Sasol's earnings have soared given the energy crunch caused by Russia’s war on Ukraine — and it’s betting on another fossil fuel to carry it into the future. (Photo by Per-Anders Pettersson/Getty Images)
Sasol’s earnings have soared amid a prolonged commodity boom, which rescued the energy giant after its pandemic-induced “near-death experience”.
Now — as recession fears weigh on demand, causing commodities to slide and South Africa sets its sights on a greener economy — the country’s second-biggest carbon emitter faces another crisis.
Sasol is hinging part of its future on a sought-after resource amid the energy crunch induced by Russia’s invasion of Ukraine — natural gas. It has been touted by the company as a transition fuel for coal-dependent economies, despite some pointing out that it is far from clean or economically practical.
Speaking to the Mail & Guardian after the release of Sasol’s annual financial results, the company’s chief financial officer, Hanré Rossouw, said there has to be a recognition that the squeeze on gas and oil prices will probably be short-lived.
“A lot of that has to do with the Russia-Ukraine conflict and also the post-Covid recovery in demand. In planning for the sustainability of the business going forward, you’ve got to be viable at — in terms of scenarios — $70 per barrel oil and $45 per barrel oil,” he said.
“And I think that is also the lesson that Sasol learned, if I look back at the 2020 crisis, where we overcommitted ourselves on the balance sheet and then the oil price collapsed. So we’ve got to keep that near-death experience in mind. I think it shouldn’t actually cloud your vision, but you’ve got to do what is right for your business longer term.”
When the pandemic hit, the oil price fell to a low of $19 a barrel, as industries ground to a halt. Sasol’s share price also collapsed.
The oil price started to recover in the second half of 2020 and into 2021. Then, earlier this year, Russia’s assault on Ukraine sent the oil price above $100 a barrel, as sanctions against the world’s second-largest oil producer spooked markets.
Sasol’s recent financial results for the year ended 30 June showed a breathtaking increase in earnings compared to last year. The company’s earnings before interest, tax, depreciation and amortisation rose by more than 100% to R75.5-billion, compared with R34.2-billion.
Its performance was buoyed by higher global energy and chemical prices. Sasol’s revenue from liquid fuels and crude oil increased from R58.2-billion in 2021 to R96-billion in 2022.
Gassing up
Although the revenue Sasol derived from gas only increased by a little more than R1-billion during that period, everything is pointing to further growth in the coming year. US natural gas futures slid in June, amid concerns of an oversupplied market. But they have more than recovered since then, as it became increasingly clear that Europe will experience shortages going into its winter.
When Sasol released its result, the Henry Hub natural gas spot price was $9.75 a metric million British thermal units (MMBtu). This is from a July low of $5.73 an MMBtu.
Meanwhile, Sasol — South Africa’s only supplier of piped gas — is set to increase its prices, to the consternation of industrial users. Earlier in August, Sasol announced it had informed the National Energy Regulator of South Africa (Nersa) and its customers that the price of piped gas will increase to R133.34 a gigajoule.
The company noted that, recognising the effect an increase would have on its customers, it did not raise the price to the maximum allowable price determined by Nersa, which would have yielded a gas price of R273.43 a gigajoule.
“The price change reflects the cyclical nature of gas and other commodity prices’ response to inflationary pressures on operating costs, an increase in gas exploration and development activities. This also includes related funding requirements to enable gas supply security to South Africa,” Sasol said.
The Industrial Gas Users Association of Southern Africa said the 96% price hike by Sasol would be detrimental to businesses that rely on natural gas to operate and would further hamstring the country’s economy.
On Nersa’s characterisation of the hike as “excessive”, Rossouw said the increase has to be viewed against the current energy crunch.
“We are, globally, in an energy crisis. To that extent, the South African domestic market has been relatively protected from that through the pricing mechanism … It is a big increase, but I think you need to put it into perspective in terms of what the methodology allows. We believe it was a reasonable price increase.”
He said there is also the bigger picture, which has to do with the security of South Africa’s gas supply.
“We recognise that we need gas … That’s why our commitment to investment in gas is so important. A fair price should also reflect the fact that we are investing over a billion dollars to extend the gas supply from Mozambique.”
During the company’s financial results announcement, Sasol said that through its investment, it had extended the gas supply for an additional two years, from 2026 to 2028. Sasol is also planning to bolster its future supply by importing liquified natural gas toward the latter end of the decade.
For Sasol, sourcing affordable natural gas is a significant part of its climate ambitions and securing the country’s energy future. The company’s financial results note that gas “is a key component of our transformation while green hydrogen remains prohibitively expensive”.
‘Distraction’
But evidence shows that developing a gas economy is not the optimal pathway for South Africa, said Robyn Hugo, the director of climate change at Just Share, a nonprofit shareholder activism organisation.
“The evidence demonstrates that gas is not ‘clean’, nor climate or environmentally ‘friendly’. Crucially, gas does not bring economic prosperity. It is also increasingly clear that the power sector does not require significant quantities of gas for energy security,” she said.
The International Institute for Sustainable Development argues that any decision to invest in gas must be delayed until at least 2030, by which time the role for gas may well have disappeared as renewables dominate South Africa’s energy mix.
Earlier this year, a report by Meridian Economics found that there is “no economic rationale for large-scale gas use in power”.
“The impact of using large volumes of gas to generate power will be borne by all electricity consumers and will essentially be a subsidy provided by power consumers to otherwise unviable gas use in other sectors,” the report states.
“The full economic cost of this subsidy is far greater than merely the additional increased cost of the power, as it includes the damage to the economy caused by the loss of business activity that will be made impossible by the higher cost of electricity.”
Hugo said: “South Africa cannot afford the risks associated with investment in gas,” adding that these risks include exacerbating climate change, being saddled with stranded assets, infrastructure lock-in and exposure to fluctuations in global gas prices.
Nor can the country miss the opportunities presented by renewables. “Investing in fossil gas is a dangerous distraction from the urgent need to rapidly increase renewable energy production and upgrade South Africa’s transmission infrastructure,” she said.
Proponents of fossil fuels regularly assert that they lead to development, economic growth and poverty alleviation, Hugo added.
“They do not consider the growing body of evidence that developing fossil fuels — particularly oil and gas assets — is neither necessary nor desirable for Africa to improve its energy security, create jobs, or alleviate poverty.”
Hugo further noted that the current geopolitical events that have led to the boom on fossil fuel-related commodities is not removed from the climate crisis.
“Increasingly there will be conflict over declining fossil fuel resources which will lead to short-term price spikes,” she said.
“Responsible investors, business leaders and politicians who want to be taken seriously when it comes to climate change should stay the course and not be tempted to indulge in short-term profit-seeking that further deepens the climate crisis.”
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