China's energy blackouts have put the country's coal-heavy national electricity grid back into the spotlight as the country plans to pivot away from coal as part of its emission reduction commitment.
The shortage shows the difficulty China faces in ensuring energy security for its enormous population and also reveals Beijing's dependence on seaborne coal and liquefied natural gas (LNG), which China's leaders are keen to remedy.
One solution could be lying just across the Mongolian border. Elixir Energy, an Australian-listed gas exploration and development company, believes there could be a giant reserve of natural gas (in the form of coal-bed methane) underneath the South Gobi and is now one of several Australian companies looking in the area.
"We're solely focused on Mongolia," Elixir Energy’s CEO Neil Young said to Mongolia Weekly. "We began exploring in 2019 and made the first discovery of gas in Mongolia in early 2020, just as the pandemic was breaking, and have been successful in raising capital to do more exploration and appraisal work with a view to establishing a large resource on the border of the world's largest energy-importing nation – China."
Young first went to Mongolia in 2011 and has experience with coal-seam gas projects in Queensland, Australia that now supply east Asia, including China.
"My insight was that if you can take gas from Queensland coal seams, liquefy it, ship it to China and make money, hopefully, you can do the same in Mongolia without the high costs of the shipping and liquefaction process," he explains. "However it took years of working with the Mongolian government before we obtained the first contract. Now there are two other ASX listed companies looking at similar projects."
It might seem strange that a huge reserve of untapped natural gas could still be found so close to the world's largest energy market – but Mongolia's historical alignment with the Soviet Union, difficult local geology, and low demand from China in the late 20th century in effect prevented exploration and development.
"The USSR had almost endless oil and gas supplies of its own," Young says. "Mongolia was a tiny economy that didn't need its own gas, and in 1990 China was still exporting energy rather than importing it. That's obviously changed substantially."
Mongolia's petroleum law was updated in 2014 to create new fiscal regulations for resources like coal-bed methane, which after a delay has begun to see the beginnings of a rush for Mongolian gas.
"It's become easier for regulators to deal with further licenses of similar types," Young says. "It's always harder to be the first."
The attraction is clearly the potential competitiveness of Mongolian gas in the Chinese market given the proximity to major east coast Chinese cities and the country’s gas transmission infrastructure. As a gas explorer, Elixir Energy's strategy is to map and develop the South Gobi project (called Nomgon IX) to the point that a major energy company would step in with the huge capital resources necessary to construct pipelines into China.
"Location is important for gas compared to other commodities," Young says. "Gas costs a lot to move. In long-term pricing, gas coming by ship into east Asia will be far more expensive than piping gas from Mongolia. You'd make better margins.
"So our job is to spend five to ten years exploring and appraising the resource, but it's optimal for the resources industry for a larger and different party to develop the asset beyond that point."
Young is optimistic that a project like Nomgon will attract enough investment to see Mongolia export its own gas to China. This in turn could even subsidize a greater role for gas in Mongolia's own national electricity grid.
"An export project like that can easily attract enough capital," he says. "If I was the Mongolian government, I'd see that as the best way to get domestic demand subsidized."
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