Dear Speaker and
Recently oil price went up dramatically at the world market.
As of January 2007, price of 1 barrel oil at NYSE was USD 52.84 whilst as of yesterday it reached USD 113.4, going up by USD 60.56. It results increase in domestic gas price and export tariff of Russia which supplies over 90 percent of our oil product consumption. The reason for increase in gas price in Mongolia is the increase of border price of oil products imported by Russia to Mongolia by USD 69-104 per ton on December 2007 and by USD 60-131 on April 2008.
With reference to continuous increase of price at the international market, Government of Mongolia has been requesting Russian side to sell oil products at discount rate to Mongolia.
On January 30, 2008 authorities of Rosnefti, a Russian company notified it was possible to accept Mongolia’s request, however with purposes of recovering the loss of Rosnefti company particularly, it was essential to run oil production in Mongolia, especially by building 100 gas stations in Ulaanbaatar and Darkhan as well as along the Millennium Road.
Authorities of Rosnefti company confirmed the above proposals to Mongolia on May and informed that the company could not supply further at discount price if we do not accept the proposal when giving us price quote of oil products to be supplied to Mongolia. This proposal does not comply with legislations of Mongolia, though this proposal could be considered as the one, which is in consistency with consumer interests, making domestic oil market more transparent and competitive.
After introducing the Rosnefti proposal to and getting opinions from domestic oil importing companies, some considered it acceptable whilst others reacted cautiously towards it, saying that it might affect on the domestic market adversely.
Discussing the conditions yesterday, the Government comes up with the following conclusions:
1. It is impossible to discuss proposals of Russian Rosnefti company in accordance with Mongolian effective legislations today because it is provided in the Clause 7.2 of the Law on Oil Products of Mongolia, ratified on July 1, 2005, “A foreign legal body procuring more than 30 percent of oil products to Mongolia alone shall be prohibited to sell its products at the domestic market through its legal body with its own investments and its units and branches under its authority and control.” Since Rosnefti Company alone supplies over 90 percent of oil products to Mongolia, it is subject to this legal restriction.
2. The above legislative restriction was of significance in preventing foreign suppliers to set monopoly over domestic market of oil products, maintaining retail sales price stable, preventing rapid increase and supporting domestic oil product importers, however we have to look back this clause today.
First of all, since oil price might go up in the world market constantly in the future that a barrel oil price would increase by 50-70 percent in comparison to today in the first half of this year, reaching USD 170-200, it is essential to prevent domestic market from rapid price growth and create an environment for purchasing oil products from Russia for a long period at discount price. If we buy oil products at the price offered this May, a liter gas price may increase by an average MNT 105-235. It is clear that offering prices would go up in coming months. Moreover, state policy is efficient for mid and long term for opening and liberalizing domestic market and encouraging fair competition at this time of oil product price increase.
3. When nullifying the above legal provision, the restriction should be modified that a foreign supplier of oil products shall sell less than 10 percent of its overall products to be sold a year in Mongolia by itself or through its legal body with its own investments and its units and branches under its authority and control when engaging in retail and wholesale activities in Mongolia. In addition to it, it is proposed that a clause “oil products to be sold by all legal foreign bodies and Mongolian legal bodies with foreign investment, its branches and units under its control and management shall not exceed 30 percent of overall oil products to be sold a year by itself or through its legal body with its own investments and its units and branches under its authority and control” to the Law on Oil products.
In doing so, it would be possible to increase product supply and competition, as well as protect from rapid price growth. On the other hand, objectives of preventing from dominance of foreign entities in the domestic market and supporting domestic importers of oil products for a particular period shall be fulfilled.
4. If the Parliament makes the above modifications to the law on Oil products and creates legal environment for holding talks and negotiations on the offers proposed by Russian Rosnefti Company, Ministry of Industry and Trade shall sign on a memorandum with the Company firsthand, finally prepare the draft agreement for purchasing oil products at discount price for a long term, not to let the price go up on May and submit it to the Parliament. I kindly ask the Parliamentarians to discuss and make decisions as soon as possible the related draft law.
The reality of rapidly increasing oil product price and 90 percent dependence of oil supply of Mongolia solely on single foreign company requires us to discuss on improving oil product supplies from every sides, formulating and realizing groundful and visionary state policies.
I hope draft decree of the Parliament, initiated by the Government and submitted to the Parliament shall accelerate it.
First of all, we need a long term and comprehensive state policy, ratified by the Parliament on enhancing supplement of oil products and improving domestic production. The Government commenced the formulation of such programme and is going to submit to the Parliament within the 3rd quarter.
Furthermore, it is to recommend to organize supply of oil products phase by phase in accordance with the Government resolution No.12, ratified on December 2008 to increase immediately the resource of oil product company for more than 20 days, increasing it up to the amount which could meet domestic needs of two months at the end of the year and of three months at the end of the year 2009.
Also, it is proper to carry out preparations for constructing a plant for oil processing and coal diluting within 2009 by taking infrastructure, mine location and other factors into account and organize financing in accordance with effective conditions of constructing-using-transferring. For instance, it is vital to encourage and support the ideas of constructing oil processing and coal diluting plants in Tavan tolgoi, Shivee ovoo, Tsaidam nuur and Aduun chuluu coal mines, oil processing plants in Darkhan-Uul aimag and Bagakhangai district, Ulaanbaatar, coal diluting plants in Gobisumber aimag and in Baganuur district, Ulaanbaatar and small size plant based on domestic raw materials in Dornod and Dornogobi aimags in order to meet local needs.
In addition to it. investment issues related to constructing the above plants; USD 3 billion for each of those in Tavan tolgoi, Shivee ovoo, Tsaidam nuur and Aduun chuluu coal mines that could produce 1 million tons oil product per year and USD 0.8-1.2 billion for each of those in Darkhan-Uul aimag and Bagakhangai district, Ulaanbaatar that could produce not less than 1 million tons annually, must be solved.
On the other hand, it is proper to study opportunities of importing oil products from China, Near east countries, Kazakhstan and other countries, creating new sources within the year 2008 and to start negotiations and talks.
Another important direction here is to study and solve the issue of processing oil dividend to Mongolia and supply oil products such as fuel and lubricants according to acceleration of oil exploration and mining and product-sharing contract.
Dear Speaker and Dear Members of the Parliament,
I kindly ask you to discuss and solve the draft law on modifications to the Law on oil products, submitted by the Government and draft resolution on some measures to be taken to improve supply of oil products.
Thank you for your attention.