South African petrochemicals group Sasol Ltd. (SSL) has confirmed its decision to abandon a proposed coal-to-liquids (“CTL”) project in Indonesia and instead turn its focus on gas-to-liquids (“GTL’) opportunities. However, the largest producer of motor fuels from coal said that it will continue to pursue its coal investment proposals in China and India, which are currently in advanced stages.
In December 2009, Sasol entered into a memorandum of understanding with the Indonesian government for the possible development of an integrated 80,000 barrels-per-day CTL plant in the Asian country. The facility – estimated by analysts to cost around $10 billion – was supposed to use Sasol’s proprietary I-Net Bridge technology.
Sasol’s decision to pull the plug on the Indonesian CTL development highlights its intentions to focus on making fuel from gas rather than coal. It is believed that GTL are smaller projects with lower risk and less environmental impact, which makes it an attractive industry to be in.
In recent times, Sasol has continuously focused on the commercialization of its GTL technology by constructing plants in gas-rich regions of the world that will strengthen its position in the industry in the coming years. The company, which constructed the world’s first commercial-sized GTL plant in Qatar, recently announced plans to buy a stake in Canadian energy explorer Talisman Energy Inc’s (TLM) Farrell Creek gas assets for $1.06 billion and may also build a motor-fuels plant in western Canada.
From a broader perspective, we see the scrapping of the project as part of Sasol’s strategic plan to capitalize on the opportunity to leverage the arbitrage between gas and oil prices.
Under normal circumstances, the ratio of the price of oil (measured in $ per barrel) to the price of natural gas (in $ per million British thermal units) fluctuates between 6 and 12. However, in recent times, this has decoupled to an unprecedented degree, up at around 20. With gas prices remaining at depressed levels and thereby diverging significantly from oil prices, Sasol is looking to utilize the spread by using its GTL technology.
Based in Johannesburg, Sasol is an integrated energy and chemicals company. It is the leading provider of liquid fuels in South Africa and a major international producer of chemicals. Sasol is fairly unique compared to other international oil companies as it has limited conventional exploration and production operations and uses a proprietary technology (Fischer-Tropsch) to manufacture synthetic fuels (synfuels) and chemicals from low-grade coal and natural gas.
Sasol manufactures more than 200 fuel and chemical products that are sold worldwide. The company also operates coal mines in South Africa to provide feedstock for its synthetic fuels plants. Sasol is the operator of the only inland crude oil refinery in South Africa. It produces crude oil in offshore Gabon, supplies Mozambican natural gas to end-user customers and petrochemical plants in South Africa, and with partners involved in gas-to-liquids fuel joint ventures in Qatar and Nigeria.
Even though Sasol has a Zacks #2 Rank (short-term Buy rating) in the short run, we are Neutral on the ADRs in the longer term.
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