A Crude Relationship

Mongolia and the DPRK are continuing to develop their economic relationship in a very crude way. Namely, in the trade of oil and refined petroleum products. In a previous post, we took a brief look at the petroleum-based power plant in Rason and the DPRK’s petroleum based energy needs. As discussed in that post, right next door to the Seonbong Thermal Power Plant is the Seungri Chemical Complex, a presently-shuttered oil refinery capable of piping heavy fuel oil directly into the power plant. However, it appears that as time goes on, Seungri may be entirely disconnected from Seonbong, serving instead as a refinery for Mongolian crude oil.

Recent reports from BDSec on the contracting of Seungri Chemical Complex and its numerous acquisitions around the DPRK indicate that not only is the financial relationship between Mongolia and the DPRK deepening, but the energy security of both nations is being, at least for the next few years, tied together in an important way. Mongolia, with its recent mining and oil boom, still doesn’t have the refineries required to domestically secure its own fuel supplies, while the DPRK has refineries, but does not yet have the oil wells producing enough to feed them.

First lets take a look at Mongolia’s current petroleum situation. In a chart-laden report release in January, the IMF release a number of interesting import-export statistics for Mongolia, mainly related to mining/oil exports and refined petroleum products and vehicle imports.

One, slightly clarified and posted here, compares the crude oil export and refined petroleum product import for Mongolia, which clearly indicates a significant imbalance.

All numbers in millions of US Dollars

2007 2008 2009 2010 2011 2012 2013
Crude Export 53 102 116 155 252 336 515
Refined Import 542 867 508 643 1,102 1,340 1,320
Net -488 -765 -392 -488 -850 -1,004 -805

 

Mongolia finds itself losing almost a billion dollars a year in its net oil trade due to its lack of domestic oil refining capacity. Even if their crude export eventually brings in a net positive, it will still have its actual practical petroleum supplies produced by foreign powers. Most crude oil isn’t terribly useful for running vehicles unless its actually refined into gasoline, kerosene, and other fuel products.

As discussed in an earlier post, according to the Singer-Prebisch Thesis, raw materials export prices erode faster than the price of manufactured and, in this case, refined goods. While Mongolia is enjoying its status as a mining boom country right now, if it doesn’t want to bust in the long run, it should aim to develop domestic industrial capacity beyond just raw mineral production. Much like DPRK’s rationale during the Cold War, choosing to develop manufacturing and refining capabilities prevents becoming an exploited peripheral nation, and can offer a degree of economic and, in this case, energy independence and security.

If the Mongolian Embassy’s numbers are correct, Mongolia is importing around 1.1 million metric tons of refined oil products, an overwhelming majority of which (98.2%) is from Russia, with the numbers slightly varying between sources. This means that while Mongolia is producing enough crude oil for domestic consumption, all of the crude has to be sold or shipped off so that refined products can be imported for use. Mongolia is essentially part of a modern Comecon, exporting its massive wealth of raw materials to industrial powers that can dictate import-export prices and regulations.

The Embassy page mentions that Mongolia aims to remedy this by building their own refinery, operational within three years. The Embassy’s numbers say a refinery with a capacity of 2 million metric tons of oil will cost $680-750 million, and one with 1.5 million metric tons capacity would cost $550-650 million. 2 million metric tons would be enough to largely cover its refined products need, and any imbalances (namely in the form of its massive need for diesel over all other forms of refined goods) could be traded off at fairer prices.

This still leaves three years minimum of buying 1.3+ billion dollars of necessary refined petroleum products. The Darkhan-Petroleum oil refinery, a Japanese-Mongolian venture with a capacity of 2 million tons per year, will probably come online by the end of 2015, meaning Russia’s near-total monopolization of Mongolian petroleum products will end relatively soon. However, the facility is not yet finished, and has allegedly been delayed at least once.

So domestically, the government was looking at an investment between $550,000,000 and $750,000,000, significantly less than the yearly expenditure on refined imports, to refine between 1,500,000 and 2,000,000 metric tons of oil per year and reduce its dependence on Russian refineries. And taking the recent events regarding Russia’s gas supplies to Ukraine and monopolization of Kyrgyzstan’s gas supplies by Gazprom, it makes sense that Mongolia is looking for new options, even if they appear to be staying steady with Russia for the present.

BDSec’s report for JBOil about Seungri and Seonbong in the DPRK mentions that Seungri, if brought online, has a throughput of 40,000 barrels per day, a number mirroring the CIA’s 1987 estimates [1], with a crude oil storage capacity of 800,000 metric tons. It also claims the refinery will be brought back online by the end of 2014. David Von Hippel and Nautilus’s Foundations of Energy Security for the DPRK pegs the throughput at 42,000 barrels per day, between 2.1 million and 2.5 million metric tons per year, with an estimated total storage of 2 million metric tons.

Mongolia’s maximum need of 2 million metric tons of oil is, depending on which conversion factor you use (we stuck with Mongolian for our calculations), and we used the Mongolian factor, around 14.2 million barrels oil per year. As long as Von Hippel’s numbers are correct, even without Darkhan-Petroleum, Seungri has more than enough space to fulfill all of Mongolia’s yearly-increasing refined petroleum importation, which, the IMF reports, was still only 1.2 million metric tons in 2013. Contracts with Seungri and the completion of Darkhan-Petroleum mean that Mongolia would be going from a 0 metric tons/year processing capacity to 4 million metric tons/year.

Refined Oil Products in 000s of Metric Tons, again from the IMF report

2007 2008 2009 2010 2011 2012 2013
Gasoline 346 366 323 285 325 389 380
Diesel 388 428 414 499 647 716 773
Other 47 38 19 21 32 40 41
Total 781 833 755 806 1,004 1,145 1,194

 

But Seungri’s importance isn’t just its general capacity for crude oil. Mongolia is specifically importing diesel fuel at a higher rate than anything else, meaning that any refining for domestic use should focus producing diesel or something that can be reasonably traded for diesel. Unfortunately we haven’t seen any numbers for the fractional output of the Darkhan-Petroleum refinery nor have we seen properly-exploited oil-well production numbers for the DPRK.

But we may have an estimation of Seungri’s fractional output, so that’s a start. Going back to the IMF numbers, we may be able to use the Mongolian crude oil export volume as a proxy for how much “extra” oil Mongolia could drop out of the raw material trade stream to refine, use, and sell. This is imperfect and imprecise unless a huge number of other economic markers are taken into account, but at least will give us some numbers to work with.

Crude Export in Barrels from IMF report, Metric Tons Approximated In-House

2007 2008 2009 2010 2011 2012 2013
Crude Export (000s of Barrels) 812 1,059 1,939 2,071 2,554 3,568 5,244
Crude Export (000s of Metric Tons) 114.4 149 273 292 360 503 739

Mongolia has an enormous amount of oil to use, assuming it can afford to pull out a few million barrels for internal use which, as the net import/export chart showed, it probably should do. Even if it couldn’t economically  pull away enough oil to to put Seungri to full capacity, local-area drilling may make up for it. HBOil’s acquisition of, among other things, the rights for onshore DPRK oil exploration and exploitation and a Production Sharing Contract for the entire Korean East Sea, means that there is the potential for significant oil production in the DPRK in the near future.

This means that as time goes on and assuming that the DPRK wells produce, Mongolia can refine local crude oil goods for shipment back into Mongolia, instead of importing crude oil all the way from Mongolia first. The wording of the HBOil Acquisition announcement implies that, at least initially, Mongolian oil will be imported, but this would be understandable since the DPRK wells are not yet online.

Seungri will not be able to completely satiate Mongolia’s need for diesel, but it combined with the more efficient Darkhan-Petroleum may offset all or most of Mongolia’s diesel needs. While we do not know yet how much raw crude oil the DPRK and HBOil will be producing, we can certainly figure out a rough output number for Seungri Chemical Complex regardless.

Within the Von Hippel report’s attachments (A1-42),  it lists the fractional output of the Seungri refinery at 34% heavy fuel oil, 24% gasoline, 15% diesel oil, 11% kerosene , and 11% liquid petroleum gas/refinery gas/non-energy. This appears to be somewhat of an estimation, as it is not significantly addressed throughout the report, and Von Hippel’s exact source is noted as a personal communication.

These numbers are all approximations and estimations based on the limited available data about the Seungri facility, and should be treated with some mild skepticism until production begins.

All numbers are in metric tons/year

Output at a capacity of 2 million metric tons/year Output at 2.5 million metric tons/year
HFO (34%) 680,000 850,000
Gasoline (24%) 480,000 600,000
Diesel Oil (15%) 300,000 375,000
Kerosene (11%) 220,000 275,000
LPG/RG/NE (11%) 220,000 275,000

These numbers represent the maximum producible amount. If we remove the amount of each refined product in an attempt to reduce Mongolia’s refined product imports, the numbers are as follows:

Mongolian imports pulled from IMF Macroeconomic Indicators report. Adjusted outputs are estimated outputs minus Mongolian imports. Positive numbers indicate surplus, negative indicate the amount needed to eliminate imports.

Mongolia 2013 imports according to IMF Adjusted output at 2 million metric tons/year Adjusted output at 2.5 million metric tons/year
HFO NA, possibly part of 41k ‘Other’ ~680,000 ~850,000
Gasoline 380,000 180,000 220,000
Diesel Oil 773,000 -473,000 -398,000
Kerosene NA, possibly part of 41k ‘Other’ ~220,000 ~275,000
LPG/RG/NE NA, possibly part of 41k ‘Other’ ~220,000 ~275,000

 

If Seungri is running at full capacity, regardless of whether that capacity is 2 million or 2.5 million metric tons/year, it could eliminate around half of Mongolia’s diesel import needs, and eliminate the need to further import gasoline. The Darkhan-Petroleum is Japanese built, and presumably will be much more efficient and modern than the Seungri facility, meaning that it isn’t outside the realm of possibility that Mongolia could reach even diesel self-sufficiency for a time.  As well, it may find itself with an excess of lesser-needed petroleum products, possibly allowing it to flip its status from refined importer to refined and raw crude exporter, both of which will likely pique China’s economic interest far more than Russia’s.

So what does this mean for the DPRK? This sounds a lot like Mongolia securing its own energy future by striking up a partnership with the DPRK instead of Russia. It doesn’t, on the surface, seem like the DPRK is really getting that much out of the deal. But the DPRK’s future of refining is dependant on this deal and the next few years of activity, and, more interestingly, the future of the DPRK’s missile forces may be seriously affected by this investment.

The DPRK does not have a rich history of oil exploration and exploitation. Known instead for its large coal deposits, the DPRK has begun oil exploitation relatively recently, relying in the past on Cold War ally imports at discounted prices. Even if the domestic crude production isn’t massive, it still will give the DPRK at least a small flow of oil that is relatively immune to embargos and sanctions. If HBOil publishes its production rates, the actual benefits can be estimated and predicted, but until then it is nothing but conjecture.

The DPRK is essentially getting a nice kickstart for both its drilling and refining industries, allowing to eke out at least a small bit of oil-based energy security, to match its already rich coal and uranium deposits. Even in the extreme scenario that the DPRK isn’t even keeping its own crude oil and 100% of it goes to Mongolia (which is unlikely), the DPRK will likely take away excellent training experience with refining and drilling. More realistically though, the DPRK will use this as an opportunity to expand its domestic refining and drilling industries, possibly turning the west-coast Bonghwa refinery into a regularly operating facility and producing even more of its own refined goods.

A note that other regional actors may find interesting is the excess of kerosene that Mongolia will find itself with when refining at Seungri. We have not found anything indicating the exact quality standards of Seungri, but the Von Hippel report does mention fluid cracking capabilities, so its not entirely out of the question that the facility is capable of creating advanced and higher-grade refined products. While it would be surprising if huge amounts could be produced, the kerosene-refining capabilities of Seungri should be investigated further.

If Mongolia and HBOil find it more economically reasonable to sell or trade kerosene products domestically within the DPRK instead of shipping them back, the DPRK may find itself with a new supply of refined products. Refined gasoline and kerosene products are used in the creation of jet and rocket fuels, meaning that if Seungri is sophisticated enough, the HBOil could incidentally be (literally) fueling the North Korean military.

The Rodong and Hwasong-6 missiles, like their Soviet predecessors, utilizes a partially kerosene based rocket fuel. While the exact specifications are exactly known, TM-185 fuel with AK-27I oxidizer seems to be the tentativelyagreed upon propellent for the Rodong. This would make them somewhat comparable, fuel wise, to the SCUD B.

As well, the Taepodong 2 and Unha 3 allegedly have 4 Rodong motors in their initial stages, meaning that they would be dependant on the same kerosene and gasoline based fuel mixture. Any program that supports the Rodong incidentally will support the Taepodong and Unha.

We do not claim to be experts in rocket propellent, though we do have a background in strategic missile analysis. As such, we welcome any suggestions, corrections, or challenges, especially in the following analyses and estimations.

According to Von Hippel’s numbers, Seungri should be capable of producing between 220,000 and 275,000 metric tons of kerosene per year and between 480,000 and 600,000 metric tons of gasoline per year.

We know you’ve already forgotten, so here is the chart again. All numbers are in metric tons/year

Output at a capacity of 2 million metric tons/year Output at 2.5 million metric tons/year
Gasoline (24%) 480,000 600,000
Kerosene (11%) 220,000 275,000

The FAS gives the total propellent mass as 12,912kg, while Charles Vick puts it at 13,326 kg. The Scud B (9K72), which used the same fuel type, used a propellent mixture that was about 22.59% fuel. It should be noted that the 9K72 was significantly smaller, totalling only 3771kg of propellent total, of which 852kg was fuel.

If the same mixture ratio is held, then the Rodong 1 requires between 2916.8kg and 3010.3kg of TM-185. TM-185 is 80% kerosene and 20% gasoline, meaning that a single Rodong 1 will need between 2333.4kg and 2408.2kg of kerosene , and 583.4kg and 602.1kg of gasoline.

Rodong Minimum and Maximum Required Gasoline and Kerosene for a Single Missile, Assuming 9K72 Mixture Ratio

Rodong 1 12,912kg Propellent 13,326 kg Propellent
Gasoline (20%) Req. .58 metric tons .60 metric tons
Kerosene (80%) Req. 2.33 metric tons 2.41 metric tons

When compared to Seungri Chemical Complex’s output numbers, this is a drop in the bucket. So let’s see what it takes to fuel the arsenal:

IISS Military Balance 2013 estimates 90+ Rodong missiles and 200+ Scud B/C (Hwasong 5 and 6, respectively), though General Thomas Schwartz of the United States Forces Korea estimated the number to be as high as 500 as early as 2000.

90 Rodongs will require between 209.7 and 216.9 metric tons of kerosene and 52.2 and 54 metric tons of gasoline.

The mixed numbers of Scuds/Hwasongs is a little different. The Hwasong 6 allegedly runs on Tonka-250, which is a 50% kerosene mix fuel. For the purposes of this calculation, we will treat all missiles as Scud B/Hwasong 5s, as this will create a much more onerous fuel burden and will put the calculation on the extreme high end of what could be required of the Korean People’s Army.

At .852 metric tons of fuel, a Scud B/Hwasong 5 should require 0.682 metric tons of kerosene and 0.170 metric tons of gasoline.

All numbers in metric tons.

Hwasong 5/Scud B 200 Missiles 500 Missiles
Gasoline (20%) 34 85
Kerosene (80%) 136.4 341

Rodong and Hwasong Overestimated  Maximum Combined Metric Ton Fuel Requirements.

Minimum Maximum
Gasoline 86.2 139
Kerosene 346.1 557.9

Neither Yong nor myself claim to be experts in refineries or missile fuel, but the maximum highly-refined kerosene requirement for the KPA’s rocket forces, 557.9 metric tons, is a tiny fraction of Seungri’s at-capacity kerosene production numbers, 220,000-275,000 metric tons. As long as Seungri can refine even .002% of its kerosene into rocket-grade kerosene, then the missiles can be fueled domestically.

Von Hippel’s report indicates that the Bonghwa refinery near Sinuijiu may be a ‘batch’ operating refinery producing products for the military, and that there may be a small third fractionating refinery. If these are capable of producing higher quality kerosene and gasoline products (which is unknown and questionable), then Seungri will only serve to augment existing military refining capabilities. The Korean People’s Air Force is always hungry for more aviation grade gasoline and kerosene, as well, so potential expansion may not end up being redundant.

Regardless, it is important to note that Mongolia’s venture into Rason may have military consequences, whether intentional or not. HBOil’s acquisitions are logical, albeit risky, purchases in a long-game attempt at establishing energy self-sufficiency or, at a minimum, some modicum of energy independence from Mongolia’s overwhelming and dominating neighbors. They give Mongolia a new source of oil, a refinery, and, while not addressed in this article, a contracted oil-transfer capable port on the Pacific, something that Mongolia has never had.

On the DPRK side, HBOil will be bringing life back into the DPRK’s ailing refining industry, and probable mass expansion to its fledgling drilling operations. This is a building block for energy security in the DRPK, allowing a least a small amount of crude oil that isn’t directly affected by sanctions, embargos, or the willingness of distant countries to do business. As well, assuming Mongolia is willing to trade off its excess gas and kerosene, the DPRK’s new space agency and the Strategic Rocket Forces can breath a little easier at night knowing that their fuel supply has been secured.

 

[1] Central Intelligence Agency, “North Korea: Energy Scene,” July 1987. Secret.

[2] Zaloga, Steve, Jim Laurier, and Lee Ray. Scud Ballistic Missile and Launch Systems 1955-2005. Oxford: Osprey, 2006. Print.

 

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3 Responses to A Crude Relationship

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