A new low-cost technique to produce low-sulphur diesel may prove to be the saving grace for Sasol’s Natref refinery, which it runs in partnership with TotalEnergies.
This is welcome news for SA’s troubled oil refinery industry, after the closure of several facilities over the past two years. Earlier in 2022, BP and Shell announced an indefinite freeze of operations at their Sapref refinery in Durban that accounted for 35% of SA’s oil refining capacity, leaving the Natref refinery as the only one operating in the country at the time.
New rules published by the government in 2021 that lower the sulphur content allowed in diesel, which will come into effect in September 2023, are a big headwind for local oil refineries. To comply, some would have to upgrade their facilities at costs that might run into billions.
Sasol and TotalEnergies have indicated that upgrades of R4bn-R6bn may be required to comply with the legislation and that operating the Natref refinery may be unfeasible in the long term due to the regulations.
However, during the presentation of its annual results to June 2022, CEO Fleetwood Grobler said the company is now “assessing creative options for repurposing the Natref refinery”, including implementing “a low-cost, innovative solution that will produce [low-sulphur] compliant diesel towards the end of 2023”.
“This is a very positive step for us and for energy security in SA,” he said.
Grobler declined to mention the investment amount required for the low-cost technique but said it is “within the realms of [Sasol’s] operational expenses”.
More options
The technique to produce cleaner diesel, Grobler told Business Day, involves a “creative way of using processing material”. Implementation does not require changes to the processing plant and equipment, but rather switching to a different type of process material including the type of crude used.
“Six months ago, one of the options under consideration was to shut down the refinery, but now we have more options,” he said.
In addition, said Grobler, Sasol has completed a prefeasibility study on a hybrid refinery concept, which includes the introduction of bio-based feedstock such as used cooking oil as a sustainable route to transition the refinery to clean fuels compliance standards and reduce greenhouse gas emissions.
Sasol restored its dividend after a near two-year hiatus, with surging global commodity prices offsetting pressure on volumes and putting shareholders on track for a R9.34bn payout.
Adjusted core profit rose 48% to R71.84bn in the group’s year to end-June, as it benefited from improved demand and a 70% rise in the average dollar price of oil, which offset issues such as coal and water quality, shutdowns and safety incidents.
The group has opted for a R14.70 per share final dividend, after last making an interim payout in its 2019 year, as refining margins and export margins reached “unprecedented levels” in its second half.
Volumes fell
Earnings before interest and taxation more than doubled in Sasol’s fuel business to R28bn, boosted by increased demand as lockdowns receded, though production was lower.
The group’s Secunda operation production volumes fell 10% to 6.9-million tonnes, exceeding revised guidance, but coming under pressure due to issues with coal quality, partly due to mining accidents and heavy rains.
Coal export sales fell 12%, due to operational challenges on SA’s rail and port network, with the group saying it is working closely with state-operator Transnet, as coal exports are a major opportunity for 2023.
Christiaan Bothma, an analyst at Sanlam Private Wealth, said despite some operational setbacks, Sasol delivered a solid set of financial numbers on very strong commodity prices.
“They also made good progress on their cost-savings initiatives, exceeding targets set a year ago. While longer-term climate risks need to be taken into account, we think the current market price still has more than discounted for these issues and we expect the business to continue to outperform given the prevailing tight energy markets,” Bothma said.
Being a commodity producer, Sasol’s fate will continue to be tied to the performance of commodity prices, he said. “But the business is in a much-improved position compared to a few years ago with the balance sheet no longer a cause for concern.”
Sasol on Tuesday guided between 7-million and 7.2-million tonnes from Secunda in 2023, saying it has beefed up its coal stockpile, while it expects to sell between 53-million and 56-million barrels of liquid fuel, having sold 55.2-million in 2022.
By the JSE’s close Sasol’s share price had risen 1.9% to R338.26. It has more than doubled over the past two years.
Update: August 23 2022
This article has been updated with Sasol’s share price reaction.
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