Peabody Energy Corp., China Shenhua Energy Co., Vale SA and other companies interested in mining a coal deposit in Mongolia should expect to produce fuel for domestic consumption if they’re awarded the development rights, a lawmaker said.

The winning group of investors, to be selected by April, will be required to convert some of the thermal coal in the Tavan Tolgoi deposit into clean-burning fuel, Batkhuu Gavaa, deputy speaker of Mongolia’s parliament, said in an interview today in the capital, Ulaanbaatar. Lawmakers want to include the provision into any agreement to help cut Mongolia’s dependence on foreign fuel and create jobs, Gavaa said.

“Some of the coal will be used in various modern technologies to convert coal into various forms of fuel like liquefied or gasified coal, and this will probably be part of the Tavan Tolgoi investment agreement,” Gavaa said. “The priority should be to meet domestic needs first, and the rest can go to China.”

Mongolia wants the Tavan Tolgoi desposit, which holds 5 billion metric tons of coking and thermal coal, as well as other mineral deposits, put into production to bolster government finances and spur economic growth. The country signed an accord in October with Ivanhoe Mines Ltd. and Rio Tinto Group to develop the Oyu Tolgoi copper field, which may require $9 billion of investment over three decades.

Mongolia’s government holds the Tavan Tolgoi license and parliament will review any agreement the government plans to sign with investors who bid for development rights, Gavaa said.

Budget Strains

The global recession that started last year cut prices for some of Mongolia’s biggest export products, including copper, cashmere and fluorspar, leading to the delay of $100 million worth of government projects, Sedvanchig Tserenbat, a lawmaker who sits on the parliamentary budget committee, said in an interview yesterday. Mining accounts for about half of the revenue in Mongolia’s state budget, he said.

Mongolia is entirely dependent on outside sources for petroleum fuels including diesel and gasoline, Gavaa said. “Fluctuations in gasoline prices and all the fees associated with imports put big strains on our local budgets. We need a partner who can bring the latest technologies that turn coal into fuel.”

BHP Billiton Ltd., Mitsui & Co., Xstrata Plc, OAO Russian Railways and Sojitz Corp. are also among the companies with which the government has been negotiating this year on Tavan Tolgoi rights, Dashdorj Zorigt, Minister of Mineral Resources and Energy, said in a Dec. 3 interview.