energy Taking stock of Sasol

AFTER the announcement that South Africa will hold the 2010 Soccer World Cup, few events, people or companies have placed the country in the limelight of world news as much as Sasol, South Africa's fourth largest company in terms of market capitalisation.


Its share price increased by 37% over the past two months and added an incredible R51bn to the JSE's value. That's more than the market cap of companies such as media group Naspers (R42bn) and Sanlam (R38bn), an insurance company.

And it's largely thanks to the relatively high and increasing oil price. Sasol currently produces fuel from coal at an estimated cost of between $28 and $33/barrel. For the six months to 31 December 2005, Sasol's operating profit from synthetic fuel was R7.34bn - almost as much as its R7.55bn operating profit for the 12 months ended 30 June 2005.

The major difference is the increase in the average oil price from $40.5 to $56.1/barrel and the average US dollar/rand exchange rate, which dropped from $1/R6.20 to $1/R6.61.

Sasol's 2005 annual report states that every $1 increase in the oil price adds $39m - or around R255m - to Sasol's operating profit. And that every 10c weakening in the US dollar/rand exchange rate contributes another R500m to Sasol's profits.

With that information - taking into consideration only the change in the average oil price and the exchange rate - Sasol's operating profit for 2005 has been adjusted up to date (see table).


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According to Business Week, the heads of oil companies who attended the recent oil seminar in Qatar were worried, despite the record profits achieved. "There's concern that the price is too high," BP CEO John Browne was quoted as saying. High oil prices led to negative consequences for the oil producers: governments charge higher levies on oil companies or can even nationalise energy sources, as happened recently in Bolivia.

In addition, oil companies are struggling to meet demand, which pushes prices up further - so much so that some analysts estimate the oil price could hit $200/barrel. Not only would that expose the world economy to a recession, it would also lead to an urgent search for alternative energy sources.

That's exactly what makes Sasol so popular. It's seen as the world leader in the production of petrol and diesel from gas and coal. Sasol CEO Pat Davies says that it produced more than 1.5bn barrels of fuel from alternative sources over the past five decades.

Sasol spokesman Johann van Rheede says that other companies have the technology to produce these synthetic fuels, but Sasol's 50 years' experience in the commercial production of fuel gives it a competitive edge. In fact, its Secunda plant - with a capacity of 160,000 barrels/day - is the only plant that produces synthetic fuel commercially.

Sasol Synfuels International MD Rudi Heydenrich says that though most of the world's major oil companies, such as Shell and ExxonMobil, have the technology, it could still take time - six to 10 years - before a viable commercial plant could come into production from the stage of the pilot plant.


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Of course, synthetic fuel is more expensive than natural fuel and building a plant is extremely capital intensive.

Sasol's first foreign gas-to-liquid (GTL) plant - the Oryx GTL plant - will start producing in Qatar next month. With a capacity of 34,000 barrels/day, it is 49% owned by Sasol, with the remainder held by state-controlled Qatar Petroleum. The plant cost $950m. There are already plans to expand it to produce 100,000 barrels/day in the short term and to build another plant in conjunction with Sasol's international partner, Chevron, that will produce 130,000 barrels/day.

In Nigeria, the Sasol-Chevron partnership has also planned a plant that will produce 100,000 barrels/day from oil. In addition, Sasol is investigating possibilities in China, where two plants of 80,000 barrels/day are being planned. Viability studies for the first plant have been completed.

In the US, an early viability study is nearing completion; and possibilities are also being investigated in Australia. Van Rheede says that Sasol is planning capacity of around 450,000 barrels/day within ten years in conjunction with its international partners.

In South Africa, Sasol's Secunda plant will be expanded by 20% to nearly 200,000 barrels/day. According to an analyst's report by Bear, Stearns & Co, within 10 years that could contribute an additional $1.5bn (R9bn) to Sasol's current operating profit of around R14.5bn.

But not all's going well for Sasol. It recently ran into problems: first, when South African Finance Minister Trevor Manuel announced in the country's 2006 budget the possibility of introducing a so-called windfall tax on Sasol.


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Though it's difficult to determine the effect of such a proposed tax, it won't have more than a 5% effect on Sasol's value, analysts say. The energy industry in South Africa is still reasonably under-taxed. Only companies in Ireland pay less tax. For example, there are regions in Russia that pay the government a 90% levy on oil products.

Another setback for Sasol was the rejection by South Africa's Competition Commission of the planned merger of its filling station operations with those of Engen - the so-called Uhambo transaction. That setback will force Sasol's management to put all its energy into the organic growth of its brand, thus leaving less time for other business, such as the expansion of its capacity to produce synthetic fuels.