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DE RUEHSA #3726/01 2961230
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R 231230Z OCT 07
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UNCLAS SECTION 01 OF 04 PRETORIA 003726
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SUBJECT: Sasol Perseveres in Coal-to-Liquid Projects
REF: Pretoria 3113
PRETORIA 00003726 001.2 OF 004
1. SUMMARY: South Africa's Sasol is committed to expanding its
coal-to-liquids production both within and outside South Africa.
Most automobile drivers in South Africa's interior are burning its
gasoline derived from coal. Sasol's Chief Engineer confirmed that
Sasol is the world's largest single point greenhouse gas emitter.
While highlighting that this marked a critical challenge in
expanding production given growing concerns about greenhouse gases,
he noted that Sasol lacked viable economic and geological options to
mitigate this issue at its current facilities in South Africa.
Economic Counselor, Minerals/Energy Officer, EST Officer and FSN
Minerals and Energy Specialist visited the Sasol plants at Secunda,
east of Johannesburg, South Africa on September 21. End Summary.
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Sasol's History - Oil Substitution and Self Sufficiency
--------------------------------------------- ----------
2. In 1950, the SAG made a strategic decision to build a plant to
produce liquid fuels from the country's abundant coal resources and
acquired the patented Fischer-Tropsch process from Germany to
implement this decision. The first Sasol installation opened in
1955 with a capacity of up to 10,000 barrels per day of crude oil
equivalent, plus chemical feedstock. The SAG prompted Sasol to
construct a second plant at Secunda in 1976 that would produce 10
times more fuel than the first - about 75,000 barrels per day, given
South Africa's reliance on imported oil in the face of oil shocks in
the 1970's, in combination with the government's desire to gain
self-sufficiency while confronting growing international opposition
to apartheid. The same international contingencies spurred the SAG
and Sasol to increase the scope and replicate the second plant with
an adjacent third one.
3. Sasol has long been perceived as a national champion and even at
times as a significant target. According to Roper, ANC militants
failed in attempts to fire katusha rockets at Sasol II at Secunda on
June 1, 1980. Sasol's Sasolburg chemical complex also came under
attack by militants, which caused damage estimated at about $7.2
million, including destruction of a gas tank.
4. The first two plants (Sasol I and II) were State-owned, but
Sasol went public in 1979 in order to finance the third one. Sasol
I became known as the Sasolburg plant and the two new plants as
Sasol Secunda. The Secunda complex is the world's largest
petrochemical plant built substantially at one time on a single
site. It includes two coal-fired electricity plants totaling 600 MW
capacity to reduce reliance on the national grid. The original life
expectancy for Secunda was 60 years, but with upgrades and
refurbishing the facility's life has been extended to 2050. The
plant capacity has increased by some 40 percent since commissioning
to the current 160,000 barrels per day of crude equivalent. Sasol
was privatized in 1979 and currently state-owned enterprises hold 20
percent of the shares. The rest are in the public domain, some 40
percent being held by overseas investors. In 2003, Sasol secured
listing on the New York Stock Exchange.
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Mining
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5. Sasol Secunda is serviced by Sasol Mining, which operates four
underground mines and one open-cast mine that produce some 45
million tons of coal per year. Sasol also procures 5 million tons
from other mines in the area. Of the total coal available, 4
million tons are exported and 40 million tons are blended before
being fed into the conversion process. South African coals contain
40 to 45 percent ash and this results in huge adjoining ash dumps
for which there is currently little demand.
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Processing
PRETORIA 00003726 002.2 OF 004
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6. Basic feed to the plant consists of coal, water and air from
which steam, power, oxygen, carbon and hydrogen are produced.
Steam, oxygen and coal are fed into gasifiers to produce a synthesis
gas stream from which value-added products are extracted. These are
used to produce a range of products including over two hundred
chemicals, sulfur, fertilizers, explosives, waxes, low sulfur
diesel, petrol and kerosene of jet engine quality. Sasol producers
80 percent of the world's octene, most of which is sold to Dow
Chemical. Currently, Sasol's mix is 70:30 fuel to chemical, but the
company aims to make this 50:50 in the future.
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Sasol Businesses
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7. Sasol Synfuels operates the gasifiers and Fischer-Tropsch
converters which convert synthesis coal gas into fuels, pipeline
gas, and chemical feedstock. Sasol Synfuels sells its synthetic
fuels to Sasol Oil for marketing and retailing. Sasol Oil operates
the Natref refinery in Sasolburg in which it has a two-thirds share
with Total Oil holding the remainder. It blends and markets
synfuels from Secunda and refined crude products from Natref, as
appropriate, and has established some 400 retail outlets for its
petroleum products. Sasol Gas owns a 50 percent share of the
Mozambique-South African gas pipeline. The company distributes both
natural gas from Mozambique and methane-rich synthetic gas produced
at Secunda.
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Sasol Looks Abroad
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8. Sasol Synfuels International (SSI) and its joint-venture partner
Sasol-Chevron undertake international gas-to-liquids (GTL) ventures.
Sasol's Slurry Phase Distillate technology converts stranded
natural gas into liquid fuels. The first operating venture was
established in Qatar, where SSI-Chevron has a 49 percent ownership.
Another venture is planned for Nigeria, where the joint venture has
50 percent. Sasol sells its business, not its technology, and
therefore wants as much control as possible. There have been
teething problems in the start-up of the Qatar Oryx plant which is
of a much larger scale than anything Sasol has built in South
Africa. (Sasol has not built a GTL plant in SA and its CTL plant
produces 160,000 bbl/day vs Qatar's 30,000 bbl/day.) SSI hopes to
have the Qatar plant up to capacity within a year. Sasol Petroleum
International (SPI) is involved in oil and gas exploration, mainly
in Africa, but also internationally, as opportunities present
themselves. Sasol's many chemical businesses' main offices and
production, research and exploration facilities are located in
Africa and the Middle East, the United States, Europe, the Far East,
and Australia.
9. SSI is far along in its consideration of coal-to-liquid (CTL)
plants in India, China, Australia and the U.S., where there is the
necessary combination of energy demand, a shortage of oil and gas
and an abundance of coal. India has lots of low-quality coal, but
it is hard to extract given the way it is deposited in numerous,
narrow seams. South African coal is not in narrow seams and is
generally of much better quality, hence India's increasing imports
of coal from South Africa. Australia has coal in the east, is
shutting down oil refineries, and is producing and/or importing
off-shore natural gas. There are concerns about the protection of
Sasol's intellectual property in China, where IP is hard to protect
and there is no word picture for the word "rights". Russia and the
EU were excluded. Russia has lots of coal, but also has lots of gas
and terrible weather which increases construction and operating
costs. The EU has coal, but it is deep and expensive to mine and
the EU has access to gas from Russia and North Africa.
10. Regarding the U.S., Sasol is considering investing in a CTL
PRETORIA 00003726 003.2 OF 004
facility in Texas, Montana, Wyoming, Illinois, or North Dakota.
Such a project would represent Africa's largest investment in the
U.S. The relative attractiveness of the various U.S. sites is
determined by the quality of the coal, the means of extraction (open
pit or underground mines), the availability of coal (2.5 billion
tons minimum with 1.5 billion tons of extractable coal), the
availability of water (for use in the CTL conversion process), the
distance to market for the electric power, the placement/use the
carbon emissions (such as a nearby oil or gas field), and local
incentives (such as tax holidays and training subsidies). The
placement of carbon emissions is a major obstacle. Montana and
North Dakota have less costly open-pit coal mines that are far from
markets, Illinois has costly underground mines that are close to
markets, and Texas has proximity to oil and gas fields. No
decisions have been made regarding the prioritization of these
sites.
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Threat of a Tax on Windfall Profits
-----------------------------------
11. Sasol has come under fire from the SAG on a number of issues.
These include Sasol's tardiness in implementing black economic
empowerment, affirmative action and equity labor legislation, and
its failure to construct additional synfuel capacity. The SAG also
challenged Sasol (and other synthetic fuel produces) on significant
(windfall) profits Sasol has made from high petroleum prices. A SAG
commission ruled against imposing a special tax that could harm
future investment, but the threats spurred Sasol to implement
significant black economic empowerment programs and announce
capacity expansions.
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Sasol's Plans to Expand Domestically
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12. Synfuel plant capacity is expected to increase by 20 percent
(to 192,000 barrels per day) over the next 10 years. Some 95
percent of the expansion is expected to be fueled by natural gas
piped in from Mozambique through Sasol's existing pipeline. In
addition, a feasibility study is currently underway for a new 80,000
barrels per day CTL plant, in partnership with the SAG, possibly
located on the Waterberg coal-fields in the north-west of the
country.
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Single Largest Point Emitter of GHG
-----------------------------------
13. Sasol Secunda Chief Engineer Ed Koper admitted that Secunda is
the world's largest single point emitter of greenhouse gas in the
world. He also said Sasol was not the "worst" emitter, noting that
state power company Eskom emits three times more greenhouse gas, but
these emissions are spread over many locations. Sasol Secunda does
not have to comply with SOx or NOx emission standards/regulations,
because none exist under South African law. Koper estimated that
operating costs would increase by 16-20 percent if companies had to
comply with these types of standards. (Comment: The South African
government has imposed a ban on new power plants in the Highveld
region unless the new plant would not increase greenhouse gas
emissions. In other words, Eskom must close a plant to build a new
plant. End Comment.)
14. The Sasol Secunda plant does not have CO2 mitigation facilities
and Koper admitted that it produces far more CO2 than it could
possibly sequester in the coal mines surrounding the plant, even if
that were a geologically feasible plan. He said, "There aren't
enough holes to put all our CO2 into the coal beds." Koper also
admitted that the plant's carbon and power efficiency is less than
that of a crude oil refinery, a fact he attributed to 1970's factory
designs that did not optimize energy use.
PRETORIA 00003726 004.2 OF 004
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HIV - AIDS
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15. Sasol has implemented a comprehensive HIV/AIDS Response Program
(SHARP) aiming to reduce HIV infection rates and extend the quality
of life of infected employees. The program emphasizes voluntary
counseling and testing. Koper said that 80 percent of employees
volunteered for testing. Only 14-15 percent of volunteering
employees tested positive, which is significantly less than
actuarial estimates of 15-20 percent. Comment: This relatively low
infection rate may reflect the fact that Sasol Secunda has an older
work force, and/or the fact that the 20 percent of employees that
did not test probably have a higher infection rate than those that
did.
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Comments on Visit
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16. Chief Engineer Koper, a Dutch national, showed pride in his
long association with Sasol, contributing to the building and
expanding of the facilities. Koper commented that some Dutch
compatriots were critical of his work in South Africa under
apartheid, but he pointed at the provision of training and expertise
to many South Africans. In addition, he noted that his management
responsibility as a young engineer working on Sasol from the ground
up gave him much more advanced and deep experience than former
school mates. Sasol's status as a national technological champion
is documented with the depiction of its original coal gasification
facilities on South Africa's 50-Rand note, along with Eskom's
nuclear power plant at Koeberg in the Western Cape Province.
Unionists still call for Sasol to be "re-nationalized". Sasol has
benefited from high oil prices, but it has also made significant
improvements in its coal- and gas-to-liquids technologies and will
continue to expand domestically and internationally. It will also
have to grapple with the challenge of carbon emissions, particularly
as it considers significant investment in the U.S.
BOST