee is what put the odds in favour of the oil refinery being finally built, but the biggest worry here is whether the oil refinery can pay for itself,” said Munkhdul. “Economically, I'm sceptical of the viability of a domestic oil refinery, as fuel prices are heavily regulated,” he said.

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