Coal, hard facts: it's the end of an era for Sasol plant
The Secunda coal-to-liquids plant, the world’s largest, will be the last the company runs
The recent completion of Sasol’s nine-year and R14-billion large mine replacement programme will provide the company’s Secunda synthetic fuels plant with feedstock until 2050.
It also marks the end of an era.
The Secunda plant uses coal-to-liquids (CTL) conversion technology and is the world’s largest by many orders of magnitude. Despite being highly profitable, the plant will be the last that Sasol will ever run.
“Categorically, we won’t do it again,” said Sasol's joint vice-president and CEO, Stephen Cornell. “This is our last coal-to-liquids operation for the world.”Sasol Mining is SA’s third-largest coal producer, churning out 40 million tons of coal annually. Apart from its chemical products, the CTL plant produces, on average, 60 million barrels of liquid fuel for Sasol to sell into the South African market each year.
But there are a lot of reasons that Sasol would not replace the plant, Cornell told Business Day. “The basic business case is challenged, in terms of making a return on the investment. The carbon footprint is extremely large.”
The original CTL plant was established in Sasolburg in 1955 but in the early 2000s was converted to produce petrochemicals only. The Secunda plant came on stream in the 1980s. The technology uses the Fischer-Tropsch’s reaction which is well known to the industry and was developed by German scientists and, under Nazi rule, was used to produce oil from coal during World War 2.
Sasol holds thousands of patents over its particular use of the reaction in producing liquid fuels and chemicals from coal. An oil embargo against apartheid SA was a key driver in developing Sasol’s (the state owned) synthetic fuels capability
Cornell said Sasol would continue to invest time and money to make the CTL plant more efficient, to lessen the environmental impact, and even to make it incrementally larger, but not significantly bigger.
They've gone off gas, too
Wade Napier, diversified resources analyst at Avior Capital, said a new CTL plant may struggle to get regulatory approval because such plants are “highly pollutive”.
But it’s not just CTL that Sasol has gone off of. More generally, gas-to-liquids (GTL) technology, which uses natural gas and not crude oil to produce liquid fuels such as petrol and diesel, has also fallen out of favour. “The current environment isn’t in favour of continuing to invest,” said Cornell. “For the foreseeable future, we don’t see more gas-to-liquids.”
According to Sean Ungerer, executive director in equity research at Arqaam Capital, “the only way gas-to-liquids works is if advantaged cheap feedstock is available, and/or GTL capex spend efficiencies are targeted, which is not really possible at this point”.For GTL economics to work, the oil price needs to be comfortably over $100-$120, Ungerer said.
The price of Brent Crude oil peaked at more than $110 a barrel in mid-2014 and dropped to a low of $34 a barrel in early 2016. It has climbed to about $75 a barrel currently.
Napier said the US shale boom has eased demand on oil and so prices are expected to trade within the reasonable range of $50 to $80 per barrel. Additionally, global gas demand is outpacing oil demand. “It doesn’t necessarily make sense to extract gas, pay money to convert it to a synthetic oil, when you can in fact sell the gas directly,” Napier said.Although the oil price is not high enough to reignite the GTL investment case, an increase in the oil price remains generally positive for Sasol.
The company share value has generally tracked the oil price – both have risen about 34% over the past 12 months.
“Most of our products are tied to the price of oil, our feedstock is generally coal which we mine and we just pay for the price to do the mining. As the product prices go up our margins go up and we start to get better profitability,” Cornell said.
A weaker rand is also in Sasol’s favour because its overseas operations generate profits in dollars and euros.