Volatile markets force LNG company to cut expenditure

18 March 2009

The volatility and uncertainty in global markets have prompted Sasol, the world’s leading producer of liquid fuels from coal and gas, to reduce its capital expenditure for the coming three years by 40% to R28bn, in an attempt to conserve cash. This is despite previous reports of a 45% year-on-year increase in profits, due to higher oil prices and a weaker rand. Sasol wants to cut "discretionary expenditure" in the form of dividends and capital expenditure relating to smaller projects.

The cut in expenditure is based on the assumption that oil prices will remain between $40 and $45 per barrel for the next two years.

Sasol’s share prices fell more that 6% in one day recently, which was in line with resources stocks on the JSE, but out of kilter with the rising oil price. The decline in Sasol's share price may have more to do with the fact that the average oil price last year was much higher than it is expected to be this year.
Sasol’s cautious stance is important as the end to unfavourable market conditions is not yet in sight and Sasol have many large projects underway.

Using techniques pioneered by Nazi Germany to convert coal and gas resources into liquid fuel, Sasol operates a major synthetic fuel plant in its native South Africa and its new natural gas-to-liquid facility in Qatar is now operating at close to full capacity.

Plans for the construction of a coal-to-liquid plant in India has proceeded from the idea stage to prefeasibility stage. This comes after the Indian government granted Sasol and its partners in the project, Tata Group, rights to a coal block in that country.

The company’s other projects include exploration in Mozambique and Papua New Guinea, the inland coal-to-liquid plant Project Mafutha, a coal-to-liquid plant in China, the expansion of the Secunda facility and the Oryx gas-to-liquid plant. Sasol is also in early talks about a project to convert Indonesia’s copious seams of lignite, a soft form of coal, into liquid fuel.

Big projects are still viable, but it has not yet been decided which projects will be put on hold as a result of the adjustment in capital expenditure.