Johannesburg - It could cost Sasol up to $6 billion (R42 billion) over five years to build a second coal-to-liquids (CTL) plant in South Africa with a capacity of 80 000 barrels a day.
Sasol spokesperson Johann van Rheede said on Friday that the group was assessing the viability of a second local plant. The cost of between $5 billion and $6 billion was based on potential CTL projects in China.
The government has been in talks with Sasol to build a new CTL plant as demand for petrol and diesel expanded strongly in tandem with South Africa's growing economy.
On Friday a report by Merrill Lynch analyst Tassin Benn said a new CTL plant could generate a dollar-based internal rate of return of 18 percent at prevailing crude oil prices above $60 a barrel.
With oil at $40 a barrel, the internal rate of return would be 11 percent, falling to 4 percent if crude cost $30 a barrel. Brent crude last traded below $30 a barrel in February 2004.
Van Rheede would not comment on the potential rate of return for a second CTL plant to complement the existing Secunda plant in Mpumalanga.
Benn said a second plant would have a ready market with solid margins, assuming the basic fuel price formula for product sales was maintained.
A CTL plant producing 80 000 barrels of liquid fuel a day would consume between 9 million tons and 15 million tons of coal a year, she said.
Feedstock would cost $5 a barrel at a coal price of $10 a ton with direct operating costs of $15 a barrel. A greenfields CTL plant could take five to eight years to build, she said.
South Africa had three options available to satisfy liquid fuel demand: it could import the final petroleum products, build a new conventional refinery and raise crude oil imports, or incentivise Sasol to build a new CTL plant using domestic coal reserves.
"We believe a new Sasol-led CTL plant is the best option in terms of security of energy supply, using South African resources and long-term foreign exchange savings."
This would also stimulate the local economy, provide jobs and raise capital investment.
If the government offered investment incentives such as accelerated capital allowances or other fiscal support, a new CTL plant would be viable even at $30 a barrel, she wrote.
With oil prices on a high, she added, rising fuel imports would continue to be a burden for the balance of payments.
Benn said a new CTL plant would probably be linked to the resolution of the treasury investigation into a windfall tax.
In August a task team set up by finance minister Trevor Manuel held public hearings into the possibility of imposing a windfall tax on the local oil sector. Manuel has received the task team's findings, but he has not made them public.
Domestic demand for petrol and diesel, 83 percent of the total petroleum demand, rose 12 percent between 2001 and last year, while refining capacity only expanded by 6 percent.
Product supply is evenly balanced between conventional crude oil refining and synthetic fuels produced by Sasol and state-owned PetroSA.
Merrill Lynch expected demand growth to continue to outstrip supply and vehicle sales growth to remain at 10 percent a year until 2010.