Coal extraction in 'the last frontier' expected to triple economy by 2020 but will compete with nomads for scarce resources

After a 16-hour drive under the piercing blue skies of Mongolia's southern Gobi, the first view of the world's newest mega-mine looks eerily like a desert aflame.

Black clouds of dust billow up above the horizon from the pit at Tavan Tolgoi, where a swarm of bulldozers and mechanical diggers have clawed a 70-metre deep gash into the yellow hills.

This resource – thought to be the biggest deposit of coking coal on the planet – is chewed out and transported away to China by a seemingly endless line of trucks that rumble across the plains in a convoy of dust.

Until recently, this area of southern Mongolia was one of the world's last great wildernesses – a cold desert that is home to gazelle, wild ass and herders living a traditional nomadic existence.

Today, however, it is the centre of the planet's greatest resource boom. Some are calling it "the last frontier", others "Minegolia". Whatever the name, this impoverished but remarkable nation in east Asia is on the brink of one of the most dramatic transformations in human history.

The dusty coal mine of Tevan Tolgoi. Photograph: Jonathan Watts for the Guardian

The vast opencast pit at Tevan Tolgoi is just the start. Its 6bn tonnes of coal are being partly developed by a local mining firm. Extraction rights will also be auctioned off to overseas bidders, likely to include China's Shenhua, Peabody of the US and a Russian consortium. Whoever does the digging, the ultimate buyer of the fuel is likely to be China, which accounts for 85% of Mongolia's exports.

Other mega-mines will follow. The extraction is expected to triple the national economy by 2020 and propel the living standards of the small, impoverished 2.6 million population into the global middle class, but locals fear it will also devastate an arid environment as the mines suck up scarce water resources, damage the grasslands and necessitate roads and electricity grids that disrupt the migration patterns of local species.

The damage is already evident in the cross-Gobi traffic, where drivers churn up so much dust that some use their headlights in the middle of the day to pierce the gloom.

"Every day, they use 2,000 off-road 100-tonne trucks. There is so much dust in the sky, it looks like a war is taking place," said Enkhbat, co-chairman of the Mongolian Green party, who fears unregulated development of the southern Gobi could lead to ecological catastrophe. "The government needs a much more comprehensive plan to protect the environment and respect local communities. This is not just about economics. It is about human rights."

Nomad families in the area blame the mines for dried up wells, shrinking watering holes and clouds of dust that blacken the lungs and stomachs of their animals.

"It makes us cough. Even the animals cough. There is so much dust we can't recognise which animal is which," said Tsevedelger, a 60-year-old herder. "The animals eat the dusty grass. Then humans eat the poisoned animals. Soon it will be impossible for us to stay here."

The partially constructed mine at Oyu Tolgoi. Photograph: Jonathan Watts for the Guardian

The next supermine to come online will be Oyu Tolgoi, which is operated by Ivanhoe Mines and Rio Tinto – a UK-headquartered mining multinational. Once it starts operations in 2012, it expects to produce 450,000 tonnes of copper every year for half a century. The total output will be worth about $200bn at today's prices.

The transformative potential of the mining boom was the subject of an international conference in the capital Ulan Bator last month. Officials from the United National Development Programme (UNDP) expressed hope that Mongolia – as a rare democracy in east Asia – could set an example in transparent, environmentally sensitive resource extraction that will benefit the entire population.

"It's very exciting. Mongolia has the potential to do it right," said Ajay Chhibber, UNDP assistant secretary general. "In a way Mongolia is the last frontier. You might have to go back to the Californian gold rush to find anything similar."

But he warned resources can also be a curse. In Nigeria, an oil boom led to environmental destruction, increased corruption, a widening income gulf and conflict.

The signals so far in Mongolia are mixed. Two-thirds of the state's Human Development Fund – which has come from mining revenues – has been spent on monthly cash payments to the population to secure electoral votes. The minister for resources, Zorigt Dashdorj, said there would be a major change in the future, with more money going on health insurance, public housing and education.

Environmental worries also loom large, particularly with regard to water usage rights. Oyu Tolgoi alone plans to use 920 litres of water per second for the next 30 years.

The former herder Dolgor, who now lives in Khanbogd, says the mines are good for Mongolia, but bad for residents of the southern Gobi. "They take too much water. There is not enough left so the herders have to move or sell their animals."

The operators of Oyu Tolgoi acknowledge they have taken surface water until now, which has made them a competitor with the nomads for scarce resources. But from next year, the mine will extract and treat saline water from a fossil aquifer 45km away. Operators say this is not linked to any lakes or watering holes.

"It's very unlikely that there'll be an impact, but we will continue to monitor the situation carefully," said Shea O'Neill, Oyu Tolgoi principal environmental adviser. The water will be recycled under the company's zero-discharge policy. "We're doing just about everything we can. It's the right thing to do and it's good for business. There is not a lot of water in the Gobi. This is a non-replenishable resource so it is in everyone's interests to conserve water. If we don't, we go out of business."

Photograph: Jonathan Watts for the Guardian

Rio Tinto have pledged to set the highest international standards in minimising the impact on the environment. They plan to build an asphalt road to reduce dust, with underpasses for migrating animals. They have also promised to recycle much of their water. Conservationists have praised their plans for "biodiversity offsets" to make-up for the damage to nearby eco-systems and wildlife.

But, even if successful, fresh threats will come from the numerous other mines, roads and electricity transmission lines that are being planned in the region.

Kirk Olsen, an expert on gazelles and wild ass, who has worked with several international conservation groups, said the impact has not been comprehensively studied.

"How much can an ecosystem take until it collapses? We don't know enough yet about the Gobi to answer," he said. "At the moment, it is all piecemeal, mine by mine, project by project. If they carry on down that road, there will be a lot of problems ahead."

Despite Mongolia's democratic system, concerns about corruption, inadequate consultation and weak oversight persist.

"There is really no enforcement of regulations. The mining companies can do what they want," said Keith Svensson, a landscape management specialist based in Ulan Bator who expects increased water stress and habitat fragmentation in the South Gobi. "These corporations have a track record. I don't think they are going to operate any differently in the Gobi."

Rio Tinto's influence is growing. Along with Ivanhoe, it expects to invest $16bn over 30 years in the Oyu Tolgoi project. The company's headquarters in Ulan Bator is one of the biggest buildings in the capital. Its advertisements run constantly on local television channels and it will be a leading sponsor of the country's Olympic team in London next year.

It remains to be seen whether it will prove a force of the good in Mongolia. But nomads fear the worst.

Mongolia mines map Photograph: guardian.co.uk

"I have seen Oyu Tolgoi grow bigger and bigger. When it started, it was just one tent. Then three, then 10. Now look at it. They are even taking our grasslands to build a new airport," said Byunjargal, the matriarch of a nomad family that had herded Bactrian camels and cashmere goats in this area for generations. "In the future. There will be more dust and less water. It will be impossible for us to stay here."