Moving into upstream, South Africa’s Sasol becoming a global player

AN INTERVIEW WITH SASOL CHIEF EXECUTIVE PAT DAVIES

EDITOR’S NOTE: Established in 1950 by the South African government, Sasol Limited is a global energy company engaged in the commercial production and marketing of chemicals and liquid fuels, with a growing interest in oil and gas exploration. Employing a workforce of 30,000, Sasol is listed on the Johannesburg Securities Exchange and the New York Stock Exchange. The following interview was conducted with Pat Davies, chief executive of Sasol, by the editorial staff of Focus Reports LLC for Oil & Gas Financial Journal.

OGFJ: The Sasol of a decade ago is a very different company from the Sasol of today. To what extent is it possible to compare the two?

PAT DAVIES: We have grown 5 times in size in the last 10 years, so we are a lot bigger than we used to be. The similarity between the Sasol of 10 years ago and today is that we still have very significant business in South Africa. Our liquid fuels business was in operation 10 years ago and it still is today. Over the years it has been expanded while its efficiency has been increased. As a result, our liquid fuels business continues to be the backbone of Sasol’s profitability. Of course the main difference is that we have become much more international over the past 10 years.

OGFJ: Which divisions have been the key drivers in making Sasol more of an international company?

PAT DAVIES: Let me start with the chemicals division first. In the last 10 years we have significantly expanded our polymers business. Nowadays, we have a polymers operation in Malaysia, in partnership with Petronas, while another large polymers facility is under construction in the Middle East, which will be commissioned towards the end of this year or early next year. Five years ago we also acquired Condea, a large olefins, surfactants, and solvents business based in Europe and the US. So, the chemicals side has been an important driver of our international growth.

Of course the rolling out of the commercialization of our unique gas-to-liquids (GTL) technology has played a key role. The first plant is being started up in Qatar at the moment, which is a significant step forward, and a second plant in Nigeria is currently under construction.

In the last 10 years, we have also grown an upstream business. Sasol didn’t really have an upstream oil and gas business until we invested US$1.2 billion in our Mozambican gas project, which comprises the exploration, appraisal, development, and production of the onshore Temane and Pande gas fields.

We have put in place pipelines that service not only the Sasol factories and production units in South Africa, but also third-party pipelines that enable us to participate in the entire value chain from gas production to the burner tips of third-party clients. This is a very exciting project for us and I am very happy to say that this project was completed on budget and on schedule. In addition, our upstream business has grown in West Africa. We are exploring and producing in Gabon, exploring in Equatorial Guinea, and have a small position in a couple of blocks in Nigeria.

OGFJ: While gas production in Mozambique directly feeds Sasol’s operations in South Africa, the business case for upstream activities in West Africa has to be of a different nature. What are the objectives of these E&P activities in West Africa?

PAT DAVIES: The goals are somewhat different, and we have refined our strategy as the years have gone by, but the main driver of our continued presence in West Africa is the fact that we have a global joint venture with Chevron regarding gas-to-liquids technology. This joint venture is exclusive in the sense that wherever we apply GTL technology based on natural gas it will be done in partnership with Chevron.

Resulting from the negotiations of this partnership, Sasol and Chevron entered into an Area of Mutual Interest agreement covering certain deepwater parts of West Africa. Whenever Chevron has new acreage, they are obliged to invite us in, which is a great value proposition for us as it enables us to grow our upstream business hanging onto the shirt tails of a super major like Chevron.

Is it strategically exactly in focus for Sasol? No it is not. But of course it brings us a lot of experience and expertise that we can also use in our Mozambique-type operations or the upstream activities around GTL projects in other parts of the world. We are building up experience-based capacity. Do we want to become big oil explorers? Not really. It is more an opportunistic thing provided by the circumstances.

OGFJ: When considering the construction of a GTL facility, do you prefer to link this with Sasol’s own exploration efforts or would you rather become the technology partner of a company that already has significant proven gas reserves?

PAT DAVIES: If it is in Mozambique, we prefer to do the exploration ourselves, which we are doing. We are already exploring onshore, and we are getting ready to explore offshore in Mozambique. The upstream business is always a partnership, and we are happy to work in partnership with the Mozambican government, but we would also be happy to work with other partners in Mozambique.

In other parts of the world we can do our own exploration, or we can negotiate deals with gas asset owners wherein we provide the technology and they provide the gas reserves. Both models are acceptable, but our preference is to be part of the full value chain and thus own a part of the upstream component, which is not always possible.

OGFJ: Can we say that when Sasol discovers a gas reserve that is large enough to justify a GTL facility, you will build one?

PAT DAVIES: You need a large enough gas reserve that is available at a reasonable price, but you also need the right enabling environment from a socio-political, economical, and fiscal point of view. We wouldn’t be putting up a GTL facility in North America, obviously, because the gas price is too high to identify a viable GTL project taking into account its capital intensive nature. To justify constructing a GTL facility, gas has to be reasonably priced and usually reasonably priced gas is far away from the market, in countries such as Qatar and Nigeria. The State of Qatar offers both an extremely good environment with excellent infrastructure and investment incentives and reasonably-priced natural gas.

OGFJ: The Oryx project in Qatar marks the first time that Sasol’s GTL technology will be applied on a large scale outside of South Africa. However, Sasol is not the only company that aims to enter Qatar’s GTL arena. How important is this project for the future of Sasol?

PAT DAVIES: It is a very important project for us. We have done coal-to-gas and gas-to-liquids in this country for the last 50 years, and we have produced over 1.5 billion barrels of oil from coal, but it has all been in South Africa. The Oryx project is the first time that this technology has been applied on such a scale internationally.

The world is waiting to see whether it will work or whether it won’t. We are very confident it will work, of course, because we have so much experience. It is like a shop window to showcase our technology and expertise, and we believe that the anticipated success of this project will generate a lot more interest in gas to liquids.

In terms of its actual volume contribution, we produce 160,000 b/d of oil equivalent in South Africa; the Oryx project will contribute 34,000 b/d. We will own 49% of that, since Oryx is a 49%-51% joint venture with Qatar Petroleum. It is a fairly small percentage increase of our total existing volume base, but its significant potential lies in the future that it holds.

Oryx is coming on-stream in a world where the oil price is US$77 per barrel, a world where transportation fuel is expensive and very much crude dependent, and we offer a completely different alternative by providing transportation fuels based on natural gas and coal rather than crude. It is a very exciting opportunity for us. It directly addresses the global energy security issue because there is a lot more gas available in the world than there is oil. In addition, there is a shortage of refining capacity, particularly for diesel, and the GTL facility is really a diesel refinery that produces diesel in a very environmentally friendly way.

The potential that GTL holds is of great value and as Oryx starts up, while Sasol also has several other projects in the pipeline, we believe that there will be even more interest from investors which we hope to see reflected in our share price.

OGFJ: In addition to investors in Sasol, your competitors are also increasingly focusing on GTL technology, and some of these companies have much deeper pockets than Sasol. Today, Sasol is a world leader in this field. Do you think your leadership position will be in jeopardy in the future?

PAT DAVIES: We are not naïve. We realize that there will be competition in GTL, and we are quite comfortable with that. In our forecasting, we certainly see competition, and in fact it helps the whole marketing effort when there is more than one company supplying GTL fuels. Clearly we believe that we are the world leaders at the moment, but will we stay ahead? Yes, I believe we will, although I cannot guarantee that we will. We have many, many years of experience and we have got hundreds of PhD graduates working internally on further improving our GTL technology. Also, we have associations with many universities around the world where particular experts work on advancing the development of GTL technology. The only way you stay ahead of this game is by continuously improving your technology.

There are other companies that wish to establish GTL facilities in Qatar, but none of them have reached a final investment decision stage yet. It will take them at least 5 or 6 years to build their GTL facilities, so for the next 5 or 6 years we will be the only one operating a GTL facility in Qatar.

Another interesting point is that the Qatari government has taken a risk with Sasol’s technology, since they have put their money down on the table. The important difference with the other projects that have been rooted in Qatar is that in the other cases the Qatari government is not taking an equity percentage but is operating through production sharing agreements. The other oil companies have to take all the risk, which sends a strong message about the relative difference in technology levels.

OGFJ: In addition to the Oryx project in Qatar, Sasol has identified opportunities for GTL in Australia and Iran. How far along is Sasol in moving into these countries?

PAT DAVIES: In Australia, we are in the pre-feasibility stage. We haven’t really made any significant announcements on that, so it is work in progress at the moment. We are happy that progress has been made, and hopefully we are able to make some announcements within a reasonable period of time. Simultaneously, we have been talking to the Iranians about the potential of GTL projects there. At the moment we are not doing a feasibility study at this stage, but that can change.

OGFJ: Of course a very important variable to take into account when conducting your feasibility studies is the oil price. Which oil price are you basing your future plans on?

PAT DAVIES: Our long-term investment oil price is around US$45 per barrel. We are fairly conservative and cannot make large capital investments on the basis that the oil price will remain around US$70 per barrel.

OGFJ: It is inevitable that your future partners will include national oil companies. How is your reputation in this circle, which is quite different from the super majors?

PAT DAVIES: I think we get on very well with the national oil companies. We are a much smaller company than they are used to dealing with, and the fact that we are from Africa seems to be an advantage for us. We are somewhat different from the super majors because of our size and roots.

OGFJ: How do you evaluate the probability of future cooperation with PetroSA, South Africa’s NOC, which also has advanced GTL technology and shares its roots with Sasol?

PAT DAVIES: I certainly wouldn’t exclude cooperating with PetroSA. They have unfortunately made that a little difficult, as the GTL technology they are offering is based on a Statoil technology, and Statoil and Sasol are competitors.

OGFJ: Sasol today seems to focus mainly on international opportunities. Is the company forgetting its roots as it becomes more global?

PAT DAVIES: No, not at all. We are very proud of being South African and are committed to our country. Over the coming years about 63% to 65% of our capital spent is going to be in this country, so we really plan to continue to invest in South Africa while we also go international to develop our asset base. We will remain here and are not planning to change our domicile to London or somewhere else as others have done. South Africa is a great country and we will continue to invest in this country.

OGFJ: One year ago, Sasol attempted to merge its liquid fuels business with Petronas’ subsidiary Engen to create Uhambo, Southern Africa’s largest liquid fuels business. Will Sasol’s downstream operations remain independent in the future?

PAT DAVIES: In the future, we will continue to operate as Sasol. We are disappointed that the merger did not go through, but we are not planning any other merger. We have a strategy to roll out our own service stations, and we are comfortable going down that road.

OGFJ: What are Sasol’s objectives in terms of the expansion of its network of service stations in South Africa?

PAT DAVIES: At the moment we have 377 service stations, Sasol convenience centres as we call them, which provide us with an 8% market share. We will probably grow our market share but we prefer not to disclose our exact plans for the obvious reasons. Even at the current level we have a very nice spread of service stations. We obviously have much more production capacity than we have marketing capacity, but all we really need is to have sufficient retail outlets to put us in a strong enough position opposite the other oil companies when we are negotiating supply agreements with them.

OGFJ: What are your other ambitions for Sasol’s growth in South Africa?

PAT DAVIES: Our gas business will be a key driver of our growth in South Africa. We will double the gas flow into this country from Mozambique, and we pre-invested in the existing pipeline, which enables us to double its capacity through the compression of gas. This gas will be supplied to ourselves but also to the third-party gas market in South Africa. In addition, we are going to grow our synthetic fuels business by about 10% to 20%, our coal mining activities will increase accordingly, and we will continue to grow our chemicals business.

There is a close alignment between what we want to do in this country and what the government wants to do. They are pushing a strong growth initiative and as we invest further, obviously, it assists to the country’s economic growth. The beneficiation of raw materials (namely oil and gas) is something that we do better and at a larger scale than anyone else in this country, so that is in line with the government’s objectives. As a big employer we are also making a significant investment in science, technology and skills development, and as we grow we are making an increasing contribution in terms of job creation.

OGFJ: While GTL is in the international spotlight, Sasol’s coal-to-liquids technology has attracted China’s interest, and in June Sasol signed a landmark coal-to-liquids agreement. How do you evaluate the potential for coal-to-liquids in China, and what are your expectations of the future commercialization of this technology?

PAT DAVIES: The energy situation in South Africa is pretty much the same as the energy situation in China - large coal reserves and a shortage of crude oil. China has all the oil that it needs stored in the form of oil, and we have the technology to convert this coal into oil. The dynamics for making coal-to-liquids technology work in China are obviously fantastic, and the Chinese have realized that. We signed the coal-to-liquids agreements when Premier Wen Jiabao was in South Africa. The premier was in the country for 23 hours and he only met with Sasol, he didn’t meet with any other company.

We think that coal-to-liquids in China is a great opportunity because we will just be replicating what we did in this country. We are looking at constructing two 80,000 b/d facilities and if it works for 2 it will work for 10. The dynamics remain the same so this is a fantastic opportunity for Sasol. In addition, we are the only company in the world that has commercial coal-to-liquids technology and experience. However, the potential of CTL lies not only in China of course, but also in countries such as India and the United States.

OGFJ: Coal-to-liquids appears to be a much easier game to play for Sasol, how would you compare the potential of the commercialization of GTL technology to the potential of CTL technology?

PAT DAVIES: It is hard to judge at this time since it will be dependent on future oil prices. Coal-to-liquids is more capital intensive so it will require a higher oil price to sustain it. If the oil price stays anywhere near the current level or even drops down to around US$40/bbl, then I think that the potential for CTL is probably higher than the potential for GTL in the longer term, given that we have reasonable fiscal regimes in countries such as China. If oil prices drop down to below $40/bbl, then I think that we will see GTL being stronger. The future development is oil price scenario dependent, but I am optimistic that both are going to be really marvellous. The future looks very exciting.

OGFJ: Do you believe that GTL and CTL will grow large enough to be taken into account in the global energy mix?

PAT DAVIES: It will be big enough to be taken into account, particularly on a country specific basis, but it still remains small compared with the 18 million b/d of oil that is being produced at the moment. The GTL industry, and that is not just us, may in 10 years time be producing 1 million b/d. In CTL we are talking about 160,000 b/d in China. This is similar to our production in South Africa. Even if that doubles or trebles then it is still fairly small compared to the global energy demand, but it will be significant for South Africa and China.

On a country specific basis, GTL and CTL will be significant, but they will not have major impact on energy security globally in the next decade. In the future, oil reserves will increasingly be depleted, we will go down the cost curve of our GTL and CTL technology and we know that the world has massive coal reserves, so in the decades to come we will see whether GTL and CTL will become a factor of importance in the global energy mix.

OGFJ: The fact that Premier Wen Jiabao comes to visit Sasol during such a short visit to South Africa is a clear indication of your rising international reputation. What has been the impact of Sasol’s international exposure on South Africa as a country?

PAT DAVIES: It is extremely good for the country. It puts us on the map internationally. The fact that we are taking an African-developed technology to the rest of the world is a nice turnaround since Africa is normally the recipient of donor aid and overseas technologies. Our government feels good about that, it feels good about the job opportunities that are being created and about the dividends that are repatriated to this country. It has put us on the map and it has put the country on the map as well.

To give you an anecdotal example, I was at the World Economic Forum in Davos earlier this year. [Microsoft founder] Bill Gates was having one of his breakfasts where he invites “about 500 of his closest friends,” who queue up in the snow outside to attend the breakfast. When he was asked about Africa, he said that good things were happening in Nigeria, and that people also need to watch South Africa’s coal-to-liquids technology. It is a rewarding moment when people like Bill Gates refer to this country and our technology to world leaders.

OGFJ: If we could look one decade ahead and you had the opportunity to host your own breakfast at the World Economic Forum, what would you like to be able to say to the world leaders to remind them of the progress that Sasol had made by that time?

PAT DAVIES: In 10 years time I would like to see Sasol operating several GTL plants in Nigeria, Australia, and Qatar, and having expanded the existing Oryx facility. I would like people to think that Sasol has brought a significant alternative to crude as a transportation fuel, and that it does this in a very environmentally friendly way. GTL is an environmentally friendly first-class process from “wells to wheels” on a comparative basis with a crude route or even the LNG route.

Clearly, CTL must have clean coal technology status. We won’t build any plant unless there are carbon capture methods in place to control emissions, and we believe that those solutions are there. By offering an alternative energy source that doesn’t come from crude and is produced in a cost effective and environmentally friendly way, Sasol in 10 years time will easily have doubled or trebled its production capacity in GTL and CTL.

It is entirely appropriate that South African technology is solving African problems. This enables us at the same time to improve the quality of lives of people, which is an important African driver for us. We feel good about the fact that we are able to make a difference by improving the quality of life of people on this continent. It helps us persevere through some difficult projects. This is Sasol’s new frontier, which will give me personally great pleasure and a lot of energy.

Thank you for taking the time to talk with us.