Sasol cuts off cash to Durban oil exploration

Sasol, which is exploring for oil and gas off the Durban coast in partnership with Italy's Eni, has halted spending on the project until there is certainty on a minerals amendment bill.

The Mineral and Petroleum Resources Amendment Bill, which was rushed through parliament in March ahead of the elections, contains various problematic clauses for the oil and gas industry. These include a provision that will see the government get a 20% free stake in all projects and the right to acquire the rest at a so-called "agreed" price.

Oil and gas may also be declared strategic resources, which could lead to price and export controls.

This week Sasol publicly added its support to Anadarko Petroleum, which said in April it would halt exploration spending in South Africa until there was regulatory certainty. Sasol wants to see the finalised law and regulations, and have certainty on whether oil and gas will be split from the mining bill.

"We cannot move forward with any type of exploration in South Africa until those details and that certainty are nailed down for us," said CEO David Constable.

Sasol has completed seismic surveys, an important step in the exploration process to help map underground rock formations and identify potential areas where hydrocarbons may be found. Sasol is "quite positive" that its exploration off the Durban coast will be successful.

"We brought in Eni from Italy, which happens to be a very successful upstream oil and gas player," he said. "They've been number one in the past few years in exploring and finding resources, and we're excited that they've chosen to come into the offshore Durban basin with us."

Manus Booysen, a partner at Webber Wentzel, said there had been no clear indication from the minister as to when the bill would come into effect.

"As far as we know, the president has not yet made a decision on the bill and is unlikely to do so before the end of September."

The Department of Mineral Resources has indicated that the bill would not be implementable until the regulations have been published.

Minister Ngoako Ramatlhodi said in July in parliament that he had established an inter-ministerial committee to help develop "robust regulations in order to provide greater certainty and to encourage continued investment in the mining sector, to give practical effect to the Mineral and Petroleum Resources Amendment Bill".

In contrast, Sasol has had much success in getting regulatory approvals in the US state of Louisiana, where it plans to build an ethane cracker and possible gas-to-liquids plant to take advantage of the shale gas boom.

It has already received air, water and wetlands permits for both the cracker and gas-to-liquids projects, even though a final investment decision on the cracker is expected only by year-end, and the go-ahead for the gas-to-liquids plant expected only two years later. The permits were issued without any challenges or objections, Constable said.

Sasol is expected to invest as much as $21-billion (about R230-billion) in the Louisiana projects, more than half its current market capitalisation of about $37-billion.

It is busy finalising funding with banks and will not bring an equity partner on board to help pay for the facilities, acting chief financial officer Paul Victor said.

Sasol, whose financial fortunes are closely tied to the rand/dollar exchange rate and the international price of oil, has very low debt levels and is a strong cash- flow generator, enabling it to substantially increase debt before its dividend policy may have to be reviewed.

It has also been aggressively restructuring the business to cut costs, giving staff the opportunity to take voluntary retrenchment packages or opt for early retirement. Constable declined to say how many staff, other than 200 senior managers, had left the company to date, but said "enforced retrenchments will be the exception to the norm".

It expects savings from the restructuring to reach R4-billion a year by 2016. The project implementation has cost R1.3-billion in the financial year to the end of June, with savings of R469-million achieved, it said. Sasol reported a 7% increase in operating profit to R41.7-billion, with 90% coming from its South African energy operations. Dividends per share rose 13% to R21.50.

Of the 16 analysts polled by Bloomberg, four rate the share a buy, seven a hold, and five a sell.