The recent completion of Sasol’s nine-year, R14bn mine replacement programme will provide the company’s Secunda synthetic fuels plant with feedstock until 2050. It, however, also marks the end of an era.
The Secunda plant uses coal-to-liquids (CTL) conversion technology and is the world’s largest by many orders of magnitude. Despite being highly profitable, the plant will be the last that Sasol will ever run.
"Categorically, we won’t do it again," says Sasol joint president and CEO Stephen Cornell. "This is our last coal-to-liquids operation for the world."
Sasol Mining is SA’s third largest coal producer, producing 40-million tonnes of coal annually. Apart from its chemical products, the CTL plant produces, on average, 60-million barrels of liquid fuel for Sasol to sell into the South African market each year.
But there are a lot of reasons why Sasol would not replace the plant, Cornell tells Business Day. "The basic business case is challenged, in terms of making a return on the investment. The carbon footprint is extremely large," he says.
The original CTL plant was established in Sasolburg in 1955 but in the early 2000s was converted to produce petrochemicals only. The Secunda plant came onstream in the 1980s.
The technology makes use of the Fischer-Tropsch reaction, which was developed by German scientists and, under Nazi rule, was used to produce oil from coal during the Second World War.
Sasol holds thousands of patents over its particular use of the reaction in producing liquid fuels and chemicals from coal. An oil embargo against apartheid SA was a key driver in developing Sasol’s synthetic fuels capability.
Cornell says Sasol will continue to invest time and money to make the CTL plant more efficient, to lessen the environmental impact and even to make it incrementally larger, but not significantly bigger.
Wade Napier, a diversified resources analyst at Avior Capital, says that a new CTL plant may struggle to get regulatory approval as they are "highly pollutive".
But it’s not just CTL that Sasol has gone off. More generally, gas-to-liquids (GTL) technology, which uses natural gas and not crude oil to produce liquid fuels such as petrol and diesel, has also fallen out of favour. "The current environment isn’t in favour of continuing to invest," says Cornell. "For the foreseeable future, we don’t see more gas to liquids."
According to Sean Ungerer, executive director in equity research at Arqaam Capital, "the only way gas-to-liquids works is if advantaged cheap feedstock is available, and/or GTL capex [capital expenditure] spend efficiencies are targeted, which is not really possible at this point". For GTL economics to work, the oil price needs to be comfortably over $100-$120, Ungerer says.
The price of Brent crude oil peaked at over $110 a barrel in mid-2014 and dropped to a low of $34 a barrel in early 2016. It is now at about $75 a barrel.
Napier says the US shale boom has eased oil demand and prices are expected to trade within the reasonable range of $50 to $80 per barrel. Global gas demand is also outpacing oil demand. "It doesn’t necessarily make sense to extract gas and pay money to convert it to a synthetic oil when you can in fact sell the gas directly."
Although the oil price is not high enough to reignite the GTL investment case, an increase in the oil price remains generally positive for Sasol. The share value has generally tracked the oil price — both have risen about 34% over the past 12 months.
"Most of our products are tied to the price of oil, our feedstock is generally coal which we mine and we just pay for the price to do the mining.
"As the product prices go up our margins go up and we start to get better profitability," Cornell says.
A weaker rand is also in Sasol’s favour because its overseas operations generate profits in dollars and euros.
Correction: July 16 2018
An earlier version of this article incorrectly identified Stephen Cornell as the Sasol joint vice-president. He is in fact the president.