DAVOS — What a difference a year makes. Twelve months ago in Davos, one sensed that CEOs from South African businesses were struggling to find some brightness in the gloom. No such challenge this year. Especially not for Sasol’s joint chiefs Bongani Nqwababa and Steve Cornell, who are now enjoying a near perfect storm – the oil price has risen; the global economic upswing is supporting the company’s key chemicals operations; and the outlook for South Africa is suddenly better. Sasol shareholders are sure to share the enthusiasm of the CEOs. – Alec Hogg
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I am Bongani Nqwababa joint CEO of Sasol Limited and I’m Stephen Cornell, also joint CEO of Sasol Limited.
Last year was the first time that you came to the World Economic Forum in Davos.
Yes.
How has the mood swung?
For us it’s a positive on a variety of levels. The oil price is higher; it’s $71 when I checked this morning, so it’s positive. The South African story is very positive. Not only is it a story, but actually there are demonstrable actions being taken, so that’s positive and the global growth is a broad-based global growth which is continuing, so it’s positive on multi fronts.
Yes, I absolutely agree, so for the first time in a long time we have a lot of uniformity in terms of growth across the continents and so most people are pretty optimistic, this time versus 12 months ago.
We have Donald Trump coming tomorrow. Is he likely to deflate the bubble?
I don’t think so. I think people are interested because what I’ve heard is a lot of sentiment that if the US wants to pull back and be somewhat isolationist. Others are going to step in and fill that void, be it Europe, be it China, be it India, but folks are saying if Donald Trump wants to do his thing and put up walls, well somebody else is going to fill the gap that there’s in the world, so it’s going to be interesting to see how he’s received.
Now I know it wasn’t your decision because you weren’t the CEOs at the time, but Sasol invested hugely in getting into China. Is it a bit sad now that you aren’t still there?
No, we’re actually investing, but in a smaller way more on a $100m plant but we were going to invest in coal to liquids. We made a strategic decision years ago, in 2011 that we are no longer going to get involved in greenfields Coal to Liquids. In our strategy review last year, we made a decision that we were not going to get involved in greenfields Gas to Liquids also because we don’t see the business case in the long run and the prognosis for diesel is not bright.
Read also:Â Sasol abandons R13bn share plan for black-investor debt
How are you reading the whole energy equation because in recent times the oil price as you mentioned in the outset has risen now above $70 a barrel. So that makes it an exciting place to be but with the volatility, I suppose you can’t take it for granted.
That’s right, it’s going to stay volatile because the real marginal players are the shale oil plays in the United States and those can come on very quickly as we have seen, as prices start to rise, a number of rigs in the US have already started to come up. So what we’ve said is, we think we’ll have something around $60 a barrel, but it’s going to be volatile, it can drop to $50 or maybe even sub-50, for short periods of time it’s going to $70 or maybe slightly above $70 for some time. But we do think it’s going to be in that range, so we’re doing all of our scenario planning around $60 and trying to be robust over a long period at that level.
In addition, from a South African perspective, you also have to plan for the Rand, which has been a welcome surprise for importers, but I guess not so much for you guys?
Yes, so the Rand might not be good news for Sasol, but it’s certainly good news for the country and also maybe good news for us in Switzerland when the prices are high. But on a more serious note in terms of business, if you look at the Rand oil price, it’s still R840 per barrel, even with the stronger Rand it is sub-R11.90, but the important thing is that it’s much better than the R650 we had two years ago.
Okay, so although the oil price benefits have been offset by the stronger Rand, it’s still better than where you’re coming from.
Absolutely.
Extremely positive.
Cyril Ramaphosa, you’ve been engaging with him you’ve heard him, he’s been all over here in Davos, and becoming very fashionable, very popular, which is a good thing for the country. He’s also said one of the things he wants to get hold of is policy certainty.
Yes.
Now the MPRDA, which directly affects you guys, has been all over the place. What do you expect on that side as a beginning point and secondly, I know you pulled out of shale in South Africa, if there is certainty would you consider going back again?
From our perspective, let me start with the MPRDA. The main contentious issue besides the shareholding was the issue of the black shareholders getting dividends disproportionate to their shareholding, which is not based on profits. This is problematic because in theory you might have a minority shareholder getting the majority of the dividends so that’s fundamentally flawed. So that’s the issue and then on shareholding it’s less of an issue for us because in mining our black shareholding is actually 46%. So that’s less of an issue for us. The issue is regulatory certainty and sticking to it because if you keep changing every three to five years, it’s not very helpful when you’re investing for a 40-year horizon.
As far as shale is concerned, the issue was on the upfront costs which is not necessarily an issue anywhere you invest in around the world, but the issue was that you risk selling your business sub-optimally to somebody who has not incurred the risk. So that’s not very helpful because you won’t even get the investment because the upstream investments are very high. You can spend hundreds of millions of Dollars and have a dry well.
So risk and who’s carrying the risk and what reward do you give for that risk is the real issue around policy certainty that you have to be clear that for all the risk you take that you are going to be able to get some reward that’s commensurate with the risk that the person carries.
But would you go back into shale, it has been a missed opportunity for South Africa unquestionably.
Yes because in terms of that it’s probably not going to be our first move because those more experienced in shale drilling might lead and then we might partner them in years to come, but also it depends on the geology. Not only is the gas there, but also is it economically extractable and there’s the not too mundane issue of societal issues and environmental backlash because you can have the mining right but you will not have the rights to mine if you are not welcome and as a business in principle, we do not invest where we’re not welcome.
So as far as shale in South Africa’s concerned, you’re standing on the sidelines until there’s more certainty on regulation and until the communities get excited about the hundreds of thousands of jobs potentially that can be created.
Yes and we probably would do more conventional first. There’s still opportunity to do conventional drilling for oil and gas, so the unconventional with shale, we’re not opposed to it, we’ve done it before (not in South Africa), but like Bongani said, a few things have to line up before it would be the right time to move into it.
Steve, you were quoted as being the biggest foreign investor in the United States with your plant in Louisiana. If that’s the case, has Donald Trump asked for a meeting with you?
My phone hasn’t rung, I don’t think Bongani’s phone has rung, but you know it was based on the fundamentals of very attractive feedstock from Shale Gas Liquids and Natural Gas Liquids and that’s still the case. The fundamentals are still good and Mr Trump did give us a bit of a help with his new tax policy.
So you’re a beneficiary of that.
So we will be a beneficiary of that, so all the fundamentals are still very positive. It was a good decision at the time; it’s still a good decision. This year’s very important for us because we’ll begin the start-up later in the back half of the calendar year 2018, so a very critical year for us, especially in terms of Louisiana.
And to see the global economy looking better with the cyclical upswing that we’re enjoying, it couldn’t be a better time for you to come on stream.
Yes the time is good. We just need to get it up safely and get it up on capacity. It’s a huge investment. There are about eight big plants, which are all connected, and they have to come up one at a time, one after the other, so a lot of effort that’ll be starting really in the next couple of months. It’ll take six, nine months to get the whole process online.
The interesting thing about coming to a place like Davos is that you can see different strands that can be pulled together and that’s why I was asking you about shale. You’re using shale feedstocks in the United States.
Yes.
You’ll be learning so much no doubt from your experiences there. South Africa has supposedly the fourth or the eighth biggest reserves of shale gas in the world, depending on whom you believe. It would seem that a national champion like Sasol, given that background would be jumping in, but you’re still holding back there.
Our capital is constrained at the moment because of our project in the US, but going forward, as I said, they’re options that we’ll consider. But a few stars have to align because we have learnt from previous experience that if you pre-invest before all the stars have aligned you’ll have a horrible experience and write off billions and billions of shareholders’ money and we wouldn’t want to do that.
We’ve noticed that Chevron who was a partner of yours, I’m not sure if they still are, but they certainly were in West Africa at one point, have pulled out of South Africa. Did they jump out of the Comrades Marathon just before the Fiduccia Line arrived?
No, in the case of Chevron it’s different. As we did our strategic review last year, they did their own, looked at their portfolio globally, and saw that South Africa is not a significant part of their portfolio globally. So it was an issue of focus I presume, but from our standpoint we did look at the assets because it’s no secret that we want to grow our retail business in South Africa, but the pricing was not commensurate with our own valuation.
What’s going on there with those assets because China says it’s going to be getting the deal, which I wrote something along those lines and then got an angry email from Glencore to say, “We have the first pre-emptive rights”. Do you know what’s happening there?
As we understand it and we’re not closely involved, but in conversations with the industry and even with Glencore, is the BBBEE minority partner whose in with Chevron actually has the first right of refusal we believe and so if they can come up with a way to match the offer then there’s a possibility that actually they would get pre-emptive rights to make the deal. So I think that’s where Glencore is going, is working with the partner, that if they can match what is being offered then they may have an opportunity to move in.
So the Chinese don’t necessarily have it from the way you’re explaining.
Again, we’re not that close to it, so we’ll have to wait and see.
I’m going to throw something else at you from left field. What about the strategic oil reserves that were sold at $27 a barrel and now we’re looking at $70 a barrel and at a different market situation?
We’re obviously not close to that, it’s a central energy fund decision, but that’s a throwback to the old days in Apartheid for security or supply in the modern days where there is abundant supply, it remains to be seen whether it’s still necessary to have that when you can easily get supplies globally.
Or from Sasol.
Yes.
How much of the country’s fuel supplies does Sasol provide (petrol and diesel)?
In terms of production, we produce 30% of the country’s liquid fuels.
So why do you need strategic stockpiles if you have a domestic producer of 30%, is that the argument?
The 30% I’m talking about includes synfuels and a large crude refinery, but you have to consider the whole portfolio of refineries including the coastal refineries owned by international oil companies.
Getting back to Davos and your second trip here, are you going to be leaving here with a different message from the one you got last year?
I’m leaving here quite a bit more invigorated and positive, not only about South Africa, but about the whole globe, that things are trending in the right direction, but as they trend in the right direction, also you need to be careful that you are not about to face the downhill in the not too distant future because you can get ahead of yourself in global economics.
Maybe that’s something that we need to end off with and getting ahead of yourself. In the Edelman Trust Barometer, South Africa was bottom of the barrel excepting for the United States, which was interesting. The trust between the people and the government in South Africa is the worst in the world or was last year and the United States has now gone below because it’s completely imploded under Trump and the comment from the panelists and the presenters were, “You see how bad the US is, they’re even worse than South Africa”, which is quite awful when you’re South African. Are you seeing maybe next year that these guys are going to be talking a different story, is that what you’re picking up here given the political changes and the mood that one’s seen?
I think the comments that I hear, and it’s somewhat the same comments we heard last year, but even stronger, is that you have to have a partnership between government, the business sector, the private sector, the society at large, to make everything work and if you try to exclude one or the other, you’re not going to be able to get your country moving in the direction that it needs to go, so the unity and the whole theme of trying to get unity in a fractured world, it continues to come through, is that the unity between government, public, society is really the thing that has to happen and of course Donald Trump’s going the other way a bit. So, I think there’s a lot of dynamics, a lot we can learn by being here, that I think we have and like Bongani, I’m going away thinking we have the will in South Africa and we have the leadership that we can get it right and really make a big difference.
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