Mongolia taps North oil potential to ease strain

A Mongolian company has tapped one of the world’s most closed markets by taking a stake in a North Korean oil refinery to help Asia’s fastest growing economy ease its energy reliance on Russia and China.

HBOil JSC, an oil trading and refining company based in Ulaanbaatar, Mongolia, said it had acquired 20 percent of the state-run entity operating North Korea’s Sungri refinery, according to an e-mailed statement yesterday. It intends to supply crude to Sungri, which won’t be fully operational for up to a year, and export the refined products to Mongolia.

“Mongolia has had diplomatic relations with North Korea for many years,” Ulziisaikhan Khudree, HBOil’s chief executive officer, said in an interview in Ulaanbaatar on June 12. “There are certain risks, but other countries do business with North Korea so I am quite optimistic that the project will be successful.”

The investment comes as ex-communist Mongolia seeks to power its mining-led boom while offering sanctions-hit North Korea a bridge to economic reforms. Since Swiss-educated Kim Jong-un took over the leadership of the totalitarian regime in December 2011, Mongolia has pledged to help its Soviet-era ally implement an economic transition similar to its own in the 1990s.

Under the transaction, worth as much as $10 million, the Mongolian Stock Exchange-listed HBOil would swap shares for full ownership of Ninox Hydrocarbons (L) Berhad, a private Malaysian company that owns 20 percent of KOEC International, and issue convertible notes to fund investment at Sungri. The rest of KOEC International is held by North Korea’s national oil company, Korea Oil Exploration Corporation, which also has oil production and exploration rights in North Korea.

The Sungri refinery, in the Special Economic Zone of Rason City in North Korea’s northeast, has a potential refining capacity of 2 million tons per year and is connected to Russia’s rail network, HBOil said in its latest release.

The company will offer to sell the North Korean refined oil to the far east of Russia, where there are no local refineries, the company said. In exchange, Russian oil companies, most of which own refineries, could send their refined products to Mongolia, a shorter route than delivering cargo to the country’s far east.

The company, which recycles fuel used by mining companies in Mongolia, also said it’s “studying the potential to expand its oil product processing and manufacturing business into” North Korea.

Bloomberg