Mongolia’s Precarious Energy Security

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Mongolia’s Precarious Energy Security

Mongolia’s energy security needs to be viewed holistically, as a function of its economy, environment, and geopolitical situation.

Mongolia’s Precarious Energy Security
Credit: Depositphotos

Mongolia sits in a unique position where its energy situation is deeply intertwined with both its economy, which is mostly driven by raw material exports, and its geographic location between two major countries. However, there is a lack of acknowledgement of the reality of the energy situation accounting for geopolitical factors within the Mongolian government, or at least within its ministries.

According to Mongolia’s Ministry of Energy, the current state policy on energy is deeply concentrated on the production, expansion, and sustainability of electricity production. The absence of other critical components – like agriculture, mining, heavy industry, transportation, development, and security factors – in energy policy immediately misinforms the public and undermines the country’s national security and interests. A precise assessment of the energy security situation should not be limited to the issue of domestic electricity and heat production, but also include greater economic and foreign policy considerations as a whole.

The Mongolian government should immediately develop comprehensive long-term energy security policies in accordance with the prevailing geopolitical realities. The necessary steps would include transforming the electricity sector from coal-fired to renewable energy, shifting away from a reliance on coal exports to becoming a renewable energy exporter, and attracting foreign infrastructure financing.

Energy as the Base of the Economy

Mongolian economic policy, energy policy, and national security policy are deeply intertwined. A failure to recognize the impact of mineral resources such as coal and copper on Mongolia’s energy policy is deeply flawed and potentially dangerous. According to data from the Mongolian National Statistics Office, last year 86 percent of the country’s exports were raw materials, including coal, copper concentrate, and gold. More than half of Mongolia’s exports were coal. 

It is no secret that the country needs to shift from an export-based economy, which is heavily dependent on the global market, to a diversified economy. Mongolia’s government itself readily acknowledges this.

In another alarming datapoint, just one trading partner, China, accounts for 80 percent of Mongolian exports. The vulnerability of the current economic picture puts Mongolian national, economic, and energy security alike at immediate risk. 

In the long run, Mongolian economic and foreign policy must recognize the fact that the sale of coal is not sustainable. The international community is eager to move from fossil fuels as the climate emergency becomes ever-more dire. Therefore, Mongolia’s current and future administrations must tailor their policies toward value-added processing – something the country has been struggling to achieve – or even the potential replacement of coal as a revenue source. 

Notably, Mongolia can tackle both its energy and economic security concerns with one approach. Mongolia has the potential to sustain its domestic electricity demand through renewable energy sources such as solar, wind, and hydro. It should also view exports of renewable energy into neighboring countries as an alternative source of economic security.

Energy as Electricity

Mongolia’s electricity and heating production is overwhelmingly based on coal-fired thermal power plants, according to the Ministry of Energy. As of 2018, the Energy Regulatory Commission reported that close to 93 percent of Mongolia’s power plants were coal-fired, while only 7 percent generated renewable energy. 

Furthermore, Mongolia produces just 80 percent of the total electricity needed domestically and imports the other 20 percent from Russia. There has been an ongoing government effort to meet growing demand by extending the capacity of existing power plants, building new ones in rural regions, and investing in the technology and infrastructure of renewable energy, including solar and wind projects, as reported in the government action plan for 2016–2020 formulated by the Ministry of Energy. However, while transmission network extensions to reach isolated parts of the country have been on the agenda for the past few years, these efforts only included coal-fired power plants.

In terms of energy policy, Mongolia’s main priority should be to target supply close to 100 percent of domestic demand when it comes to electricity and heating production – even if this power is generated by fossil fuels. 

There are growing efforts by the international community to capture carbon emissions or remove them, which need to be studied and implemented immediately, including by shifting toward renewable energy sources. In the long run, however, it is only realistic to assume coal-fired plants are not a sustainable solution given the climate emergency. As a result, ambitious efforts to pursue renewable energy will be the future.  

Energy as Petroleum Products 

Perhaps one of the greatest information gaps for average Mongolians or even policymakers is the tendency to look at critical petroleum products such as diesel and gas in isolation, excluding the energy factor, which is deeply tied to national security. 

Mongolian industrial and other consumers are 95 percent dependent on imported petroleum products, despite the country having crude oil deposits. Indeed, petroleum products make up the biggest share of imports in terms of value. Data from the Mongolian National Statistics Office indicated that diesel and petrol ranked first and third, respectively, on the list of commodities Mongolia imported in 2022, together accounting for 35 percent of all imports.

Around 90 percent of all imported petroleum products come from Russia, which creates a geopolitical dependency. The general public has seen disruptions of Russian oil supplies from time to time and shares a common feeling of uneasiness about the fact that Mongolia’s economy is dependent on foreign actors’ discretion. Despite Mongolia having 43 million tons of proven crude oil reserves and production, the lack of in-country refineries has forced it to export its oil to China since 1998. 

According to the Mineral Resources and Petroleum Authority of Mongolia and other news agencies, the construction of Mongolia’s own refinery and oil pipelines are underway, funded by a soft loan from the Indian government. They are expected to be operational in 2027. 

The current plan is to be able to produce up to 20 percent of domestic petroleum product consumption and have six months of country reserve to boost Mongolia’s resilience to disruptions or price spikes. If the plan proceeds on schedule, the Mongolian government will gain significant leverage in foreign policy. However, the size of the oil reserve is relatively small, and the fact that 8 million tons out of 43 have already been extracted suggests that the potential leverage from this infrastructure development will be temporary and short-term. 

In the long term, the government of Mongolia should join the rest of the world in electrifying its transportation sector, supported by domestic renewable energy production.

Government Commitments and Vision 2050

Mongolia’s latest long-term development policy known as “Vision 2050” sets the tone for future government policy in energy security but again lacks the necessary national security element. There are a number of significant goals, such as “becoming self-sufficient in electricity production,” “increasing export-oriented sources and becoming an energy exporter,” and “developing an independent integrated energy system,” but the strategy ultimately failed to inform or reiterate why those goals are fundamental to Mongolia’s national security and dependency. 

In 2021, in the midst of COVID-19 and the greater economic impact of the pandemic, the Mongolian Parliament announced a “New Recovery Policy” as a part of Vision 2050. In addition to the number of action plans to increase the existing capacities of thermal power plants and a proposal to build a hydropower plant in the recovery plan, a couple of debatable proposals were mentioned: a natural gas pipeline from Russia to China via Mongolia, and a potential Northeast Asian integrated power grid. 

The potential new gas pipeline, Power of Siberia 2, has been under discussion for years, if not decades, although progress was frozen temporarily during the pandemic. According to a recent Reuters report, the Russian deputy prime minister announced that construction may begin in Mongolia starting in 2024 on a pipeline to carry 50 billion cubic meters of gas a year. 

According to the Intelligence Department of Mongolia’s study on the potential pipeline, the talks had been unproductive among stakeholder groups up until Russia’s invasion of Ukraine, which changed the geopolitical landscape immensely. It is interesting and almost counterintuitive that the Mongolian government has been pushing the idea of becoming a transit nation, thereby emphasizing further cooperation between neighbors, while also longing to assert geopolitical independence. In this context, the most controversial comment made by the Intelligence Department study was that transit countries can pose certain “risks” to supplier countries, citing the examples of Ukraine and Belarus.

In terms of geopolitics, embracing the Power of Siberia 2 pipeline can be seen as having two possible outcomes, depending on one’s perspective: Either it is political suicide by allowing expansionist Russia to export its gas using Mongolian land, or it is the ultimate ticket for security to avoid hostility from both Russia and China by connecting critical energy sectors.

I am skeptical about the argument made by the Intelligence Department about the “risk” situation. I would argue that it is the complete opposite: Mongolia would face increasing risk from Russia. Embedding a Russian pipeline in the territory of Mongolia only would deepen Russia’s interest in interfering with Mongolian domestic affairs, undermining Mongolian sovereignty. Furthermore, the key considerations – such as who would own, finance, and construct the pipeline – are still unclear. 

The most important question of the deal is, what is in it for Mongolia? If the Mongolian government manages to cut a favorable deal by negotiating a “bid check” as a transmission country and a concession to respect territorial integrity at all times, the situation could be a win for Mongolia, allowing it to finance much-needed projects from education to infrastructure. Otherwise, it is seen as a blunt invitation for Russians to interfere in Mongolian domestic affairs in the name of the pipeline. 

Another intriguing possibility is the potential for Mongolia to become a renewable energy exporter using an integrated Northeast Asian power grid linking Mongolia, Russia, China, Japan, and South Korea. This would be the preferable choice if the Mongolian government decided to pursue the development of the project seriously. Not only would this project open a new line of revenue for Mongolia, but it would also be a critical foreign policy tool to strengthen Mongolia’s position in global politics.

According to a study conducted by the Asian Development Bank, researchers found “ample renewable resources for both domestic use and potential export” in Mongolia but concluded that “system flexibility remains an impediment” and “future analysis is needed prior to investment.” 

An interconnected transmission line could ease the tensions in Northeast Asia and foster trust in an already heightened region. Participation by high-income, energy-insecure countries like Japan and South Korea could be a significant part of financing the infrastructure and knowledge; at the same time, manufacturing giants like China could potentially provide resources such as solar panels and batteries. 

If the Russian gas pipeline were to cross Mongolia as a transit country, the integrated power grid would provide crucial security and bargaining leverage for Mongolia as a complement.

Policy Recommendations

Mongolian policymakers, ministries, and the general public must understand that the energy security issue is not limited to electricity production and consumption; rather, almost every sector in Mongolia, from the economy to agriculture, is deeply intertwined with the energy situation, which makes it a national security priority. Hence, a comprehensive long-term energy security policy based on a precise assessment of the geopolitical realities of today’s Mongolia must be proposed and implemented. 

Those policies include transforming Mongolia’s electricity sector from coal-fired to renewables-based, while also shifting Mongolia’s exports from coal to renewable energy. To achieve both goals, Mongolia must attract more foreign infrastructure financing. 

Serious attempts to revolutionize Mongolia’s electricity sector from fossil fuel-based to renewable must be the long-term goal in the coming decades. The government of Mongolia must invest in transmission lines as well as storage for renewable energy production that could supply domestic consumers.

On a related note, Mongolia must move away from a coal-based economy and intensify its effort to produce more renewable energy. The government of Mongolia must recognize that the revenue from coal exports to China is not only sustainable but also not reliable. The large proportion of exports tied up in a single resource (coal) and a single recipient (China) leave Mongolia’s economy dependent on market factors beyond its control. Projects like the Northeast Asian Integrated Power Grid open the door for a new era where Mongolia exports renewable energy to the rest of the world.

Financing major renewable energy projects will be costly, and the returns will not be immediate. However, there are many ways to navigate those challenges by attracting foreign investment from “third neighbors,” including Japan, India, or South Korea. Along the way, development banks like the World Bank, Asian Development Bank, and Asian Infrastructure Investment Bank, by effectively advertising Mongolia, could potentially offer renewables to the rest of the world. 

To achieve that, strengthening Mongolia’s economic and political stability has become a prerequisite, and building a predictable legal environment for foreign investment has become a must. Here again, Mongolia’s energy security cannot be separated from broader concerns.