Sasol Records $2.8 Billion Profit as Synfuel Projects Plow Through Engineering Resource Shortages

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Researched by Industrial Info Resources (Sugar Land, Texas). With a projected annual capital investment of over $2 billion over the next three years, Sasol (NYSE:SSL) (Johannesburg, South Africa), the synthetic fuel and chemicals company, will have to factor the global shortage in engineering skills and equipment resources rising project costs into its forward planning.

Presenting the company’s annual results, which included a record pre-tax profit of $2.8 billion (up 45%) and a revenue figure of $9 billion (up 21%), CEO Pat Davies said that the shortages were slowing down a number of major Sasol projects globally. As high oil prices increased industry investment, they also prompted delays and cost overruns on projects. He mentioned a polymer project in Iran, GTL (gas to liquid) projects in Nigeria and Qatar and a catalytic cracker in South Africa as projects experiencing the effects of the tight conditions. Davies did not quantify the increase in costs to the projects but did say that some oil companies had experienced overruns of between 30% and 100% on current projects.

In the twelve months of June 2005 to June 2006, Sasol’s offshore investments in gas to liquid projects totaled $215 million. Approximately 75 % of the company’s capital investment total of $1.9 billion went into South Africa operations with preparations for Operation Turbo, the country’s switch to non-leaded petrol, taking the major share. The profit in the synfuel sector of the company rose 79% to $1.9 billion. The same oil prices that lifted fuel earnings reduced income from the oil derivative-fed chemicals sector by 38%.

The company’s German chemicals business, Condea, was written down by $400 million in a pre-sale move. Three bidders for Condea have been short-listed and the conclusion of the sale is now expected in December, later than the initial target of September.

Davies said that there was enormous interest in the company’s CTL (coal to liquid) and GTL (gas to liquid) projects. Sasol was scrutinizing possible projects in a number of countries including China, the U.S., India, Australia, and Iran. He said that Sasol was engaged in feasibility studies in China for two $5 billion 80,000 barrels per day (bpd) CTL refineries, for which the provincial governments in Western China were planning industry incentives to secure the Sasol projects. Sasol was also looking to establish a third chemicals hub in the Middle East, Davies added.

In South Africa, the government has indicated that it would like to see plans for a third GTL plant with a 150,000 bpd capacity to assist in closing the country’s looming fuel gap. Sasol already operates two CTL complexes at Sasolburg and Secunda in the Free State province. Davies said discussions with the government were ongoing and more would be needed before the details of the possible site and capacity of a possible refinery were released. He said that the state’s PetroSA, which has a GTL plant on the southern coast (Mossel Bay) and uses SASOL technology, could be involved in a new CTL refinery. Observers say this project could lead to an improvement of relations between Sasol and the government. The latter has been pronouncing on a possible windfall tax on Sasol linked to profits from the high oil price.

Sasol is being closely observed by major oil companies and if the Oryx GTL project in Qatar starts successful, it will become an attractive takeover target. Oryx suffered a blip in the commissioning schedule when a local contractor did not adhere to guidelines and a steam super heater was damaged. The plant, the first of its kind in the world, is now scheduled for commissioning in the fourth quarter of this year. Sasol is also working on a GTL plant in Nigeria that is scheduled to go into operation in 2009.

Sasol expects the oil price to stay in the low $60 range until the end of December before falling to the mid to upper $40 range. In the longer term, the price is seen going to the low $50s. These price levels keep GTL projects viability intact with $35 per barrel being the break point.

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