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Three legs of new Sasol: gas, US growth, Southern African consolidation

David Constable: Looking at our growth programmes, the one ingredient that is constant is natural gas

David Constable: Looking at our growth programmes, the one ingredient that is constant is natural gas

Photo by Duane Daws

19th September 2014

By: Terence Creamer

Creamer Media Editor

  

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South African energy and chemicals group Sasol has “strategically repositioned” itself over the past three years to focus on gas-based opportunities in Southern Africa and North America, having moved away from coal-to-liquids opportunities in China, Indonesia, India and South Africa.

The repositioning has been associated with a wide-ranging restructuring initiative, as well as a reprioritisation of the JSE-listed group’s capital expenditure (capex) programme, which is set to rise from R40-billion in 2014, to R50-billion this year and R65-billion in 2016.

The shift will result in a relative shrinking of the Southern Africa component of Sasol’s capex spend, with decisions on two US megaprojects likely in the coming months and years. In 2014, Southern Africa absorbed 57% of the group’s overall sustaining and growth capex.

Sasol expects to make a final investment decision on a 1.5-million-ton-a-year ethane cracker in Lake Charles, Louisiana, before the end of the 2014 calendar year – a project that could involve an investment of between $5-billion and $7-billion. A decision on an $11-billion to $14-billion, 96 000 bl/d gas-to-liquids (GTL) facility, also in Louisiana, is likely to be made 18 to 24 months thereafter.

However, CEO David Constable insists that opportunities remain in both South Africa and Mozambique, noting that nine of the 17 largest gas discoveries in the last five years have been in sub-Saharan Africa, with two of the top three being in Mozambique.

“Looking at our growth programmes, the one ingredient that is constant is natural gas,” he says, while underlining the group’s plans to pursue additional gas “monetisation” projects in South Africa and Mozambique.

Sasol intends increasing production from the Pande and Temane fields, where output rose to 116-million gigajoules in 2014. A pipeline expansion is under way, which will increase supply to southern Mozambique and South Africa.

In August, a 175 MW gas-fired power plant was also opened in Ressano Garcia, increasing Sasol’s gas-based electricity production to 350 MW in both countries. It is also planning to submit a field development plan in February next year in a bid to develop its gas reserves in southern Mozambique.

In northern Mozambique, where the really large gas finds have been announced, the South African group has initiated a GTL prefeasibility study together with Eni, of Italy, and Empresa Nacional de Hidrocarbonetos. Eni is the operator of the block called Area 4 in the deep waters of the Rovuma basin, which is estimated to hold up to 85-trillion cubic feet of gas.

In South Africa, Sasol and Eni have teamed up on an offshore exploration venture of an 82 000 km2 block in the Durban basin, off- shore KwaZulu-Natal. A seismic survey has been completed, but Constable says greater certainty is required about South Africa’s legal framework before further investments can be made.

He says it is closely monitoring developments surrounding the Mineral and Petroleum Resources Development Act. “We cannot move with any type of exploration in South Africa until those [legal] details are nailed down for us.”

In addition, while it is pursuing gas value-addition opportunities in both North America and northern Mozambique, where Sasol is not the owner of the gas resource, Constable says “integration of the value chain” remains important.

Sasol will, therefore, continue to pursue projects to increase ownership of natural gas feedstocks in Southern Africa, but it has a “natural hedge” in North America with its shale gas assets in Canada, which “cover a good portion of our GTL aspirations in North America – we think it’s appropriate to have the 70% coverage”.

The group is also comfortable with long-term contracts and a 20% spot-market exposure for its ethane cracker supply, in Louisiana. “But obviously integration is a key strategy for us,” Constable says.

Solid Platform
He is also sanguine about the group’s financial and organisation ability to execute on what he describes as a “new era for Sasol”, particularly in light of a far-reaching business performance enhancement programme that is being undertaken.

The group now expects to deliver sustainable savings of more than R4-billion a year as a result of the restructuring, which is a material improvement on the R3-billion initially forecast.

There is also unlikely to be any “forced retrenchments” of its unionised employees. However, around 200 senior managers have already taken severance packages and it is anticipated that other employees could follow suite by opting for early retirement or voluntary retrenchment packages. Prior to the restructuring, Sasol employed around 34 000 people.

The group, which reported record earnings of R29.6-billion for the year ended June 30, expects to conclude the restructuring exercise during its 2015 financial year, having also introduced, from July 1, a new value-chain-based operating model.

Savings of R469-million were achieved in 2014 and savings of R1.5-billion are expected to be realised in 2015. Restructuring costs of R1.3-billion have been incurred, with the entire programme likely to cost around R2.5-billion.

Constable also stresses that, while the US is an immediate area of growth, Southern Africa remains a key focus area, with ‘Project 2050’ having been launched to prolong, enhance and expand Sasol’s operations in the region

.

The JSE-listed group, which reported an operating profit of R41.7-billion on revenue of R202.7-billion in 2014, attributes the performance to better operational results, the weaker rand and an improvement in chemical prices.

Synfuels production volumes rose to 7.6-million tons, which the JSE-listed group said was the highest output in a decade. The rand:dollar exchange rate was 17% weaker during the period, while the average Brent crude oil price was flat.

Sasol expects to produce between 7.5- million and 7.6-million tons of synfuels in 2015 and has not adjusted its exchange rate and oil-price assumptions. For every 10c move in the rand:dollar exchange rate, Sasol earnings move R860-million, while a $1/barrel change in the Brent crude oil price results in a R750-million change.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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