The fiscal and regulatory terms governing Mongolia’s upstream oil and gas sector remain attractive, with recent clarification of the legal framework surrounding exploration and production (E&P) operations boosting investor confidence, according to research and consulting firm GlobalData.
GlobalData’s latest report states that while the new Petroleum Law, passed on 1 July 2014, makes few significant changes to the fiscal and regulatory terms governing conventional hydrocarbons, it contains specific provisions for unconventional hydrocarbons for the first time.
The only specific fiscal incentive is a 10% royalty, instead of 15% for conventional resources. However, the flexibility of the production sharing contract (PSC) framework means that contractors will likely be able to negotiate more attractive production sharing terms for unconventional PSCs.
“This is an important step for Mongolia, where there is growing interest in oil shale resources,” says Will Scargill, GlobalData upstream fiscal analyst. “The government has already started to sign agreements with investors for shale oil extraction pilots, envisaging conversion to a PSC once commerciality is established.”
“The law also offers longer contract periods for unconventional compared to conventional operations, which are likely to prove an incentive to investors,” says Scargill. “The exploration phase can last for up to 15 years, three years longer than normal, and the production phase is extended from 25 to 30 years."
GlobalData’s report also states that the fiscal regime for conventional hydrocarbons under Mongolian PSCs grants the investor a significantly higher share of revenue than in other countries with similar levels of reserves.
According to Scargill, Mongolia reports proven reserves of 2.4 billion barrels of oil. When compared to countries with similar levels, such as Colombia, Gabon and Uganda, which all have reserves of 2 to 2.5 billion barrels, the Mongolian PSC is the most favorable to investors across all field sizes when other factors are assumed constant.
“However, the lack of infrastructure to commercialize reserves is a significant problem. Combined with the relatively unexplored nature of much of the country, this means that significantly increased competition for acreage is unlikely in the medium term and should keep the negotiated fiscal terms in conventional PSCs relatively stable,” says Scargill.
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