Sasol of South Africa, one of the world leaders in technology for converting natural gas and coal to liquid fuels, has said new investments in the process are unattractive on economic and environmental grounds.
It shows how far the technology has fallen out of favour compared with five to 10 years ago when there was a wave of investments in gas-to-liquids plants with oil prices averaging above $80 per barrel.
Sasol’s joint chief executives say new plants for converting gas to liquids were now unlikely to be economically viable in unstable commodity markets, while converting coal to liquids had low returns and unacceptably high carbon dioxide emissions.
Only countries with strong government support, led by China, are still pressing ahead with new coal-to-liquids or gas-to-liquids plants.
The unfavourable conditions are pushing Sasol into a shift away from fuels and towards chemicals production, including an $11bn project in Louisiana, one of the largest foreign manufacturing investments ever in the US.
A second investment in Louisiana of up to $14bn to build a new gas-to-liquids plant is unlikely to go ahead, however, with a formal decision expected in the coming year.
Sasol has been working on processes to convert coal and gas into liquids since the 1950s, when it started production to supply synthetic fuels in apartheid South Africa. Its Secunda plant east of Johannesburg is the world’s largest coal-to-liquids facility, and it has a successful gas-to-liquids joint venture in Qatar called Oryx GTL.
However, Bongani Nqwababa, one of the two joint chief executives who took over in July last year, said the company’s strategy was to become “more chemical, and more global”.
Chemicals, which will generate about half the group’s profits this year, are intended to rise to more than 60 per cent when the investment in the US is complete, he said, and the proportion of earnings made in South Africa is set to drop from about 65 per cent to 50 per cent.
The $11bn chemicals plant that Sasol is building in Louisiana is a huge commitment for the group, worth more than half its market capitalisation of about $18bn.
Stephen Cornell, the other chief executive, said the availability of cheap natural gas liquids such as ethane and propane as feedstocks made investing in chemicals production in the US highly attractive.
“You can compete globally with anybody in the world,” he said. “Your feedstock cost is second only to the Middle East.”
The potential gas-to-liquids plant, however, is facing greater challenges. Its economics depend on the arbitrage between natural gas and oil, and look unattractive at current crude prices.
An investment in a new gas-to-liquids plant was “conceivable”, Mr Cornell said, but the projects would make sense only if the price of the gas or the products such as diesel fuel could be fixed. “Those opportunities are getting less and less. So it’s going to be hard,” he said.
The outlook for coal-to-liquids is even more difficult. China has been investing in coal-to-liquids plants, and Sasol had been looking at possible projects there, but has decided to back out.
Mr Cornell said the company would continue to run its Secunda plant at full capacity, but had “no intentions” of making any more investments in new coal-to-liquids plants.
“The carbon footprint is too big, the capital investment is just extremely large, and there are better options for us in terms of return on investment,” he said.
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