Sasol bets on shale gas with $9bn plant

Sep 24, 2015 12:00 AM

Like its global energy peers, South Africa’s Sasol has been slashing costs, delaying projects and shedding jobs as it attempts to weather the fall in oil prices.

But, even as it attempts to make annual savings of R4.3bn ($306m), it is forging ahead with its largest ever project: an $8.9bn investment in a US gas processing facility that can produce 1.55m tonnes of ethylene. It is a bold move, and a big bet on both the shale gas revolution and the US economy.

Sasol’s investment is in an ethane cracker — a facility where ethane is taken from shale gas, and heated to “crack” its molecular bonds, turning it into ethylene for use in the chemicals industry. To be cost effective, it needs affordable supplies of ethane-rich gas and, thanks to shale extraction technologies in the US, prices have come down.

Sasol is betting that they will remain low for some time. If it is right, its move stands to elevate the 65-year-old group to the upper echelons of the global chemicals industry.

“It is a defining moment because it’s diversifying the company, both in terms of chemicals . . . and geographically,” says David Constable, Sasol’s chief executive.

Although Sasol already has an international presence — with operations across 37 countries in North America, Europe, the Middle East and Africa — it still relies on the South African market for more than 80 per cent of its profits. However, if the cracker starts operating in 2018 as planned, Mr Constable estimates that 30 per cent of group profits will come from Louisiana by the end of the decade.

This percentage would have been higher had Sasol not indefinitely delayed plans to build a $14bn gas-to-liquids plant on the Gulf of Mexico coast because of lower oil prices.

Still, while oil prices have fallen, chemicals have become a key driver of the group’s performance in recent years, and about half its profit is now derived from that sector.

By diversifying its portfolio and global footprint in this way, Sasol has moved ever further from its roots as a key economic engine of South Africa’s apartheid regime.

Having been established in 1950 by the National Party, the company developed a coal-to-liquids technology that provided enough fuel to survive economic sanctions — making it the target of attacks by the military wing of the African National Congress (ANC) in its struggle against the government’s white minority rule.

Privatised in 1979, Sasol still provides about a quarter of South Africa’s fuel requirement. With a market capitalisation of around $24bn and revenues of nearly $14bn, it also remains one of the country’s largest companies.

Even so, when Mr Constable was appointed in 2011 — as a Canadian, the first non-South African to hold the top job — he saw a lumbering company in need of a radical shake up.

Before his restructuring, the company had 282 legal entities, with 72 in South Africa alone, and its cash fixed costs were rising by 11 per cent annually. It held 16 subsidiary board meetings every quarter. Of 600,000 transactions carried out every year, 400,000 were internal.

“That wasn’t fair to shareholders,” Mr Constable says. “We said: ‘we can’t continue, our case for change if this cost curve continues to go in the wrong direction. It’s not sustainable so let’s fix the house while the sun’s shining.’”

Now, Sasol has reduced its various legal entities by more than 70, holds only five board meetings a quarter, and has cut its top management by more than half. Costs are trending below inflation. By next month it will have weeded out 2,500 jobs in addition to 10,400 contract workers globally.

“Even governance and decision making, delegation of authority, had to be changed,” Mr Constable says. “That whole company . . . you wouldn’t recognise it, then and now.”

His shake up of the group was welcomed by investors, so the market expressed disappointment when Sasol announced he would step down at the end of May, remaining only in an advisory role for another year.

Sasol shares are down 22 per cent over the past two years, to R401, against a 30 per cent fall in the FTSE Global energy Index. Stephen Meintjes, head of research at Imara, a South African-based investment group, says: “The share price has done well considering the oil price and the market seems to have appreciated his actions.”

With oil and gas prices still at multiyear lows and Sasol’s headline earnings down 17 per cent in the year to June 30, the group is now aiming to conserve cash of R30bn-R50bn through to the end of June 2017.

It has slowed drilling in gasfields in Canada, where it is in partnership with Petronas, and reined in its African expansion plans.

Mr Constable predicts that oil will be back in a “very healthy place” by 2018/19 as companies cut spending on upstream developments and reserves are depleted. But, for now, the approach is one of conservatism.

“There’s a lot of potential out there,” he says, referring to African oil and gas. “It’s a great time to buy those assets, but we’re going to bide our time.”

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