South Africa's Sasol Moves Into Canada

| About: Sasol Limited (SSL)

South Africa’s petrochemicals company, Sasol (NYSE:SSL), has a lot going for it. The world leader in producing liquid fuel from coal, it is also Africa’s biggest energy company in terms of market capitalization.

Right now, Sasol firmly expects natural gas prices to rise around the world. As support for that position, it cites the Japanese nuclear disaster, climate change and robust energy demand in China. Particularly, the company sees prices rising in North America, which continues to experience very depressed gas prices, in large part due to the shale gas boom. Natural gas still remains far below its July 2008 peak of $13.69 per million BTUs, currently hovering above $4.

Even so, Sasol is now putting a growing emphasis on gas-to-liquid technology.

Gas-to-Liquid Fuel Technology

Sasol has some competition in the gas-to-liquid technology market. Royal Dutch Shell (NYSE:RDS.A) expects to produce 140,000 barrels of fuel a day from its Qatar plant. Shell recently embarrassed Sasol on its home turf when it bought up valuable parts of South Africa’s semi-desert Karoo region. Experts believe the region contains huge shale gas reserves.

Even so, Sasol remains the leader in the actual technology used to make liquid fuels from natural gas. The company is involved in such projects in Qatar and Nigeria, with further feasibility studies in Uzbekistan and Australia.

And natural gas’ growing availability is opening up opportunities for Sasol around the world. Its leadership position in gas-to-liquids technology gives it some immunity from competition. Sasol even believes “the more the merrier” in this case, deeming that more entrants into the industry will help get it off the ground.

The company’s CEO, Pat Davies, says:

What we’re seeing here is the start of a new industry. And the more credible players that are participating in that industry, the quicker it will gain credibility in the eyes of customers.

Sasol Moves Into Canada

With an eye on the future, Sasol is scoping out Canada and its abundance of shale gas reserves. It recently invested $2.1 billion in two such ventures with Talisman Energy (NYSE:TLM). Still, their interest goes well beyond the actual gas in the ground; when they announced the latest deal, the companies also reported assessing the idea of building North America’s first natural gas-to-liquids plant based on western Canada’s large deposits.

They say the plant could provide “a strategic alternative to a traditional North America pipeline or LNG (liquefied natural gas) markets.”

They should decide whether to proceed with that project in the second half of 2012. That timeline allows them to proceed with caution, considering the amount of money involved.

To put it into perspective, Sasol’s 34,000-barrels-a-day plant in Qatar cost $1 billion to build.

Outlook for Sasol

Sasol timed its move into the North American shale gas market very well. Prices are depressed right now, but look set to head higher in the years ahead. Alex Comer, an analyst at JP Morgan, says that though advances in shale gas technology have held down gas prices, they should rise over the medium term.

Meanwhile, Sasol still has its leading positions in coal-to-liquid and gas-to-liquid technologies. Its CEO says, “The industry is now perhaps where liquid natural gas was 30 years ago.” But like that industry, he hopes to build this one up one step at a time.

And that makes Sasol’s future brighter than ever.

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