PREMIUM: Re-inventing Sasol: 4IR behind supertanker’s switch from hydrocarbons to specialty chemicals

LONDON — South Africa's energy multinational Sasol is changing direction – abandoning future investments in hydrocarbons in deferment to its new focus on non-commoditised chemicals. The re-invention sees "for sale" signs being erected at its Canadian shale gas investment and the end of an obsession to dominate the world's Gas-to-Liquids (GTL) market. This major strategic switch comes after a six month re-assessment of the group's activities in the light of seismic changes being wrought globally by the Fourth Industrial Revolution (4IR). In this fascinating interview, Sasol's joint CEOs Steve Cornell and Bongani Nqwababa move from hydrocarbons to electric cars to provide the back story to the $21bn group's reinvention after almost three quarters of a century in business. – Alec Hogg.Crossing to Johannesburg now where we link up with Steve Cornell and Bongani Nqwababa, the joint CEOs of Sasol. Gents, you've got a big day ahead of you, Capital Markets Day, how many people and/or how many investors come together to hear your presentation? .___STEADY_PAYWALL___.We have confirmation of at least 50 coming and then there'll be midyear as well and because we are on a webcast the others will come in via webcast but physically, there'll be at least 50..All right so, the webcast as well, you've got a global audience and you've got some pretty big news to tell them. Specifically, that Sasol is going to be adjusting its focus away from GTL (Gas-to-Liquids) towards more specialty chemicals or am I not reading this right?.You are absolutely reading it right because we have to be very clear as to what we will do and what we will not do because we wanted to make sure that we were driving a value-based growth strategy, which is fit for the future and that our strategy is focussed and then we have a very disciplined capital allocation, and last but not least, we deliver sustainable returns to shareholders. So, in terms of what we do and what we won't do, let me start with what we'll do. What we'll do is we'll focus more on specialty chemicals and still do base chemicals, which enables specialty chemicals. We will also do retail service stations in Southern Africa because it's more regulated and higher returns here rather than the rest of the world. Then we'll focus on exploration in production in Mozambique, where we are already established and, also growing into West Africa, where we've done significant work so, these are the focus areas. What we will do less of is to do a mega-scale based chemicals, like Lake Charles on our own in the future. The second thing which we will not do is greenfields gas-to-liquids because we have a view that the oil price now is structurally lower so, we are unlikely to generate the required returns with greenfields gas-to-liquids..Those are very significant decisions. Based on what you've just said now, the structurally lower oil price. Just take us through the strategic process you would have gone through to actually come to that conclusion?.If I may jump in, this is Steve Cornell. There's a lot we've done and we've been working on this, as you can imagine, for probably 6 or 7 months and where we started was to look at the mega-trends that are driving the world. The main things that were clear to us is that further urbanisation, further population growth is going to continue to drive the need for primary energy like transportation fuels. It's going to continue to drive the need for chemicals. In addition, you see that the desire to have lower ignitions and to continue to have mobility, and to focus us in terms of certain areas in the transportation field. In the specialty chemicals fields, where we can add value and our view is that notwithstanding a significant growth in electric mobility, hydrocarbons are still going to be the primary need for energy and transport well beyond 2030, into the 2040 period. Before we start to see some sort of drop-off from the levels that we're at today..So those were the things that drove us in terms of the mega-trends in the world and looking at that helped us to say, speciality chemicals is going to have a higher growth rate. That's the place we want to really be playing in. Southern Africa retail has still got a lot of value and we've performed well in that area over the last few years, and we'll continue to grow that and exploration in production in, as we've said, in Mozambique and moving more into West Africa, which would be the areas that we want to look at. Moving away from more, let's say, refining capacity and commodity chemicals into the higher value specialty areas, based on what we see in the future..Those are big decisions that you've taken but when one has a look at the internal combustion engine and hydrocarbons, and the forecasts on that front. How are you with your repositioning, or fortunately you've got lots of time to do it in but how in your repositioning are you going to be looking or specifically taking advantage of the new world, the electric car world, etc?.In our analysis we based it on a scenario analysis rather than being deterministic so we had three scenarios which we looked at it, from a price perspective, which was a long-term of 50 increasing in real terms and a high one of 70 increasing in real terms. So our planning scenario was based on 60. Then we had to do a scenario analysis also on the world we'll be living in the future. We looked at what we termed a fragmented world with everybody for himself and we also looked at the cooperative world where the world is working together in a collaborative manner. In our analysis is that in terms of liquid fuels with the entry of electric vehicles, it's going to impact us in the short-term with lower refining margins but not necessarily volumes. Remember our retail sales and our fuel business is in SA and not global so, we are going to be affected indirectly. .But in terms from a volume perspective, our scenario analysis was that the impact would be around 2030 to 2040. So, this gives us the reason to say, it's a robust strategy then in terms of retail. However, we'll continue having and watching and making sure that the retail stations, which we develop are the retail stations of the future and not of the past so that they are able to have charging stations and cater for the growth of electric vehicles..Bongani when are you likely to put in your first electric charging stations in your retail outlets?.That is still in the planning stages so it is something which we'll have in the next 24 to 36 months. .So, even in SA the electric car revolution is at least being planned for right now?.Yes, but it's pretty modest..It's pretty modest, you say so, within the scenario, when do you think electric cars will start to become a significant part of that market, the SA market, and significant say, at 10%?.I guess and what we've said is probably the 2030/2040 period is when we expect it. As Bongani was saying we are also impacted as a business by what happens in the rest of the world particularly in Europe because fuel products flow from Europe to Africa. So, one of the things that we do see is that the use of diesel fuel for light duty vehicles, passenger type vehicles, is going to drop significantly in the next 10 – 20 years so that's probably going to have a bigger impact in the near-term than the electrification is that diesel will come under downward pressure on pricing because supplies may be higher than demand. So, that will push molecules and push those barrels of diesel to other places and other regions like Africa. So, that's probably going to be the first thing that we see in terms of the big, major shifts in the world..It's fascinating when you have a look into the future but you, as mentioned before, are taking some pretty big bets now. If you were to go back 2 years even would these scenarios have even been contemplated particularly, selling shale gas and moving away from gas to liquids?.Not as much as it is now, and maybe let me deal with the issues differently. If you look at shale gas in Canada the dynamics in Canada was initially, the thinking was that the gas will be produced and then it'll be imported to the US but America is largely self-sufficient now and they don't need that gas. In terms of LNG the world is currently over supplied with LNG and there is a big stake on the enterprise in SE Asia, which has decided not to go on with the LNG projects. Also, the gas in Southern USA, Texas, which is wet gas, which has got ethane as a by-product. The gas in Canada is dry gas so, it limits your optionality. Hence the decision we have made..Geologically, it's a good and big field. It produces well, as they're saying it's dry gas so, with our decision not to pursue future GTLs, it doesn't fit with our strategy so, someone else is probably the better owner who can produce it and just put it into the energy market but that's really not the play that we're looking for. That's why it doesn't really fit in the future scenarios that we have laid out for Sasol..So you've put it up for sale?.Yes we'll talk to our partners. We're not the operator and it's a joint venture with Progress Energy so, we'll be talking to Progress Energy today and informing them of our decision and talking to them about the path forward but looking for an exit for us..The other big story of the most recent past has been the investment into Lake Charles in Louisiana. Now, in the statement, in your strategy going forward, you're not going to repeat this. Does this mean that you're a little sad about the fact that you did Lake Charles in the first instance?.No, not at all. I think you've read it a bit differently than what we were trying to message. What we said is that the risk reward profile for such projects that have a lot of commodity chemicals, along with the specialty chemicals. Going forward really isn't the type of project that we'd want to do alone. Strategic investments like this that are feedstock advantaged, and world scale – we're still going to consider them but if they have a big commodity component like Lake Charles, we'll do them in the future probably in partnership, almost certainly. We're still going to look at how we can go further in Lake Charles and expand Lake Charles. Even in the commodity side if it's got a good return so, it's a good project but as we've said, the size of it versus our market cap. The fact that it has lots of commodity along with the specialty so as that in the future, a wiser decision might be to do that type of investment with a partner..Would you be looking for a partner now then, if there was someone interested in coming into Lake Charles?.Now is probably not the appropriate time because we are 79% done with the project. Mechanical completion is just over 50% so the reality is that if you were to bring a partner now it would have to carry all the construction risks and all sorts of warranties. So, it's not the appropriate time to be doing that but when we have commissioned and when steady state it is certainly an option we would consider but we are not desperate financially to find a partner now. We can fund the project ourselves – no problem..So that's one of the big focussed areas in the short-term. The other big focus area is in Mozambique. Just explain how that fits into the strategy?.In Mozambique, we've been there since 2004 so the gas, not only do we do monetisation in Mozambique in the form of industrialisation and the power station, which we have there, called CTRG. We supply, together with our partner about 30% of the power needs in Mozambique but the bulk of it then comes into SA into our value-chain that Sasolburg, as an example, when we were founded it has been fully considered from coal to gas feedstock. So, that will continue and we have got secure feedstock up to at least 2034 so we are continuing with exploration now because we want to flatten the profile to make sure that as much as we are secure with coal, up to 2050 and beyond, we do the same from a gas perspective. That's why we'll be exploring in finding more acreage in Mozambique so that we'll start getting returns. From the production share agreement, we'll start getting production around 2020/2021..Just as a slight aside on that, is there a carbon omission advantage by taking Sasolburg, for instance, and putting it onto gas feedstocks rather than coal?.Yes, there's a significant improvement in the greenhouse gas emissions and going to a GTL versus a CTL. That was one of the reasons that we decided not to pursue coal-to-liquids in other parts of the world. We one time had looked at, should we do this in China? We even considered the US coal at one time, and because of the large CO2 footprint that was a big factor in terms of deciding not to build any additional CTL and rather focus on GTL. Now, we've decided, a further step that we will not do any additional new greenfield GTLs..It's important to emphasis though that we will continue with our Fischer-Tropsch technology. We are not un-honouring our Fischer-Tropsch technology so our operations in SA, which are using Fischer-Tropsch technology will continue and we'll continue to optimise and have our Oryx GTL in Qatar and we'll continue partnering Chevron in our GTL in Nigeria. So, those continue and we will continue to support them. Actually, we might optimise them to high-value them so that we move the products from drivel to synthetic based oils, which are high value and highly sought after..Sasol is a big ship and it will take, presumably, a long time to turn. You've put the path in front of us, as investors, shareholders, and stakeholders we can see now where you are going. What is also interesting align to this is that you're still looking at a fairly robust forecast for return on investment and your growth in profits – 5%, I guess, doesn't sound like a lot in your profit growth but in a low inflation world that's not a bad result. How are you going to manage that, given that you're turning the ship around or changing direction, plus you have to find a way of meeting that kind of a target?.I think you can think of it in two different parts. The first is the existing business we've got – in the next 4 years we're going to really continue to drive the improvement of the existing business and start the growth on a new one but it will take a while and a little bit of time for us to deleverage our balance sheets so that we can grow at the rate we want, in the future, into the areas we've specified. So the immediate focus is to get the balance sheet in good shape. We've got a great portfolio of existing assets that are highly cash generative and we're going to drive a continuous improvement for our plan to further improve or sweating out of the existing assets. We're already profitable at $40 a barrel and we want to lower that so, we're going to continue to drive actions that incorporate digitalisation that look at further ways to reduce our fixed costs and our variable costs. We've said, we're going to go through a very structured review of our existing assets and look at those like Canada that may not be in line with our strategy or don't have the desired performance and if so, we'll take the right actions to improve or sell them, if necessary..That set of activities around the existing business by itself, we're trying to increase the return on invested capital by about 15% over the next 4 years, which is not insignificant at all. Then we'll start in our growth areas using the cashflows that we're getting from existing business, Lake Charles, Mozambique expansion and continue to take those monies into the areas we talked about, specialty chemicals, and retail growth in SA, E&P in Africa as our growth engines..You're also looking to reduce the dividend cover. How does that fit in, given that you are steering the ship in a different direction, if you like?.Because our shareholders have been quite patient with us, whilst we've been in the Lake Charles chemical plant, but we would want to increase the dividend pay-out to them. So, we currently have to give them cover of 2.8, which is a payout ratio of 36%, in American terms. We anticipate that we'll steadily increase the dividend payout to 40% by 2022. That transmits into a cover of 2.5, and thereafter we'll be at the lower end of our cover range and our cover fee, which is 2.2, which translates into a cover range or a payout ratio of 45%. So, it basically means we are working towards increasing the payout ratio from 36% currently, over to 45% over time..Just stepping away from this, and if you have a look from the outside. You've set yourself some big challenges. Primarily though, you're going to have to become more productive. How do you do that? How do you implement that kind of a strategy to make sure that you can execute on what looked like some fairly aggressive targets, given that you're changing direction to specialty chemicals and given that you are still wanting to or targeting to grow your profits, and to payout more dividends? How do you execute that productivity improvement?.Alec, I think that's one of the hallmarks of our company. We've shown that we can really manage those things that are within our control. If you look at the efforts we put in place over the last 4 or 5 years, we've been able to reduce our cash fixed costs by R5.4bn, but we see that there's more opportunities. We've been very good about looking at benchmarks and what other people do around the world in our industry. We're looking at what digitalisation of some of our processes can bring and how quickly can we adapt that technology? We're looking at how can we increase our throughput around the world on all of our assets and get more throughput and that all relates to what you said, is being more productive and that is a big piece of the focus over the next 4 years. Is further sweating the assets – we think we do that well but we're going to do it even more because we believe that there is opportunity based on what we see the rest of the industry doing..So, if I talk to an engineer in Secunda, what is he going to make about all of this? How's his life, as a young engineer let's say, how's his career with Sasol over the next 20 years going to change?.As I've mentioned earlier, we'll continue with our operations and the Fischer-Tropsch technology will continue to enhance it. So, the engineer will continue working on how we can improve the productivity and how we can improve the yield? Then also, more importantly, how we can reduce the emissions but these are extremely smart people, and we are working on digitisation, as Steve told us earlier. So we have found that quite a few of them have been involved, for instance, in Digital Catalyst, which is a project in our chemical business to enhance the customer's experience and enhance value. So, we have seen quite a number of engineers working in that end and reinventing themselves so to speak. In addition, we'll be growing globally. We might not be having many major projects but we'll be growing in a very disciplined and focussed manner and there will always be opportunities. Not only here but also globally, to work within Sasol..This whole thing of specialty chemicals, just for people who don't understand anything about it. What exactly does that mean? What area are you talking about there?.A good example is to compare specialty chemicals against commodity or base chemicals. Now, commodity or base chemicals is something like polyethylene. There are large and/or multiple producers of this around the world. It's used in every-day kind of products, plastics that you'll see in the stores, in your homes, and even in your cars. Specialty chemicals are chemicals that require a lot more intellectual property and are more tailored to smaller markets and more specialty markets. The big one that we're in is alcohols and this isn't the alcohol that goes into a liquor. It's alcohol that we can actually control the size of the molecule or the shape of the molecule, and that can bring certain properties like better lubrication. We use it in inks to spread the ink faster in printers and it's those sorts of things that requires much more interface with the customer and have much more in-value and so, that's the part that the growth of that is probably going to be 2% every year, higher growth rate in specialty chemicals than commodity chemicals. That's why we want to play there..And that's playing to your strengths?.We believe so, and we've got a good business in specialities here, in SA. We sell our specialty chemicals produced in Secunda and Sasolburg throughout the continent. We even move it to Europe and the US. We also have specialty production in the US, and Europe, and we're expanding in China so, we're already there and we want to just get bigger..South Africa's Sasol tightens purse strings for new projects.(Bloomberg) – Sasol Ltd. said it will steer clear of big new investments as the world's largest maker of fuel from coal reviews existing assets and focuses on completing its $11.13 billion U.S. chemicals plant..Sasol won't invest in further new gas-to-liquids or crude-oil refining capacity, according to a statement on its website ahead of an investor day being held Thursday in Johannesburg. The company won't entertain new, wholly owned mega-projects such as the Lake Charles chemical project in Louisiana either."The risk profile to execute such projects alone, in the future, is larger than what Sasol wishes to undertake," co-Chief Executive Officer Stephen Cornell said in the statement. The company's strategy going forward will be "underpinned by increased discipline in capital allocation."Sasol said in August it was reviewing its assets around the world, at the same time that it lowered its estimate for returns at Lake Charles. The company announced an almost 25 percent jump in the project's cost last year to $11 billion, which prompted it to make cuts elsewhere. It's added a further $130 million to the budget because of costs related to Hurricane Harvey, the company said Thursday.Read also: Sasol abandons R13bn share plan for black-investor debtThe company has completed reviews on more than half of its global assets and decided that most of those will be retained. However, the company intends to exit its Canadian shale-gas project and will start a structured sale process.Between now and 2022, the company will focus on completing Lake Charles and its production-sharing agreement in Mozambique, it said."Beyond 2022, we will focus on building an investment portfolio of smaller to medium-sized organic and inorganic opportunities, in the range of $500 million to $1 billion," said Chief Financial Officer Paul Victor. "This will be directed towards our growth focus areas in specialty chemicals, exploration and production and retail fuels."Read also: Sasol reboots Inzalo; new scheme guarantees solid returns for BEE shareholders.While Sasol's gas-to-liquids operations are generating good returns and cash flows, the company won't invest in further greenfield gas-to-liquids projects, including one it had proposed in the U.S. The "volatile external environment and structural shift to a low oil price environment" make new projects uneconomic, Cornell said.The company won't add new crude-refining capacity because of the large investments that would be required to meet changing fuel specifications in South Africa and a lack of any clear competitive advantage for Sasol outside its existing position in Secunda, a facility where it makes crude from coal, he said.The initiatives will help to increase the producer's dividend payout to 40 percent, or 2.5 times cover, by 2022, he said.

PREMIUM: Re-inventing Sasol: 4IR behind supertanker’s switch from hydrocarbons to specialty chemicals

Related Stories

Meet Tshepo Mahloele – Big Capitec shareholder, ABSIP’s “CEO of the Decade” now accused by Holomisa as kingpin of corrupt network

PREMIUM: Making of a great editor – the George Palmer playbook

Premium – BizNews global portfolio: ASML joins – so does Adobe as Bull takes hold again

Alec Hogg: Helen Zille predicts SA choice will be DA or EFF