Transitioning SA's Petrochemical Value Chain

Finance for coal-based activities, in particular finance sourced from international markets, is getting increasingly expensive and scarce. A range of factors is contributing to this, including the evolving understanding of climate science; the international climate policy process leading to government and private-sector action to align with global treaties; requirements for increased disclosure such as is required under the Taskforce for Climate Related Disclosures (TCFD) framework; actions by global coalitions and pressure groups such as the Glasgow Financial Alliance for Net Zero (GFANZ); and local action by activist shareholders such as Just Share.

Despite the shifts in the finance space, many green activities remain higher risk given their technological immaturity, and therefore are more expensive to finance than their carbon intensive counterparts which are supported by path dependencies related to policy, infrastructure, contracts, relationships and institutions throughout the economy. Ironically, technological innovation itself is to a large extent determined by the amount of finance supporting it (Government Engagement). Whilst Sasol has identified that it can self-fund the first phase of its transition until 2030, it has indicated that it will require capital support to invest in pre-commercial hydrogen, Carbon Capture Utilisation and Storage (CCUS) and sustainable carbon opportunities (Business Engagement). A limited amount of public concessional finance, either domestic or international, is available to support early investments in green hydrogen, sustainable carbon or EVs for example. Sasol has indicated it will rely on some form of public or concessional finance to make the capital investments in decarbonising Secunda and Sasolburg post 2030 (Business Engagement).

Globally, the finance sector will need to establish mechanisms to optimally allocate finance during the decarbonization transition, to match the pace of decarbonization required by climate science without stranding systemically important facilities prematurely. These include instruments such as entity level sustainability linked bonds, and establishing ways of evaluating whether a company’s decarbonization plans are appropriate. The latter is particularly difficult in Sasol’s case given the uniqueness of Sasol’s processes and market position. Maintenance of revenue generation through the transition will be critical, as will be the availability of capital (Asset Management Engagement).

Sasol’s balance sheet plus its responsiveness to market changes will be key determinants of its ability to meet these challenges (Asset Management Engagement). Key contributors to its credibility and implementability of changes include the quality of the senior management team, and how embedded decarbonisation is in the organisation, including in remuneration, Key Performance Indicators, skills and expertise (Asset Management Engagement). Sasol will need to ‘walk the transition tightrope’ of tightening fossil markets and expanding green opportunities.

Sasol’s main revenue streams are liquid fuels, which represented R67m in FY 2019 and chemicals, R55m. Given the anticipated shift to EVs and other transport decarbonisation initiatives, only Sustainable Aviation Fuels (SAF) look set to remain in a decarbonised liquid fuels product slate. This raises some questions of financial sustainability from Secunda and Sasolburg under a net zero future, and whether green chemical revenues can make up for a decline in liquid fuels sales.

Given the potential for Sasol to generate super-profits when the international crude oil price is high (Sasol’s input costs are linked to the price of low-cost domestic coal rather than crude oil), it has come under scrutiny in recent times by National Treasury for the levying of a windfall tax. This aligns with global discussions on the imposition of taxes on the super-profits being realised by oil and gas companies as a result of the Ukraine invasion, which would respond to the need for early capital requirements to support the decarbonisation transition. The money required to transition is therefore tied to fossil fuel assets (Business Engagement).