Picture: RUSSELL ROBERTS
Picture: RUSSELL ROBERTS

SASOL plans to bet the farm on a new R120.4-bn gas-to-liquids (GTL) plant in the US, cashing in on a natural gas boom in North America, cutting its reliance on coal and diversifying revenue streams from SouthAfrica.

The planned facility will be trumped in size only by Shell's Pearl project in Qatar, which has been marred by cost inflation and delays. The R163.4bn Pearl project, the world's biggest GTL facility, was originally expected to cost R43bn and is yet to reach full capacity despite production starting last year. Sasol and Shell are the only GTL producers in the world.

The sheer size of the US investment - Sasol plans to spend a maximum of R182bn on the GTL plant and an ethane cracker, compared with its market capitalisation of R238bn on Friday - demonstrates why progress on the projects will be watched closely. Sasol said it is studying a "number of diverse funding tools" in order to gain the most efficient overall cost of funding.

"The big question is whether Sasol will be able to build this project within budget and on time. There have been hiccups in the past that had an impact on the returns a project will earn," said Mohamed Kharva, an analyst at Nedgroup Securities. The facility will have a capacity of 96,000 barrels a day and production is expected to start in 2018.

Sasol's GTL plant in Qatar took much longer than expected to reach design capacity, and a GTL project in Nigeria, which should have been operational last year, "has huge cost overruns resulting in Sasol decreasing its shareholding in the project", said Kharva. To date, it has invested nearly R3bn in the Nigerian project.

"Over the past five years, they haven't really given us comfort that they can do it" on time and within budget.

The cost estimate of the Louisiana GTL facility, a first for the US, has already been increased from the original R77.4bn to between R94.6bn and R120.4bn, partly because it plans to upgrade 30% of the fuel to high-quality chemicals and phase the plant after a planned ethane cracker.

The R60.2bn cracker will use natural gas to produce 1.5-million tons a year of ethylene, a key raw material in the chemical industry.

"Through our innovative energy and chemicals technologies, we will provide the US with world-class, cleaner-burning fuel, contribute to the country's energy security, boost downstream manufacturing capacity, and diversify the utilisation of domestic gas resources," said Sasol CEO David Constable. A final decision will be made in 2014.

The shale boom in the US has supported 1.7-million jobs in the country and will trigger capital investment of more than R43.8-trillion this year, IHS Global Insight said in a recent study. More than two million barrels a day of oil, nearly a third of total US output, is now produced from shale. These deposits, trapped in shale rock, are released using drilling and hydraulic fracturing, or fracking.

The boom has pushed down natural gas prices by 74% since the 2008 peak, making it a financially lucrative feedstock for fuel and chemical producers like Sasol. Crude oil is currently four times more expensive than US gas on an energy-equivalent basis.

Unlike crude oil, there is no global price for natural gas. It needs pipelines or liquification before transport is possible, and trade of liquified natural gas (LNG) is dependent on expensive export terminals. US producers can currently earn much higher prices for gas in Europe and Asia.

Sasol has also successfully completed a feasibility study in Canada.

* This article was first published in Sunday Times: Business Times