The Petroleum Regime - Mongolia
Legal News & Analysis - Asia Pacific - Mongolia – Energy & Project Finance
9 June, 2016
Mongolia is nearly entirely dependent on the import of finished petroleum projects. Wary of this dependence, Mongolia has been trying to develop its domestic petroleum sector by attracting foreign investors through a revision of its legal framework and by introducing tax incentives for oil refineries.
In general, the petroleum industry is divided into two main sectors being (i) the petroleum sector (upstream); and (ii) petroleum products sector (downstream). These are regulated by two separate laws, being the Law of Mongolia on Petroleum enacted on 1 July 2014 (Petroleum Law), and the Law of Mongolia on Petroleum Products (Petroleum Products Law) enacted on 1 July 2005. Both petroleum and petroleum production activities are licensed activities in Mongolia.
1. Petroleum Products Law and Downstream sector
The Petroleum Products Law defines petroleum products as "all types of fuel products, special liquids, combustible gases, lubricating materials, bitumen, black oil and other products that are produced through the refining of petroleum and other chemical compounds."
The Petroleum Products Law sets out the following five different classifications of activities in relation to petroleum products: (a) import; (b) production; (c) trade; (d) transportation; and (e) storage. The import, production, and trade of petroleum products requires a license, whereas transportation and storage activities must be carried out in compliance with the Petroleum Products Law and relevant regulations, but without the need for a license. Furthermore, on 7 February 2013, an amendment was made to the Petroleum Products Law requiring an additional license for retail trade of petroleum products, which was until such time an unlicensed activity.
2. Petroleum Law and Upstream sector
A revised version of Petroleum Law came into effect on 20 July 2014.
2.1 General content
The Petroleum Law distinguishes between two main categories of petroleum products, being: (i) "oil" and (ii) "unconventional oil". Oil refers to crude oil and natural gas in addition to refined petroleum, whereas unconventional oil refers to oil sands and shale.
As a welcome departure from the previous regime, the new Petroleum Law identifies just three types of petroleum-related activities: (i) research, (ii) exploration, and (iii) extraction. Exploration and extraction activities for oil and unconventional oil are subject to licensing procedures under the Petroleum Law, whilst other activities, such as research and pet storage and transportation, are subject to a simplified permission procedure.
The Ministry of Mining and the Petroleum Authority of Mongolia (PAM) are the two primary regulators for the petroleum sector. The Ministry of Mining is responsible for policy issues, the issuance of licenses and organizing tenders for exploration sites. PAM is the main implementing authority responsible for matters such as concluding production sharing agreements, approval of annual plans, and fee collection.
2.2 Research and Production Sharing Agreements
The term "research" is defined as "geological, geochemical and geophysical research conducted in order to determine the presence and condition of oil and unconventional oil in a certain area". If PAM approves the research results, a legal entity can submit a proposal to enter into a production sharing agreement, by way of submitting a draft agreement.
The Petroleum Law defines the term "exploration" as "geological, geochemical, geophysical activities, drilling and test extractions conducted in order to explore an oil deposit and determine the amount of its reserves."
The Ministry of Mining will issue an exploration license to a Mongolian company that has entered into a production sharing agreement with PAM. Alternatively, an exploration license may be issued to a company that has won a bid for a reserve where PAM and a company conducting research have not been able to conclude a production sharing agreement.
The term of an oil exploration license may be no more than eight years and can be extended twice for up to two years each time. Unconventional oil exploration licenses are issued for a term of no more than 10 years which can be extended once for a maximum of a further five years.
The term "extraction" is defined as "extraction site development and the extraction of oil and unconventional oil."
Extraction is also a licensed activity. Within 90 days of the expiry of the exploration term, an exploration license holder must present a reserve report to the Ministry of Mining in order to obtain its approval of the reserve. The Ministry of Mining will approve a reserve on the basis of an opinion issued by a committee formed under the Ministry and PAM.
The term of an oil extraction license may not exceed 25 years, but can be extended twice thereafter by up to five years each time. The initial term of an unconventional oil exploration license can be no more than 30 years, but again may be extended once for a maximum of five years.
For further information, please contact:
Chris Melville, Partner, Hogan Lovells