SASOL BOSS ON:
BEE THE OIL PRICE GROWTH OPPORTUNITIES
Sasol is ready to drill for oil and gas off the Durban coast, but policy uncertainty is hampering further developments, says CEO David Constable. “We have 82 000km2; the seismics are well underway; we know there are reserves down there. We’re ready to go.”
For an energy-starved country like South Africa, where oil and gas is a nascent industry, this should be great news. But Sasol and its project partner, Italy’s Eni, won’t spend any more money on it for the foreseeable future.
“You can’t invest. You can’t even bring a drill rig down here because you don’t know what your investment ultimately looks like,” says Constable. The main concern for oil and gas players is government’s long-stalled a mendments to t he Mineral and Petroleum Resources Development Act ( MPRDA), which would give government the right to acquire any stake in the oil and gas sector at an “agreed price”.
Constable, like many critics of the amendments, believes that oil and gas should have their own legislation.
“The risk profiles are totally different bet ween mining and oil and gas. [Exploring for hydrocarbons] costs a lot more. You have a lot of dry wells; it is high risk,” he explains.
SA has few proven resources, and therefore, says Constable, government should first incentivise, and then “turn it up at some future date” by, for example, i ncreasing royalties. “But having uncertainty and lack of direction doesn’t work for the oil and gas industry, and especially not now with the oil price.”
The MPRDA isn’t the only regulatory hurd le: Sasol ’s ot her challenges include proposed carbon ta xes, delays on government r ules regarding fuels standards, changing BEE codes, air quality legislation, and massive Competition Commission fines that eventually get overturned on appeals, such as the recent R534m fine related to polymer pricing. Sasol has invested significantly to ensure that it is compliant with the raft of regulations
that govern its business, which is negated by further amendments to the various pieces of legislation.
Constable is particularly concerned about t he BEE codes. “The dt i [department of trade and industry] is tr ying to get their heads around ownership control. That’s a huge goalpost move. We’ve spent a lot of time and effort getting to level 4, and we’ll be right back at the bottom of the barrel when these new codes come into effect.”
Diversity in Sasol is at 65.2%, he says, and 50% in top management levels. On employment equity, Sasol is on track to reach its 2017 targets as agreed with the department of labour. “Preferential procurement, enterprise development… all the things we do on the existing scorecard is out the window.”
It is one of many moving goalposts, he says, which is likely to deter new investment.
“That to me is not certainty.”
With low oil and gas prices forcing higher-cost producers out of business, countries whose economies are heavily reliant on the sector may start looking at “rolling out the red carpet a bit more” to investors, Constable reckons.
For Sasol, Qatar, where it already operates Oryx, a gas-to-liquids (GTL) plant, and Canada, where it has been suffering losses f rom its shale gas operations, could offer potential.
“A lot of contracts are coming up for renewal in the Middle East,” he says. “Qatar, for example, is concerned about the price they can get for LNG [ liquefied natural gas]. That begs the question − well, let’s take that gas and build another GTL plant, which is an opportunity for us as well,” says Constable. An Oryx 2 can potentially leapfrog Sasol’s plans to build a GTL plant in Louisiana, he says.
While the $8.9bn ethane cracker at the same Lake Charles complex in Louisiana is going full-steam ahead, Sasol moved the GTL plans, which would cost between $11bn and $14bn, “to t he backseat” earlier t his year following the drop in oil prices.
“It’s not in the trunk,” Constable says, adding that Sasol has reworked the original size and scope of the project as part of its strategy to adapt to lower oil prices, proving “robust” returns at an oil price of $80 a barrel.
“I’m not going to say never to Canada either – they’re in a world of pain right now. They can’t sell gas in the US because the US has shale gas. Their oil is down to $23 a barrel on oil sands,” he says. “It’s really a painful time for Western Canada. I think because of that they’re going to start thinking about being a l it t le more f riendly, like Louisiana was, to new industry. Industrial tax holidays, payroll rebates, you know − just nice incentives to get us more interested like Louisiana did.”
With gas being a “buyer’s market”, SA is in a strong position to negotiate contracts for LNG imports and build a new industry around that, Constable believes.
Sasol has submitted a proposal as part of request for information (RFI) to the department of energy in July. This forms part of government’s plans to increase the contribution of gas to SA’s energy mix, including through LNG imports, a regasification terminal, setting up gas-f i red power plants and bringing additional gas into the country’s piped grid. Special economic zones such as Richards Bay and Coega could work as entry portals for LNG, which would be a “great way to go” for power generation.
“Certainly we as an industry would need some protection on LNG prices from an exchange rate perspective, but other than that I think we could get there. You know, roll out the red carpet a little bit for a new industry.”
CEO of Sasol