SASOL PRODUCTION UP BUT PROFITS DOWN

Sasol Ltd. has reported its financial results for the year ended June 25, 1998. According to director P. Cox, "The profits attributable to shareholders of R2.075 billion demonstrates Sasol’s resilience and its ability to withstand various adverse economic factors. The major variables which influenced Sasol’s profits are the R/US$ exchange rate, crude oil prices, petrochemical commodity prices and refining margins. With the exception of the exchange rate, these all had a negative impact on the 1998 profits compared with 1997."

Turnover increased by 5.4 percent to R16.66 billion mainly as a result of higher production volumes from existing plants and increased production from new plants commissioned during the year. Operating profit of R3.121 billion was 20 percent lower than the previous year.

Compared with the 1997 financial year average of US$19.33, the average price for Dubai crude oil dropped by 22 percent to US$15.08 per barrel, its lowest average level in 4 years. Chemical commodity prices were also suppressed. Reduced prices were partially countered by the slight weakening of the rand against the United States dollar. The average rand/dollar exchange rate devalued by 6.6 percent from R4.52 for the 1997 financial year to R4.82 for the 1998 financial year.

The South African Cabinet decided in December 1995 to phase down the crude oil floor price applicable to tariff protection on synthetic fuels. This floor price, which was originally set at $23 per barrel, has been progressively phased down from a level of US$21.40 per barrel in 1995 to its present level of US$17 per barrel. In terms of the 1995 agreement with the government, the floor price will be reduced further to a level of US$16 per barrel on July 1, 1999, and the level and structure of tariff protection for the synthetic fuel industry will again be reviewed in June 2000. No further reduction has been agreed to.

Sasol Synfuels International (Pty) Ltd. (SSI) was incorporated during the 1998 financial year to specifically develop and implement international business ventures based on the application of Sasol’s Fischer-Tropsch synthesis technology.

During the year SSI focused primarily on its planned gas-to-fuels ventures in Qatar and Nigeria, as well as joint studies for offshore applications of its technology in the North Sea. Through the Qatari venture, with the Qatar General Petroleum Corporation and Phillips Petroleum Corporation as venture partners, Sasol envisages a 20,000-barrel per day plant being commissioned in 2002. On the strength of a preliminary feasibility study completed during the year under review, Sasol and Chevron Nigeria Ltd. have committed themselves to proceed with the detailed feasibility investigation of the 20,000- to 30,000-barrel per day plant in Nigeria.

During the year SSI and Statoil of Norway completed a joint feasibility study of an extended well-testing vessel operating offshore the United Kingdom and Norway. The results of the study indicate that the issues of process safety and the technical feasibility of producing synthetic oil offshore can be resolved successfully.

During the year under review several new joint ventures were developed, the most notable of which was the formation of the international Merichem-Sasol phenolics joint venture (trading as Merisol). Launched in October 1997, Merisol is the merger of the Sasolburg-based operations of the Sasol Phenolics division and the Houston, Texas-based operations of Merichem Company of the United States.

Schümann Sasol International AG, through its subsidiary company of Schümann Sasol (South Africa) (Pty) Ltd., acquired the wax and emulsions operations of Engen in Durban during the year. This acquisition has since enabled Schümann Sasol to widen its product spectrum and its customer base into new applications and to expand its business into emulsions.

Schümann Sasol International also formed a new joint venture with a Venezuelan company, Proesca, a wholly owned subsidiary of Petroleos de Venezuela SA. The new company, Ceraven CA, will operate a new-generation paraffin wax de-oiling and refining plant near Cardon, Venezuela.

The new alliance between Sasol Mining Explosives and Sasol DHB Holdings Inc. (DHB) in the United States for the production and marketing of Sasol’s revolutionary new Expan technology for the North American mining industry gathered impetus during the year. DHB Holdings plans to become, in time, the world’s leading explosives company.

Sasol is also a member of a global fuels alliance comprising Sasol, Amoco, Phillips Petroleum, Praxair, British Petroleum and Statoil of Norway. The six oil companies are pooling their financial, technical and research and development resources to develop and commercialize a new-generation environment-friendly technology to produce synthesis gas for the production of chemicals and cleaner-burning fuels. This involves oxygen transfer membranes.

Based at Secunda, Sasol Synthetic Fuels (Pty) Ltd. (SSF) uses unique Sasol processes to manufacture synthesis gas from low-grade coal and to convert this gas into a large range of valuable hydrocarbons, including synthetic liquid fuels and pipeline gas. These products also provide the bulk of the building blocks for most of the South African chemical industry.

For SSF to prosper as a business in the long term, the production of synthetic oil must be able to continuously compete with equivalent crude oils on international markets. The far-reaching SSF business transformation process, Vulamehlo, initiated in 1995, will enable SSF to sustain competitiveness. The fixed-cash production cost of product in 1996 values has decreased by 13.2 percent over the past 2 years. SSF is now cash-positive even at low crude oil prices. At current low crude oil prices, however, shareholders do not receive an acceptable return on their investments.

During the year SSF received tariff protection to the value of some R500 million due to the low crude oil price. There was also a further shift in sales from liquid fuels to chemical feedstocks. At present 20 percent of the total SSF production is sold to the petrochemical industry, 70 percent as liquid fuels and 10 percent to the fertilizer, explosives and carbon coke industries.

The export of fuel alcohol to Brazil ended during the latter half of the financial year due to surpluses resulting from bumper sugar crops in that country. Consequently, alcohol stocks have increased and prices have dropped significantly. The best alternative appears to be to reintroduce fuel alcohol to the South African fuel pool as a gasoline extender. The South African motor industry and fuel companies have been notified of Sasol’s intention to do so.

During the past 2 years new methods were sought to further integrate and operate the two SSF plants (SSF East and SSF West) as a single production unit. Integration increases the complexity and interdependency of the various subunits, but substantial financial rewards could be achieved. Projects to be implemented including a linear programming model to optimize production planning and the installation of advanced process control and unit optimization systems.

Jet fuel produced from components emanating from the Synthol process has been accepted by all of the world’s major aircraft engine and airframe manufacturers. One of these manufacturers, however, required consultation with its suppliers, which delayed the final approval of synthetic components in jet fuel for commercial use. SSF expects to obtain this approval and plans to start supplying the aviation market with synthetic jet fuel components in the 1999 financial year.

The seven new-generation Sasol Advanced Synthol (SAS) reactors, once all fully commissioned in the latter half of the 1999 financial year, will result in a significant reduction in cash operating costs. The full benefits of these savings, however, will only be realized during the 2002 financial year.

Additional studies have been initiated to investigate and develop growth opportunities. The main initiative under investigation is the planned Sky High project through which SSF intends to expand the total production of its current fuels and chemicals by 15 percent by the 2003 financial year. SSF also intends to further improve process efficiency. In this regard, the main study areas for advanced process control cover gas production optimization, gas circuit spectrum control, steam optimization, inter-unit control and overall information management.

Several projects were completed during the year, most notably the R96-million project to convert the methane gas reformers to open-flame technology. Open-flame technology enables reduced operating costs as a result of more efficient catalyst usage, while obtaining better plant availability and an improved conversion efficiency.

Sasol Chemical Industries Ltd. (SCI) produces and markets more than 120 chemical products from the beneficiation of coal at Sasolburg and from various feedstocks purchased from SSF at Secunda. The main products manufactured at Sasolburg include ammonia, ammonium nitrate, ammonium sulfate, cresols, phenol, hydrogen, industrial pipeline gas, methanol, ketones, mining chemicals, nitric acid, paraffins, various solvents and waxes. A new 140,000-ton per year methanol plant will replace the existing 20,000-ton per year facility in the 1999 financial year.

The SSF feedstocks are processed into a range of value-added chemicals at Secunda including acetic acid and propionic acid, acetone and other ketones, acrylonitrile, alcohols and alcohol blends, ammonia, argon, carbon products, fertilizers, mining explosives, granular sulfur, 1-hexene, 1-pentene and a mixture of krypton and xenon. During the 1999 financial year the Secunda product portfolio will be extended to include 1-octene.

SCI uses the division and subsidiary approach to operations. These are:

• Synthesis Gas - converts coal into synthesis gas
• Industrial Gas - supplies pipeline gas to Johannesburg and Pretoria
• Sasolburg Utilities - provides reliable on-site utilities
• Sasol Ammonia - ammonia for the fertilizer, explosives and industrial markets
• Sasol Fertilizers - fertilizer products
• Sasol Mining Explosives (SMX) - explosives and initiation systems
• Sasol Akrylo - acrylonitrile for conversion into acrylic fibers and other chemicals
• Sasol Alpha Olefins - 1-hexene, 1-pentene and other alpha olefins
• Sasol Carbo-Tar - carbon and tar products
• Sasol Mining Chemicals - chemicals for the mining and metallurgical industries
• Sasol Solvents - a wide range of solvents and related products

SCI has had a largely satisfactory year, although widespread decreases in prices reduced profit in comparison with the 1997 financial year. The growth in total product volume of 8 percent spread over most of the SCI business divisions will enable strong future performance when prices recover.

At the Synthesis Gas division, an out-dated and inefficient oxygen unit was renewed during the year with advanced and more competitive air-separation technology.

At SMX local and international demand for Expan explosives-grade ammonium nitrate products continues to grow. Independent laboratory tests conducted on these products have demonstrated a superior energy-release profile in all tests.

Sasol Alpha Olefins’ worldwide business turnover increased by 40 percent to R297 million. The revenue gains came almost exclusively from substantial increases in sales volumes as the division increased its global market share from 23 to 27 percent. The global hexene comonomer business continues its current rate of growth of between 8 and 10 percent per year.

The major engineering project to install a Synthol light oil feed preparation unit, another first-of-a-kind process designed by Sasol Technology, was completed successfully in November 1997. This unit has enabled Sasol Alpha Olefins to increase the annual capacity of its first two production modules to more than 120,000 tons of hexene in addition to the requirements for pentene. Although the division has 100 percent of the world pentene market, pentene production has been limited by small market demand. Therefore, most of the plant capacity is dedicated to hexene production. The construction of the octene plant, which was approved in 1997, is progressing to schedule and the first octene shipment from South Africa is expected to be undertaken in the second quarter of 1999. The octene plant is also based on unique process technology developed by Sasol Technology. The first-phase octene capacity is for dedicated supply to Dow Chemicals.

The Carbo-Tar division services the wood preservation, heating fuels, ferro-alloy, steel and foundry industries, among others. The division’s products fall within the definition of solid carbon and tar products, while carbon reductants, recarburisers, creosote and petroleum coke are examples of the generic names of the products.

Sasol Carbo-Tar’s turnover increased by 11.8 percent to R236 million. Sasol Carbo-Tar was restructured into four independent and empowered business units, the Carbon, Tar, Reductants and Trading units. Each is responsible for its own value chain.

The decision in the 1997 financial year to allocate 2 percent of revenue to research and development is starting to pay dividends, says Sasol. An active research program has been established and many improvements in product quality have already resulted. Sasol Carbo-Tar intends to upgrade its products into higher-purity, higher-value products targeting niche applications.

A breakthrough was achieved that will allow the division’s Carbon unit to supply high-quality carbon to the market in the near future. Focused research and development also allowed the Tar business unit to extend its product range with the introduction of road tars and impregnation pitch.

The Mining Chemicals division produces and markets a range of collector and frother chemicals for application in the flotation plants of mines. New mining chemicals being developed include: tri-ethoxy butane, manufactured from crotonaldehyde; a range of polyacrylamide flocculants, made from acrylonitrile; and a range of sulfur chemicals based on sulfur dioxide and hydrogen sulfide.

During the year additional production capacity was commissioned. At the acetic acid and propionic acid recovery plant the first phase of the chemical work-up debottlenecking project was commissioned toward the end of 1997. This has enabled a 20 percent increase in the methyl ethyl ketone production rate. Additional aromatic solvent capacity, sold under the trade name of Solumix, was added at the beginning of the financial year and will enable Sasol Solvents to expand its sales over the next few years.

In the 1999 financial year growth will be supported by the commissioning of a substantially bigger methanol plant as well as the expansion of the high-purity ethanol plant at Secunda, the introduction of a new alcohol blend, isopropylol and the commissioning of a crotonaldehyde purification facility at Secunda.

The merged wax activities of Schümann and Sasol continue to grow. Schümann Sasol, the world’s primary producer of Fischer-Tropsch synthetic waxes, widened its product portfolio with the complementary introduction of paraffin waxes derived from crude oil by acquiring Engen’s wax business at Durban during the year.

Restructuring in the worldwide lube oil industry led to a positive market development for paraffin waxes. In recent months this has been conspicuous in the United States where the company’s American subsidiary, M&M Marketing, was able to benefit from this development. The South-East Asian financial crisis, however, had a detrimental effect on business volumes in the region.

The first sales of products that utilize the phase-change properties of wax were achieved. This totally new application for wax usage holds great potential and, to this end, further product development is being undertaken.

Merichem-Sasol LP, the Sasol-Merichem joint-venture chemical company was launched internationally on October 1, 1997, combining the production and marketing functions of the Sasol Phenolics division with the phenolic operations of Merichem Company of Houston, Texas. Merichem Company has more than 50 years’ experience in upgrading natural phenolic products to high-grade pure products and has been SCI’s largest single customer for phenolic products for several years.

In recent years Sasol has grown to become the world’s largest single producer of natural phenolic products from its coal-to-oil plants at Sasolburg and Secunda. Merisol was established to combine Sasol’s secure feedstock supply and primary purification capacity with Merichem’s flexible and under-utilized purification capacity, as well as its advanced presence in higher-value specialty phenolic products and markets.

Merisol operates primary-product production facilities at Sasolburg and at Houston. Phenolic products serve a broad number of industrial applications, including antioxidants, agrochemicals, pharmaceuticals, resins, flame-retardants and electronic components. The products of Merisol’s customers serve the automotive, construction, electrical, pharmaceutical, animal health and foundry industries.

Sasol Oil (Pty) Ltd. markets liquid fuels, gaseous fuels and lubricants. Liquid fuels include liquid petroleum gas, gasoline, fuel alcohol, illuminating paraffin, jet fuel, diesel and a variety of fuel oils. About one-third of the liquid fuels marketed are produced from crude oil through Sasol’s share of the Natref oil refinery at Sasolburg. The rest is produced by SSF and is marketed on its behalf. Sasol also imports some liquid fuels to supply its export markets.

The South African Government’s draft White Paper on Energy Policy was published in June 1998 for public comment. For the South African liquid fuels industry, the White Paper recommends a phased-deregulation process of up to 5 years during which period certain conditions for the industry’s restructuring would have to be met.

Sales of liquid fuels decreased by 0.8 percent due to the long-standing Group strategy to extract larger volumes of higher-value chemicals from intermediate feedstreams at the SSF facilities. Although sales of synthetic fuels were 6.1 percent lower than those of the 1997 financial year, sales of crude oil-based fuel products were 10.7 percent higher.

The Research and Development (R&D) division is responsible for technology support to existing Sasol business divisions in order to ensure their sustainable competitive advantage. Sasol’s increasing diversification toward chemical products has also increased the need for chemical research. The R&D staff has therefore been increased to about 400.

A notable achievement of the R&D division during the year was the successful commercialization of a uniquely active cobalt Fischer-Tropsch catalyst. This catalyst forms the basis of the Sasol Slurry Phase Distillate process.

Following research into the important coal properties and operating conditions for the Sasol Lurgi gasification process in recent years, tests are being conducted on a single commercial gasifier to evaluate laboratory findings and the predictions made by using mathematical models of the gasification process. The test program is scheduled to run for the next 2 years, and should confirm the division’s expectations of achieving significant improvements in gasifier capacity and operating stability and efficiency.

A master license agreement with Catalytic Distillation Technologies of the United States allows Sasol Technology to research applications of this promising catalytic distillation technology. Several applications of catalytic distillation have been identified and are in different stages of research, piloting and commercialization. The technology finds value in converting many of the Sasol oxygenate streams into useful chemicals.

During the year the development of the Sasol Slurry Phase Distillate process was advanced through the completion of several prefeasibility and feasibility studies. These detailed studies have confirmed that plant costs are on the order of US$25,000 per barrel of daily installed capacity, depending on scope and site-specific factors. These figures represent a large reduction in the cost of any gas-to-liquids plant built in the past.