Good Business, Bad Policy: South Africa's Sasol Is the World's Largest Producer of Synthetic Fuels from the Country's Vast Reserves of Coal. but as Carbon Emisssions Regulations Tighten, Is There a Future for This Industry?
Ford, Neil, African Business
Synthetic fuel technology has something of an odd track record. Developed by both Nazi Germany and Apartheid-era South Africa to avoid reliance on foreign energy supplies, it has attracted support from some infamous sources. Yet South African firm Sasol is trying to make the most of its technology by turning from energy self-sufficiency to international trading. Continued high oil prices make synthetic fuels more economically viable, while fears over future oil supply shortages could make it a tool in the battle for energy security.
Sasol has traditionally produced synthetic fuels from coal, but it is now following in the footsteps of another South African company, Mossgas, by investing in gas to liquids technology. At present, synthetic fuels account for about three quarters of all South African oil production. Sasol has production capacity of 160,000 barrels a day (b/d) and the state owned Petroleum Oil and Gas Corporation of South Africa (PetroSA), into which Mossgas was subsumed, another 45,000 b/d.
Sasol is the world's biggest coal to liquids producer and owns a huge fuel production plant at Secunda in Mpumalanga Province, and another at Sasolburg, where it produces petrochemicals. Sasol is also the world's only commercial coal to liquids producer and uses around 42m/t of coal a year from its own mines. In November, Buyelwa Sonjica, the minister for minerals and energy, sanctioned Sasol's plans to almost double its production capacity to about 300,000 b/d. It also seems likely that taxes on synthetic fuels will rise, so refined petroleum fuels are likely to remain roughly as competitive as they are now in South Africa.
It is difficult to pinpoint the price at which refined petroleum products become more expensive than synthetic fuels, but estimates range from $20-$40 a barrel, still far lower than the current price of crude oil. Nevertheless, the company is keen to fight what it regards as a windfall tax on its success. Chief executive Pat Davies says: "Sasol has presented its case to the task team, stating the undesirability of a windfall tax for the company and the country as a whole, as this would create investor uncertainty and not support the government's stated fiscal and energy policy objectives to reward beneficiation. We also conveyed the message that we believe the time is right for a dialogue between government, Sasol and other stakeholders to map a way forward to secure additional local liquid fuels production for South Africa."
Sasol has also been criticised for a lack of progress in ensuring that it is partly owned by black empowerment investors. Moreover coal to fuel technology is something of an environmental nightmare. When many governments and scientists are trying to encourage reductions in greenhouse gas emissions, synthetic fuel production will provide another method of burning an awful lot of coal very quickly. Supporters of the technology argue that carbon capture can virtually eliminate emissions from both coal fired power plants and synthetic fuel projects, yet geosequestration is a theory rather than a technology at present and the prospect of capturing carbon emissions and storing them underground is a long way off.
Despite such problems, the firm is keen to expand overseas and the likelihood of sustained high oil prices is generating a demand for its technology. It has set up a joint venture with Qatar Petroleum to develop a gas to liquids plant in one of the world's biggest gas producers, Qatar. The $1bn Oryx plant, opened in June 2006, will produce about 34,000 b/d and is fed by the North Field, the world's biggest single gas field with reserves of 900 trillion cubic feet.
Yet while Sasol may currently lead the way in synthetic fuel production, Qatar is banking upon much larger energy companies to take its gas to fuel industry on to the next level. Shell and ExxonMobil have been selected to develop synthetic fuel production capacity worth $13bn. …