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| Is Sasol an asset or a liability? |
| August 07 2008 at 09:31AM |
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By Jeremy Wakeford Second, should domestically produced "synfuels" be sold at a discount relative to international prices? Bell argued that the government has discretion when it comes to the pricing of liquid fuels and that the current formula might not be in the interests of the majority of South Africans, who are "being held to ransom" by suppliers and high prices. However, from a sustainability perspective, the answers to the policy questions posed above are "yes" to a windfall tax and "no" to discounted synfuel prices. To understand why, one first has to consider the global energy context, which is dominated by two interconnected issues. In the first place, as Bell noted in passing, there is convincing evidence that the world has reached, or is perilously close to, the all-time peak of global oil production. Probably within the next three years, according to many experts using a variety of forecasting techniques, the annual output of oil will begin to fall inexorably as old wells dry up faster than new ones can be brought on stream. Moreover, the amount of oil available for importing countries such as South Africa will shrink even sooner and faster than total world production, since domestic consumption of oil is growing rapidly in most oil exporting countries. The stark implication is that South Africans will face further oil price spikes and, before long, actual shortages. The biggest near-term threat would be if military action were taken by Israel and its allies against Iran, which along with Saudi Arabia supplies over 80 percent of South Africa's crude oil imports - or half of our liquid fuel supply. At first glance, the impending oil crisis might seem like a rock-solid motivation for expanding domestic synfuel production in order to boost energy security. However, the flip side of burning up fossil fuels like coal is their emissions of carbon dioxide, which contribute to global warming. The most recent scientific evidence shows that the process of warming and melting is accelerating, placing us dangerously close to a "point of no return", after which humans will lose any ability to prevent catastrophic climate change. Some researchers are saying the Arctic could be completely free of ice in summer by 2013. This implies that the Greenland icecap could disintegrate much sooner than is commonly expected - releasing enough water to raise sea levels globally by up to seven metres. Reducing CO2 emissions drastically and rapidly is, therefore, essential - in all countries with significant emissions, not just in the main historical polluters. Another probable implication is that carbon taxes of one form or another are likely to be imposed globally in the not-too-distant future. Sasol alone emitted over 70-million tons of CO2 in 2007. At a price of $20 (about R140) per ton of CO2 - a conservative estimate - this translates into a potential liability of more than R10 billion. Sasol generates vast amounts of greenhouse gases by converting some 20 percent of the country's mined coal into liquid fuels. As Bell wrote, the company satisfies in the region of a quarter to a third of South Africa's liquid fuel demand. PetroSA contributes about 7 percent of liquid fuels through its gas-to-liquids process, plus a small amount of domestic crude oil. The remaining two-thirds or so of liquid fuels are imported, mostly as crude oil which is then refined locally. Irrespective of the fuels' origins, retail petrol and wholesale diesel prices are regulated by the Department of Minerals and Energy according to an import parity pricing formula. This means the prices of local fuels are based on the costs of crude oil and refining in other parts of the world. Thus, whenever the international price of crude oil rises - or the rand weakens - South Africans pay more at the pump. The impact of rising fuel prices is plain to all. It squeezes the budgets of everyone who depends on motorised transport, while pushing up the prices of most goods and many services. As usual, the poor bear the brunt of the cost increases. Sasol, on the other hand, is profiting handsomely from the high fuel prices. Its production costs - variously estimated at between &USD;15 and &USD;35 per barrel - have risen far more slowly than the price of crude oil, which in recent months has been fluctuating between &USD;125 and &USD;145 per barrel. Sasol is expected to post an after-tax profit of R25-billion for 2008 to June, a 47 percent increase from the previous year. Sasol's share price on the JSE has climbed from R180 at the end of 2005 to just shy of R400 at present. The company's directors are also making a fortune, even taking advantage of July's Inzalo empowerment share issue. Furthermore, as Bell points out, 40 percent of share dividends flow out of the country to foreign investors. The SA Revenue Service will collect about R10-billion in normal company tax revenue from Sasol in 2008 - its single largest corporate tax receipt. Should an extra windfall tax be imposed on synfuel producers on top of this? PetroSA is a state-owned enterprise and thus its profits accrue to the government, so a windfall tax is not strictly necessary - although it affects the fungibility of revenues. On the other hand, while Sasol was created and funded by the apartheid state in the 1950s, it was privatised in 1979 and is now listed jointly on the JSE and the New York Stock Exchange. Some argue - and Bell hints - that it should now be pay-back time for Sasol. In fact, a task team appointed by the National Treasury in 2006 recommended the imposition of a windfall tax on synthetic fuel producers. However, Finance Minister Trevor Manuel opted not to follow this advice, out of fear that it would undermine further investment in the synfuel industry, which he saw as necessary for bolstering energy security. An additional reason cited by the Treasury was that it could not be sure whether the windfall profits were of a cyclical or structural nature. Clearly, they did not anticipate a near-term global oil peak. At the time, crude oil was selling for about &USD;60 per barrel - less than half of what it costs today. Manuel has recently expressed regret at the Treasury's decision not to impose a windfall tax, and yet he says there is still no plan to implement one. Presumably this is because the government would still like to see an expansion of synfuel production capacity. Sasol is conducting a prefeasibility study for a proposed new CTL plant dubbed Mafutha, with an intended capacity to produce 80 000 barrels of liquid fuels per day - nearly half of its current volumes. Sasol has indicated that it would not be the sole investor in such a large-scale project, which is estimated to cost in the region of R50-billion. The company is holding investment talks with the Industrial Development Corporation, as well as with the departments of trade and industry and minerals and energy. Clearly, such a project will proceed only if sufficient coal (or natural gas) feedstock can be secured. This cannot be taken for granted, given the unfolding global energy crunch and Eskom's recent warning that South Africa might face a deficit of coal production of 100-million tons (mt) a year by 2017 - compared to total domestic consumption last year of about 180mt. Another risk is continued cost escalation for new plant construction in the energy sector. Should the Mafutha project go ahead, it will be bad news from a climate point of view and in stark contrast to Environment Minister Martinus van Schalkwyk's recent announcements about the government's climate mitigation plans Energy security is not merely about ensuring adequate supply, but is also about demand management and restructuring. South Africa needs to reduce its dependence on liquid petroleum fuels by adopting a more sustainable transport system. Revenues from a windfall synfuels tax could assist this transformation, for example by subsidising buses and trains, as well as by boosting investment in renewable energy sources. A similar argument applies to the question of whether to scrap or modify the practice of import parity pricing. From a climate and long-term energy security perspective, it makes more sense to maintain a high price for synfuels so that motorists and businesses are incentivised to use fuel more efficiently and to shift to more sustainable alternatives. To protect poor consumers, other forms of support from the state could be considered, such as larger subsidies for public transport or direct income support. Furthermore, in anticipation of dwindling fuel supplies following the oil peak, it may be wise for the government to put in place legislation that would allow a portion of Sasol's and PetroSA's liquid fuels to be allocated strategically for priority areas. Chief among these would be ensuring that food produce gets to people in cities and that essential services - such as police, fire, ambulance, the defence force and even refuse collection - keep functioning. To conclude, whether or not the price of synfuels is too high depends on what you mean by price. From a sustainability point of view, the retail price is not too high, but the price paid by the environment and future generations is excessive. Sasol is a short-term asset, but in some ways a long-term liability. Its once-off exploitation of part of the nation's coal reserves should benefit - and not harm - the long-term interest of the country. Consequently, the Treasury should impose a "syn" tax - a windfall tax on synthetic fuel profits - while consumers should wean themselves off this addictive and polluting substance.
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