• Gas running out:   Sasol has not been able to add to its gas reserves in Mozambique and the remaining reserve life is seven years.  Gas production should start declining in 2024 as pressure in the wells drop.
  • The importance of gas:  Gas is used as feedstocks into the Secunda and Sasolburg plants while it is also used for power generation.  We estimate the production from gas is 1.1mn tons in Secunda and 580kt in Sasolburg with electricity production up to 340MW.  At $50/bbl oil the profit contribution from these volumes are around R17bn.  Sasol also highlights that more gas is required to reduce its carbon emissions.
  • Sasol concurs:  Sasol concedes that its gas reserves are depleting and that immediate solutions are not available.  In its impairment calculations it has increased its long run gas price assumption from $4.86/MGJ to $7.10/MGJ.  This new price reflects increased imports of LNG.
  • Where will LNG come from?  The Baluluane Gas Company (Total and Gigajoule) has embarked on a project to build an LNG import terminal in Mozambique.  Front end engineering design is underway.  This consortium could also be in the bidding for Sasol’s share in ROMPCO.
  • Significantly higher costs:  Lower production in Mozambique coupled with increased LNG imports will increase gas costs while profits in the Sasol Gas and upstream business will decline.  We expect that cash flows in real terms will contract as a result.  This is not an economically viable option in the long run and Sasol needs to find access to cheaper pipeline gas or shut production at certain facilities in South Africa.
  • Gas in Southern Africa:  Sizable gas reserves have been discovered in northern Mozambique.  Offshore LNG facilities are planned in these areas, but pipeline investments would require political stability.
  • Share price: There remains significant risk in the Sasol investment case, including the need to reduce emissions and other environmental capex as well as risks around gas prices and the need for imported gas.  The impact on value could be significant and these and other risks should be considered when deciding how to act on a possible rights issue.  We maintain our cautious stance on Sasol.