As filed with the Securities and Exchange Commission on 29 October 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-31615
Sasol Limited
(Exact name of registrant as Specified in its Charter)
Republic of South Africa
(Jurisdiction of Incorporation or Organization)
1 Sturdee Avenue, Rosebank 2196
Republic of South Africa
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered |
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American Depositary Shares | New York Stock Exchange | |
Ordinary Shares of no par value* |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:
611,159,948 Ordinary Shares of no par value
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:
Yes ý No o
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 ý
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PART I | 5 | ||||||
ITEM 1. |
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
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ITEM 2. |
OFFER STATISTICS AND EXPECTED TIMETABLE |
5 |
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ITEM 3. |
KEY INFORMATION |
6 |
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3.A | Selected Financial Data | 6 | |||||
3.B | Capitalization and Indebtedness | 7 | |||||
3.C | Reasons for the Offer and Use of Proceeds | 7 | |||||
3.D | Risk Factors | 7 | |||||
ITEM 4. |
INFORMATION ON THE COMPANY |
22 |
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4.A | History and Development of the Company | 22 | |||||
4.B | Business Overview | 26 | |||||
4.C | Organizational Structure | 81 | |||||
4.D | Property, Plant and Equipment | 82 | |||||
ITEM 5. |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
92 |
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5.A | Operating Results | 92 | |||||
5.B | Liquidity and Capital Resources | 141 | |||||
5.C | Research and Development, Patents and Licenses | 145 | |||||
5.D | Trend Information | 146 | |||||
5.E | Off-Balance Sheet Arrangements | 146 | |||||
5.F | Tabular disclosure of contractual obligations | 148 | |||||
5.G | Safe Harbor | 149 | |||||
ITEM 6. |
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
150 |
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6.A | Directors and Senior Management | 150 | |||||
6.B | Compensation | 155 | |||||
6.C | Board Practices | 156 | |||||
6.D | Employees | 162 | |||||
6.E | Share Ownership | 165 | |||||
ITEM 7. |
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
168 |
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7.A | Major Shareholders | 168 | |||||
7.B | Related Party Transactions | 168 | |||||
7.C | Interests of Experts and Counsel | 168 | |||||
ITEM 8. |
FINANCIAL INFORMATION |
169 |
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8.A | Consolidated Statements and Other Financial Information | 169 | |||||
8.B | Significant Changes | 169 | |||||
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ITEM 9. |
THE OFFER AND LISTING |
170 |
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9.A | Offer and Listing Details | 170 | |||||
9.B | Plan of Distribution | 170 | |||||
9.C | Markets | 170 | |||||
9.D | Selling Shareholders | 170 | |||||
9.E | Dilution | 170 | |||||
9.F | Expenses of the Issue | 170 | |||||
ITEM 10. |
ADDITIONAL INFORMATION |
171 |
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10.A | Share Capital | 171 | |||||
10.B | Memorandum and Articles of Association | 171 | |||||
10.C | Material Contracts | 176 | |||||
10.D | Exchange Controls | 176 | |||||
10.E | Taxation | 178 | |||||
10.F | Dividends and Paying Agents | 182 | |||||
10.G | Statement by Experts | 182 | |||||
10.H | Documents on Display | 183 | |||||
10.I | Subsidiary Information | 183 | |||||
ITEM 11. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
184 |
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ITEM 12. |
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
187 |
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PART II |
187 |
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ITEM 13. |
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
187 |
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ITEM 14. |
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
187 |
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ITEM 15. |
CONTROLS AND PROCEDURES |
187 |
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ITEM 16. |
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16.A | Audit Committee Financial Expert | 187 | |||||
16.B | Code of Ethics | 187 | |||||
16.C | Principal Accountant Fees and Services | 188 | |||||
16.D | Exemption from the Listing Standard for Audit Committees | 189 | |||||
16.E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 189 | |||||
PART III |
190 |
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ITEM 17. |
FINANCIAL STATEMENTS |
190 |
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ITEM 18. |
FINANCIAL STATEMENTS |
190 |
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ITEM 19. |
EXHIBITS |
190 |
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GLOSSARY OF TERMS |
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LOCATION MAPS |
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We are incorporated in South Africa as a public company under South African law. Our consolidated financial statements included in our corporate filings in South Africa were prepared in accordance with International Financial Reporting Standards, or IFRS, for the financial years ended 25 June 2000, 25 June 2001, 30 June 2002, 30 June 2003 and 30 June 2004.
For purposes of this annual report on Form 20-F, we have prepared our consolidated financial statements in accordance with United States Generally Accepted Accounting Principles, or US GAAP. Our consolidated financial statements for each of the financial years ended 25 June 2001, 30 June 2002, 30 June 2003 and 30 June 2004 have been audited by KPMG Inc., independent accountants.
As used in this Form 20-F:
We present our financial information in Rand, which is our reporting currency. Solely for your convenience, this Form 20-F contains translations of certain Rand amounts into US dollars at specified rates. These Rand amounts do not actually represent such US dollar amounts, nor could they necessarily have been converted into US dollars at the rates indicated. Unless otherwise indicated, Rand amounts have been translated into US dollars at the rate of R6.2275 per US$1.00, which was the noon buying rate for customs purposes of the Rand, as reported by the Federal Reserve Bank of New York on 30 June 2004.
All references in this Form 20-F to "years" refer to the financial years ended on 25 June with respect to the financial year 2001 and to previous financial years and on 30 June with respect to the financial year 2002 and to subsequent financial years, unless otherwise stated.
All references in this Form 20-F to billions are to thousands of millions.
All references in this Form 20-F to the "Group" are to Sasol Limited, its group of subsidiaries and its interests in associates and joint ventures. All references in this Form 20-F to "us", "we", "the Company", or "Sasol" are to Sasol Limited or the companies comprising the Group, as the context may require. All references to "(Pty)" refer to Proprietary, a form of limited liability corporation in South Africa.
All references in this Form 20-F to "South Africa" and "the government" are to the Republic of South Africa and its government. All references to the "JSE Securities Exchange" are to the JSE Securities Exchange, South Africa. All references to "SARB" refer to the South African Reserve Bank and all references to "PPI" refer to the Producer Price Index, which is used to measure inflation in South Africa. All references to "GTL" refer to the Gas-to-Liquid technology and all references to "ton" or "tons" refer to the metric ton or tons, respectively.
Certain industry terms used in this Form 20-F are defined in the Glossary of Terms.
Unless otherwise stated, presentation of financial information in this annual report on Form 20-F will be under US GAAP. Our discussion of business segment results follows the basis on which management measures business segment performance. Presentation of business segment results on a management basis differs from results on a US GAAP basis in certain respects. For more information on the reconciliation of segmental turnover and operating profit see Note 3 to our consolidated financial statements.
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We may from time to time make written or oral forward-looking statements, including in this Form 20-F, in other filings with the United States Securities and Exchange Commission, in reports to shareholders and in other communications. These statements may relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our future prospects, developments and business strategies. Examples of such forward-looking statements include, but are not limited to:
Words such as "believe", "anticipate", "expect", "intend", "seek", "will", "plan", "could", "may", "endeavor" and "project" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and there are risks that the predictions, forecasts, projections and other forward-looking statements will not be achieved. If one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may be very different from those anticipated in this Form 20-F. You should understand that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include among others:
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The foregoing list of important factors is not exhaustive; when relying on forward-looking statements to make investment decisions, you should carefully consider the foregoing factors and other uncertainties and events. Such forward-looking statements apply only as of the date on which they are made, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.
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ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
We are a public company incorporated under the laws of South Africa. All of our directors and officers, except one director, named in this annual report reside outside the United States, principally in South Africa. You may not be able, therefore, to effect service of process within the United States upon those directors and officers with respect to matters arising under the federal securities laws of the United States.
In addition, substantially all of our assets and the assets of our directors and officers are located outside the United States. As a result, you may not be able to enforce against us or our directors and officers judgments obtained in US courts predicated on the civil liability provisions of the federal securities laws of the United States.
A foreign judgment is not directly enforceable in South Africa, but constitutes a cause of action which will be enforced by South African courts provided that:
It is the policy of South African courts to award compensation for the loss or damage actually sustained by the person to whom the compensation is awarded. Although the award of punitive damages is generally unknown to the South African legal system that does not mean that such awards are necessarily contrary to public policy. Whether a judgment was contrary to public policy depends on the facts of each case. Exorbitant, unconscionable, or excessive awards will generally be contrary to public policy. South African courts cannot enter into the merits of a foreign judgment and cannot act as a court of appeal or review over the foreign court. South African courts will usually implement their own procedural laws and, where an action based on an international contract is brought before a South African court, the capacity of the parties to the contract will usually be determined in accordance with South African law. It is doubtful whether an original action based on United States federal securities law can be brought before South African courts. A plaintiff who is not resident in South Africa may be required to provide security for costs in the event of proceedings being initiated in South Africa. Furthermore the Rules of the High Court of South Africa require that documents executed outside South Africa must be authenticated for the purpose of use in South Africa.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
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3.A Selected Financial Data
The following information should be read in conjunction with "Item 5. Operating and Financial Review and Prospects" and the consolidated financial statements, the accompanying notes and other financial information included elsewhere in this annual report on Form 20-F.
The US GAAP financial data set forth below has been derived from the audited consolidated financial statements for the years ended and as at 30 June 2004, 30 June 2003 and 30 June 2002 which are included in this Form 20-F and which have been prepared in accordance with US GAAP. The US GAAP financial information for the year ended 25 June 2001 has been derived from audited financial statements not included in this annual report on Form 20-F. The IFRS financial data set forth below for the years ended and as at 30 June 2004, 30 June 2003, 30 June 2002, 25 June 2001, and 25 June 2000 has been derived from audited consolidated financial statements prepared in accordance with IFRS. The IFRS financial data set forth below for the year ended and as at 25 June 2000 is not available under US GAAP.
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Year ended |
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25 June 2000 |
25 June 2001 |
30 June 2002 |
30 June 2003 |
30 June 2004 |
30 June(1) 2004 |
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(Rand) |
(Rand) |
(Rand) |
(Rand) |
(Rand) |
(US$) |
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(in millions, except earnings and dividends per share and number of shares) |
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Income Statement Data: | ||||||||||||
IFRS | ||||||||||||
Turnover | 25,762 | 40,768 | 59,590 | 64,555 | 60,151 | 9,190 | ||||||
Operating profit | 6,292 | 10,619 | 14,783 | 11,911 | 9,314 | 1,423 | ||||||
Income before tax | 6,109 | 10,664 | 14,760 | 11,913 | 9,182 | 1,403 | ||||||
Earnings attributable to shareholders | 4,096 | 7,125 | 9,817 | 7,817 | 5,940 | 908 | ||||||
US GAAP |
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Turnover | | 37,636 | 55,667 | 63,769 | 58,808 | 8,986 | ||||||
Operating profit | | 10,230 | 14,224 | 11,011 | 8,739 | 1,334 | ||||||
Income before tax | | 10,274 | 14,178 | 10,947 | 8,676 | 1,325 | ||||||
Earnings attributable to shareholders | | 6,952 | 9,434 | 7,344 | 5,358 | 819 | ||||||
Per share information (South African and US cents) |
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IFRS | ||||||||||||
Basic earnings per share | 620 | 1,136 | 1,603 | 1,283 | 974 | 149 | ||||||
Diluted earnings per share | 620 | 1,123 | 1,571 | 1,262 | 964 | 147 | ||||||
Dividends per share | 220 | 320 | 450 | 450 | 450 | 69 | ||||||
US GAAP |
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Basic earnings per share | | 1,108 | 1,540 | 1,206 | 878 | 134 | ||||||
Diluted earnings per share | | 1,095 | 1,509 | 1,185 | 870 | 133 | ||||||
Weighted average shares in issue: |
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Average shares outstandingbasic (in millions) | 604.4 | 627.3 | 612.5 | 609.3 | 610.0 | | ||||||
Average shares outstandingdiluted (in millions) | 660.8 | 634.7 | 625.0 | 619.6 | 616.2 | | ||||||
Balance Sheet data: |
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IFRS | ||||||||||||
Total assets | 29,665 | 51,443 | 65,730 | 69,619 | 73,486 | 11,228 | ||||||
Total shareholders' equity | 17,715 | 23,137 | 31,315 | 33,518 | 35,027 | 5,352 | ||||||
Share capital | 1,559 | 2,630 | 2,706 | 2,783 | 2,892 | 442 | ||||||
US GAAP |
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Total assets | | 51,158 | 62,493 | 67,905 | 68,765 | 10,505 | ||||||
Total shareholders' equity | | 23,658 | 30,944 | 32,793 | 33,669 | 5,144 | ||||||
Share capital | | 2,648 | 2,772 | 2,842 | 2,976 | 455 |
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Exchange rate information
The following table sets forth certain information as published by the Federal Reserve Bank of New York with respect to the Noon Buying Rate of US dollars in terms of Rand for the years shown:
Rand per US dollar for the year ended 30 June or the respective month |
Average(1) |
High |
Low |
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2000 | 6.33 | 7.18 | 5.99 | |||
2001 | 7.64 | 8.16 | 6.79 | |||
2002 | 10.20 | 13.60 | 8.23 | |||
2003 | 9.04 | 10.90 | 7.18 | |||
2004 | 6.88 | 7.80 | 6.17 | |||
April 2004 | | 6.94 | 6.27 | |||
May 2004 | | 7.05 | 6.52 | |||
June 2004 | | 6.64 | 6.17 | |||
July 2004 | | 6.34 | 5.91 | |||
August 2004 | | 6.74 | 6.09 | |||
September 2004 | | 6.68 | 6.43 |
The rate on 14 October 2004 was R6.545 per US dollar.
3.B Capitalization and Indebtedness
Not applicable.
3.C Reasons for the Offer and Use of Proceeds
Not applicable.
3.D Risk Factors
Fluctuations in exchange rates may adversely affect our business, operating results, cash flows and financial condition.
The Rand is our principal operating currency. However, a large part of our Group's turnover is denominated in US dollars and some part in euro, derived either from exports from South Africa or from our manufacturing and distribution operations outside South Africa. Also, a significant part of our revenues is determined by the US dollar, as petroleum prices in general and the price of most petroleum and chemical products in South Africa are based on global commodity and benchmark prices which are quoted in US dollars. Hence, a large part of our Group sales (approximately 90%) is denominated in US dollars or influenced by the underlying global commodity and benchmark prices which are quoted in US dollars, while about one third of our costs are Rand denominated. Furthermore, a significant part of our capital expenditure is also US dollar-denominated, as it is directed to investments outside South Africa. The rate of change in the PPI has been for many years above the rate of inflation in the United States. This, among other factors, resulted in a concomitant decline in the value of the Rand against the US dollar up until 2002, during which year the average exchange rate was 10.20 against the US dollar. However, since early 2002, due to a variety of reasons, the Rand has strengthened against the US dollar, reaching R6.545 at 14 October 2004. Whilst the exchange rate during the current year has been relatively less volatile than in previous years we are unable to forecast whether this will continue in the foreseeable future.
In addition, although the exchange rate of the Rand is primarily market-determined, its value at any time may not be an accurate reflection of the underlying value of the Rand, due to the potential effect of, among other factors, exchange controls. For more information regarding exchange controls in South Africa see "Item 10.D Exchange Controls".
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Up until 2002, trends in our turnover and profits were significantly positively impacted by the Rand's decline against the US dollar. See "Item 5.A Operating ResultsCompany and Business OverviewExchange rate fluctuation". During 2003 and 2004, the Rand appreciated against the US dollar, negatively impacting our results. Should the Rand continue to appreciate against the US dollar in the future, this would have a further negative impact on our profits. Similarly, the strengthening of the euro against the US dollar in the last two years has negatively impacted the profitability of our European operations where a large part of our costs are euro based and a significant part of our turnover is US dollar based.
Fluctuations in refining margins and crude oil, natural gas and petroleum products prices may adversely affect our business, operating results, cash flows and financial condition.
Market prices for crude oil, natural gas and petroleum products may fluctuate as they are subject to local and international supply and demand fundamentals and factors over which we have no control. Worldwide supply conditions and the price levels of crude oil may be significantly influenced by international cartels, which control the production of a significant proportion of the worldwide supply of crude oil, and by political developments, especially in the Middle East. Other factors which may influence the aggregate demand and hence affect the markets and prices for petroleum products in regions which influence domestic fuel prices through the Basic Fuel Price (BFP) price formula (introduced on 1 April 2003 and currently in place for the calculation of the refinery gate price in South Africa) and/or where we market these products, may include changes in economic conditions, the price and availability of substitute fuels, changes in product inventory, product specifications and other factors. In recent years, prices for petroleum products have fluctuated widely. In recent months the price of crude oil has been at very high levels. See "Item 5.DTrend Information".
A substantial proportion of our turnover is derived from sales of petroleum and petrochemical products. Through our equity participation in the Natref crude oil refinery, we are exposed to fluctuations in refinery margins resulting from differing fluctuations in international crude oil and petroleum product prices. We are also exposed to changes in absolute levels of international petroleum product prices through our synfuels operations. Fluctuations in international crude oil prices affect our results mainly through their indirect effect on the Basic Fuel Price (BFP) price formula. See "Item 4.B Business OverviewSasol Synfuels" and "Sasol's Liquid Fuels Business". Furthermore, prices of petrochemical products and natural gas are also affected by fluctuation in crude oil prices. Fluctuations and, in particular, decreases in the price of crude oil and petroleum products can have a material adverse effect on our business, operating results, cash flows and financial condition.
We use hedging instruments to protect against day to day US dollar price fluctuations affecting the acquisition cost of our crude oil needs, including Rand to US dollar exchange rate fluctuations. We have also, during the course of the 2004 year, hedged a portion of our synthetic fuel production in respect of the 2005 financial year. See "Item 8.B Significant Changes". While the use of these instruments may provide some protection against short-term fluctuation in crude oil prices it does not protect against longer term fluctuations in crude oil prices or differing trends between crude oil and petroleum product prices.
We are unable to forecast fluctuations in refining margins and crude oil, natural gas and petroleum products prices. Fluctuations in any of these may have a material adverse effect on our business, operating results, cash flows and financial condition.
Cyclicality in petrochemical product prices may adversely affect our business, operating results, cash flows and financial condition.
The market for chemicals and especially products such as solvents, alkylates and polymers is cyclical. Typically, higher demand during peaks in the industry business cycles leads producers to increase their production capacity. Although peaks in the business cycle have been characterized by increased selling prices and higher operating margins, in the past such peaks have led to overcapacity and supply exceeding
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demand growth. Low periods in the business cycle are then characterized by decreasing prices and excess capacity, which can depress operating margins and may result in operating losses. We believe that some areas within the chemicals industry currently show overcapacity with the possibility of further capacity additions in the next few years. We cannot assure you that future growth in demand will be sufficient to absorb current overcapacity or future capacity additions without downward pressure on prices of chemical products. Such pressure may have a material adverse effect on our business, operating results, cash flows and financial condition.
We may not be able to exploit technological advances quickly and successfully.
Most of our operations, including the gasification of coal and the manufacture of synthetic fuels (synfuels) and petrochemical products, are highly dependent on the use of advanced technological methods. The commercialization and use of the appropriate advanced technologies can affect, among other things, the competitiveness of our products; the continuity of our operations, our feedstock requirements and the capacity and efficiency of our production.
We believe that new technologies or novel processes may emerge and that existing technologies may be further developed in the fields in which we operate. Unexpected rapid changes in employed technologies or the development of novel processes that affect our operations and product range could render the technologies we utilize or the products we produce obsolete or less competitive in the future. Difficulties in accessing new technologies may impede us from implementing them and competitive pressures may force us to implement these new technologies at a substantial cost. Examples of new technologies which may in the future affect our business include the following:
We cannot predict the effect of these or other technological changes or the development of novel processes on our business or on our ability to provide competitive products. Our ability to meet the competition will depend on our timely and cost-effective implementation of new technological advances. It will also depend on our success in commercializing these advances in spite of competition we face by patents registered by our competitors. If we are unable to implement new technologies in a timely or cost-efficient basis, or penetrate new markets in a timely manner in response to changing market conditions or customer requirements, we could experience a material adverse effect on our business, operating results, cash flows and financial condition.
Our GTL projects may not prove sufficiently viable or as profitable as planned.
We are currently developing GTL projects in Qatar and Nigeria. In addition we are considering opportunities for further GTL investments in other areas of the world. The development of these projects, either solely or through our joint venture with ChevronTexaco, is a capital-intensive process and requires us to commit significant capital expenditure and devote considerable management resources in utilizing our existing experience and know-how, especially in connection with Fischer-Tropsch synthesis technologies. See "Item 4.B Business OverviewGTLSasol Synfuels International". This process and its
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products may also give rise to patent risks in connection with the use of our GTL technology. See below, "Intellectual property risks may adversely affect our products or processes and our competitive advantage".
We consider the development of our GTL projects a major part of our strategy for future growth in the international fuel industry and believe that GTL fuels will in time develop to become an efficient and widely used alternative to conventional diesel fuel. In assessing the viability of our GTL projects, we make a number of assumptions relating to specific variables, mainly including:
Significant variations in any one or more of the above factors beyond our control, or any other relevant factor, may adversely affect the profitability or even the viability of our GTL investments. Should we not be successful in the implementation of our GTL projects, we may be required to write off significant amounts devoted to them, while we may need to redirect our strategy for future growth. In view of the resources invested in these projects and their importance to our growth strategy, problems we may experience as a result of these factors may have a material adverse effect on our business, operating results, cash flows and financial condition and opportunities for future growth.
There are risks relating to the sustainability of wholesale petroleum products supply agreements and to the establishment of our retail service station network.
Up until December 2003 we were party to the Main Supply and Blue Pump Agreements, which formed a series of long-term supply agreements with the major oil companies operating in South Africa, under which oil companies purchased certain of our petroleum products up to a maximum of 7,740 million liters per year. As a result, we sold more than 80% of our petroleum production to these oil companies under the Main Supply Agreements. Moreover, we were not allowed to market liquid fuels directly to the retail and commercial markets in South Africa, with the main exception of the so-called "Blue Pumps", which were Sasol-branded fuel pumps supplying our own fuels, located at service stations of other oil companies in designated regions. The Main Supply and Blue Pump Agreements terminated in December 2003, pursuant to a notice of termination filed by our Company in 1998.
Following the termination of the agreements, we have sold or removed the Blue Pumps and associated infrastructure from service stations owned by other oil companies, and have concluded new short-term arrangements with the oil companies to supply their petroleum products requirements in certain geographic areas. We have sold a substantial portion of our aggregate petroleum production to the oil companies under these arrangements. Further negotiations with these oil companies are ongoing. Furthermore, as a result of the termination of the agreements, the restrictions on our ability to market our petroleum products directly to the South African retail and commercial markets expired. During 2003 we commenced with the development of a service station network with a view to accessing the retail market in
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South Africa with our own Sasol brand, and, in order to enhance the profitability of this network, we are concentrating on developing high volume stations in growth areas. See "Item 4.B Business OverviewSasol's Liquid Fuel Business". We are also in negotiations with Petrolium Nasional Berhad ("Petronas") to combine our respective liquid fuels businesses in a joint venture which will provide us with further access to the South African retail market. See "Item 8.B Significant Changes".
Nonetheless, we cannot assure you that our ongoing negotiations with other oil companies will result in beneficial arrangements on a sustainable basis. We cannot assure you that we will be successful in competing with the oil companies' established service station networks, or in optimizing the configuration of our network, or that our negotiations with Petronas will be successful, or in selling the balance of our non-committed petroleum product directly to the commercial or retail markets. Failure to meet any of these objectives may have a material adverse effect on our business, operating results, cash flows and financial condition.
There are risks relating to countries in which we operate that could adversely affect our business, operating results, cash flows and financial condition.
Various of our subsidiaries, joint ventures and associates operate in countries and regions that are subject to significantly differing political, social, economic and market conditions. See "Item 18. Financial StatementsNote 3Segmental Analysis" for a description of the extent of our operations in the main countries and regions in which we operate. We are a South African domiciled company. About 60% of our operations are located and 48% of our sales are generated in South Africa.
Specific aspects of country risks that may have a material impact on our business, operating results, cash flows and financial condition include:
Sasol has or is in the process of investing in significant operations in African, South East Asian and Middle Eastern regions that have in the past to a greater or lesser extent experienced social, economic and political uncertainty. More recently certain countries in which Sasol operates have achieved greater social, political and economic stability. Since 1994 South Africa, in particular, has experienced significantly improved social, economic and political conditions.
Whilst over recent years, rates of inflation and interest have been at relatively low levels, the economy of South Africa, though currently well managed, at various times in the past has had high rates of inflation and high interest rates compared to the United States and Europe. Should these conditions recur, this would increase our South African-based costs and decrease our operating margins. High interest rates could adversely affect our ability to ensure cost-effective debt financing in South Africa.
The infrastructure in some countries in which we operate, such as electricity and water supply in South Africa, may need to be further upgraded and expanded and in certain instances possibly at our own cost.
The majority of our employees worldwide belong to trade unions. These employees comprise mainly general workers, artisans and technical operators. Although in recent years we have not experienced significant labor disruptions and have had constructive relations with our employees and their unions, we cannot assure you that such labor disruptions will not occur in the future.
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There have been some instances of social, political, and economic instability in some of the countries surrounding South Africa. Although we believe South Africa's growing stature has increasingly separated it from the effects of regional issues, such political or economic instability in neighboring countries could negatively affect conditions in South Africa.
South African law provides for exchange control regulations which restrict the export of capital from the Common Monetary Area, which includes South Africa, subject to SARB dispensation. These regulations apply to transactions involving South African residents, including both natural persons and legal entities. These regulations also affect our ability to borrow funds from non-South African sources for use in South Africa or to repay these funds from South Africa and, in some cases, our ability to guarantee the obligations of our subsidiaries with regard to these funds. These restrictions have affected the manner in which we have financed our acquisitions outside South Africa and the geographic distribution of our debt. See "Item 10.D Exchange Controls" and "Item 5.B Liquidity and Capital Resources".
HIV/AIDS and tuberculosis, which is exacerbated in the presence of HIV/AIDS, are the major healthcare challenges faced by our South African and other sub-Saharan operations. HIV infection among women in antenatal clinics around South Africa rose from 1% in 1990 to nearly 25% in 2000. Under South African law, we may not run tests to accurately establish the number of our employees who are infected with, or die from, AIDS related illnesses without the express consent of the people to be tested. However, based on the preliminary results of our voluntary counseling and testing programme, we estimate that between 10%15% of our South African workforce may be currently infected, with the highest concentration of infections in our mining operations. Based on an actuarial study, which excludes the positive impact of any prevention and management intervention program, we estimate that, while the percentage of infected employees may not rise significantly in the forthcoming years, there will be a significant increase in the number of AIDS-related fatalities. See "Item 6.D Employees".
We incur costs relating to the medical treatment and loss of infected personnel, as well as the related loss of productivity. We also incur costs relating to the recruitment and training of new personnel. We are not in a position to accurately quantify these costs. Based on our actuarial models, we estimate that the impact of HIV/AIDS on our payroll expenses should be less than 1% of our current payroll for our South African employees by the year 2007, when we expect prevalence rates to peak. This calculation is based on the estimated financial impact on production resulting from the projected prevalence of HIV/AIDS among our workforce, but does not take into account indirect costs of productivity losses. We are investing human and financial resources in connection with establishing and maintaining programs to address the HIV/AIDS problem. In September 2002, we launched the Sasol HIV/AIDS Response Programme ("SHARP"), which is our initiative to respond to the HIV/AIDS problem, in connection with which we committed a sum of R13 million during the 2004 year. Although, at present, we have no further commitments in connection with HIV/AIDS, apart from on-going funding of the SHARP programme and post-retirement healthcare contributions in respect of current employees who commenced service prior to 1 January 1998, we cannot assure you that the costs we are currently incurring and will incur in the future in connection with the HIV/AIDS problem, will not have a material adverse effect on our business, operating results, cash flows and financial condition.
In some countries our operations are required to comply with local procurement, employment equity, ownership and other regulations which are designed to address country specific social and economic
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transformation issues. In this regard, the following South African-specific initiatives apply which are intended to redress historical social and economic inequalities and ensure socio-economic stability.
As a leading and patriotic South African-based company, we embrace and will engender or participate in initiatives to bring about meaningful transformation to assist in correcting the imbalances and injustices of the apartheid era. We consider these initiatives to be a strategic imperative and we recognise the risk of not vigorously pursuing them or of them not succeeding and adversely impacting on the long-term sustainable performance and reputation of our company.
As part of an initiative of the government of South Africa to advance the participation of historically disadvantaged South Africans in the country's economy, in November 2000, we became party to an agreement with the government and the liquid fuels industry, the Charter for the South African Petroleum and Liquid Fuels Industry on Empowering Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry (the Liquid Fuels Charter). The Charter deals with the following key matters:
See "Item 4.B Business OverviewSasol's Liquid Fuel Business" and "Empowerment of Historically Disadvantaged South Africans".
The Liquid Fuels Charter requires us, amongst other things, to ensure that historically disadvantaged South Africans hold at least 25% equity ownership of our liquid fuels business by the year 2010. Based on our experience with Black Economic Empowerment transactions over the past number of years, we believe that equity participation should take place through transactions at fair market value, although we may be required to facilitate these transactions.
In October 2002, the government and representatives of South African mining companies and mineworkers' unions reached broad agreement on a charter (the Mining Charter), designed to facilitate the participation of historically disadvantaged South Africans in the country's mining industry. The Charter's stated objectives include the:
The Charter, together with the recently published scorecard to facilitate the interpretation of and compliance with the Mining Charter, requires mining companies to ensure that historically disadvantaged South Africans hold at least 15% ownership of mining assets or equity in South Africa within 5 years and 26% ownership within 10 years from the effective date of the new Mineral and Petroleum Resources Development Act which was on 1 May 2004. The Charter further specifies that the mining industry is required to assist historically disadvantaged South Africans in securing finance to fund their equity participation up to an amount of R100 billion within the first five years after the implementation of the aforementioned Act. Beyond this R100 billion commitment, the Mining Charter requires that participation of historically disadvantaged South Africans should be increased towards the 26% target on a willing
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buyer-willing seller basis. See "Item 4.B Business OverviewSasol Mining" and "Empowerment of Historically Disadvantaged South Africans".
Various principles of the Mining Charter have been incorporated in regulations promulgated by the Minister of Minerals and Energy under the new Mineral and Petroleum Resources Development Act with respect to the South African mining industry. These regulations came into effect on 1 May 2004. We have commenced a process to apply for the conversion of our existing mining licenses under the new Mineral and Petroleum Resources Development Act. See below "New mining legislation may have an adverse effect on our mineral rights". When considering applications for the conversion of existing mining licenses under the Mineral and Petroleum Resources Development Act, the Minister of Minerals and Energy must take into account, among other factors, the applicant company's compliance with the Mining Charter. We intend to undertake any appropriate action required to ensure conversion of our existing mining rights under the Mineral and Petroleum Resources Development Act.
It is not currently known what financing arrangements may ultimately be put in place to support any transactions required in order to comply with the above-mentioned Charters and we cannot assure you that we will not be required to participate in these arrangements.
It is also not currently known what additional costs we will incur to comply with these and other requirements of both the Liquid Fuels and Mining Charters and we cannot assure you that these costs will not have a material adverse effect on our business, operating results, cash flows and financial condition.
Some of the countries where we have already made, or other countries where we may consider making, investments are in various stages of developing institutions and legal and regulatory systems that are characteristic of parliamentary democracies. However, institutions in these countries may not yet be as firmly established as they are in parliamentary democracies in South Africa, the United States of America and some European countries. Some of these countries are also transitioning to a market economy and, as a result, experience changes in their economies and their government policies that could affect our investments in these countries. Moreover, the procedural safeguards of the new legal and regulatory regimes in these countries are still being developed and, therefore, existing laws and regulations may be applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and regulations in a timely manner.
As the political, economic and legal environments remain subject to continuous development, investors in these countries face uncertainty as to the security of their investments. Any unexpected changes in the political or economic conditions in the countries in which we operate (including neighboring countries) may have a material adverse effect on the investments that we have made or may make in the
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future, which may in turn have a material adverse effect on our business, operating results, cash flows and financial condition.
New mining legislation may have an adverse effect on our mineral rights.
The Mineral and Petroleum Resources Development Act came into effect on 1 May 2004. The fundamental principle of the Act is that mineral resources are the common heritage of all South Africans and collectively belong to all the people of South Africa. The Act provides that the right to prospect and mine, including the right to grant prospecting and mining rights on behalf of the nation, be administered by the government of South Africa which will have the right to exercise full and permanent custodianship over mineral resources.
The Act requires mining companies, including our Company, to apply for conversion of their existing prospecting and mining permits. A wide range of factors and principles must be taken into account by the Minister of Minerals and Energy when considering these applications. These factors include the applicant's access to financial resources and appropriate technical ability to conduct the proposed prospecting or mining operation, the environmental impact of the operation and, in the case of prospecting rights, considerations relating to fair competition. Other factors include considerations relevant to promoting employment and the social and economic welfare of all South Africans and showing compliance with the provisions of the Mining Charter for the empowerment of historically disadvantaged persons in the mining industry. See "Item 4.B Business OverviewRegulation of Mining Activities in South Africa" and "Empowerment of Historically Disadvantaged South Africans".
The Act also provides that a mining right granted under the Act may be cancelled if the mineral to which such mining right relates is not mined at an optimal rate. Furthermore, royalties from mining activities may become payable to the state under provisions contained in the "Mineral and Petroleum Royalty Bill". This bill was published in March 2003. The bill provides for a royalty rate of 2% on anthracite and bituminous coal (low ash and steam) and 1% on bituminous coal for domestic energy consumption. The royalty is payable quarterly to the state. The Minister of Finance in his budget speech to Parliament in February 2004 confirmed that these royalties will be revenue based and will take effect in 2009. There is uncertainty as to whether or not further amendments will be made to the bill and when the bill will become law. Due to this uncertainty we are unable to assess the potential impact on our future business, operating results, cash flows and financial condition.
It is the declared intent of the South African government not to disrupt operations as a result of the introduction of the new legislation and we intend to undertake the appropriate actions in order to ensure conversion of our existing prospecting and mining rights. However, we cannot assure you that we will be successful in all our applications for conversion and that our rights on existing coal mine reserves will not be affected, which could have a material adverse effect on our business, operating results, cash flows and financial condition.
New legislation on petroleum and energy activities may have an adverse impact on our business, operating results, cash flows and financial condition.
The Petroleum Products Amendment Act was signed by the President of South Africa on 20 April 2004. A subsequent proposed amendment to the Act is currently before Parliament. We are therefore uncertain when the Act will take effect. The Act amends the existing Petroleum Products Act, enacting provisions regulating a range of matters including the licensing of persons involved in the manufacturing, wholesale and retail sale of petroleum products. As the Act and regulations to be promulgated thereunder will regulate matters pertaining to wholesale and retail sales of petroleum products, including their retail prices, its provisions may impact the conditions and cost of our entry into the retail fuel market in South Africa. See "Item 4.B Business OverviewSasol Liquid Fuels Business" and "Regulation of Petroleum-Related Activities in South Africa".
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The Petroleum Pipelines Act was signed by the President of South Africa on 31 May 2004. It is uncertain when the Act will take effect. The Act will regulate petroleum pipelines and storage facility activities, including the construction and operation of petroleum pipelines and the delivery of certain commercial services in connection with these pipelines and storage facilities. The Act grants broad discretion to the Minister of Minerals and Energy to adopt different pricing methodologies in connection with the setting of tariffs, which may prove advantageous for some competitors, because of different market and geographic positions. Regulations that may be promulgated under the Act may affect our advantage due to the location in the economic heartland of the country of our Natref refinery and our synfuels facilities at Secunda. See "Item 4.B Business OverviewSasol's Liquid Fuels Business" and "Regulation of Petroleum-Related Activities in South Africa". We cannot assure you that the enactment of new legislation or the amendment of existing laws and regulations will not have a material adverse effect on our business, operating results, cash flows and financial condition.
The Gas Act, which is expected to come into effect on a date to be determined by the President, will regulate matters relating to gas transmission, storage, distribution, liquefaction and re-gasification activities. Although Sasol has negotiated a ten year regulatory dispensation with the South African government covering the supply of Mozambican natural gas to the South African market, we cannot assure you that the enactment of the new Gas Act and the appointment of a new Gas Regulator will not have a material adverse impact on our business, operating results, cash flows and financial condition. After June 2004, the National Energy Regulator Bill was submitted to Parliament for approval. The Bill proposes that a National Energy Regulator, amongst other things, assumes the responsibilities of the Gas Regulator. See "Item 4.B Business OverviewSasol Gas" and "Regulation of Gas-Related Activities in South Africa".
The South African government issued a draft policy relating to new fuel specifications, portions of which are intended to come into effect in January 2006 and other portions in 2010. These specifications relate to the phasing out of lead from the petroleum products we manufacture as well as a reduction in the sulfur content in certain of these products. There is also uncertainty as to what additives we will be allowed to use in the manufacture of these petroleum products. To meet these new specifications we are making significant capital investments at our manufacturing sites to modify our current petroleum production processes. It is as yet uncertain what the market demand will be for the various new products. Should the demand for particular products outstrip our ability to manufacture them as a result of a delay in completing modifications to our plants and/or anticipated demand projections being exceeded this could have a material adverse effect on our business, operating results, cash flows and financial condition.
We may not be successful in attracting and retaining sufficient skilled employees in South Africa.
We are highly dependent on the continuous development and successful application of new technologies. In order to achieve this, we need to maintain a focus on recruiting and retaining qualified scientists and engineers. In the past, we have been successful in recruiting such personnel. We have also established certain research and development facilities overseas. However, demand for personnel with the range of capabilities and experience required in our industry in South Africa is high and success in attracting and retaining such employees is not guaranteed. The risk exists that our scientific and engineering skills base may be depleted over time because of, for example, natural attrition and a shortage of people being available in these disciplines. Failure to attract and retain people with the right capabilities and experience could negatively affect our ability to introduce and maintain the appropriate technological improvements to our business and may have a material adverse effect on our business, operating results, cash flows and financial condition.
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Intellectual property risks may adversely affect our products or processes and our competitive advantage.
Our various products and processes, including most notably, our chemical and GTL products and processes have unique characteristics and structures and, as a result, are subject to patent protection, the extent of which varies from country to country. The expiry of a patent results in increased competition in the market for the previously patented products and processes. In addition, aggressive patenting by our competition may result in an increased patent infringement risk.
A high percentage of our products can be regarded as commodity chemicals, some of which have unique characteristics and structure. These products are normally utilized by our clients as feedstock to manufacture specialty chemicals or application-type products. We have noticed a worldwide trend of increased filing of patents relating to the composition of application-type products. These patents may create pressure on our clients who market these application-type products which may adversely affect our sales to these clients. Patent-related pressures may adversely affect our business, operating results, cash flows and financial condition.
We believe that our proprietary technology, know-how and trade secrets, especially in the Fischer-Tropsch area, provide us with a competitive advantage. A possible loss of experienced personnel to competitors, and a possible transfer of know-how and trade secrets associated therewith, may negatively impact this advantage. Similarly, operating and licensing technology in countries in which intellectual property laws are not well established and enforced may result in some transfer of our know-how and trade secrets to our competitors. This may adversely affect our business, operating results, cash flows and financial condition.
Increasing competition from products originating from countries with low production costs may adversely affect our business, operating results, cash flows and financial condition.
A significant part of our chemical production facilities is located in developed countries, including the United States and Europe. Economic and political conditions in these countries result in relatively high labor costs and, in some regions, inflexible labor markets, compared to others. Increasing competition from regions with lower labor costs and feedstock prices, for example the Middle East and China, exercises pressure on the competitiveness of our chemical products and, therefore, on our profit margins and may result in withdrawal of particular products or closure of facilities. We cannot assure you that increasing competition by products originating from countries with low production costs will not result in withdrawal of our products or closure of our facilities, which may have a material adverse effect on our business, operating results, cash flows and financial condition.
Changes in consumer and safety, health and environmental regulations and legislation and public opinion may adversely affect our business, operating results, cash flows and financial condition.
Our products are required to comply with legislation relating to the protection of the environment, health and safety and/or the end consumer, as well as customer needs. As these regulations may grow stricter, we may be required in some cases to incur additional expenditure in providing additional test data in order to register our products or to adjust the manufacturing processes for certain of our products, including liquid fuels and chemicals, or even withdraw some of them, in order to be in a position to comply with market needs or more stringent regulatory requirements. For example, compliance with the REACH (Registration, evaluation and authorization of chemicals) procedure proposed by the European Commission (EC) may have significant cost implications as we may be required, among other things, to provide risk assessments and apply for registration of our products. Similarly, public opinion is growing more sensitive to consumer health and safety and environmental protection matters, and, as a result, markets may apply pressure on us concerning certain of our products. Should we be required to comply with REACH requirements we may incur significant additional costs. We may be required to withdraw
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from the market certain products which we consider uneconomical given these additional costs of compliance or otherwise due to public opinion considerations. These factors may have a material adverse effect on our business, operating results, cash flows and financial condition.
Our exploration, mining and production operations are required to conform with legislation relating to the protection of the environment, health and safety of the workforce and/or neighboring communities. As these regulations may grow stricter, we may be required in some cases to incur additional expenditure in order to provide additional protection or to adjust specifications or manufacturing processes or transport and distribution arrangements for certain of our operations or products. Should we make changes or incur such costs this may have a material adverse effect on our business, operating results, cash flows and financial condition.
We may face potential costs in connection with industry-related accidents or deliberate acts of terror causing property damages, personal injuries or environmental contamination.
We operate coal mines, explore for and produce oil and gas and operate a number of plants and facilities for the storage, processing and transportation of oil, chemicals and gas related raw materials, products and wastes. These facilities and their respective operations are subject to various risks, including, but not limited to, fire, explosion, leaks, ruptures, discharges of toxic hazardous substances, soil and water contamination, flooding and land subsidence, among others. As a result, we are subject to the risk of experiencing, and have in the past experienced, industry-related accidents.
The terrorist attacks in the United States on 11 September 2001 demonstrated the increased risk posed by the threat of terrorism. Our facilities, located mainly in South Africa, the United States and various European countries, as well as in various African countries, the Middle east and SouthEast Asia, are subject to the risk of experiencing deliberate acts of terror.
Industry-related accidents and acts of terror may result in damages to our facilities and may require temporary shutdown of the affected facilities, thereby delaying production or increasing production costs. Furthermore, acts of terror, accidents or historical operations may cause, or may have caused, environmental contamination, personal injuries, health impairment or fatalities and may result in exposure to extensive environmental remediation costs, civil litigation, the imposition of fines and penalties and the need to obtain costly pollution control technology.
We obtain insurance cover over our assets and against business interruption. We also obtain insurance to limit certain of our exposures. In some cases we also have indemnity agreements with the previous owners of acquired businesses which limit certain of our exposures to environmental contamination. As a result of the terrorist attacks on 11 September 2001, our insurance costs have increased significantly. We are implementing a number of programs, including on-the-job safety training, in order to increase safety, and we closely monitor our safety, health and environmental procedures. However, there can be no assurance that accidents or acts of terror will not occur in the future, that insurance will adequately cover the entire scope or extent of our losses or that we may not be found directly liable in connection with claims arising from these events.
In general, we cannot assure you that costs incurred as a result of the above or related factors will not have a material adverse effect on our business, operating results, cash flows and financial condition.
Failure to comply timely with safety, health and environmental and other laws may adversely affect our market position and our business, operating results, cash flows and financial condition.
We are subject to a wide range of general and industry-specific environmental, health and safety and other legislation in jurisdictions in which we operate. Environmental requirements govern, among other things, land use, air emissions, use of water, wastewater discharge, waste management and site remediation. These regulations often require us to obtain and operate in compliance with the conditions of
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permits and authorizations from the appropriate regulatory authorities. Compliance with these laws, regulations, permits and authorizations is a significant factor in our business, and we incur, and expect to continue to incur, significant capital and operating expenditures in order to continue to comply, in all material respects, with applicable laws, regulations, permits and authorizations.
Failure to comply timely with applicable environmental laws, regulations or permit requirements may result in fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or other remedial actions, any of which could entail significant expenditures.
We are also continuing to take remedial actions at a number of sites due to soil and groundwater contamination. The process of investigation and remediation can be lengthy and is subject to the uncertainties of site specific factors, changing legal requirements, developing technologies, the allocation of liability among multiple parties and the discretion of regulators. Accordingly, we cannot estimate with certainty the actual amount and timing of costs associated with site remediation.
In order to comply with these safety, health and environmental laws and regulations we may have to incur costs which we could finance from our available cash flows or from alternative sources of financing. No assurance can be given that changes in safety, health and environmental laws and regulations or their application or the discovery of previously unknown contamination or other liabilities will not have a material adverse effect on our business, operating results, cash flows and financial condition.
Whilst it is our policy that asbestos-containing materials will be phased out as part of our routine maintenance program there are currently certain asbestos-containing materials in use at our facilities. In addition, we produce carcinogenic materials at some of our facilities. We cannot assure you that no liabilities may arise as a result of the use or exposure to these materials.
In addition to undertaking internal investigations we are also subject to review from time to time by Government authorities on our compliance with tax and excise duty laws and regulations impacting our operations. Our product pricing structures are also reviewed from time to time by regulatory authorities. Whilst it is our policy to conduct our operations in accordance with applicable laws and regulations and we have established control systems to monitor such compliance, no assurance can be given that these control systems will not fail or that some of our product pricing structures will not change in the future. Failure to interpret correctly and comply with such laws and regulations and/or changes to our product pricing and cost structures may have a material adverse impact on our business, operating results, cash flows and financial condition.
Our coal reserve estimates may be materially different from reserves that we may actually recover.
Our reported coal reserves are estimated quantities that under present and anticipated conditions have the potential to be economically mined and processed. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of coal production, including many factors beyond our control. In addition, reserve engineering is a subjective process of estimating underground deposits of reserves that cannot be measured in an exact manner and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Estimates of different engineers may vary and results of our mining and production subsequent to the date of an estimate may justify revision of estimates. Reserve estimates may require revision based on actual production experience and other factors. In addition, several factors including the market price of coal, reduced recovery rates or increased production costs due to inflation or other factors may render certain proven and probable reserves uneconomical to exploit and may ultimately result in a restatement of reserves. This may have a material adverse effect on our business, operating results, cash flows and financial condition.
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Our crude oil and natural gas proved reserve estimates may be materially different from reserves that we may actually recover.
Our proved reserves figures are estimates reflecting applicable reporting regulations. There are numerous uncertainties inherent in estimating quantities of reserves and in projecting potential future rates of production, including many factors beyond our control. In addition, reservoir engineering is a subjective process of estimating underground deposits of reserves that cannot be measured in an exact manner and the accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Estimates of different engineers may vary and results of our drilling, testing and production subsequent to the date of an estimate may justify revision of estimates. Reserve estimates may require revision based on actual production experience and other factors. In addition, several factors including fluctuations in the market price of oil and natural gas, reduced recovery rates or increased production costs due to inflation or other factors may render certain proved reserves uneconomical to exploit and may ultimately result in a restatement of reserves. This may have a material adverse effect on our business, operating results, cash flows and financial condition.
There is a possible risk that sanctions may be imposed by the US Government as a result of our Iran-related activities.
There are possible risks posed by the potential imposition of US economic sanctions in connection with activities we are undertaking in the polymers field and considering in respect of a GTL opportunity in Iran. For a description of our activities in Iran see "Item 4.B Business OverviewSasol Polymers" and "GTLSasol Synfuels International". The risks relate to two sanctions programs administered by the US Government that we have considered: the Iranian Transactions Regulations ("ITR") administered by the US Treasury Department Office of Foreign Assets Control ("OFAC") and the Iran and Libya Sanctions Act ("ILSA") administered by the US Department of State.
The ITR, administered by OFAC, do not apply directly to either Sasol or the Group entities involved in activities in Iran, because none of them would be considered a US person under these regulations. Nonetheless, because the Group is a multinational enterprise, we are aware that the ITR may apply to certain entities associated with the Group, including US employees, investors and certain subsidiaries.
We are taking measures to ensure that US employees, investors and certain subsidiaries of the Group to which the ITR applies will not violate the ITR as a result of their respective affiliation with the Group. For instance, to that end, we are taking measures to:
By undertaking the aforementioned steps, we believe that any risks posed by the ITR to US persons and entities affiliated with the Group will be mitigated. Nevertheless, we cannot predict OFAC's enforcement policy in this regard and it is possible that OFAC may take a different view of the measures described above. In such event, US persons or affiliates associated with the Group may be subject to a range of civil and criminal penalties.
ILSA grants the President of the United States discretion in imposing sanctions on companies found to be in violation of its provisions involving investment in the petroleum industry in Iran. Should the US government determine that some or all of our activities in Iran are investments in the petroleum
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industry, as statutorily defined by ILSA, the President of the United States may in his discretion impose, among other sanctions, restrictions on our ability to obtain credit from US financial institutions, restrictions on our ability to procure goods, services and technology from the United States or restrictions on our ability to make sales into the United States.
We cannot predict future interpretations of ILSA or the implementation policy of the US Government with respect to ILSA. Although we believe that our polymers project is not in the petroleum industry and we are only involved in a feasibility study in connection with other activities in Iran, we cannot assure you that our activities in Iran would not be considered investments as statutorily defined by ILSA or that the imposition of sanctions on the Company or other entities of the Group would not have a material adverse impact on our business, operating results, cash flows and financial condition.
The exercise of voting rights by holders of ADRs is limited in some circumstances.
Holders of American Depositary Receipts (ADRs) may exercise voting rights with respect to the ordinary shares underlying their American Depositary Shares (ADSs) only in accordance with the provisions of our deposit agreement with The Bank of New York, as the depositary. For example, ADR holders will not receive notice of a meeting directly from us. Rather, we will provide notice of a shareholders meeting to The Bank of New York in accordance with the deposit agreement. The Bank of New York has undertaken in turn, as soon as practicable after receipt of our notice, to mail to holders of ADRs voting materials. These voting materials include the information on the matters to be voted on contained in our notice of the shareholders meeting and a statement that the holders of ADRs on a specified date will be entitled, subject to any applicable provision of the laws of South Africa and our Articles of Association, to instruct The Bank of New York as to the exercise of the voting rights, pertaining to the shares underlying their respective ADSs on a specified date. In addition, holders of our ADRs will be required to instruct The Bank of New York how to exercise these voting rights.
Upon the written instruction of an ADR holder, The Bank of New York will endeavor, in so far as practicable, to vote or cause to be voted the shares underlying the ADSs in accordance with the instructions received. If instructions from an ADR holder are not received by The Bank of New York by the date specified in the voting materials, The Bank of New York will not request a proxy on behalf of such holder. The Bank of New York will not vote or attempt to exercise the right to vote other than in accordance with the instructions received from ADR holders. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct The Bank of New York to vote the shares underlying your ADSs. In addition, The Bank of New York and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if your voting rights are not exercised as you directed.
There is limited liquidity for our shares on the JSE Securities Exchange.
Our shares are listed on the JSE Securities Exchange which is less liquid than major securities exchanges in Western Europe and the United States. From 1 January through to 30 June 2004, the average daily volume of all shares listed on the JSE Securities Exchange was approximately 185 million, and, as of 30 June 2004, the market capitalization of the JSE Securities Exchange was approximately R1,918,988 million (US$293,199 million). There can be no certainty about the future liquidity of a market for our shares. There can also be no certainty about the future liquidity of a market for our ADSs.
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ITEM 4. INFORMATION ON THE COMPANY
4.A History and Development of the Company
Sasol Limited, the ultimate holding company of our Group, is a public company. It was incorporated under the laws of the Republic of South Africa in 1979 and has been listed on the JSE Securities Exchange, since October 1979. Our registered office and corporate headquarters are at 1 Sturdee Avenue, Rosebank 2196, South Africa, and our telephone number is +27 11 441 3111. Our agent for service of process in the United States is Puglisi and Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715.
In 1947, the South African Parliament enacted legislation detailing the establishment of an oil-from-coal industry in South Africa. This followed 20 years after the publication of a White Paper by Parliament, aiming to protect the country's balance of payments against increasing crude oil imports in view of the lack of domestic crude oil reserves. As a result of this initiative in 1950, the South African government through the Industrial Development Corporation, a state-owned entity, formed our predecessor company known as the South African Coal, Oil and Gas Corporation Limited to manufacture fuels and chemicals from indigenous raw materials.
Construction work on our synthetic fuels plant at Sasolburg, in the Free State Province, about 80 kilometers (km) south of Johannesburg, commenced in 1952, and in 1955, the original Sasol One production units were commissioned. We supplied our first gasoline and diesel to motorists at Sasolburg in November 1955. The operation of this plant was based on a combination of the German fixed-bed and the US fluidized-bed Fischer-Tropsch technologies, together with German Lurgi coal gasification technologies for the synthetic production of gasoline, diesel, other liquid fuels and chemical feedstocks from coal.
During the 1960s, we became a major supplier of raw materials for the chemical industry. This included products such as solvents for paints, butadiene and styrene for synthetic rubber and ammonia for nitrogenous fertilizer. When our first naphtha cracker became operational in the mid-1960s, we added ethylene and propylene for the plastics industry to our product portfolio.
In 1966, we completed construction of our first gas pipeline, which connected 250 industrial companies in the greater Johannesburg area to pipeline gas.
In December 1967, National Petroleum Refiners of South Africa (Pty) Limited (Natref) was incorporated as a joint venture company and, at the same time, construction of the oil refinery commenced at Sasolburg. The refinery was commissioned in February 1971. Currently, we, as the major shareholder, and Total South Africa (a subsidiary of TotalFinaElf of France) hold 63.64% and 36.36%, respectively, in Natref.
The Organization of the Petroleum Exporting Countries (OPEC) oil crisis of the early seventies presented us with an opportunity to increase our synfuels production capacity and assist in reducing South Africa's dependence on expensive imported crude oil. We commenced the construction of Sasol Two in Secunda, 145 km southeast of Johannesburg in the Mpumalanga province, in 1976, and in March 1980, this plant produced its first synthetic oil. During the final construction phases of Sasol Two in 1979, work commenced on the construction of a third synfuels and chemicals plant, Sasol Three, which was completed in 1982. The virtually identical operations of Sasol Two and Sasol Three were merged in 1993 to form Sasol Synthetic Fuels, now Sasol Synfuels.
Towards the time of the completion of the Sasol Three project, all our technical and research and development services were consolidated into a new company, Sasol Technology. Since then, Sasol Technology has been an important area of our activities, responsible for research and development, technology development and commercialization, project management and specialist engineering skills.
In October 1979, Sasol Limited was listed on the JSE Securities Exchange, and 70% of its share capital was privatized. Subsequently, the interest in our share capital held by the South African
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government through the Industrial Development Corporation was further reduced to its current 7.9%. In 1982, our ADRs were quoted on the NASDAQ National Market through an unsponsored ADR program, which was later converted to a sponsored ADR program in 1994. With effect from 9 April 2003 we transferred our listing to the New York Stock Exchange from NASDAQ.
Our technology enabled us to enter the downstream production of higher-value chemicals, including nitrogenous fertilizers and commercial explosives in 1983 and 1984, respectively, and also of solvents, phenolics, waxes and alpha olefins.
In the years 1988 and 1989, we undertook the construction of a large polypropylene plant that incorporated BASF gas-phase technology. Between 1990 and 1993, Sasol One underwent an R820 million renovation, during which we discontinued the production of synfuels and increased the production of higher-value chemicals, including ammonia, solvents, phenolics, paraffins and waxes.
Polifin was established in Johannesburg in January 1994, as a joint venture with AECI Limited (AECI), a South African listed chemicals and explosives company. The joint venture manufactured and marketed monomers and polymers. In 1996, Polifin was listed on the JSE Securities Exchange. In 1999, pursuant to a takeover offer, we acquired Polifin's remaining share capital from AECI and the public and delisted Polifin. Following this, Polifin became part of our chemicals portfolio and was renamed Sasol Polymers.
In mid 1994 Sasol Fibres, our 50:50 partnership with the Industrial Development Corporation commissioned an acrylic fibers manufacturing plant at Durban in the KwaZulu-Natal province. A strategic decision was taken to wind down and close the Sasol Fibres partnership in financial year 2002 because it was underperforming and unlikely to meet our targeted rates of return in the long term.
In June 1994, the first alpha olefins plant at Secunda was commissioned to produce 1-hexene and 1-pentene for the international copolymers market. This was followed in November 1994 by the opening of the African Amines alkylamines plant at Newcastle in KwaZulu-Natal in a 50:50 joint venture with Sentrachem Ltd. Dow Chemicals became our joint venture partner in African Amines in 1997 following its acquisition of Sentrachem. Air Products became our joint venture partner in 2002 following Dow Chemicals' disposal of its interest in African Amines.
In 1995, we founded Sasol Petroleum International (SPI) to undertake oil and gas exploration and production in selected high potential areas in West and Southern Africa. Sasol Petroleum International is active in South Africa, Gabon, Equatorial Guinea, Nigeria and, most notably, in Mozambique.
The Schümann Sasol International wax manufacturing and marketing venture was established in 1995 as a merger of Sasol Waxes and the Hamburg-based Schümann wax operations, and in July 2002, it became our wholly owned subsidiary and was renamed Sasol Wax. It produces paraffin and Fischer-Tropsch waxes with operations in various countries.
Merisol, formerly known as Merichem-Sasol, was formed in October 1997 as a 50:50 joint venture with Merichem Company of Houston. Merisol produces and supplies natural phenolics and cresylics.
By early 1999, Sasol Synfuels, our synfuels segment, had commissioned the last of its eight new-generation Sasol Advanced Synthol (SAS) reactors at Secunda, and a ninth reactor was commissioned in 2001. The 1-octene plant, also at Secunda, was commissioned in April 1999 by Sasol Alpha Olefins and commenced supply to the Dow Chemical polyethylene plants in May 1999.
In recent years, we have been exploring opportunities through Sasol Synfuels International (SSI) to exploit our Slurry Phase Distillate (SPD) technology for the production of high-quality, environment-friendly diesel and other higher-value hydrocarbons from natural gas. In October 2000, we signed agreements with ChevronTexaco for the creation of Sasol Chevron, a 50:50 global joint venture founded on GTL technology.
23
Sasol and ChevronTexaco are currently involved in the development of a GTL project in collaboration with the Nigerian National Petroleum Corporation at existing oil and gas facilities at Escravos in Nigeria. We are currently evaluating other GTL ventures in Australia, Latin America, the Middle East and Southeast Asia.
Since May 2000 the Group has undertaken share repurchases, which may be made at times and at prices deemed appropriate by management and consistent with the authorisation of the shareholders. During the year ended 30 June 2004, 370,000 shares (2003 1,884,328 shares) of the company at a total price of R33 million (2003 R185 million) were repurchased. At 30 June 2004, a total of 60,111,477 shares, representing 9% of the issued share capital of the company, had been repurchased since 9 May 2000 at an average price of R60.67 per share.
In July 2001, we signed a joint venture agreement with Qatar Petroleum (Qatar Petroleum 51% and Sasol 49%) to establish Oryx GTL. The joint venture is constructing, on behalf of both venture partners, a US$952 million (excluding finance charges) (R7.8 billion, converted at forward covered rates) GTL plant based at Ras Laffan Industrial City to produce high quality synfuels from Qatar's natural gas resources.
In 2000 and 2001, we signed agreements with the government of Mozambique for the development of natural gas fields and the construction of a gas pipeline transporting gas to the South African market. The construction of this pipeline commenced in 2002. We introduced natural gas to the South African pipeline gas market as of 2004 and use natural gas as part of our feedstock for our chemicals and synfuels operations in both Secunda and Sasolburg.
Effective 1 March 2001, we acquired Condea, the whole of RWE-DEA's chemical business which we renamed Sasol Chemie, for approximately euro1.3 billion (approximately R8.3 billion at actual rates). This was our largest and most significant acquisition to date, in line with our strategy of achieving international growth in the alpha olefins, surfactants and solvents businesses. More than 80% of Sasol Chemie's turnover fell in the surfactant and intermediaries value chain, which fit well with our established alpha olefins business, while the solvents produced at Sasol Chemie also fit well with our existing product portfolio. With the acquisition of Sasol Chemie, we achieved significant geographic diversification for our Group, consolidated our alpha olefins and solvents businesses and enlarged our worldwide workforce by about 4,500 employees. Following the addition of Sasol Chemie to our Group, we combined the surfactant and intermediate value chain with our alpha olefins business to form Sasol Olefins and Surfactants, and we absorbed the solvents activities into Sasol Solvents.
Effective 1 July 2002, we acquired from Vara Holdings GmbH and Co KG the outstanding one-third of the share capital of Schümann Sasol, for approximately euro 51.1 million (approximately R521 million at actual rates), and this subsidiary, now 100% owned, has been renamed Sasol Wax.
Effective 1 January 2004, Sasol Oil, now comprising all of Sasol's Liquid Fuels Business, entered the South African retail fuel market with the establishment of it's first Sasol-branded retail convenience centre (service station). Sasol Oil also completed the acquisition and integration of Exel Petroleum in a major step towards forming Sasol's Liquid Fuels Business.
24
Capital Expenditure
In 2004, 2003, and 2002, we invested approximately R29 billion in capital expenditure (on a cash flow basis including capitalized interest) to enhance our existing facilities and to expand operations. Key capital expended on projects during these three financial years include:
Projects and Investments |
Business Categories |
Years 2004, 2003 and 2002 Capital spend(1) |
||
---|---|---|---|---|
|
|
(in millions) |
||
Mozambique Natural Gas ProjectPipeline Cost | Gas | R3,120 | ||
Acrylic Acid and Acrylates Complex | Solvents | R1,630 | ||
Mozambique Natural Gas ProjectCentral Processing Facility | Gas | R1,216 | ||
Mozambique Natural Gas ProjectConversion Costs | Gas | R1,165 | ||
Project Turbo | Synfuels | R1,150 | ||
Project Turbo | Polymers | R1,142 | ||
n-Butanol | Solvents | R733 | ||
Arya Sasol Polymers | Polymers | R668 | ||
Oxygen Train 15 | Synfuels | R630 | ||
Natref Expansion | Sasol's Liquid Fuels Business | R619 | ||
Octene Train 2 | Olefins and Surfactants | R572 | ||
Petlin LDPEPolyethylene Plant (40% interest) | Polymers | R550 | ||
Detergent-Range Alcohols Plant | Olefins and Surfactants | R525 | ||
Skeletal Isomerization Plant | Synfuels | R215 | ||
Distribution Network | Gas | R277 | ||
Brine Holding Facility | Mining | R214 | ||
Sulfur Debottlenecking | Synfuels | R171 | ||
Coke Feed Preparation | CarboTar | R125 | ||
Vinyls Expansion | Polymers | R130 | ||
Tar Naphtha Phenolic Extraction | Merisol | R122 | ||
Oryx (Qatar) (49% interest) | SSI | US$245 | ||
Escravos (Nigeria) | SSI | US$104 |
During the same period, we invested approximately R2.9 billion in acquisitions and investments in equity accounted investees. In addition, we invested approximately R1.9 billion in intangible assets, mainly in respect of exploration expenditure, software and patents and trademarks during this period. For a discussion of the method of financing for our capital expenditures, see "Item 5.B Liquidity and Capital ResourcesLiquidity".
Capital Commitments
As at 30 June 2004, we had authorized approximately R34 billion of Group capital expenditure, of which we had spent R9 billion during 2004. Of the unspent capital commitments of R25 billion, R10 billion has been contracted for. Of the unspent capital commitments of R25 billion, we expect to spend R15 billion in 2005, R7 billion in 2006 and the remainder of R3 billion in 2007 and thereafter. For more information regarding our capital commitments see "Item 5.B Liquidity and Capital Resources" and "Item 5.F Capital and Contractual Commitments".
We expect to spend approximately R16 billion of our R25 billion unspent capital commitments in projects in South Africa, R4 billion in other African countries and the balance of R5 billion in projects in other regions.
25
The following table reflects key projects approved and contracted during the 2004 and prior years, which were not completed at 30 June 2004. The total project cost budgeted and the scheduled date of operation are set out below:
Project |
Business Categories |
Total Project Cost |
Scheduled Operation Date |
|||
---|---|---|---|---|---|---|
|
|
(in millions) |
|
|||
Octene Train 2 | Olefins and Surfactants | R870 | November 2004 | |||
Tar Naphtha Phenolic Extraction | Merisol | R192 | March 2005 | |||
Waste recycling facility | Synfuels | R520 | April 2005 | |||
Mooikraal underground mine | Mining | R229 | May 2005 | |||
Project Turbo(1) | Synfuels | R4,440 | September 2005 | |||
Natref clean fuels project(2) | Sasol's Liquid Fuels Business | R575 | September 2005 | |||
GTL | ||||||
Oryx GTL (Qatar)(3) | SSI | US$466 | First Quarter 2006 | |||
Escravos (Nigeria)(4) | SSI | (5) | Fourth Quarter 2008 | |||
Arya Sasol Polymers(6) | Polymers | US$462 | First Quarter 2006 | |||
Project Turbo(5) | Polymers | R7,741 | January 2006 |
4.B Business Overview
We are an integrated oil and gas group with substantial chemical interests, based in South Africa and operating in 23 other countries throughout the world. We are the leading provider of liquid fuels in South Africa in terms of both turnover and sales volumes and a major international producer of chemicals. We use a world-leading technology for the commercial production of synfuels and chemicals from coal. We expect in future to apply this technology to convert substantially more natural gas to diesel fuel and chemicals. We manufacture over 200 fuel and chemical products, which we sell in more than 90 countries. We also operate coal mines and have recently completed our natural gas pipeline to provide feedstock for our synfuels and chemical plants, produce and market natural and synthesis gas (syngas) and operate the only inland crude oil refinery in South Africa. See Note 3 of "Item 18Financial Statements" for a geographic analysis of our operating results, assets and capital commitments.
We were founded in 1950 and we have been listed on the JSE Securities Exchange since 1979 and on the New York Stock Exchange since 9 April 2003. As of 15 October 2004, we were the largest listed domiciled South African company by market capitalization, with total consolidated turnover in terms of IFRS of approximately R60 billion in 2004. We employ approximately 31,000 people.
During 2003, we completed the process of integrating the Sasol Chemie acquired businesses into the respective business units of Sasol Olefins and Surfactants and Sasol Solvents (previously included in the Sasol Chemical Industries segment), linked with internal organizational and management restructuring, which continued in 2004 for our other business units.
In conjunction with these changes, we also revised our internal financial reporting to our Group Executive Committee (GEC), to report separately on the businesses of Sasol Oil (renamed Sasol's Liquid Fuels Business) and Sasol Gas, and due to the increased importance of our gas to liquids strategy to, separately report on Sasol Synfuels International. Prior year segmental information has been restated to conform with this presentation.
26
The Group has recently formed significant joint ventures to promote Sasol technology and products internationally. The Group is promoting and marketing its GTL process for converting remote or flared natural gas into new-generation, low-emissions GTL diesel, GTL naphtha and other products. It is envisaged that SSI through the recent development of GTL plants in, for example, Qatar will contribute significantly to the Group results and will contribute to the growing of a global gas to liquids business in the future. Consequently the chief operating decision maker has chosen to include Sasol Synfuels International (SSI) as a reportable operating segment. SSI did not meet any of the quantitative thresholds but has been considered reportable and has been separately disclosed in terms of SFAS 131, Disclosures About Segments of an Enterprise and Related Information as the chief operating decision maker believes that the information about SSI would be useful to readers of the financial statements.
The formation of LFB included restructuring of Group activities as well as the acquisition of the remaining interest in Naledi Petroleum Holdings (Pty) Limited. In addition, Sasol Synfuels transferred its fuel blending plant and related storage facilities to LFB with the result that all fuel sales are now made by LFB. In addition, Sasol CarboTar (involved in the production and marketing of carbon and tar products) which was previously reported as part of the Sasol Oil and Gas reporting segment was transferred to the Sasol Synfuels reporting segment as it no longer forms part of LFB.
The financial information presented to our GEC, including the financial information in the reportable segments, is presented based on IFRS. Since the IFRS financial information is the basis for segmental financial decisions, resource allocation and performance assessment, it forms the accounting basis for segmental reporting that is disclosed to the investing public. The IFRS segmental reporting information is reconciled to the amounts reported in our Group consolidated financial statements, prepared in accordance with US GAAP, for all years presented.
We divide our operations into the following segments:
27
Our total turnover by category of activity and geographic market is as follows:
2004 |
Sasol Mining |
Sasol Synfuels |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol's LFB |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total 2004 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
||||||||||||||||||||
South Africa | 45 | 1,077 | 142 | 5,063 | 799 | 17,237 | 1,389 | | 3,202 | 28,954 | |||||||||||
Rest of Africa | 6 | 26 | 133 | 815 | 95 | 1,305 | | 7 | 675 | 3,062 | |||||||||||
Europe | 1,032 | 153 | 9,304 | 26 | 2,543 | | | | 2,574 | 15,632 | |||||||||||
Middle East and India | | 21 | 431 | 48 | 731 | | | | 216 | 1,447 | |||||||||||
Far East | | 6 | 911 | 178 | 843 | | | | 124 | 2,062 | |||||||||||
North America | | 21 | 5,618 | | 518 | | | | 903 | 7,060 | |||||||||||
South America | | 7 | 457 | 14 | 113 | | | | 132 | 723 | |||||||||||
South East Asia and Australasia | | 18 | 137 | 432 | 314 | 12 | | | 298 | 1,211 | |||||||||||
Total segment | 1,083 | 1,329 | 17,133 | 6,576 | 5,956 | 18,554 | 1,389 | 7 | 8,124 | 60,151 | |||||||||||
Adjustments to US GAAP | |||||||||||||||||||||
Equity accounting and reversal of proportionate consolidation | (1,609 | ) | |||||||||||||||||||
Entities previously not consolidated | 266 | ||||||||||||||||||||
Turnover per consolidated income statement(1) | 58,808 | ||||||||||||||||||||
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2003 RESTATED |
Sasol Mining |
Sasol Synfuels |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol's LFB |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total 2003 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
||||||||||||||||||||
South Africa | 3 | 1,122 | 161 | 5,162 | 881 | 18,857 | 1,480 | | 3,470 | 31,136 | |||||||||||
Rest of Africa | | 43 | 37 | 694 | 106 | 409 | | 7 | 663 | 1,959 | |||||||||||
Europe | 998 | 45 | 10,534 | 6 | 2,614 | 117 | | | 2,835 | 17,149 | |||||||||||
Middle East and India | | | 1,005 | 1 | 692 | 14 | | | 364 | 2,076 | |||||||||||
Far East | | | 573 | 176 | 721 | 18 | | | 146 | 1,634 | |||||||||||
North America | 12 | | 6,688 | | 515 | 18 | | | 1,576 | 8,809 | |||||||||||
South America | | | 373 | 3 | 87 | 4 | | | 230 | 697 | |||||||||||
South East Asia and Australasia | | | 172 | 203 | 334 | 23 | | | 363 | 1,095 | |||||||||||
Total segment | 1,013 | 1,210 | 19,543 | 6,245 | 5,950 | 19,460 | 1,480 | 7 | 9,647 | 64,555 | |||||||||||
Adjustments to US GAAP | |||||||||||||||||||||
Equity accounting and reversal of proportionate consolidation | (1,539 | ) | |||||||||||||||||||
Entities previously not consolidated | 650 | ||||||||||||||||||||
Other | 103 | ||||||||||||||||||||
Turnover per consolidated income statement(1) | 63,769 | ||||||||||||||||||||
2002 RESTATED |
Sasol Mining |
Sasol Synfuels |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol's LFB |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total 2002 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
||||||||||||||||||||
South Africa | 4 | 744 | 41 | 4,505 | 584 | 16,332 | 1,271 | | 3,254 | 26,735 | |||||||||||
Rest of Africa | | 108 | 103 | 807 | 112 | 337 | | 176 | 436 | 2,079 | |||||||||||
Europe | 1,235 | 46 | 9,754 | 2 | 2,863 | 86 | | | 2,404 | 16,390 | |||||||||||
Middle East and India | | | 601 | 1 | 584 | 9 | | | 230 | 1,425 | |||||||||||
Far East | | | 657 | 241 | 757 | 18 | | | 110 | 1,783 | |||||||||||
North America | | | 7,259 | 2 | 422 | 41 | | | 1,790 | 9,514 | |||||||||||
South America | | | 400 | 6 | 52 | 9 | | | 208 | 675 | |||||||||||
South East Asia and Australasia | | | 314 | 16 | 292 | 33 | | | 334 | 989 | |||||||||||
Total segment | 1,239 | 898 | 19,129 | 5,580 | 5,666 | 16,865 | 1,271 | 176 | 8,766 | 59,590 | |||||||||||
Adjustments to US GAAP | |||||||||||||||||||||
Equity accounting and reversal of proportionate consolidation | (2,288 | ) | |||||||||||||||||||
Entities previously not consolidated | 429 | ||||||||||||||||||||
Business combinations | (2,131 | ) | |||||||||||||||||||
Other | 67 | ||||||||||||||||||||
Turnover per consolidated income statement(1) | 55,667 | ||||||||||||||||||||
Our Strategy
We are committed to delivering on our strategic plan, which consists of three primary growth drivers:
29
Create a global GTL business
We have made significant progress towards our goals of commercializing our GTL technology based on the integrated, three-step Sasol SPD process through the construction of GTL plants in gas-rich regions.
A significant development in the execution of these plans was the award of our first Engineering, Procurement and Construction (EPC) contract for an international GTL plant. A US$675 million (our portion is 49% or US$331 million), lump-sum, turnkey EPC contract, out of a budgeted total project cost of US$952 million, was awarded to the multinational French-based engineering company, Technip, for a 34,000 bbl/d GTL plant at Ras Laffan in Qatar. This plant is a 51:49 joint venture between Qatar Petroleum and Sasol Synfuels International. It is expected to be commissioned by the first quarter of 2006.
Work on our second GTL plant is also progressing. In collaboration with Sasol Synfuels International (SSI), Sasol Technology, the Nigerian National Petroleum Corporation and Chevron Nigeria Limited, the Sasol Chevron joint venture with ChevronTexaco of the USA is advancing the commercial development of the Escravos GTL plant to be built in the Niger Delta region of Nigeria. The EPC bidding process is still progressing. Other potential GTL projects are under review, one of which could include a second and significantly larger GTL plant in Qatar.
In support of our Qatari, Nigerian and other potential GTL investments, Sasol Technology continues to advance our second-generation GTL technology, including our proprietary low-temperature Fischer-Tropsch Slurry Phase reactor and cobalt catalysts. The underlying objective is to lower capital and operating costs and to increase plant efficiencies and yields.
Working in partnership with Sasol Technology, SSI also continues to explore for new opportunities to commercialize Sasol's competitive Fischer-Tropsch synthesis technology for the beneficiation of coal and other hydrocarbon resources, including biomass.
SSI is also about to commence a pre-feasibility study with a consortium of Chinese companies for the potential development of two 60,000 bbl/d to 80,000 bbl/d coal-to-liquid fuels (CTL) facilities in the People's Republic of China.
Grow our chemicals portfolio
We intend to grow our chemicals portfolio either by:
We do not expect to undertake large chemical acquisitions in the foreseeable future.
In 2002, we commissioned our new Sasol Olefins and Surfactants C12C15 alcohols plant. Our R950 million investment in this plant enables us to beneficiate some of our higher alpha olefins at Secunda and to widen our portfolio of specialty alcohols.
Sasol Olefins and Surfactants is progressing with a R870 million project to develop our second train for the recovery and production of additional volumes of 1-octene co-monomer at Secunda. The additional octene volumes will mostly be for dedicated supply to Dow Chemicals under a long-term sales agreement. Once ready for beneficial operation by the end of 2004, the second octene train will enable us to double octene production to about 96 Ktpa (Kilo tons per annum). This investment will also enable Sasol Olefins and Surfactants to further purify the octene currently being produced in the first train. Sasol Olefins and Surfactants also intends to establish a third octene train.
Sasol Polymers is advancing with a series of expansion projects that will enable it to increase its annual polymer production by about 100% over the five-year period of financial years 2002 to 2006. The division's
30
investments into an upstream cracker and a downstream polyethylene plant at Kertih in Malaysia performed well during the year and contributed to earnings. Both of the facilities exceeded 90% capacity utilization for the year.
Sasol Solvents continues to grow through new investments in higher-value solvents. The commissioning of the Sasol Dia Acrylates complex at Sasolburg was one of the year's significant new business launches.
In the future, we expect to focus primarily on the production and marketing of higher-margin performance chemicals and on achieving higher levels of integration.
Exploit upstream hydrocarbon opportunities
Our US$1.2 billion project to develop Mozambique's Temane and Pande gas fields and to deliver natural gas to our customers and our main petrochemical plants was completed on schedule. See "Item 4.B Business OverviewSasol Gas". Our upstream hydrocarbon exploration and production business, Sasol Petroleum International, commenced gas production in Mozambique during the first quarter of calendar year 2004, significantly increasing our gas production capabilities.
The strength of our South African synfuels and chemical operations is partly attributable to our ability to efficiently back-integrate into cost-competitive hydrocarbon feedstocks. We are therefore seeking new back-integration opportunities outside of South Africa, especially in light of our emerging GTL conversion technology. To this end, Sasol Petroleum International is currently investigating opportunities in partnership with Sasol Synfuels International to become an offshore producer in Qatar where we are investing in our first GTL plant. Sasol Petroleum International and Sasol Synfuels International are also exploring collaborative integration opportunities in other gas-rich regions around the world.
Our activities
Sasol Mining
Sasol Mining extracts and supplies coal mainly to our synfuels and chemical plants while about 8% of its output is sold to external customers, primarily international. In 2004 its external turnover amounted to R1.1 billion, representing 2% of our total external segmental turnover, while its aggregate inter-segment and external turnover was R5.2 billion.
Sasol Mining has two South African operations:
During 2004 total production was 52.4 Mt of coal, compared to 51.3 Mt in the previous year. Saleable production volumes vary each year according to inter-segment demand and export capacity. For more information regarding our mining properties and operations and our mining reserves see "Item 4.D Property, Plant and EquipmentMining Properties and Operations".
31
In 2004, total sales to Sasol Synfuels, Sasol Infrachem and external customers in the international market were 51.1 Mt of coal, compared to 49.4 Mt in 2003. In particular, in 2004, Sasol Mining supplied 40.2 Mt to Sasol Synfuels at Secunda and 6.8 Mt to Sasol Infrachem at Sasolburg. In 2003, it supplied 39.4 Mt to Sasol Synfuels and 6.4 Mt to Sasol Infrachem.
Sasol Mining exports approximately 9% of the Secunda Complex's production. In 2004 external sales, primarily exports, amounted to 4.1 Mt, compared to 3.6 Mt in 2003. While Dollar export prices increased by 24% in a recovering market, the Rand coal price decreased by 5% as a result of the strengthening Rand. Exports continue to be concentrated in Europe, the natural market for South African coal. Marketing opportunities for coal in both the international and domestic utility market are being explored. It is the intention to increase our presence in the international market over the ensuing decade. This is currently constrained by our throughput entitlement at the Richards Bay Coal Terminal, South Africa's predominant coal export outlet. The planned expansion of this terminal, once completed at a date yet to be determined, will provide a further 0.5 Mtpa of export capacity.
We are applying a new methodology towards optimizing the layout and planning of future mines, especially at Secunda, where we expect about 95% of our future coal production, for own consumption, to occur. Our new methodology integrates operational criteria such as geological conditions, rock mechanics, technology advances, the prospective development of new markets and mandatory mining restrictions applicable to the protection of the natural environment and surface structures.
We have signed an agreement with Anglo American, a mining and resources group domiciled in the United Kingdom, to develop the Kriel South coal reserves, in the Mpumalanga province, South Africa. Anglo Operations Limited will invest R769 million (approximately US$96 million) and Sasol Mining R320 million (approximately US$40 million) in the project. Anglo Operations Limited will produce, for Sasol's consumption, 5 million tons of coal a year while a similar production rate will be added to the rate at which Sasol's Syferfontein Colliery will produce. Together they are expected to yield an estimated 200 million tons of thermal coal for supply to Sasol Synfuels at Secunda over 20 years. Production will commence in July 2005.
Sasol Mining
Coal Production and Sales Data
|
2004 |
2003 |
2002 |
|||
---|---|---|---|---|---|---|
|
(Mt, unless otherwise stated) |
|||||
Sigma Mine, including Wonderwater | 6.2 | 5.9 | 5.9 | |||
Secunda Mines | 46.2 | 45.4 | 45.7 | |||
Total production | 52.4 | 51.3 | 51.6 | |||
Saleable production(1) from all mines |
50.4 |
49.6 |
49.5 |
|||
External coal purchases from other mines | | 0.4 | 0.7 | |||
Sales to Sasol Infrachem, Sasolburg |
6.8 |
6.4 |
6.3 |
|||
Sales to Sasol Synfuels, Secunda | 40.2 | 39.4 | 40.8 | |||
Additional domestic markets | 0.5 | | | |||
International sales | 3.6 | 3.6 | 3.5 | |||
Total sales including exports | 51.1 | 49.4 | 50.6 | |||
Production per shift of continuous miner (mining production machine) (tons) |
1,707 |
1,644 |
1,495 |
32
Cost management and productivity improvement. In 1998, we commenced the implementation of a comprehensive business renewal project, aiming:
Our business renewal process was based mainly on streamlining our processes in order to improve productivity and involved minimal capital expenditure. For more information about the safety, health and environmental aspects of our business renewal process see below "Safety, Health and Environment".
We have implemented a SAP-enabled enterprise management system, aimed at improving the management of all our information systems by eliminating the barriers between different business functions.
In 1998, the beginning of our renewal process, we operated 74 non-standardized continuous miners. Through significant improvements in productivity, we have maintained the number of continuous miners to the current number of 52 (52 in 2003). Over the same six-year period we have also achieved the following results:
In 2004, total run-of-mine costs (per ton of coal produced) increased by 1%, compared to 2003. There was no increase in cash cost per ton of coal produced compared to 2003. Machine productivity increased by 3.8% in 2004 to 1,707 tons per shift of a continuous miner. Per capita productivity rose by 5.82%. The percentage of coal fines (less than 6.35 mm) has reduced from 32.28% to 31.20% and the non-coal contaminants such as stone was reduced from 3.2% to 2.16%. Underground dust levels, which were reduced from an average of 5 mg/m3 to 3.5 mg/m3 in the previous year, were held at an acceptable level of 3.0 mg/m3 throughout the year.
Project 2010. A recent analysis of the future challenges facing Sasol Mining and a review of our strategy culminated in the definition of Project 2010. This project aims to ensure that Sasol Mining meets the challenges going forward. These challenges are encapsulated in strategic themes, namely:
The renewal process that helped Sasol Mining to sustain improvement forms part of the continuous improvement theme.
We continue to improve the design, operability and performance of the continuous miner fleet at our Secunda underground operations.
33
During 2004 fine coal was reduced to record low levels with development work on the cutting drum and cutting elements gaining impetus. Further, a new control system has been introduced on selected continuous miners. It is expected that this system will especially assist with productivity improvements.
Mining rights ownership. In terms of the transitional arrangements of the Mineral and Petroleum Resources Development Act (Act No. 28 of 2002), the mining authorizations in terms of Section 9 of the repealed Minerals Act, remains in force for five years from date of implementation of the Act. During this five year period, applications will have to be submitted to the State for the conversion of the present mining authorizations to mining rights. These new rights are granted for a maximum period of thirty years. For a further discussion of the Mineral and Petroleum Resources Development Act see "3.D Risk FactorsNew mining legislation may have an adverse effect on our mineral rights" and below "Regulation of Mining Activities in South AfricaThe Mineral and Petroleum Resources Development Act".
Economic empowerment of historically disadvantaged South Africans. The Mineral and Petroleum Resources Development Act, (with its adjuncts the Mining Charter and scorecard) came into effect on 1 May 2004.
The Act is aimed at fostering and encouraging black economic empowerment (BEE) and transformation within the mining industry at the tiers of ownership, management, skills development, employment equity, procurement and rural development. The Mining Charter provides for 15% of equity in South Africa's mining assets to be owned by historically disadvantaged South Africans (HDSAs) within 5 years of the Act coming into effect, and 26% within 10 years. For further discussion on the Mining Charter see "3.D Risk FactorsNew mining legislation may have an adverse effect on our mineral rights. The Mining Charter scorecard will be used as a measuring tool by the government (department of Mineral and Energy Affairs) to measure conformance to the Mining Charter when it decides to grant mining permits.
Compliance with the Mining Charter is a prerequisite for the conversion of mining rights. Mining rights under the new legislation must be converted from "old order' rights to "new order' rights. Failure to comply will result in a company losing its right to mine.
In order to make these changes in ownership as seamless as possible, Sasol Mining has pursued a rigorous black economic empowerment strategy formulation process, followed by a partner selection process, the result of which has been the selection of Eyesizwe Coal (Pty) Limited (Eyesizwe) as the preferred lead strategic black economic empowerment partner. Sasol Mining engaged in negotiations with Eyesizwe which resulted in an agreement on a Memorandum of Understanding (MOU). The parties will exchange information on a continuous basis to establish possible synergies. Potential opportunities will be considered in the areas of coal export, Eskom market (power generation) and the Sasolburg mining operations.
We expect that the Export business (Twistdraai Mine and Plant) will be the first focus area for inclusion in a future deal with Eyesizwe. We believe Sasol Mining will comply with the 15% ownership requirement of the Act and Mining Charter within the prescribed five year period.
Sasol Synfuels
Sasol Synfuels operates a coal and gas-based synfuels manufacturing facility which, on the basis of our knowledge of the industry and publicly available information, we believe to be the world's only large commercial-scale facility of this type. Based at Secunda, Sasol Synfuels produces syngas primarily from low-grade coal with a smaller portion of feedstock being natural gas. The process uses our advanced high-temperature Fischer-Tropsch technology to convert this into a wide range of synfuels, as well as industrial pipeline gas and chemical feedstocks. Sasol Synfuels also produces most of South Africa's chemical and polymer building blocks, including ethylene, propylene, ammonia, phenolics, alcohols and
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ketones. It operates the world's largest oxygen production facilities (according to Air Liquide, the French industrial gas company), currently consisting of 15 units. As a result, it has the capacity to recover high volumes of two noble gases, krypton and xenon.
Sasol Synfuels obtains its coal feedstock requirements from Sasol Mining and purchases natural gas feedstocks from Sasol Gas. The company produces fuel components that are sold to Sasol's Liquid Fuels Business. The pipeline gas is marketed by Sasol Gas to industrial consumers. Chemical feedstocks are processed and marketed by Sasol and its joint ventures, including Merisol. Unrefined ethylene and propylene are purified by Sasol Polymers' Monomers division at Secunda for the downstream production of polymers. Ammonia is sold to the fertilizer and explosives industries, including Sasol Nitro, our nitrogenous products division.
In 2004, Sasol Synfuels' turnover amounted to R16 billion, of which R1.3 billion (8%) was sold to external customers and R14.7 billion (92%) to other companies in the Sasol Group.
Total production increased by 4.1% to 7.7 Mt in 2004 from 7.4 Mt in 2003, resulting mainly from better stability achieved during the year. Average per capita production increased for the same reason by 6% to 1,357 t. The production of liquid and gaseous fuels remained at 66% of total volumes compared to 2003.
Sasol Synfuels
Production Volumes
|
2004 |
2003 |
||
---|---|---|---|---|
Total production (Mt) | 7.7 | 7.4 | ||
Average production per employee (t) | 1,357 | 1,280 |
Specific Products Volumes
|
2004 |
2003 |
||
---|---|---|---|---|
Liquid and gaseous fuels (%) | 66 | 66 | ||
Petrochemical feedstock (%) | 20 | 20 | ||
Carbon plus nitrogenous feedstock for fertilizers and explosives (%) | 11 | 11 | ||
Specialized cokes, creosote and related carbon and tar products (%) | 3 | 3 |
Overall production integrity and reliability remained at high levels throughout the year. Ongoing programs are followed to improve plant reliability, availability and efficiency of operations. Specific initiatives are being rolled out to improve productivity, starting with maintenance work processes. Behavior based safety is also currently rolled out to improve the risk and safety profile of the organization.
Our investments. Natural gas was successfully introduced to the Synfuels factory during February 2004. Natural gas is used to supplement coal derived gas and represented 1% of product volumes for the 2004 financial year. It is expected that natural gas' contribution to product volumes for 2005 will be 3%.
We commissioned a 15th oxygen train in December 2003, at a capital cost of R634 million. We believe that this unit, with a planned capacity of 3,500 tons of oxygen per day, will enable further growth in our production and, on the basis of our knowledge of the industry and publicly available information, we believe that it is the world's largest single air separation unit. A krypton/xenon line was added to this unit at a cost of R13 million.
A project to upgrade the control response optimization system was also completed in the year. This project enables advanced or pro-active synchronization of the volume of gas produced with the volume of gas that can be processed in the synthesis units.
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New fuel specifications will come into effect in January 2006, which will allow consumption of only unleaded fuel in South Africa. Sasol Synfuels is advancing an initiative in partnership with Sasol Technology and Sasol's Liquid Fuels Business to ensure our compliance. We currently expect to invest about R4.4 billion to modify our liquid fuel refining and blending operations and to establish additional new plant aimed at increasing the octane rating of our synthetic petrol. The majority of this expenditure (approximately R4.0 billion), relating to the installation of a selective catalytic cracker, will have to be incurred over the next two financial years. Unlike our other major capital investment projects undertaken in recent years, this project is not expected to generate substantial returns for the Group, but is required to meet the changed fuel specifications. The project will require multiple refinery unit changes, and the construction of new refinery units, as well as the installation of a catalytic cracker required to produce additional tranches of ethylene, propylene and high-octane fuel components. We expect that in addition to developing the new fuels solution for 2006, this project will also address most of the work that will be required to meet the envisaged future more stringent fuel specifications which are expected to be mandated in future years.
We also expect that the additional ethylene production capacity will permit a rationalization of our assets in the polyethylene business unit of Sasol Polymers, providing us with the opportunity to construct a new large-scale tubular low-density polyethylene unit. Some of the additional propylene will be used in a new large-scale polypropylene unit. We expect the planned monomer and polymer expansions to yield substantial returns after 2006 and, in the medium term, to counter the impact of the investments for Sasol Synfuels of the fuel specification investments.
Because of the way process plants are configured at Sasol Synfuels, its ultra-low-sulfur synthetic diesel already meets the more stringent 2006 specifications for the sulfur content of diesel (to be lowered in South Africa from 3,000 ppm to 500 ppm).
Natural gas. In 2001, Sasol Synfuels and Sasol Technology commenced the preparatory work to install an additional plant and facilities in Secunda to commence using natural gas imported from Mozambique as supplementary hydrocarbon feedstock. As part of the Natural Gas Project, Sasol Synfuels converted portions of its plant to use natural gas which is reformed into hydrogen and carbon monoxide for the production of additional volumes of syngas. We expect that the supplementary supply of natural gas will enable Sasol Synfuels to increase its current gas loads initially by about 3%, and we expect that, in time and subject to the discovery of additional gas reserves in Mozambique, it could allow an increase in its current gas loads.
Strategy. Sasol Synfuels' primary strategic objectives are:
In 2001, Sasol Synfuels initiated the implementation of Project Champion, a business optimization process aimed at containing costs, increasing productivity and promoting our competitiveness, especially in periods of low oil and chemical prices, through optimizing information management and process integration. This project is ongoing in terms of process embedding, supplemented by specific initiatives that support the strategic objectives as highlighted above.
Sasol CarboTar
Sasol's CarboTar business was transferred to Sasol Synfuels from Sasol's Liquid Fuels Business with effect from 1 July 2003 as an operating division of Synfuels. Sasol CarboTar produces and markets a range
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of value-added carbon and tar products including calcined coke, creosote and various other tar products. Its production facilities are located at Secunda and Sasolburg, in South Africa.
The division was formed in 1995 and its Secunda operations are focused primarily on the production of value-added carbon products such as calcined pitch and waxy oil coke, while the Sasolburg operations are focused primarily on the production of creosote and various other tar products. New capital projects are progressing to source alternative feedstock for Sasol CarboTar since the Sasolburg factory converted to natural gas. Additional feedstock is also sourced from Sasol Synfuels' Secunda tar stream.
Sasol CarboTar experienced a 14% decline in turnover and a profit decrease of 43% to R84 million, primarily due to exchange rate exposure. Own production sales increased slightly to approximately 372,000 tons.
Sasol Olefins and Surfactants
Sasol Olefins and Surfactants manufactures and markets a diverse range of surfactants, surfactant intermediates, alcohols, monomers and inorganic specialty chemicals. Its production activities are mainly located in the United States, Germany, Italy and South Africa, with smaller operations in Slovakia, UAE and China. Sasol Olefins and Surfactants divested its specialty surfactants production facility in the Netherlands (Sasol Servo) at the end of this fiscal year.
Olefins and Surfactants' customers are distributed globally, with the majority of sales in Europe and the United States. This global customer base is served from an international sales offices network. In addition to divisional headquarters in Bad Homburg (Frankfurt), Germany, sales offices are located throughout Europe, as well as in the U.S., South Africa, UAE and Asia. Total external sales for Olefins and Surfactants were R17.1 billion in 2004, approximately 28% of total Sasol Group turnover.
Strategic review of the Olefins and Surfactants business management structure led to the consolidation of the original five business units into four, with the former Surfactants business unit being split along Alkylate and Alcohol value chains. The restructuring took place at fiscal year-end. The four global business units are:
Alkylates and Surfactants: The main products of the Alkylates and Surfactants business unit are paraffins, olefins (including poly-internal olefins), linear alkylbenzene (LAB) and their surfactant derivatives, such as paraffin sulfonate and linear alkylbenzene sulfonate (LAS).
LAB is the feedstock for the manufacture of linear alkylbenzene sulfonate (LAS), an essential surfactant ingredient for the detergents industry. Paraffins (n-paraffins) and n-olefins are produced mainly as feedstock for the production of LAB, oxo-alcohols and paraffin sulfonates. A portion of this business unit's products are used internally for the production of downstream surfactants and alcohols.
Based on industry and publicly available information, Sasol's Alkylates and Surfactants business unit is one of the leading global producers of paraffins and LAB, as well as a leading supplier of LAS in Europe. The main competitors include: ExxonMobil, Shell and Petresa in the n-paraffins market; Huntsman, Petresa and ISU in the LAB market; and Stepan, Huntsman and Cognis in LAS.
Alcohols and Surfactants: The Alcohols and Surfactants business unit produces a diversified portfolio of linear and semi-linear alcohols of carbon range between C6 and C22+. The diversity of this product portfolio is supported by the wide range of raw materials (Petrochemical, Oleochemical and Coal-based)
37
and manufacturing facilities used, and technologies applied. Nonionic and anionic surfactants enhance the product portfolio, as well as some surfactant intermediates such as ethylene oxide, alkyl phenols and alkanolamines via the merging of the former Surfactants business unit.
Alcohols and Surfactants products are used in a wide range of applications, including metalworking, flavors and fragrances, personal care, cosmetics, plastic additives, textiles, agriculture, detergents and cleaners. A portion of the alcohols production is consumed internally in Olefins and Surfactants' value chain to produce surfactants and specialty plasticizers.
Based on industry and publicly available information, Sasol's Alcohols and Surfactants business unit is one of the leading global suppliers of carbon range C6+ linear and semi-linear alcohols, as well as a leading producer of surfactants in Europe. The main competitors include Cognis and Shell.
Inorganic Specialties: This business unit produces mainly alumina products. Alumina is used in a broad range of applications, including catalyst supports, raw materials for ceramics, coatings and polymer additives. This business unit also produces zeolites, which are used as softening components in detergents. Competitors include Akzo Filtrol, and Engelhard in aluminas. There are numerous competitors in zeolites.
Monomers: The Monomers business unit has two main activities: producing alpha-olefin co-monomers in South Africa and ethylene in the United States.
The alpha olefin co-monomers, 1-pentene, 1-hexene and 1-octene are manufactured at facilities in Secunda as an integral part of Sasol's synfuels process. Most of these co-monomers are sold to third parties for use in the manufacture of polyethylene plastics (LLDPE and HDPE), which end up in applications such as shrink-wrap film, woven plastic bags and refuse bags. The main competitors include BP, Shell and Chevron.
Ethylene is produced at our ethane-based ethylene cracker and is sold to plastics manufacturers in the U.S. Gulf Coast region. Some of the ethylene production is used internally to manufacture alcohols. There are numerous competitors in the U.S. ethylene market.
The following table summarizes the production capacity of Sasol Olefins and Surfactants for each of its main product areas.
Sasol Olefins and Surfactants
Production Capacity
Product |
Facilities Location |
(Ktpa) |
||
---|---|---|---|---|
C5C8 alpha olefins | South Africa | 225 | ||
Ethylene | United States | 455 | ||
C6+ alcohol | United States, Europe, South Africa | 600 | ||
Inorganics | United States, Europe | 170 | ||
Paraffins and olefins | United States, Europe | 800 | ||
LAB | United States, Europe | 550 | ||
Surfactants | United States, Europe, Far East, Middle East | 1,000 |
These production facilities are located in Secunda in South Africa; Lake Charles, Tucson and Baltimore in the United States; Brunsbüttel, Marl and Witten in Germany; Augusta, Terranova, Sarroch, Crotone and Porte Torres in Italy; Dubai in the UAE; Novaky in Slovakia and Nanjing in China.
Sasol Polymers
The Sasol group's polymer related activities are managed in two separate companies namely Sasol Polymers, a division of Sasol Chemicals Industries, and Sasol Polymers International Investments. Sasol Polymers is responsible for the local operations and Sasol Polymers International Investments for the
38
offshore operations. The results of these companies are shown together in this document for ease of analysis of the total polymer related activities.
Sasol Polymers focuses on the production of ethylene and propylene monomers, polypropylene, polyethylene and polyvinyl chloride polymers and other chemical products through its respective businesses with operations located in South Africa and Malaysia. In South Africa, Sasol Polymers has its major manufacturing plants at Sasolburg and Secunda. In addition, it participates in three ventures, Optimal Olefins and Petlin in Malaysia and Wesco China Limited in China.
During 2004, Sasol Polymers achieved external turnover of R6.6 billion, representing 11% of our total segmental turnover.
The division has retained a sharp focus on continuous improvement. Since 1995 per-capita productivity (tons of total production per employee) has risen by a total of 308% in ten years. Cash fixed costs per ton in real terms have dropped by 46% over the same ten years.
Monomers. The Monomers business unit of the Polymers division supplies feedstock to its polypropylene, polythene and vinyls business units and to Dow Plastics South Africa. Sasol Polymers extracts the ethylene and propylene feedstocks from feedstreams produced in our Fischer-Tropsch process at Secunda, while a small portion of ethylene is produced from propane cracking. The ethylene production capacity is 480 Ktpa and includes facilities for ethane cracking in both Secunda and Sasolburg.
Ethylene production fell slightly below target during the year because of lower propane supply from Natref in Sasolburg. This loss in production was matched by a reduction in demand when a major external customer experienced production difficulties.
The propylene extraction facilities comprise three splitter columns at Secunda with a total capacity of 475 Ktpa (350 Ktpa polymer and 125 Ktpa chemical grade), as well as one splitter column at Natref with a capacity of 45 Ktpa chemical grade. The propylene plants had a stable period in 2004 with production maintained slightly above target. We supply approximately 160 Ktpa of ethylene and 100 Ktpa of propylene to Dow Plastics South Africa for its high-density polyethylene (HDPE) and polypropylene plants at Sasolburg.
Polypropylene. The Polypropylene business unit manufactures and markets homopolymers as well as random and impact copolymers. The polypropylene plant technology is licensed from Novolen Technology Holdings of Germany and has a production capacity of 220 Ktpa. About 51% of the production is supplied to customers in South Africa. The remainder is sold in more than 30 countries in the Far East, Africa, North West Europe and South America.
Polyethylene. The Polyethylene business unit is a long-established producer and marketer of low-density polyethylene (LDPE) and linear low-density polyethylene (LLDPE) for a broad spectrum of customers in the South African plastics conversion industry. It is the country's sole producer of these products and has a market share of more than 75%. The polyethylene business achieved 204 Kt of total production despite ethylene supply constraints.
The 100 Ktpa LDPE plant at Sasolburg uses high-pressure autoclave technology licensed originally from ICI of the United Kingdom. The 110 Ktpa LLDPE plant uses gas-phase technology licensed from Union Carbide (now The Dow Chemical Company). The plant has been upgraded to produce 1-hexene grades in addition to 1-butene grades.
Vinyls. The Vinyls business unit produces suspension polyvinyl chloride (PVC) resins, dry blends and compounds. Its fully integrated vinyl chloride monomer (VCM) and PVC production chain is situated at Sasolburg. Ethylene and chlorine are sourced from within Sasol Polymers. It uses technology licensed from European-based VinTec and European Vinyls Corporation (EVC) for VCM and PVC respectively. The current PVC nameplate capacity is 160 Ktpa. The Vinyls business is in the process of upgrading its VCM
39
and PVC plants to increase PVC production by at least 40 Ktpa during 2005. This business unit supplies more than 95% of the South African resin market as well as exporting to markets in Africa and the Far East.
Local PVC sales were 7% higher than in the previous year, due to demand for PVC infrastructural products in South Africa.
The Vinyls business completed the revised consolidation of its PVC compounding operations and the Durban factory was closed at the end of 2003. Production still takes place at its Johannesburg and Sasolburg plants.
Chemicals. The Chemicals business unit operates plants at Sasolburg producing chlor-alkali chemicals, cyanide and organic peroxides. The latter is produced in a joint venture with Degussa.
The Chemicals business unit operates a 145 Ktpa chlorine plant and supplies some 72% of its chlorine production to the Vinyls business unit. The balance is beneficiated into hydrochloric acid, sodium hypochlorite and calcium chloride. We sell 133 Ktpa of diaphragm- and membrane-grade caustic soda to South African customers in the pulp and paper, minerals beneficiation and soap and detergent industries.
The Chemicals business is South Africa's sole manufacturer of sodium and calcium cyanide solution with a production capacity of 40 Ktpa, which is sold to local gold producers. Local demand for cyanide is anticipated to decline in the longer term in line with South Africa's reduced extraction and refining of gold ore.
Sasol Polymers
Production Capacity(1)
Product |
Total Ktpa |
Africa |
Asia |
|||
---|---|---|---|---|---|---|
Polymers (excl. capacity of JV facilities) | ||||||
Ethylene | 480 | | ||||
Propylene | 520 | | ||||
Polypropylene | 220 | | ||||
LDPE | 100 | | ||||
LLPDE | 110 | | ||||
PVC | 160 | | ||||
Chlorine | 145 | | ||||
Caustic soda | 165 | | ||||
Cyanide | 40 | | ||||
Polymers (capacity of JV facilities) |
||||||
Ethylene | 72 | | ||||
Propylene | 11 | | ||||
LDPE | 102 | |
Investments. As additional ethylene and propylene feedstock is expected to become available during the 2006 financial year, resulting from our unleaded petrol and polymers project, Sasol Polymers will be increasing its South African output of both polyethylene and polypropylene by a total of 510 Ktpa at its Sasolburg and Secunda operations. For more information on our Synfuels unleaded petrol and polymers project see above "Sasol Synfuels".
At the Sasolburg Midland site, we will develop a new 220 Ktpa LDPE plant incorporating licensed ExxonMobil process technology and downscale production at the long-serving Poly 1 LDPE plant from 100 Ktpa to 40 Ktpa. We will also increase LLDPE capacity from 110 Ktpa to 150 Ktpa. At the Secunda site, we will develop a new 300 Ktpa polypropylene plant based on licensed process technology from BP.
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Markets and competition. Sasol Polymers' major focus is on the Southern African polymers market, from which it derives more than 75% of its turnover. As the sole producer of LDPE, LLDPE and PVC in South Africa, it holds the leading share in the local market. The main competitors in this market are Asian and Middle Eastern producers.
Dow Plastics South Africa is the main competitor for our polypropylene business, producing 110 Ktpa. Sasol Polymers exports to neighboring countries in Southern, East and West Africa, the Far East, North West Europe and South America. Sales to these markets depend on the extent to which production capacity exceeds domestic market sales.
In 2004, Sasol Polymers exported 124 Ktpa of polypropylene, 46 Ktpa of PVC, 5 Ktpa of polyethylene and 5 Kt of chemicals. Polypropylene accounts for by far the largest portion and geographical spread of Sasol Polymers' exports.
Sasol Polymers International Investments
Sasol Polymers International Investments' growth strategy focuses on Africa and the Indian Ocean Rim. To support its objectives in this latter region, it has established four ventures, Optimal Olefins and Petlin in Malaysia, Wesco China Limited in China and Arya Sasol Polymer Company in Iran.
Optimal Olefins operates a 600 Kt per year ethane/propane cracker at Kertih, on the east coast of Malaysia. The company is a venture between Petronas of Malaysia (64%), The Dow Chemical Company (24%) and Sasol Polymers International Investments (12%). The cracker principally produces 600 Ktpa of ethylene and 90 Ktpa of propylene. The monomers are sold to captive downstream customers, including Petlin, in the same petrochemical production complex at Kertih.
Petlin operates a LDPE production plant on the east coast of Malaysia. The company is a joint venture between Sasol Polymers (40%), Petronas (40%) and SABIC EuroPetrochemicals, formerly DSM (20%). This plant has a capacity of 255 Ktpa and, on the basis of our knowledge of the industry and publicly available information, we believe that it is one of the world's largest of its type. It commenced production in September 2002 and its production is primarily for the Southeast Asian and Chinese markets. Both these plants are in steady state production and contribute to group profits.
Sasol Polymers International Investments holds a 40% stake in Wesco China, a distributor of polymer products mainly to customers in Southern China and Taiwan. Wesco operates a polymer warehouse and bagging plant, a compounding plant and a recycling plant in the Guangdong province in China. The company handles more than 150 Ktpa of polymers and has distributed Sasol Polymers' polypropylene in China since 1990.
Sasol Polymers Germany, a subsidiary of Sasol Polymers International Investments, has entered into a 50:50 joint venture with the National Petrochemical Company of Iran to construct and operate an integrated ethylene and polyethylene production facility in Iran. The joint venture, Arya Sasol Polymer Company, comprises a 1,000 Ktpa ethane cracker and two 300 Ktpa polyethylene plants (one for producing LDPE and one for HDPE). Construction of the production facility has commenced. The cracker is expected to come on stream towards the middle of 2005 and the two polyethylene plants early in 2006.
Sasol Solvents
Sasol Solvents primarily manufactures and markets globally a range of oxygenated solvents to various industries. In 2004, Sasol Solvents achieved a global external turnover of R6.0 billion, which represents 10% of our total segmental turnover.
Products and activities. A significant part of Sasol Solvents' portfolio of products can be classified as oxygenates. These are used as solvents in the manufacturing of paints, inks, coatings, adhesives, pharmaceuticals, cosmetics, fragrances and other applications. In addition to their solvent applications, a number of these products serve as intermediates for the production of downstream chemicals. We believe
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that the breadth of our product portfolio is a competitive advantage, compared to more limited portfolios of some of our competitors in the global solvents market.
Sasol Solvents
Production Capacity
Product |
Total (Ktpa) |
Africa |
Europe |
||||
---|---|---|---|---|---|---|---|
Ketones | 313 | ||||||
Acetone | 168 | | |||||
MEK | 120 | | |||||
MIBK | 25 | | |||||
Glycol ethers |
70 |
||||||
Butyl glycol ether | 70 | | |||||
Acetates |
59 |
||||||
n-Propyl acetate | 9 | | |||||
Ethyl acetate | 50 | | |||||
Solvent blends |
50 |
|
|||||
Mixed alcohols |
385 |
|
|||||
Pure alcohols |
860 |
||||||
Methanol (C1) | 140 | | |||||
Ethanol (C2) | 285 | | |||||
n-Propanol (C3) | 45 | | |||||
Isopropanol (C3) | 225 | | |||||
n-Butanol (C3) | 150 | | |||||
iso-Butanol | 15 | | |||||
Acrylates |
125 |
|
|||||
Ethyl acrylate | 35 | | |||||
Butyl acrylate | 80 | | |||||
Glacial acrylic acid | 10 | | |||||
Other |
70 |
|
|
Sasol Solvents has a total production capacity of more than 1,900 Ktpa, at four sites in South Africa and three in Germany. The South African production facilities are located at Secunda in the Mpumalanga Province and Germiston in the Gauteng Province and at two separate locations in Sasolburg in the Free State Province. Our German production facilities are located at Herne, Marl and Moers in the Ruhr area.
The main portion of the division's South African product is derived as a co-product of the Synfuels process at Secunda. Significant parts of the products are nevertheless synthesized from chemical feedstocks. Ethanol, isopropanol and methyl ethyl ketone (MEK) are synthesized from ethylene, propylene and butane respectively and the German plants. In South Africa, butanol is synthesized from propylene and carbon monoxide and acrylic acid is synthesized from propylene.
Some of the products also result from the downstream conversion of the primary chemicals to higher value-added derivatives. Examples of these products include the production of:
Sasol Dia Acrylates is our new marketing and production joint venture with Mitsubishi Chemical Corporation of Japan. This company successfully brought on stream its 80,000 tpa acrylic acid and 115,000 tpa acrylates complex in February 2004.
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The integrated, four-plant facility produces acrylic acid, glacial acrylic acid, butyl acrylate and ethyl acrylate from Sasol feedstock, including butanol from the adjacent butanol plant brought on stream in the previous year. This new chemical complex has enabled Sasol to become the world's only known acrylic acid and acrylates producer that is fully back-integrated into the required feedstocks of propylene, butanol and ethanol. The complex also underscores our commitment to expand our chemical portfolio by adding value to our chemical feedstocks.
Closer collaboration of Sasol Solvents with Sasol Olefins and Surfactants in Europe, the US and South Africa has yielded operational synergy. By sharing services, these two divisions have reduced their operating costs.
Markets and competition. In 2004, Sasol Solvents sold approximately 1.48 Mt of products worldwide, approximately 90% of which were sold in the European, South African, Asia-Pacific and Middle Eastern markets. Sasol Solvents markets its products globally and manages its global business from its central offices in Johannesburg and Hamburg. It also operates thirteen regional sales offices and seven storage hubs in South Africa, Asia-Pacific, the Middle East, the United States and Europe.
Sasol Solvents holds significant market shares in the global markets for some products, amongst which n-propanol, propyl acetate and iso-propanol are the most prominent.
Sasol Solvents' competitors vary depending on the products and include a number of major international oil and chemical companies. In the market for ketones, its main competitors are ExxonMobil, Shell Chemicals and Ineos. In the alcohols market, its main competitors are BP Chemicals, Shell Chemicals, Dow, Celanese and Equistar. In the market for acetates and acids, its main competitors include Celanese, Eastman and BP Chemicals.
Sasol's Liquid Fuels Business (Sasol's LFB or LFB)
In line with the requirements of South Africa's Liquid Fuels Charter of 2000 and our commitment to advancing Black Economic Empowerment (BEE), we have focused on creating the new Sasol LFB. The Sasol LFB encompasses the established liquid fuels and lubricants marketing, distribution, commercial and retailing interests, including the Exel business, our shareholding in the Natref crude oil refinery, and the acquisition of fuel components and the fuel blending and storage facilities at Sasol Synfuels in Secunda. Products include petrol, diesel, jet fuel, fuel alcohol, illuminating paraffin, liquefied petroleum gas, fuel oils, motor and industrial lubricants. Sasol Synfuels' fuel blending and logistics operations at Secunda were transferred to, and successfully integrated into, the Sasol LFB. The Sasol LFB also encompasses crude oil procurement, shipping and refining, as well as final product supply to, and trading with, other oil companies operating in Southern Africa.
On 6 February 2004, Sasol announced that Sasol Limited and Petrolium Nasional Berhad (Petronas)the Partieswere in discussions concerning the combination of their respective interests in Sasol's Liquid Fuels Business and Engen in a joint venture to create a leading South African Liquid Fuels Business. It is envisaged that the new Sasol's Liquid Fuels Business will be effected by way of a joint venture in which the Parties will each have an equal 37.5% interest and in which BEE partners (both existing and new) will hold a combined 25% interest.
The parties plan to conclude definitive agreements concerning the joint venture during the last quarter of 2004. A further announcement will be made at the conclusion of this process. Definitive agreements will be subject to regulatory review which it is hoped will be completed during the first quarter of 2005.
The Natref refinery. National Petroleum Refiners of South Africa (Pty) Limited (Natref), is South Africa's only inland crude oil refinery. We own 63.64% of Natref and Total South Africa (Pty) Limited (Total) owns the balance of 36.36%. While we operate the refinery, Total participates in its management with veto rights in respect to a number of corporate actions, including, among others, increasing or reducing Natref's share capital, amending Natref's Memorandum and Articles of Association and the
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rights attaching to its shares, appointing directors to serve as executive officers and determining directors' remuneration.
Under the terms of an agreement concluded between Total and Sasol, Total was granted the option to purchase up to 13.64% of the ordinary shares in Natref from Sasol at fair market value upon the occurrence of certain events. Termination of the Main Supply Agreements in December 2003 allowed Total to exercise its option to increase its interest in Natref to up to 50%, although Total decided not to exercise its option and increase its interest to 50%, at that stage. The envisaged transaction to combine the sub-saharan liquid fuels businesses of Sasol and Petronas, in a joint venture, will again provide Total with the option to increase their shareholding in Natref by 13.64%. Total would be allowed equal representation on Natref's board of directors, once they have acquired an additional 13.64%. Potential disagreements regarding matters before the board of directors or shareholders meetings will be resolved through appropriate deadlock procedures, or otherwise referred to arbitration.
Refinery production and capacity. Natref obtains approximately 50% of its crude oil requirements from the Middle East through crude oil term contracts and the balance at spot prices from West Africa and other sources. Durban landed crude oil is transferred to the refinery through a 670 kilometer pipeline owned by Petronet, a state-owned pipeline company.
Natref is a technologically advanced refinery, highly efficient in refining heavy crude oil into gasoline, diesel and other white products. It is South Africa's only inland crude oil refinery, as the other three crude oil refineries are located along the country's shores. Its inland position does not allow the refinery easy access to the bunkers fuel market, which is the case for coastal refineries. Therefore, Natref focuses on the production of white petroleum products. It is designed to upgrade relatively heavy crude oil with a high sulfur content (sour) to yield about 90% white petroleum products. Crude oil selection and degree of upgrade are ultimately dictated by refinery configuration and overall economics. Other products of the refinery include commercial propane, jet fuel, different grades of bitumen and fuel oils.
We are investing in the Natref refinery to meet new fuel specifications. This project is aimed at meeting the more stringent legislation for the introduction of low-sulfur diesel and lead-free petrol production in January 2006. The project will allow Natref to produce to the 2006 specifications, but at the reduced capacity of 89%. The project should be completed by the end of 2005 and our share of capital for the Natref project is expected to be about R366 million. New processing units will have to be built to meet the required fuel specifications in 2010 and will require a substantial investment.
With regard to refinery efficiency during the year 2004, plant availability was 97.82%. White product yield was 90.7% in 2004, compared to 91.6% in 2003. The total product yield increased from 98.4% in 2003, to 99.4% in 2004. Unintended downtime was reduced from 0.94% to 0.52%, which falls within the upper 20% of Asia-Pacific refiners. Energy efficiency improved by 1.5 percentage point and refinery losses reduced from 0.72 weight percentage (wt%) to 0.70 wt% during 2004.
In September 2002, we completed our project to expand the refinery in order to increase the refining capacity by 22%, to up to 107,000 bbl per day. The total cost of this project amounted to R845 million (excluding capitalized interest), of which we spent R766 million during the years 2003, 2002 and 2001. In light of our expectations for future deregulation of the industry and the projected increase in fuel demand, we believe that this additional capacity will in the long-term provide economies of scale that can enhance our low-cost competitive advantage and increase our market share. In addition to increasing refining capacity, we expect that this expansion will enable Natref to improve the range of products offered, the yield of white products and environmental efficiency.
Natref Refinery Production(1)
Product |
2004 |
2003 |
2002(2) |
|||
---|---|---|---|---|---|---|
Crude oil processed (million liters) | 3,115 | 2,751 | 2,055 | |||
White product yield (% of raw material) | 90.7 | 91.6 | 88.1 | |||
Total product yield (%) | 99.4 | 98.4 | 96.5 |
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Liquid Fuels Marketed
by Sasol's LFB
Product |
2004 |
2003 |
2002 |
|||
---|---|---|---|---|---|---|
Total liquid fuel sales (million liters) | 9,318 | 8,868 | 7,727 | |||
Fuel and bitumen exports (million liters) | 739 | 158 | 160 |
The South African liquid fuels market. We are the leading provider of liquid fuels in South Africa in terms of both turnover and sales volumes (South African Petroleum Industry AssociationProduct Sales Figures, 2003 calendar year). The proportion of Natref's capacity that corresponds to our 63.64% share in the refinery represents about 14% of South Africa's total liquid fuels demand. In addition, 27% of South Africa's fuel demand is produced from components produced at Sasol Synfuels in Secunda. Our main wholesale customers in the South African liquid fuels market include Engen, BP, Caltex, Shell and Total. These companies, among others, currently purchase a part of their liquid fuels requirements for the South African market from us.
The Natref refinery at Sasolburg and our facilities at Secunda are located in the economic heartland of the country, where an estimated 55% of the country's liquid fuels are consumed. We currently supply approximately 6.6 Mt of white products per year to the South African market, representing approximately 41% of South Africa's fuel needs of about 16 Mt per year. Petrol and diesel export volumes to African countries, excluding South Africa more than doubled.
Through our joint venture with ExxonMobil we have established a 15% direct market share for the supply of jet fuel at Johannesburg International Airport.
After termination of the Main Supply and Blue Pump agreements, we concluded new supply agreements with the main oil companies operating in South Africa. Our new wholesale agreements came into effect from January 2004. These agreements cover the supply of liquid fuels, including petrol, diesel, liquefied petroleum gas, jet fuel and illuminating paraffin. The transition to the new agreements was reasonably smooth and we met all supply commitments.
The termination the Main Supply Agreement (MSA) on 31 December 2003 constrained volumes sold to major oil companies under new supply agreements relative to volumes sold under the MSA during the second half of the financial year. Turnover for the year decreased by 4%, while operating profit increased by 2%. Higher direct sales volumes, disciplined cost management and higher US dollar refining margins, all contributed positively to profit. Lower sales to other oil companies and the Rand's strengthening were the main constraints on achieving further profit growth. The operating profit from fuels marketing improved by 86% due to the successful launch of our retail network, which resulted in higher direct sales volumes.
In the commercial sector, we are targeting three primary business sectors for marketing and supplying Sasol liquid fuels and lubricants: the mining industry, the transport industry and government organizations. Our successful marketing of products, for example our low-sulfur Sasol turbodiesel, has assisted in promoting our successes in both the commercial and retail markets.
The distinctive commercial, logistical, marketing and technical operations of Exel Petroleum and Sasol's Liquid Fuels Business were integrated into one new company and culture during the second half of the year. At year-end, we had established 115 Sasol Retail Convenience Centers (RCC) (service stations) and 175 Exel service stations in line with maintaining a dual-branding approach to support two distinctive, but complementary marketing strategies.
Our program to roll out Sasol RCCs across South Africa within an extremely tight timeframe is being executed on schedule, and enabled us to achieve our interim objectives in terms of market share for both retail petrol and diesel.
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When the Main Supply Agreement expired, we started directly to sell, on a commercial basis, the group's low-sulfur, low-benzene illuminating paraffin. We expect to build up a market share for our illuminating paraffin over the next five years. We retain competitive advantage in this sector of the industrial and related energy markets because of a notably low sulfur content of our fuel oils and special distillate fuels.
The Petroleum Products Amendment Act and subsequent further Amendment Bill, are expected, when enacted, to allow the Minister of Minerals and Energy, if required, to regulate the conditions and requirements for licensing of the sale of petroleum products to the retail markets in South Africa, including liquid fuel retail prices. Its provisions can affect the conditions and cost of our entry into the South African retail market for liquid fuels. See "Item 4.B Business OverviewRegulationRegulation of PetroleumRelated Activities in South Africa".
The Petroleum Pipelines Bill proposed, among other things, to establish a petroleum pipelines authority responsible for the supervision of the national regulatory framework of petroleum pipelines and provisions for the issuance of licenses relating to the construction and operation of petroleum pipelines and the delivery of certain commercial services in connection with these pipelines. It is intended to subsume the pipelines authority into a single Energy Regulator to be created by legislation.
Among the matters governed by the Act, of particular significance to our business, are issues relating to the issuance of licenses and the discretion granted to the Minister of Minerals and Energy with respect to the exercise of executive powers, the determination of tariffs and the issue of open access to pipelines.
With regard to the setting of tariffs, different methodologies can be adopted, which may prove disadvantageous to some competitors because of their different market position and geographic location. Regulations that may be promulgated under the Act, could affect our logistic position due to the location in the economic heartland of the country of our Natref refinery and our Synfuels facilities at Secunda. The Act provides that sufficient pipeline capacity will be made available in the crude oil pipeline to enable Natref to operate at its capacity at the commencement of the Act.
We believe that securing direct independent access to the retail markets will yield strategic advantages to further improve our position in the South African fuels market. Since the restrictions on our direct sales to the South African market have been removed, we have the opportunity to increase our fuel production and sales by accessing the retail and commercial markets.
Petronet, the South African pipeline company, transfers synthetic fractions from Secunda to Natref on behalf of Sasol. Petronet has purported to terminate the agreement to transfer these fractions with effect from 1 January 2005. Sasol's contention is that they have no right to do so and an application is being made to Court to interdict them from ceasing such transfer.
We continue to support and participatewith the South African liquid fuels industry and the national departments of Minerals and Energy and of Environmental Affairs and Tourismin comprehensive technical program towards finalizing South Africa's national vehicular emission strategy. The final draft strategy is due to be presented to the South African Cabinet for ratification before the end of 2004.
We have also been participating in, and contributing to, a National Optimum Octane Study with a view towards defining an optimum octane structure for petrol in South Africa once octane-enhancing lead additives are removed, by law, by 2006.
Economic empowerment of historically disadvantaged South Africans. As part of a general initiative of the government of South Africa to ensure the participation of historically disadvantaged South Africans in the country's economy, in November 2000, we became party to an agreement with the government and the liquid fuels industry which requires us, as well as other oil companies in this sector, to allow and facilitate Black Economic Empowerment (BEE) participation. For a further discussion of the Liquid Fuels Charter see "Empowerment of Historically Disadvantaged South Africans". The Liquid Fuels Charter requires,
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inter alia, us to allow historically disadvantaged South Africans to acquire an equity participation of at least 25% in the company holding our Sasol's Liquid Fuels Business by 2010. We presented our charter-specific plan to a dedicated parliamentary portfolio committee of the South African Parliament during 2003. Our plan outlined our commitment to include a 25% BEE shareholding in our South African Sasol's Liquid Fuels Business before 2010. The process to identify suitable Black Economic Empowerment shareholders is well advanced and has been accelerated from January 2004 after the expiry of the Main Supply and Blue Pump Agreements between Sasol and other oil companies in South Africa. In order to facilitate this participation, we reorganized our South African Sasol's Liquid Fuels Businesses, including our crude oil refining facilities, our liquid fuels marketing and distribution operations and our Synfuels blending and storage facilities.
In February 2004, we announced our intention, subject to final agreement between the parties and approval by the regulatory authorities, to merge our Sasol LFB with Engen, a leading petroleum manufacturing and marketing company in South Africa. A joint business plan is being developed and further discussions on structuring the 25% BEE participation in the joint-venture transaction are ongoing with our respective BEE partners. Dr Penuell Maduna, a former cabinet minister, was appointed as an advisor to facilitate and structure the BEE consortium associated with Sasol's LFB. (See Item 8.BSignificant changes)
Sasol Gas
Through Sasol Gas, we market pipeline gas, produced by Sasol Synfuels and natural gas as a result of the inception of natural gas production from the Mozambican gas fields. Since 1964, we have developed gas markets and a gas distribution pipeline network of 2,200 km through which we currently supply 52.9 million gigajoules per annum (mGJ/a) throughout the regions of Mpumalanga, Gauteng, KwaZulu-Natal and the Free State. In these regions, we supply our gas to more than 530 industrial and commercial customers. We use a Petronet pipeline to transport gas to our markets in KwaZulu-Natal.
Our gas products consist of synthetic methane-rich gas produced at our Synfuels plants in Secunda and natural gas piped from the Mozambican gas fields. Our gas competes mainly with crude oil-derived products in various industries, including ceramics, glass, metal manufacturing, chemical, food and a number of other sectors.
The South African gas market. The market for pipeline gas in South Africa, is still in its infancy. We expect the market to grow substantially as a result of the introduction of natural gas from Mozambique. Our current supply of 52.9 mGJ/a of pipeline gas represents 2% of the final energy market in South Africa, dominated by electricity and coal. Environmental and technological trends are expected to entice customers to convert to gas as a substitute for electricity, crude derivatives and coal.
The natural gas project. Through Sasol Petroleum International, we agreed with the government of Mozambique to develop its natural gas fields in the region of Temane. To this end, we concluded a petroleum production agreement under which, in partnership with Companhia Moçambicana de Hidrocarbonetos, a subsidiary of Mozambique's national oil company, we are developing the reservoirs in Temane and Pande and constructed a main natural gas central processing facility. We have also concluded a production sharing agreement which grants us exploration rights to defined areas surrounding the Temane and Pande reservoirs.
Furthermore, the government of Mozambique granted us the right to construct and operate a gas transmission pipeline for the transportation of gas from Mozambique to South Africa. The governments of South Africa and Mozambique have the option collectively to acquire 50% of the shares in the pipeline company which is currently a wholly owned Sasol subsidiary, at a price to be determined by means of a formula at the date they exercise the option. The South African Government's option is due to lapse three months from the date we submit reserve reports which confirm that there are sufficient proven reserves to
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ensure adequate supply to the South African natural gas market, at a potential rate of 120 mGJ/a, for twenty five years.
The project has been completed on schedule and within budget and comprised eight main objectives:
Construction of the central processing facility near Vilanculos in Mozambique, was completed in March 2004 and can currently be fed with gas from nine of its twelve production wells. In June 2002, we commenced construction of the transmission pipeline from Mozambique, which was completed in March 2004. For a discussion of the regulation of pipeline gas activities in South Africa see "Regulation of gas-related activities in South Africa".
We have successfully converted more than 500 inland customers to natural gas by the end of June 2004.
During the year demand for gas from external markets remained largely flat. While growth in sales volumes was achieved in certain market sectors, several of Sasol Gas' high-volume industrial customers have implemented an energy-efficiency drive as part of their wider corporate programs to reduce operating costs.
Based on our estimates, we believe that natural gas will be delivered to South Africa at an initial rate of 80 mGJ/a, which we expect to increase to 120 mGJ/a by the end of the decade.
The introduction of natural gas from Mozambique coincided with the exhaustion of the coal reserves and the shutdown of the majority of our mining operations at the Sigma Mine at Sasolburg. We transformed our coal gasification facilities at Sasolburg to natural gas refining as part of the Mozambique natural gas project. In addition, Sasol Synfuels and Sasol Technology installed additional facilities at our Secunda plant to commence using natural gas as supplementary hydrocarbon feedstock.
The natural gas project was conducted with due regard for social and environmental obligations and our requirement to complete construction according to the principles of sustainable development. We utilized prevailing international development guidelines and principles issued by various organizations into account, including the World Bank and the World Health Organization.
The Petronet gas pipeline. Petronet, a state owned-enterprise, is the owner and operator of a network of 3,000 km of high-pressure petroleum and gas pipelines. Petronet recently gave us notice to terminate the agreement for the transportation of gas through their Kwa-Zulu Natal pipeline to the Durban market which termination is effective 1 January 2011. We have entered into discussions with Petronet in order to attempt to secure the pipeline on gas for an extended period of time. Petronet has agreed in principle to such negotiations and the negotiations are at an advanced stage. It is envisaged that a heads of agreement can be signed during the next few months and a definitive agreement by the end of 2004.
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Co-generation. We are currently examining opportunities of co-generation, the supply of both electricity and steam to utilities consumers, especially in the regions of Newcastle, Durban and Richards Bay. In view of the government's plans to privatize electricity generation activities a co-generation project of this type should be able to achieve profitability in line with utility benchmarks.
As part of our commitment to Black Economic Empowerment, Sasol Gas formed a joint venture company, Spring Lights Gas which successfully completed its second year of commercial operations with increased operating profit on the previous year. A Black Economic Empowerment company, Coal Energy and Power Resources, holds 51% of the shares and Sasol Gas the balance. Sasol Gas sold its business rights to market pipeline gas in the Durban South area of Kwa-Zulu Natal to this joint venture, which commenced operations in July 2002.
Sasol Gas signed a memorandum of understanding in 2002 with another black empowerment company, Umkhumbi We Afrika, for the potential distribution and marketing of natural gas in the Nelspruit region of Mpumalanga. Umkhumbi We Afrika and Sasol Gas are continuing with their study to assess the feasibility of constructing the necessary spur pipeline and support infrastructure. The companies intend to complete their study before December 2004.
GTLSasol Synfuels International
Based in Johannesburg and formed in 1997, Sasol Synfuels International (SSI), our technology marketing and support subsidiary, is responsible for developing and implementing international business ventures based on our Fischer-Tropsch synthesis technology. SSI initiates and develops new ventures from project conception through to venture implementation. We expect that, in time, it will participate fully in the supporting of those ventures and the marketing of their products after the commercial start-up.
The Sasol SPD process. Exploiting our long and extensive experience in the commercial application of Fischer-Tropsch technology, we have successfully developed a Fischer-Tropsch-based SPD process for converting natural gas into high-quality, environment-friendly diesel and other liquid hydrocarbons. The Gas to Liquids (GTL) process consists of three main steps, each one of which is commercially proven. These include:
Currently, we believe, based on our knowledge of the industry and publicly available information, that on a worldwide basis we have the most extensive experience in the application of Fischer-Tropsch technology on a commercial scale, with Shell being the only other company with significant experience in this field. Given the increasing discovery of extensive natural gas resources, especially in remote regions, our Sasol SPD process can be applied with significant commercial and efficiency advantages in various parts of the world. Proven global natural gas resources are currently estimated to be an oil equivalent of more than 900 billion bbl. In addition, transportation of fuels in liquid form is easier and cheaper than transportation of gas. As a consequence, our technology has evoked interest from countries and companies with extensive natural gas reserves, as an appealing alternative for exploiting these reserves. In recent years, we have been actively promoting our Sasol SPD technology and are examining several projects, with a view to commencing its commercial application at the core of new GTL plants.
The Sasol SPD process converts natural gas into diesel and other liquid hydrocarbons which are generally more environment-friendly and of higher quality and performance, compared to the equivalent crude oil-derived products. In view of product specifications gradually becoming more stringent, especially with respect to emissions, we believe that the option of environment-friendly GTL fuels will become more
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appealing in time. However, the construction of GTL facilities and the production of GTL fuels require significant capital investments, at least during their initial stages, as is usually the case with the application of new technologies. GTL fuels can be used with optimized engines for best performance, although they can also be utilized with current compression ignition engines. We also expect that GTL diesel may be suitable as a cost-competitive blend stock for conventional diesels, thereby enabling diesel producers to improve the quality of their existing diesel formulations without investing substantially in sophisticated new plants and infrastructure. We anticipate the combined factors of GTL diesel's superior characteristics and the prevailing market conditions in developed economies will enable GTL products to initially command premium prices for either niche applications or as a blend stock for upgrading off-specification products.
The Sasol Chevron (SC) joint venture. In June 1999, SSI and ChevronTexaco, then Chevron Corp., agreed to create a global alliance SC in order to identify and implement ventures based on GTL technology as part of our strategy to exploit our Fischer-Tropsch technology and to develop and commercialize the GTL process. We believe that there are considerable synergies between the two companies, which will enable the alliance to accelerate both the implementation of GTL ventures and the development of markets for the new products, to be produced from the ventures that will be established. We finalized and implemented our global joint venture in October 2000. SC and SSI continue to be involved in exploratory discussions and feasibility studies with some of the world's gas-rich countries, including Australia, with the view to develop GTL plants over the next decade.
In addition, working closely with Sasol Technology's Fischer-Tropsch process innovation teams at Sasolburg and Johannesburg, SSI and SC are involved in an ongoing program aimed at further improving competitiveness by lowering the capital and operating costs of future GTL plants.
Sasol exploring new opportunities. Working in partnership with Sasol Technology, SSI also continues to explore for new opportunities to commercialize Sasol's competitive Fischer-Tropsch synthesis technology for the beneficiation of coal and other hydrocarbon resources, including biomass.
The Qatari GTL project. We have formed a joint venture with Qatar Petroleum (QP), Qatar's state-owned energy company, the Oryx GTL venture, in respect of the joint development of a GTL plant at Ras Laffan Industrial City in Qatar. We hold 49% in this venture, with QP holding 51%, in the US$952 million project (excluding financial charges), including site, pre-production and contingency costs. Construction of the GTL plant has commenced and a dedicated Sasol management team has been established in Qatar.
In November 2002 we jointly appointed 15 banks as lead arrangers to provide the US$700 million non-recourse debt financing for the venture. QP and SSI awarded the US$675 million lump-sum, turnkey engineering, procurement and construction (EPC) contract to the multinational, French-based engineering company, Technip, in December 2002. The EPC contract became effective in March 2003 after finalizing the financial agreements. The EPC contract is being executed from Technip's Italian operations in Rome. Sasol Technology design engineers and project managers are managing the technology, engineering and project management portfolios for SSI and QP.
Site work for the construction of the Oryx GTL plant began in September 2003. Civil engineering work, including pipe laying, will be completed in mid-2005. All major pieces of long-lead-order equipment, including the two low-temperature Fischer-Tropsch Slurry Phase reactors being fabricated in Japan, Haldor Topsøe autothermal reformers, a ChevronTexaco Isocracking unit and the compressors will arrive at Ras Laffan in phases during our 2005 financial year. Plant start-up is scheduled for first quarter 2006. Most of the Oryx GTL diesel (about eight-million barrels a year) will be marketed to customers in Western Europe, where much of this ultra-low-sulfur diesel will most likely be used as blend stock for higher-sulfur diesel derived from conventional oil refining.
Expansion of Qatari GTL capacity. In March 2004, SC and QP announced plans to expand the Oryx GTL plant in order to increase its capacity to about 100,000 bbl/d. In support of these plans, SC and QP
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signed a memorandum of understanding for the expansion project that would add a further capacity of about 66,000 bbl/d.
In addition, QP and SC have agreed to pursue the opportunity of developing an upstream-downstream integrated GTL project, also at Ras Laffan, with a capacity of about 130,000 bbl/d.
Bidding phase progress for Escravos GTL (EGTL). SC is also participating in the development of a second GTL plant, EGTL at Escravos in the Niger Delta region of southern Nigeria. EGTL is a joint venture between the Nigerian National Petroleum Corporation (NNPC) and Chevron Nigeria Limited (CNL), two companies with established petroleum production interests at Escravos. The EPC bidding process is progressing.
We believe that the operation of the GTL plants in Nigeria and Qatar will effectively demonstrate the successful commercial application of the Sasol SPD process outside South Africa.
The Gulf GTL study planned. A potential GTL project opportunity exists in gas-rich Iran, for which SSI recently completed a pre-feasibility study. SSI and Iran's state-owned National Petrochemical Company (NPC) have been involved in discussions with a view to exploring the merits of constructing on the Gulf a GTL plant based on the Sasol SPD process. SSI and NPC plan to commence a feasibility study for this potential project in the year ahead. An investment decision will only be made after the results of a feasibility study have been evaluated.
Coal beneficiation study for China. SSI is about to commence a feasibility study with a consortium of Chinese companies for the potential development of two 60,000 bbl/d to 80,000 bbl/d coal-to-liquids (CTL) facilities in the People's Republic of China.
Catalyst facility. To support our plans to globally develop and exploit GTL technology, Sasol Technology entered a co-investment agreement with Engelhard Corp. during 2002 to manufacture our proprietary advanced cobalt catalyst. Sasol Technology developed this cobalt catalyst for application in the Sasol Slurry Phase Distillate (Sasol SPD) reactor to be featured in future GTL plants. In January 2002, we commissioned our 500 tpa cobalt catalyst production facility at De Meern in the Netherlands. It has since been producing and stockpiling high-quality catalyst for our Nigerian and Qatari GTL plants.
Other Activities
Sasol Wax
Sasol Wax, our wholly owned wax operation, produces and markets wax and wax-related products to commodity and specialty wax markets globally. It manufactures crude oil-derived paraffin waxes, as well as synthetic waxes produced on the basis of our Fischer-Tropsch technology. Sasol Wax has its head office in Hamburg and employs 1,095 people globally. In 2004, it had a global external turnover of R3.9 billion, representing 6% of our total segmental turnover.
Products and activities. The overall volume of products marketed amounts to 780 Ktpa per year of which 31% are products derived from the Fischer-Tropsch process. The main product portfolio includes paraffin waxes, both fully refined and semi-refined, produced and marketed in various grades, as well as Fischer-Tropsch-based synthetic waxes which include the Fischer-Tropsch-derived hard wax (melting point range 80°C and higher), the Fischer-Tropsch-derived medium wax (melting point range 3080°C) and liquid paraffins in the carbon range C5 through C20. Various specialty blends of waxes are also produced and marketed. Sasol Wax continues to develop niche markets for higher-value specialty waxes, such as those used by the food, cosmetics, pharmaceutical, construction-board and adhesive industries. We recently increased sales of specialized liquid paraffins to the oil and gas exploration and production drilling industry. Demand for our liquid paraffins for environmentally preferred drilling fluids has been growing in the Gulf of Mexico following the introduction of more stringent US Environmental Protection Agency specifications for drilling fluids and other oilfield chemicals. The recently acquired ExxonMobil European
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wax emulsion business has annual sales of about euro 22 million. We produce, as a result, about 60 Ktpa of wax emulsion at facilities in the UK, Austria, Norway, and Germany.
The main productive assets of this division are located in Hamburg, Germany, in Sasolburg and Durban, in South Africa, in Pass Christian, Mississippi, and Oakland, California, in the United States.
Our plant in Hamburg has a production and blending capacity for paraffin wax of 300 Ktpa. It purchases slack wax feedstock from numerous lube-oil-producing refineries predominantly in Western Europe and from Eastern Europe and Africa. We initially de-oil slack waxes to fully or semi-refined quality and fully hydrogenate them. Subsequently, we blend them into various product blends. We market them either in liquid bulk or in solidified form. This operation has a trading activity of about 100 Ktpa.
Our plant in Sasolburg operates Fischer-Tropsch-based technology for the production of synthetic waxes. It currently uses coal-derived syngas as feedstock, which we plan to change to natural gas-derived syngas, when Mozambique natural gas reaches our facilities in 2004. The production capacity of the wax plant in Sasolburg amounts to 240 Ktpa of Fischer-Tropsch-derived products, of which 70 Ktpa are hardwaxes, 80 Ktpa medium waxes, 30 Ktpa waxy oils and 60 Ktpa liquid paraffins.
We own and operate a wax plant integrated in the Engen refinery in Durban, South Africa. This plant produces wax blends predominantly for the South African and other African candle industry. We also operate a major candle factory located in Johannesburg with a capacity of up to 30 Ktpa, which represents approximately 50% of the South African candle industry market.
In the United States, our wholly owned subsidiary Sasol Wax Americas, Inc. (formerly Moore and Munger Inc.), based in Shelton, Connecticut, is engaged predominantly in trading activities, both in Fischer-Tropsch-derived and paraffin waxes. Sasol Wax Americas, Inc. holds a 50% share in the Luxco Wax business based in Oakland, California, which operates a wax blending facility in Pass Christian, Mississippi with a capacity of up to 20 Ktpa. The total product manufactured and traded by Sasol Wax Americas, Inc. in the United States amounts to approximately 100 Ktpa.
Sasol Wax
Production Capacity
Product |
Facilities location |
(Ktpa) |
||
---|---|---|---|---|
Paraffin wax | Germany | 300 | ||
FT Hard wax | South Africa | 70 | ||
FT Medium wax | South Africa | 80 | ||
Waxy oils | South Africa | 30 | ||
Liquid Paraffins | South Africa | 60 | ||
Semi-refined paraffin wax | South Africa | 30 | ||
Specialty wax blends | Germany, United States, Netherlands | 80 |
Markets and competition. The division markets its products globally, but its main markets are in Europe and the United States. In both Europe and the United States, approximately 50% of paraffin waxes are sold to candle companies and the balance is sold to numerous industries, including rubber and tire, cosmetics, adhesives and surface coatings industries. Fischer-Tropsch-derived hard wax production is sold predominantly in the United States and Europe, and also in Asia. Fischer-Tropsch-derived medium waxes and paraffin waxes produced in South Africa are predominantly sold to the candle industry in South Africa.
The overall world market for waxes is estimated at about 3,300 Ktpa and the main competitors in the market are the Chinese producers China Oil and Sinopec and Sasol Wax. In the specialty wax market, our Dutch subsidiary Paramelt competes with Honeywell's special products, Witco and the former Dussek Campbell, which formed a part of BP Special Products. BP Special Products was recently sold to H and R Wax Company GmbH.
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Sasol Nitro
Sasol Nitro, our nitrogenous products division, manufactures and markets ammonia, fertilizers, commercial explosives and related products. The division also markets ammonia, sulfur and specialty gases produced by other Sasol divisions. Production activities are mainly located in South Africa. The division focuses on supplying the Southern African market with selective exports of fertilizers, ammonium nitrate-based explosives and explosives accessories. In 2004, Sasol Nitro's external turnover was R3.1 billion, representing 5% of our total segmental turnover.
Main products. The division's product portfolio includes:
Production facilities. With exception of Sasol Southwest Energy (SSWE), the production facilities of Sasol Nitro are located in South Africa.
Our 330 Ktpa ammonia plant in Sasolburg was converted from coal-based gas to natural gas in June 2004. This plant can also produce high purity hydrogen that is sold to the oil and metal refining industries in South Africa. We also derive 330 Ktpa of ammonia as a by-product from coal gasification in Secunda.
Sasol Nitro operates two nitric acid plants. The smaller 315 Ktpa unit in Sasolburg is linked to a downstream ammonium nitrate plant. The ammonium nitrate is processed in Sasolburg to produce low-density ammonium nitrate for use in the production of explosives. The 470 Ktpa nitric acid plant in Secunda supplies a downstream ammonium nitrate plant linked to a 500 Ktpa fertilizer granulation facility that produces limestone ammonium nitrate (LAN) and various other fertilizer grades containing nitrogen, phosphorus and potassium. Ammonium nitrate for industrial use is sourced from both sites.
In Phalaborwa adjacent to the phosphate rock mine of Foskor, Sasol Nitro operates a 325 Ktpa phosphoric acid plant, of which 100 Ktpa capacity has been mothballed during 2004 due to adverse market conditions. The rock is of igneous origin and therefore low in cadmium and organic material, which makes it highly suitable for industrial and food-grade applications. Phosphoric acid is exported to India, Japan and Europe and used within our Group for the production of fertilizer and sodium tri-polyphosphate.
In February 2004, the supplier of phosphoric rock informed us that the formula for rock price sales will from June 2004 be based on the import parity alternative price, an increase of some 100% on the old formula. This significant cost increase coupled with the strong Rand and adverse market conditions leaves us no alternative but to shut down or sell the phosphoric acid business. Both alternatives are currently being investigated.
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Sasol Nitro also manufactures bulk explosives at various mining sites and cartridged explosives in Secunda and Ekandustria. Non-electric initiation systems are manufactured in a joint venture with Dyno Nobel and electronic initiation systems manufactured for exclusive supply to Orica Explosives.
Sasol Nitro
Production Capacities(1)
Product |
Ktpa |
South Africa |
||
---|---|---|---|---|
Ammonia(1) | 660 | | ||
Sulfur | 205 | | ||
Granular and liquid fertilizers | 700 | | ||
Fertilizers bulk blending | 905 | | ||
Phosphates(2) | 325 | | ||
Explosives | 300 | |
Markets and competition. Sasol Nitro focuses primarily on the Southern African market. Exports of ammonium nitrate, phosphoric acid and fertilizers have been reduced significantly since 2003 due to the impact of the strong Rand against the dollar. About half of the 660 Ktpa total ammonia product is used within the Group to produce ammonium nitrate-based fertilizers and explosives. The balance is sold mainly to other South African fertilizer and explosives manufacturers with small quantities made available for industrial usage in chemical manufacture and mineral beneficiation.
Sasol Nitro is the only ammonia producer in South Africa. About 15% of South Africa's ammonia requirement in 2004 was imported. Omnia and AECI are our two major customers for ammonia and compete in the downstream fertilizer and explosives markets. We have entered into market-related contractual arrangements with these customers.
Urea, an alternative to ammonium nitrate based fertilizers, is not manufactured in South Africa. Due to the strong Rand, Urea imports into South Africa have increased significantly during 2004. Increased Urea imports, along with adverse climatic conditions on the agricultural sector, resulted in reduced ammonium nitrate based fertilizer sales during 2004.
Explosive products are mainly supplied to the Southern African market, with some quantities of cartridged explosives also exported to other African countries. Export sales of explosive-grade ammonium nitrate into South America and Australia were reduced to minimal levels during 2004 due to the combined impacts of the strong Rand and high ammonia prices. A toll-manufacturing agreement with African Explosives ended the continuous underutilization of our cartridge emulsion production facility, and this facility is now dedicated to production of cartridged emulsion explosives products for African Explosives. The market for explosives accessories in South Africa is significant, as large quantities of detonators are used in extensive mining activities. Sales of explosives accessories by the Sasol Dyno Nobel joint venture reached record levels mainly as a result of sales growth in niche markets. Sales of UNI Tronic electronic detonators were severely impacted by the mining industry's reaction to cost pressures. The sale of the UNI Tronic technology and marketing rights to Orica Explosives, along with an associated supply agreement, is expected to turn our electronic detonator business to profitability in 2005.
The South African explosives market remains very competitive and prices are amongst the lowest worldwide.
Discussions with potential buyers for our 50% stake in the Sasol Southwest Energy joint venture in the USA are in progress and are likely to be resolved shortly.
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Sasol Infrachem
Sasol Infrachem has operated coal gasifiers that produced coal-derived Syngas for the downstream chemical beneficiation and hydrogen rich industrial gas for the past 50 years. As a supplier of on-site utilities, infrastructure and services, this division assisted Sasolburg to grow through investments in new and expanded production capacity.
Syngas production was limited to 53.4 million Gigajoules (GJ) as a result of the change-over to natural gas as feedstock in June 2004. Although the syngas production was 1% lower, compared to the previous year's 53.7 million GJ, the output for the comparative coal-based syngas production rose by 4.8% from 48.1 million GJ to 50.4 million GJ for the period July 2002 to May 2003 and July 2003 to May 2004.
The R1,330 million project to convert from coal gasification to natural gas reforming, the largest engineering project on the site since terminating synfuels production in 1993, was completed on schedule and within budget. First product from the reformer plant was produced on 30 June 2004. After start-up minor technical design problems were encountered around the control system and as this would require some minor plant shutdowns up to December 2004. To ensure the impact is reduced on final product supply out of Sasolburg, it has been decided to restart coal gasification partially.
Once the reliability of the autothermal reformers have been proven, coal gasification will be permanently shut down. We expect that this change will improve air quality in the Vaal Triangle region by eliminating hydrogen sulphide emissions and substantially reduce emissions of particulates, nitrous oxides, sulphur dioxide and carbon dioxide. Raw water consumption is also expected to be reduced by about 20% a day.
Petroleum Exploration and ProductionSasol Petroleum International
Based in Johannesburg and founded in 1995, Sasol Petroleum International is responsible for our expanding international upstream interests in oil and gas exploration and production activities. Sasol Petroleum International also concentrates on high-potential areas in West and Southern Africa and invests in partnerships with international oil and gas companies. Sasol Petroleum International has its international office in London, where it is co-located with the offices of the Sasol Chevron joint venture, and has responsibility for the West African exploration and production activities. Sasol Petroleum International's expenditure on exploration during 2004 was R223.1 million (including the expensing of the exploration costs (R153 million) in respect of Mozambique).
Mozambique. We signed landmark agreements in 2000 and 2001 with the government of Mozambique for the development of natural gas fields, including the construction of a pipeline for the South African gas market. Our 70:30 partnership of Sasol Petroleum Temane Limitada with Companhia Moçambicana de Hidrocarbonetos was granted rights by the government of Mozambique for the development, production and disposition of the reserves of petroleum located in the Pande and Temane field reservoirs in Mozambique. It is currently estimated that Sasol have, as at 30 June 2004, proved Mozambican gas reserves of about 1.4 trillion cubic feet (tcf). These reserves are estimated to provide a steady stream of gas over 25 years on the basis of projected production and consumption rates.
Sasol's Temane and Pande production and exploration rights cover an area of 16,540 km2. The program to develop 11 interlinked production wells in the Temane field was completed in January 2004. The program to develop additional production wells in the neighboring Pande field is likely to start during 2007. By this time it is expected that the gas pressure in the Temane wells will be similar to that of the Pande wells.
In an effort to extend the projected lifespan of the current Temane and Pande gas reserves and to provide gas for higher production rates, Sasol Petroleum International continues to explore for additional reserves in the Temane and Pande region. Sasol Petroleum International drilled nine exploration and
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appraisal wells during the last yearof which eight successfully encountered gas filled reservoirs. It was nevertheless deemed prudent to charge the cost of this exploration effort against income.
South Africa. Sasol Petroleum International has maintained its interests in Block 3A/4A off South Africa's west coast, where it has a prospecting sub-lease agreement with the South African Petroleum Agency and the Ministry of Minerals and Energy. The agreement covers an area of 28,395 km2in shallow Atlantic waters up to a depth of about 300 meters. The extensive data gathered from the three-dimensional seismic survey undertaken in November 2001 has since been evaluated and interpreted. We are currently seeking to form a joint-venture exploration partnership before committing to exploration drilling.
Gabon. In Gabon, Sasol Petroleum International holds a 27.75% interest in a partnership with Vaalco Gabon (28.07%), Panafrican Energy (31.36%), PetroEnergy Resources (2.34%), Energy Resources Japan (Etame) (2.98%) and Energy Africa (7.5%) for the exploration, development, production and disposition of hydrocarbons in the Etame block. The partnership has been awarded a production license by the Gabonese government and the Etame oilfield is currently in production. Oil commenced flowing in September 2002 and has maintained a steady gross production rate of approximately 15,000 bbl per day. Exploration and appraisal drilling during the last year has resulted in the discovery of two additional oil accumulations, Ebouri and Avouma, in the Etame license. Studies are underway to evaluate the optimum development for these accumulations.
Immediately south of the Etame oilfield, Sasol Petroleum International and its exploration partners have completed their initial seismic studies of the Dussafu block (formerly Phenix). Sasol Petroleum International is the operator for the Dussafu venture and exploration drilling commenced in August 2004. At this stage it appears that the exploration wells have not identified any hydrocarbons.
Equatorial Guinea. In Equatorial Guinea, Sasol Petroleum International holds a 20% interest in Block H in the Rio Muni Basin along with Roc Oil, Pioneer Resources and Atlas Petroleum International and a 10% interest in Block L with ChevronTexaco, Amerada Hess and Energy Africa. Exploration wells drilled in late 2003 in Block L and in mid 2004 in Block H were both plugged and abandoned as dry holes. Through a seismic option agreement signed with Atlas for the participation in Block I in Equatorial Guinea, Sasol Petroleum International also has the option to acquire equity of up to 40% in this block and become the technical partner, upon completion of the seismic data review.
Nigeria. We are working in partnership with ChevronTexaco Nigeria in conducting deepwater exploration for oil and gas. Entry, with small working interests, into two offshore licenses are awaiting Nigerian Government ratification. Further opportunities in this major oil and gas province are being pursued.
Middle East. SPI is also working to help capture upstream positions for Sasol's GTL projects and in this regard are looking at opportunities in the Middle East. Upstream involvement supports the goal to be active in the entire "value chain" of the projects and helps to secure the delivery of the upstream resource for the GTL plant in the downstream through the "integrated project" approach.
Research and DevelopmentSasol Technology
Our subsidiary, Sasol Technology, acts as our technology partner to all our business units through launching and helping to sustain our growth initiatives. Sasol Technology aims to provide functionally driven support across geographic boundaries through its research and development, new business development, engineering and project management and information and logistics divisions within the Sasol Technology business unit.
Our research and development functions. Our central research and development division employs over 500 people in South Africa who focus on fundamental research, while our decentralized division consists of various areas focusing on applications. The phased expansion and modernization of the
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Sasolburg Research and Development (R & D) facilities is progressing with the first two of three phases completed. We are undertaking an R & D expansion and modernization program which aims to:
We initiated this program after the completion of a comprehensive exercise to benchmark the structure, equipment and performance of our R & D facilities against those of other international organizations. The enhanced facilities will create the opportunity to commercialize new and improved petrochemical processes more effectively.
The central research function has a full suite of state-of-the-art pilot plants to support both current and future technology being developed. The central research team has highly skilled employees, of whom approximately 70% have a university qualification and over 80 employees hold a doctorate in chemistry or engineering.
We also conduct our research activities through external alliances and research collaborations with over 100 research institutions, consortia and universities worldwide. In addition, strong emphasis is placed on training; at least 20 of our employees from South Africa are currently studying abroad in a continuing effort to ensure top level in-house research competency.
Fundamental research activities. Among our noteworthy research and development successes over the past decade is the development of the Slurry Phase and Advanced Synthol reactors, the development of the proprietary cobalt catalyst, the low temperature Fischer-Tropsch process, recarburized carbon, and ethylene trimerization.
A significant part of our research focuses on supporting our coal-to-liquids and GTL technologies and associated products. This includes research on coal gasification and gasification products, syngas conversion through the application of Fischer-Tropsch and research relating to adding value to Fischer-Tropsch-derived products. Catalysis research includes the development of both iron- and cobalt-based proprietary Fischer-Tropsch catalysts and we have already commenced manufacture of our cobalt catalyst through a joint venture with Engelhard Corp. Through Sasol Technology, we have progressed in developing the second generation of our integrated Sasol SPD process to convert natural gas into a clean-burning synthetic fraction of diesel and other premium- grade products. In time, we plan to integrate some of the experience gained from operating the Nigerian and Qatari GTL plants which are under development into the new-generation Sasol SPD process. Sasol Technology is also investigating chemical expansion opportunities based on GTL plants. In particular, the fuel products of our GTL plants, including the Oryx plant, can be diverted towards the production of chemicals. As was the case with chemical production at Secunda, unique beneficiation technologies are being developed.
A wax hydroprocessor was commissioned in 2003 and has been linked to our established 100 bbl/d Fischer-Tropsch demonstration unit. It is being used to demonstrate catalyst performance and to produce, from mixed wax and light-hydrocarbons, a GTL diesel for testing.
Our wide range of products requires extensive research on product work-up and beneficiation, including separation and purification processes and new product development. Carbon-based products and cresylic acids are among the cases in which we have adapted existing technology to meet our needs. The development of carbon-based products (recarburized carbon) from medium temperature gasification pitch, a product of CarboTar, has already been successfully implemented on a commercial scale. Similarly, we have carried out work on cresylic acids, another gasification by-product, on behalf of our joint venture with
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Merisol, relating to purification of various associated products and also derivatizing and adding value to certain feedstreams.
Over the years, we have developed a strong competency in purification in order to extract high value alpha olefins from Fischer-Tropsch products. This has helped us successfully develop purification processes for 1-pentene, 1-hexene, 1-heptene and 1-octene products, which allow us to apply them as co-monomers in polymers. Ongoing studies include those dedicated to the commercial viability of exploiting metathesis and other processes to convert odd-number alpha olefins (such as 1-pentene and 1-heptene) into even-numbered counterparts (such as 1-hexene and 1-octene), which are in far greater demand. Sasol Technology is also focused on improving hydroformylation as an alternative process for producing specialty alcohols from olefins. Sasol Technology has also been successful in further increasing the purities of hexene and octene co-monomers to enable their optimal application with new-generation polyolefin catalyst systems. In order to benefit from the projected demand growth in global markets for 1-hexene, we are investigating various potential production routes, including ethylene trimerization.
Derivatization of Fischer-Tropsch derived feedstreams is also a high priority. To support this focus, we have developed our competency in homogenous catalysis. Our in-house skills were leveraged through a laboratory that we established at St. Andrews University in Scotland, which, when fully operational, will comprise 25 highly qualified scientists. The focus is currently on hydroformylation of olefins to produce a range of alcohols. We recently applied hydroformylation at a commercial scale to produce detergent range alcohols. Carbonylation of alpha olefins is another area where we are investigating homogenous catalysis. Other derivatization technologies include the use of oxidation of olefins and paraffins.
Research focused on the reduction of our operations' environmental footprint includes water treatment and purification. In this regard, special attention is given to water utilization, given the location of some of our current and future plants in semi-arid areas. We follow an integrated approach toward optimization of current processes focusing, among others, on energy efficiency, emissions and water utilization. End of pipe solutions include technology such as microbial treatment processes and desalination technology, which has already been tested and implemented.
We continue to focus on identifying and implementing new technologies, which can help reduce production cost. This includes research focusing on the application of catalytic distillation in various new and existing processes. Work is continuing within a consortium including Queen's University, Belfast, to investigate the potential use of ionic liquids as environmentally friendly solvents. We are also researching emerging technology relating to living polymerization through a consortium coordinated by Carnegie Mellon University in the United States.
Renewable and alternative fuels are fast becoming important for future competitive strategies. Sasol Technology is investigating biodiesel and fuel cells. We are also experimenting with the formulation and performance of biodiesels derived from soya beans and select Sasol chemical feedstocks. We expect that Sasol will be able to produce high-quality biodiesels based on renewable resources for potential use as a future fuel blend stock.
We have implemented techniques such as computational chemistry and have evaluated combinatorial chemistry, on a smaller scale, in order to improve productivity and speed up our technology development efforts.
Applications research and development. Our applications research and development activities are focused around four areas:
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In addition to Sasol Technology research, over 200 employees are involved in applications research, of which approximately 25% concentrate their efforts on developing new products and applications and 25% on customer support. The majority are involved in research and development on a part time basis. About 120 of these research personnel are located in Germany, over 50 in Italy and the United States and the remainder in the Netherlands.
The key applications research and development product areas are:
Approximately 70% of our applications research division relates to specific customer-requested research, which illustrates our commitment to meeting our customers' changing requirements. We acquired this customer-driven research and development capability, especially in the areas of surfactants, inorganic specialties and LABs, through the Sasol Chemie acquisition. This complemented our existing applications research and development capabilities in South Africa, which primarily related to fuel applications and wax research, conducted in conjunction with Sasol Wax in Germany. Following the integration of Sasol Chemie into our Group there is strong interaction between our South African research operations and those of Sasol Chemie.
Merisol
Merisol is a joint venture company formed in 1997 by the merger of Sasol Phenolics with the phenolics activities of Merichem Company, based in Houston, Texas. We and Merichem each own 50% of Merisol. Merisol has a strong presence in the global market for natural phenolics and cresylics with manufacturing facilities in Houston, Sasolburg and Oil City, Pennsylvania, and has manufacturing joint ventures with Sumitomo Chemicals in Oita, Japan and Sasolburg.
Products and activities. Natural phenolics are products related to phenol, which are derived as by-products of coal gasification, coal carbonization and certain petroleum refining processes and are recovered for purification and separation. Merisol manufactures the pure products, phenol, ortho-cresol, meta-cresol and para-cresol, and a diverse range of blended products, consisting of mixtures of phenol, cresols, xylenols and other phenol derivatives. These blends are known collectively as cresylic acids. Both the Sasolburg and Houston plants produce phenol and ortho-cresol and cresylic acids. The Houston plant uses proprietary separation technologies to produce high-purity meta-cresol and para-cresol and pure meta-cresol and para-cresol, making Merisol one of the few producers of all of these products in the world.
Merisol's Sasolburg plant uses feedstock from our coal gasification activities at Secunda. At Houston, Merisol uses a more diverse feedstock mix from coal gasification and coal carbonization. Petroleum refining sources are declining in significance as refining practices in the United States change due to environmental regulations. Merisol also transfers semi-refined feedstock from Sasolburg to Houston.
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Merisol has an interest in the production of synthetic, as opposed to natural, meta-cresol and para-cresol through a 50:50 manufacturing joint venture with Sumitomo Chemicals. This relationship also includes a 20:80 joint venture (Merisol being 20%) for the production in Sasolburg of ortho-cresol novolac, a precursor to high-performance epoxy resins used for encapsulating memory and processor chips. Merisol is the supplier of ortho-cresol feedstock to this plant.
Merisol owns a butylation plant at Oil City, Pennsylvania, producing di-butyl para-cresol (BHT), meta-cresol and mono-butyl meta-cresol (MBMC) from meta-cresol, para-cresol and pure para-cresol feedstocks made by Merisol at its Houston plant.
Merisol
Production Capacity
Products |
Facilities location |
Ktpa |
||
---|---|---|---|---|
Phenol | South Africa, United States | 45 | ||
Ortho-cresol | South Africa, United States | 15 | ||
Meta-cresol and para-cresol | United States | 16 | ||
Pure metapara-cresol | United States | 30 | ||
Cresylic acids and xylenols | South Africa, United States | 28 | ||
High-boiling tar acids | United States | 4 | ||
Butylated products (BHT and MBMC) | United States | 13 |
Merisol commenced its R400 million project to expand and improve feedstock recovery and processing operations. This investment includes a new Sasolburg plant to extract and refine additional volumes of Secunda depitched tar acids to enable Merisol to grow with future market demand and compensate for the decrease of other feedstock globally. The Houston operations are being streamlined to enable Merisol to rationalize production at its Houston site. The project is on track to be completed before June 2005.
Markets and competition. Merisol markets its products worldwide through sales offices in the United Kingdom, Hong Kong, the United States and in South Africa. Markets are served from product inventories held in Rotterdam, for the European market, in Houston, for the US market and in Taiwan and Sasolburg for most other markets.
The pure products, phenol, ortho-cresol, meta-cresol and para-cresol are sold in competition with synthetically produced equivalents. In the phenol market, Merisol is relatively small in the global market, but strong in the South African market and in selected niche markets elsewhere.
In cresols and cresylic acids, Merisol supplies major shares of the global markets for:
Merisol derives about 87% of its turnover from the United States, European and the Far East markets and the balance from other regions.
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African Amines
African Amines is a 50:50 joint venture of Sasol and Air Products. It manufactures, purchases and sells alkylamines, principally for use in explosives, water-treatment chemicals and agricultural chemicals. Its products range includes:
African Amines has production facilities in Newcastle, Kwa-Zulu Natal, in South Africa. This location makes African Amines an efficient and cost-effective supplier to markets in Australasia, South America, Asia-Pacific regions and the Indian subcontinent. African Amines tends to be less competitive in the main ports of Europe and the United States due to the density of local producers serving those markets.
Legal Proceedings
We are party to legal proceedings in the ordinary course of business and we do not believe that there are any pending legal proceedings which could have a material adverse effect on our business, operating results or financial condition.
The EDC pipeline litigation. Under a 1984 agreement, Conoco owned, operated, and maintained a pipeline, running from the Conoco Refinery to a VCM plant in Westlake, Louisiana, formerly operated by Vista Chemical Company, subsequently renamed Condea Vista Company and now Sasol North America Inc. (Sasol NA), a wholly owned subsidiary of ours following the acquisition of Condea, a business we renamed Sasol Chemie. This pipeline was used to transport ethylene dichloride (EDC) from the Conoco Refinery docks to the VCM Plant which was then part of Sasol NA's Lake Charles Chemical Complex but which has since been sold. In March 1994, Conoco discovered a rupture of the pipeline.
Conoco undertook, at its expense, a clean-up of the 1994 EDC spill and, for this purpose, hired a number of remediation contractors. Beginning in 1995, employees of Conoco's contractors who were present on site during the clean-up, including employees of remediation contractors, filed a number of lawsuits against Conoco and Sasol NA seeking compensatory and punitive damages for personal injuries resulting from alleged EDC exposures.
Defending and settling these lawsuits has cost Sasol NA over US$60 million, most of which has been reimbursed by insurance carriers or RWE-DEA under the agreement for the acquisition of Sasol Chemie. Most of the settlements and legal fees were paid before 30 June 2002 and are reflected in our financial statements for the financial year ended 30 June 2002.
In respect of the lawsuits (about 40 plaintiffs) that had been filed as of 1 January 2002 and remain unresolved following the settlements, Conoco (now ConocoPhillips) and Sasol NA have an indemnity from the plaintiffs' former counsel who agreed to settle or dismiss these lawsuits at their expense. An additional round of settlements of approximately 389 claims was completed in 2003 at a cost to Sasol NA of about US$3 million. In February 2004, plaintiffs' counsel advised ConocoPhillips and Sasol NA of an additional 400500 claimants, although no new lawsuits had been filed as of 30 June 2004. Additional lawsuits could be filed in the future, although we believe that the possibility of additional lawsuits being filed diminishes over time.
EDC pipeline insurance litigation. The insurance companies providing primary coverage for Sasol NA's Westlake facilities in 1994, when the pipeline incident occurred, provided Sasol NA with liability insurance protection capped at US$50 million in excess of Sasol NA's US$5 million self-insured retention for each occurrence. In September 1998, Sasol NA filed a lawsuit before a Louisiana state court
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against the primary insurers for the coverage for the EDC pipeline litigation, including both compensatory damages for personal injury damage and punitive damages.
As a result of mediation concluded in May 2001, the parties reached a final settlement under which Sasol NA received a substantial amount of coverage for costs incurred in connection with the EDC pipeline litigation which amount was paid in full by April 2002. Sasol NA is seeking a small amount of additional coverage from its first layer of excess coverage It is likely that pursuit of insurance coverage for the EDC pipeline litigation will end with the resolution of the pending coverage lawsuits.
Sulfur dioxide release. On 18 January 2003, Sasol NA's Lake Charles Chemical Complex released approximately 15,000 pounds of sulfur dioxide to the environment as a result of a power outage at ConocoPhillips Lake Charles Refinery causing an increase in the sulfur compounds present in the refinery fuel gas which is burned in the Sasol's Ethylene Unit furnaces and boilers. During the same outage, the refinery also released in excess of 130,000 pounds of sulfur dioxide which required the surrounding neighborhoods to be sheltered in place. Numerous lawsuits were filed against ConocoPhillips in 2003 and in December 2003, ConocoPhillips advised Sasol NA that plaintiffs' counsel intended to add Sasol NA as a defendant in the pending lawsuits. As of 30 June 2004, more than 600 lawsuits had been filed on behalf of more than 6,000 plaintiffs. ConocoPhillips and Sasol NA are jointly defending the lawsuits, and Sasol NA's liability for defense and settlement costs has been limited to a non-material amount. A mediation of the claims is scheduled to begin in September 2004. Sasol NA has notified its insurer which has denied coverage.
Fly Ash Plant. Sasol Synfuels (Pty) Limited is in legal proceedings with regard to the operation of a plant in Secunda. Ashcor has claimed damages relating to their inability to develop their business and a projected loss of future cash flows. The trial has been postponed to 4 April 2005.
Joel Nagashigo and Others. A class action was filed before the Supreme Court of the State of New York, County of New York by an undisclosed number of plaintiffs (represented by attorney Edward Fagan) who are each claiming US$1 million plus punitive damages of US$5 million in respect of claims based on negligence, product liability, failure to warn of dangers and emotional distress together with actual damages for past and future medical expenses. Sasol Limited and National Petroleum Refiners of South Africa (Pty) Limited and other non Sasol companies are cited as defendants. It is not clear from the summons what the factual foundations of the claim are. We are of the view the claims are without merit and the case should in any event be dismissed on the basis amongst other things that the appropriate forum, both in respect of jurisdiction and convenience, ought to be South Africa and not the Supreme Court of the State of New York.
Dorothy Molefi and Others. Certain plaintiffs have sued Sasol Limited and National Petroleum Refiners of South Africa (Pty) Limited and various other defendants in two claims in the United States District Court for the Southern District of New York. The plaintiffs are represented by attorney Edward Fagan. These claims are similar to many already served against a large number of multi-national corporations worldwide. The plaintiffs allege that during the period from the 1960s to the early 1990s, the tribes, people and indigenous men and women of South Africa were subjected to inhumane and cruel treatment by and at the hands of and as a direct result of a conspiracy between the defendants and the "Apartheid Era Government". The plaintiffs also allege that the defendants have conspired with the post-apartheid governments of former President Mandela and President Mbeki (who is also cited as a defendant in his personal capacity) to commit acts of genocide against the plaintiffs, plaintiffs' families, etc and perpetrated unwarranted expropriation and other wrongful acts. It is also alleged that defendants violated international law and the ius gentium. The claims against Sasol Limited have been consolidated with many other similar claims against many other multi-national corporations before the Federal Court of New York. Sasol is of the view that the claims are without merit and the case should in any event be dismissed on the basis of amongst other things that the appropriate forum, both in respect of jurisdiction
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and convenience, ought to be South Africa and not the United States District Court for the Southern District of New York.
Fertilizer competition matters. Nutri-Flo CC and Nutri-Fertilizer CC filed a complaint in November 2002 with the Competition Commission that Sasol Nitro was abusing its dominance and excluding Nutri-Flo from certain markets. The complaint was rejected by the Competition Commission and Nutri-Flo has subsequently applied to the Contribution Tribunal for an interdict against Sasol. A parallel investigation by the Competitions Commission into allegations of collusive behavior in the fertilizer industry are ongoing and documents requested have been submitted to the Commission.
Retail filling station guidelines. The Gauteng Department of Agriculture Conservation and Environment (DACE) has developed guidelines relating to the development and upgrading of filling stations within the Gauteng region in South Africa which constrain the development of service stations. A number of applications for authorizations for filling stations in which Sasol Liquid Fuels Business has an interest have been rejected. A number of appeals were lodged, one of which was taken on review to the High court. Sasol was successful in so far as the court found that DACE had relied on inappropriate and irrelevant considerations in coming to its decision. The State is taking the matter on appeal to the Appeal Court.
Other. From time to time Sasol companies are involved in other litigation and administrative proceedings in the normal course of business. Although the outcome of these proceedings and claims cannot be predicted with certainty, the company does not believe that the outcome of any of these cases would have a material effect on the Group's financial results.
Environmental Orders. The Group is subject to numerous national and local laws and regulations that regulate the discharge of materials into the environment or that otherwise relate to the protection of human health and the environment in all locations in which it operates. As with the oil and gas and chemical industries, generally, compliance with existing and anticipated environmental health, safety and process safety laws and regulations increases the overall cost of business, including capital costs to construct, maintain, and upgrade equipment and facilities. These laws and regulations have required, and are expected to continue to require, the Group to make significant expenditures of both a capital and expense nature. Under the agreement for the acquisition of Sasol Chemie, we received an indemnification from RWE-DEA for most of the costs of operational compliance with respect to conditions existing at Condea Vista Company located in the United States on or before 1 March 2001 that we expect will survive until at least 1 March 2006.
We have various immaterial environmental actions currently outstanding from government regulatory agencies in the United States related to Sasol Chemie's waste management facilities, air emissions, and groundwater contamination. At 30 June 2004, the Company had accrued R64 million (2003-R110 million) related to outstanding environmental actions. This amount has been included in the long-term rehabilitation obligation in Note 19. Total environmental compliance expenditures for Sasol Chemie's US manufacturing sites for the next five years are estimated to range from R5 million to R13 million per annum.
Regulation
The majority of our operations are based in South Africa, but we also operate in numerous other countries throughout the world. In South Africa, we operate coal mines and a number of plants and facilities for the storage, processing and transportation of raw materials, products and wastes related to coal, oil, chemicals, and gas. These facilities and the respective operations are subject to various laws and regulations that may become more stringent and may, in some cases, affect our business, operating results, cash flows and financial condition.
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Regulation of Mining Activities in South Africa
The Minerals Act. For the period up to 30 April 2004, all mineral rights, encompassing the right to prospect and mine, were held, either privately or by the government of South Africa. Ownership of private mineral rights is held through title deeds and constitutes real rights in land, which are enforceable against any third party. Prospecting and mining were regulated by the Minerals Act and South African common law. The Minerals Act regulated the prospecting for and the optimal exploitation, processing and utilization of minerals, in addition to imposing reclamation requirements on prospecting and mining operations. The Act required that anyone undertaking prospecting or mining operations had to compile an environmental management program and to provide for the environmental impact of the proposed prospecting or mining activities. This program had to be approved by the relevant Director of Mineral Development. The Minerals Act has subsequently been repealed by the implementation of the Mineral and Petroleum Resources Development Act (Act 28 of 2004), on 1 May 2004.
We owned all the coal rights for the properties over which we have mining authorizations, except for small tracts of land at Secunda, which were owned by the government of South Africa and for which we have obtained the government's consent to mine in consideration for the payment of a royalty per ton of coal mined from those properties.
The Mineral and Petroleum Resources Development Act. The Mineral and Petroleum Resources Development Act, (Act 28 of 2002), was implemented on 1 May 2004. The fundamental principle of the Act is the recognition that the mineral resources of the country are the common heritage of all South Africans and therefore belong to all the people of South Africa. The Act vests the right to prospect and mine, including the right to grant prospecting and mining rights on behalf of the nation, in the state, to be administered by the government of South Africa. Thus, the state is the guardian of all mineral rights and has the right to exercise full and permanent custodianship over mineral resources.
The Act imposes significantly more stringent environmental obligations on mining activities than the repealed Minerals Act. However, it contains transitional arrangements for existing operations. Under these transitional provisions, the environmental management programs will continue in force, as the Department of Minerals and Energy introduces the more stringent requirements of the Mineral and Petroleum Resources Development Act.
The Mineral and Petroleum Resources Development Act adopts the environmental management principles and environmental impact assessment provisions of the National Environmental Management Act. The Mineral and Petroleum Resources Development Act addresses the allocation of responsibilities for environmental damage, pollution and degradation and imposes rehabilitation obligations. It significantly extends the scope of liability of directors who may be jointly and severally liable for any unacceptable negative impact on the environment, advertently or inadvertently caused by the company. It also allows the state to take remedial action and claim costs. It maintains the requirement for an environmental management program for all mining operations, but with more detailed specifications than under the Minerals Act, and prohibits the carrying out of mining activities before the approval of the program. When rehabilitation is required, it is not limited to land surface. We were in material compliance with the repealed Minerals Act, and we expect to continue to be in compliance with the new legislation. The Act also deals with matters relating to petroleum exploration and development, which may impact our current or future petroleum and gas exploration and development activities in South Africa.
Mining rights. Transitional provisions are included in the Mineral and Petroleum Resources Development Act, which phases out privately held mineral rights held under the repealed legislation. The transitional provisions contemplate three types of rights:
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The rights described in these three categories are defined as Old Order rights. Under category (a), the holders of privately-held mineral rights must apply for a prospecting or mining right in their own names to replace their existing mineral rights by 30 April 2005. Under categories (b) and (c), any prospecting permit or mining authorization granted under the present legislation would continue to be valid for a maximum period of two or five years from enactment, respectively. After the lapse of the one-year period referred to in category (a) and the respective periods in categories (b) and (c), respectively, the mineral rights will cease to exist. Within these periods, the holders of mineral rights and prospecting permits or mining authorizations, in order to continue with their mining or prospecting operations, must apply for a new prospecting right or mining right in respect of category (a) and for conversion to new prospecting or mining rights in respect of categories (b) and (c).
Under the Act, prospecting rights will be granted for an initial maximum period of five years, and could be renewed once, upon application, for a period not exceeding three years. Mining rights will be valid for a maximum period of 30 years, and could be renewed, upon application, for further periods, each not exceeding 30 years. Provision is made for the grant of retention permits, which would have a maximum term of three years and could be renewed once upon application for a further two years.
A wide range of factors and principles will be taken into account by the Minister of Minerals and Energy, when considering these applications. These factors include the applicant's access to financial resources and appropriate technical ability to conduct the proposed prospecting or mining operation, the environmental impact of the operation and, in the case of prospecting rights, considerations relating to fair competition. Other factors include considerations relevant to promoting employment and the social and economic welfare of all South Africans and showing compliance with the provisions of the Mining Charter for the empowerment of historically disadvantaged persons in the mining industry. See "Empowerment of Historically Disadvantaged South AfricansThe Mining Charter".
Part II of the Regulations promulgated under the Mineral and Petroleum Resources Development Act, relate to the Social and Labour Plan that must accompany any application for a mining right. The Mining Titles Registration Amendment Act (Act 24 of 2003) and Regulations have been implemented simultaneously with the implementation of the Mineral and Petroleum Resources Development Act. It provides the mechanism to give effect to the provisions of the Mineral and Petroleum Resources Development Act, in particular with regard to the registration of rights under that Act. Draft Regulations under this Bill have also been published for comment.
We held various prospecting permits or mining authorizations with respect to our existing mining operations, which are now being classified as old order rights. We have commenced with the process to apply for conversion of our existing mining and prospecting rights into new rights and for any new licenses we may require under the Mineral and Petroleum Resources Development Act. It is the declared intent of the South African government not to disrupt operations as a result of the introduction of the new legislation and we intend to undertake any appropriate action required to ensure conversion of our existing prospecting and mining rights under the Act. We believe that the Minister of Minerals and Energy should grant conversion of our existing Old Order rights, provided that we comply with any requirements for conversion.
The Act provides that a mining right granted under the Act may be cancelled if the mineral to which such mining right relates is not mined at an optimal rate. Furthermore, royalties from mining activities will become payable to the state under provisions contained in separate legislation, in 2009.
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The Mineral and Petroleum Royalty Bill was published for comment in March 2003. After the Department of Finance considered representations from interested parties, the bill was withdrawn and is currently being redrafted. The Minister of Finance indicated in his budget speech in parliament during February 2004 that the Mineral and Petroleum Royalty Bill will not be implemented before 2009.
Empowerment of Historically Disadvantaged South Africans
The Liquid Fuels Charter. In November 2000, following a process of consultation, the Minister of Minerals and Energy and representatives of the companies in the liquid fuels industry, including our Company, signed the Liquid Fuels Charter setting the principles for the empowerment of historically disadvantaged South Africans in the South African petroleum and liquid fuels industry.
The Liquid Fuels Charter requires liquid fuels companies, including Sasol's Liquid Fuels Business, to ensure that historically disadvantaged South Africans hold at least 25% equity ownership in the South African company of their liquid fuels assets by the year 2010. It also envisages methods of measuring progress on meeting targets set in connection with transformation of ownership.
We are currently in discussions with prospective Black Economic Empowerment parties and we believe that we should be able to meet the requirements of the Liquid Fuels Charter.
In addition, the Liquid Fuels Charter requires that historically disadvantaged persons be given preferred supplier status, where possible, in the procurement of supplies, products, goods and services, as well as access to use and ownership of facilities.
The Mining Charter. In October 2002, the government and representatives of South African mining companies and mineworkers' unions reached broad agreement on a charter (the Mining Charter), designed to facilitate the participation of historically disadvantaged South Africans in the country's mining industry. The Charter's stated objectives include the:
The Charter, together with the recently published scorecard to facilitate the interpretation of and compliance with the Mining Charter, requires mining companies to ensure that historically disadvantaged South Africans hold at least 15% ownership of mining assets or equity in South Africa within five years and 26% ownership within 10 years from the enactment of the new Mineral and Petroleum Resources Development Act which was on 1 May 2004. The Charter further specifies that the mining industry is required to assist historically disadvantaged South Africans in securing finance to fund their equity participation up to an amount of R100 billion within the first five years after the implementation of the aforementioned Act. Beyond this R100 billion commitment, the Mining Charter requires that participation of historically disadvantaged South Africans should be increased towards the 26% target on a willing buyer-willing seller basis. See "Item 4.B Business OverviewSasol Mining" and "Economic Empowerment of Historically Disadvantaged South Africans".
Various principles of the Mining Charter have been incorporated in regulations promulgated by the Minister of Minerals and Energy under the new Mineral and Petroleum Resources Development Act with respect to the South African mining industry. These regulations came into effect on 1 May 2004. We have commenced a process to apply for the conversion of our existing mining licenses under the new Mineral
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and Petroleum Resources Development Act. See below "New mining legislation may have an adverse effect on our mineral rights". When considering applications for the conversion of existing mining licenses under the Mineral and Petroleum Resources Development Act, the Minister of Minerals and Energy must take into account, among other factors, the applicant company's compliance with the Mining Charter. We intend to undertake any appropriate action required to ensure conversion of our existing mining rights under the Mineral and Petroleum Resources Development Act. See above "Regulation of Mining Activities in South AfricaThe Mineral and Petroleum Resources Development Act".
A scorecard intended to give effect to and facilitate the interpretation of the provisions of the Mining Charter was made public on 18 February 2003. The scorecard provides a method of indicating the extent to which applicants for the conversion of their rights under the Mineral and Petroleum Resources Development Act have complied with the provisions of the Mining Charter. It is intended that the entire scorecard would be taken into account in decision making. Notes attached to the scorecard provide guidance in interpreting the objectives of the Mining Charter.
We are currently in discussions with prospective Black Economic Empowerment mining parties and we believe that we should be able to meet the requirements of the Mining Charter. In any case, we intend to undertake any appropriate action required to ensure conversion of our existing mining rights under the Mineral and Petroleum Resources Development Act.
The Restitution of Land Rights Act
Our privately held land and mineral rights could be subject to land restitution claims under the Restitution of Land Rights Act 1994. Under this Act, any person who was dispossessed of rights in land in South Africa as a result of past racially discriminatory laws or practices is granted certain remedies, including, but not limited to:
If land is restored without fair compensation, it is possible that a constitutional challenge to the restoration could be successful. Once a land claim has been lodged with the Commission on Restitution of Land Rights, the rights of any person in respect of such land are restricted in that he may not perform certain actions relating to the land, including, but not limited to, selling, leasing or developing such land, without the consent of the Commission. The Commission is obligated to notify the land owner of such a claim lodged or any other party which might have an interest in a claim. All claims had to have been lodged with the Commission by 31 December 1998. Although this was the final date for filing claims, many claims lodged before the deadline are still being reviewed and not all parties who are subject to claims have yet been notified. We have not been notified of any land claim that could have a material adverse effect on our rights to any of our significant properties.
The Restitution of Land Rights Amendment Bill was published for comment on 25 July 2003. Under the existing Act, in the absence of a court order, the power of the Minister to acquire or expropriate land for restitution purposes is limited to circumstances where an agreement has been reached between the interested parties. The Bill would entitle the Minister to expropriate land in the absence of agreement. Such an expropriation could be for restitution or another land reform purposes. Compensation payable to the owner of the land would be subject to the provisions of the Expropriation Act 63 of 1975 and section 25(3) of the Constitution which provides, in general, that compensation must be just and equitable.
Broad-based Black Economic Empowerment Act. The South African Department of Trade and Industry introduced the Black Economic Empowerment Act ("the Act"). The Act's stated objectives are to:
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The Act establishes a Black Economic Empowerment Advisory Council ("the Council") to advise the President on Black Economic Empowerment. In terms of the Act, the Minister of Trade and Industry may issue codes of practice on Black Economic Empowerment, which may include:
The Act provides that every organ of the State must take into account any relevant code of practice issued in terms of this Act in determining qualification criteria for the issuing of licenses and other authorizations in terms of any law and in developing and implementing a preferential procurement policy. The Minister of Trade and Industry may propose regulations under this Act.
Regulation of Petroleum-Related Activities in South Africa
The Petroleum Products Act and the Petroleum Products Amendment Act
The Petroleum Products Act. The Petroleum Products Act was adopted to provide measures relating to, among others, the maintenance and control of petroleum products prices and the cost of distribution and the standards of particular services rendered in connection with motor vehicles. The Act empowers the Minister of Minerals and Energy, at her discretion, to promulgate regulations relating to the sale and distribution of petroleum products, including the price at which petroleum products may be sold.
The Petroleum Products Amendment Act. The Petroleum Products Amendment Act and subsequent further Amendment Bill, amends the existing Petroleum Products Act. The Act and subsequent Amendment Bill include provisions for the licensing of persons involved in the sale of petroleum products and envisage the establishment of a controller with authority to issue wholesale, retail and site licenses. The Minister of Minerals and Energy may promulgate regulations relating to licensing to which the controller will be bound.
Among the matters governed by these pieces of legislation of particular significance to our business are issues relating to the Minister's discretion in the exercise of executive powers and the issuance of licenses.
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Although the Main Supply and Blue Pump Agreements largely excluded us from selling fuels directly to the retail market in South Africa, the expiration on 31 December 2003 enabled us to commence the process of establishing a network of service stations. As future legislation is expected to regulate matters pertaining to the conditions and requirements for licensing the sale of petroleum products to the retail market, including the prices at which liquid fuels will be sold to the retail market in the country, we believe that the provisions of the Act could impact the conditions and cost of our entry into the retail fuel market in South Africa.
The Petroleum Pipelines Act
The Petroleum Pipelines Act was submitted to Parliament and proposes, among other things, to establish a petroleum pipelines regulator, responsible for the supervision of activities, including the following:
Among the stated objectives of the Petroleum Pipelines Act are:
Among the matters governed by the Act of particular significance to our business, are issues relating to the issuance of licenses and the discretion granted to the Minister of Minerals and Energy with respect to the exercise of executive powers, the determination of tariffs and the issue of open access to pipelines.
The Act, grants broad discretion to the Minister of Minerals and Energy, who will supervise the activities governed by the draft Bill and promulgate regulations relating to any matter covered by the Act. With regard to the setting of tariffs, different pricing methodologies can be adopted, which may prove disadvantageous for some competitors because of their different market position and geographic location. Regulations that may be promulgated under the Act, could affect our locational advantage in the economic heartland of the country of our Natref refinery and our synfuels facilities at Secunda. The Act provides that sufficient pipeline capacity will be made available in the crude oil pipeline to enable Natref to operate at its capacity at the commencement of the Act.
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Regulation of Gas-Related Activities in South Africa
The Gas Act
The Gas Act, which is expected to come into effect on a date to be determined by the President, will regulate matters relating to gas transmission, storage, distribution, liquefaction, and re-gasification activities. Among its stated objectives are:
The Gas Act provides for the establishment of a national energy regulator, whose powers would include the issuance of licenses for a range of activities including:
The National Energy Regulator determines maximum prices for distributors, reticulators and all classes of consumers where there is inadequate competition as contemplated in the South African Competition Act. The National Energy Regulator may impose fines not exceeding R2 million a day, if a licensee fails to comply with any provisions of the Gas Act.
In accordance with the Gas Act, licensees may not discriminate between customers or classes of customers regarding access, tariffs, prices, conditions or service, except for objectively justifiable and identifiable differences.
The Mozambique Gas Pipeline Agreement. The Gas Act deals with the Mozambique Gas Pipeline Agreement entered into between the Minister of Minerals and Energy, the Minister of Trade and Industry and our Company in connection with the introduction of natural gas by pipeline from Mozambique into South Africa. See above "Sasol's Liquid Fuels BusinessSasol GasThe natural gas project". The Gas Act recognizes that the terms of the agreement bind the Gas Regulator for a period until 10 years after natural gas is first received from Mozambique. From the date of the conclusion of the agreement, the terms of the agreement relating to the following matters constitute conditions of a license issued under the Gas Act:
No assurances can be given that the government may not amend the current legislative position to alter various terms and conditions of the Mozambique Gas Pipeline Agreement.
The Gas Regulator Levies Act 75 of 2002 was signed into law on 15 January 2003, but as yet has not come into operation, nor has the Regulator been appointed to assess the levies payable. It provides for the
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imposition of levies by the Gas Regulator on the amount of gas delivered by importers and producers to inlet flanges of transmission or distribution pipelines. These levies would be used to meet the general administrative and other costs of the Gas Regulator and the functions performed by the Gas Regulator. According to the Department of Minerals and Energy, this Act will come into effect at the same time as the Gas Act mentioned above.
Safety, Health and Environment
Our combined mining, fuels and chemical operations are subject to numerous local, national and regional safety, health and environmental laws and regulations in Southern Africa, Europe, the United States and Asia-Pacific. Our global operations, including marketing and logistics, are also affected by international environmental conventions.
We focus on our safety, health and environmental responsibilities and try to ensure that we operate under safe working practices, and safeguard against accidents and avoid harm to people or the environment in all our businesses.
Safety, health and environmental laws and regulations affect a wide spectrum of our Group activities. They often require permits to be obtained for the use of natural resources such as water, for instance, and for the operation of our facilities and the disposal of our waste products. They prescribe minimum standards for the safety and health of our employees. They impose restrictions on the types and quantities of emissions that can be released into the environment, and also regulate issues of product safety, waste generation, management and ultimate disposal. It is our expectation that these laws and regulations will become more stringent in the future.
Our safety, health and environment policy. We have developed a systems-oriented approach towards the management of these issues. We have moved from a division-based safety, health and environment management policy to a structure managed on a Group basis. We are committed to sustainable development, legal compliance being the minimum requirement for all our operations. Matters of safety, health and environment are treated as critical business issues. Planning on safety, health and environmental issues includes the setting of targets, performance measurement, reporting and review.
In order to ensure that our safety, health and environmental performance is aligned with our Group targets and objectives, corporate governance and other audits are carried out regularly. All of our businesses are required to track their performance and furnish quarterly reports to their respective boards and to the Group Safety, Health and Environment and Sustainable Development Forum via the Group Safety, Health and Environment Management Committee and the Risk and Safety, Health and Environment Committee of the Sasol Limited Board on their major risks and liabilities, progress on our internal indicators of performance and any major incidents and non-compliances. For information regarding our Group Safety, Health and Environment and Sustainable Development Forum and the Risk and Safety, Health and Environment Committee of the Sasol Limited Board, see also "Item 6.C Board Practices". Similar reports are also required to address significant division-specific issues. We use the findings emanating from corporate governance and other audits to implement improvement measures.
Our businesses are required to manage their safety, health and environmental risks in line with internationally accredited management systems. On environmental management systems, we are currently progressing towards our Group target of achieving ISO 14001 certification for all our businesses. The ISO (International Standards Organization) 14001 standard is an internationally accepted standard for the development and implementation of environmental management systems. Certification to the standard entails regular audits by an independent, accredited third party, such as the South African Bureau of Standards. Our businesses in South Africa have received more than 40 ISO 14001 certifications. Most of our US and German businesses are ISO 14001 certified, while our operations in Italy are at an advanced stage of ISO 14001 implementation. In South Africa, we have a long history of the use of the local National
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Occupational Safety Association safety system in respect of which many of our businesses hold the five star premier award.
We have approved environmental management programs and ISO 14001 certification for each of our coal mining operational areas and their future extensions. Our Wonderwater strip-mining operation was the first South African surface coal mining operation to obtain ISO 14001 certification for its environmental management system.
Health and Safety. In the financial year 2004 we regrettably lost five workers, including contractors, and another four fatalities occurred due to transport related incidents. We lost ten workers, including contractors, to fatalities in the financial year 2003 and seven in the financial year 2002.
On 1 September 2004, an explosion at Sasol Polymers' ethylene plant in Secunda occurred, regrettably resulting in loss of life of ten employees and contractors and injuries. This will not affect fuel production although polymers production will be affected in the short-term. The incident is being investigated.
Numerous programs involving senior management are being conducted to render our mines safer including behavior-based safety training programs.
Emissions. Because of the nature of some of our processes, including coal gasification for the production of petrochemical products, our operations generate relatively high carbon dioxide emissions. Our coal gasification operations are situated in South Africa, which is classified as a developing country in terms of the Kyoto Protocol and though we are largely exempt from the emissions reduction targets required under the Protocol, we are exploring our options to voluntarily reduce emissions at our facilities.
We monitor air emissions around our plants to measure ambient air quality. In Lake Charles in the United States, we also are part of an authority-led initiative to monitor ambient air concentrations, in order to identify and address proactively major risks for community health in a timely manner. In addition, our operations in the United States have reduced reported emissions under the Toxic Release Inventory by over 80% since reporting began in 1987.
We expect hydrogen sulfide odors from coal gasification, which are already within statutory limits, to be substantially reduced or eliminated in the Vaal Triangle region of South Africa in 2004 when natural gas replaces coal as a feedstock for our Sasolburg operations. Significant efforts are also being made to reduce hydrogen sulfide emissions emanating from the Secunda operation. The sulfur recovery plants are being upgraded to reduce levels of hydrogen sulfide emissions and improved monitoring and control equipment will also be addressed as part of this project.
Water. Water is increasingly becoming a source of concern, not only in mining, but in all our operations, in particular in South Africa, which is an arid country. A series of water treatment and saving programs and projects are currently under way to address relevant challenges in all of our operations.
We have progressed significantly in the research and development of managing the water-related impacts of our mining activities. The company has committed resources to the following:
Our project team of internal and external experts in mining, geohydrology, geochemistry, water and waste treatment is currently committed to researching innovative and cost-effective solutions to further reduce our impact on the environment.
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Fires, explosions and releases. The manufacture of petrochemicals involves using high volumes of flammable substances, often under high pressure and at high temperatures. Hence, managing the risk of fires, explosions and releases of hazardous substances is essential for us. In the course of our operations, we experience a number of fires, explosions and releases of hazardous chemical substances, the most significant being a fire that occurred at our Natref refinery in June 2001, which resulted in a four-month suspension of production. See above "Sasol's Liquid Fuels Business". We are taking steps to reduce the frequency and severity of these events, and do not expect any other past fires, explosions or releases to have a material effect on our results or operations.
Our operations in the United States are conducted in accordance with the requirements of the Occupational Safety and Health Administration Process Safety Management regulations. Through the application of these regulations, we implement a thorough safety management process designed to minimize the risks of accidents and releases of hazardous substances.
In addition, since 11 September 2001, assessing and improving the security of chemical operations in the United States has become an important focus. Our Baltimore and Lake Charles plants have since evaluated plant security programs and made changes in procedures and physical security measures. As a member of the American Chemistry Council, Sasol NA has also adopted a Security Code of Management Practice, which requires that we conduct a security vulnerability analysis to identify areas in which additional security measures are necessary, and have a management system in place for other aspects of plant, distribution and cyber security.
We maintain a comprehensive insurance program because of the nature of our processes, to address attendant risks.
Land remediation and rehabilitation. Because of our chemicals and fuels processes, we have particular legacy and current risks that we are addressing. We approved the establishment of a Group-wide strategy to address potential liabilities associated with land remediation and rehabilitation.
At 30 June 2004, we had a provision of R404.1 million of which R210 million was invested in a trust fund for mine closure and rehabilitation. This figure is reviewed on an annual basis to ensure that adequate provision is made at all times, taking into account all relevant circumstances.
Our gas pipelines are buried underground in order to reduce long-term impacts. We implemented this approach for the Mozambique natural gas project, for which we used World Bank guidelines for environmental impact assessment studies.
Waste. Potential risks associated with waste are a priority for us. Historical legacies are addressed in accordance with relevant legal requirements, and cleaner production techniques are implemented to address future risks. Where we acquire new plants, the attendant risks are identified and the necessary indemnities sought from the sellers. Where we have not secured such indemnities, we are confident that such risks and attendant liabilities will not have a material effect.
Asbestos. We have a strategy for the phase-out of asbestos, which is being implemented by our operations. We have implemented a policy to ensure that new sources of asbestos are not procured in the construction of new facilities worldwide. Asbestos is removed and disposed of under strict regulatory requirements as plant modifications are made or as necessary for maintenance.
Environmental regulation in South Africa
The Constitution of the Republic of South Africa forms the framework for the environmental legislation in South Africa. Section 24 of the Constitution enshrines the right of all citizens to an environment that is not harmful to their health and well-being and provides individuals with a right for the protection of the environment. It further provides that these rights can be enforced through reasonable legislative and other measures to prevent pollution and degradation, to promote conservation and to
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secure an ecologically sustainable development. Further constitutional provisions provide relevant rights of enforcement, including class actions. A number of laws and regulations address specific issues relating to the protection of the environment. The following includes an analysis of some of these laws, which may be relevant to our operations.
National Environmental Management Act. The National Environmental Management Act provides for cooperative environmental governance and coordination of the environmental functions of the government. The Act regulates environmental compliance and provides for enforcement measures. The Act principally imposes a duty of care on persons who have or may pollute or degrade the environment and other responsible parties to take reasonable measures to prevent and remediate environmental damage, protects workers refusing to undertake environmentally hazardous work and provides for control over emergency incidents. It promotes access to environmental information, protects whistleblowers and allows for private prosecution and class actions. The Act also provides for integrated environmental management and, in time, it is intended to replace the Environment Conservation Act. Recent amendments have been proposed relating to improved enforcement of environmental compliance and improved regulation of environmental impact assessments.
Environment Conservation Act. The Environment Conservation Act provides for the protection and controlled utilization of the environment. The Act and the environmental impact assessment regulations promulgated under the Act require approval by the Department of Environmental Affairs and Tourism in advance of the initiation of activities that may have a detrimental impact on the environment. The Act also provides for the designation and protection of nature reserves, imposes licensing requirements for the operation of waste disposal sites and addresses noise control and waste disposal.
National Environmental Management: Biodiversity Act. Parliament published this Act, which deals with various issues relating to biological diversity including its management and conservation.
National Environment Management: Protected Areas Act. This Act provides for the declaration of conservation areas. Of particular significance is that it provides for the expropriation of private land, including servitudes, in the interests of conservation. We have not been notified of any action that could have a material adverse effect on our rights to any of our significant properties.
Water protection
The National Water Act provides for the equitable allocation of water for beneficial use, sustainable water resource management and the protection of the quality of water resources. The Act establishes water management procedures and protects water resources through the licensing of various uses of water. It also includes provisions for pollution prevention, remediation requirements and emergency incidents. The Department of Water Affairs and Forestry is currently attending to the drafting of legislation regarding a waste discharge charging system and a natural water resource strategy. The former is currently in draft form.
A significant part of our operations, including mining, chemical processing and others, require use of large volumes of water. South Africa is generally an arid country and prolonged periods of drought or significant changes to current water laws could increase the cost of our water supplies or otherwise impact our operations.
Air protection
The Atmospheric Pollution Prevention Act regulates air emissions, including emission of smoke, and allows for promulgation of smoke-control regulations. The Act provides for steps to be taken for preventing atmospheric pollution by dust and restricts the disposal of assets by mines before remediation of dust impacts. Regulations promulgated under this Act require that we maintain air pollution permits for certain scheduled activities, smoke-control regulations, vehicle emissions, and guidelines for sulfur dioxide
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emissions. This Act is currently under revision and will be replaced by the National Environmental Management: Air Quality Act, which is expected to be promulgated shortly. It is expected that this Act will impose stricter standards on air quality management in South Africa, through the adoption of internationally accepted ambient and emission standards.
The National Ambient Air Quality Standard for Sulfur Dioxide published in December 2001 is the first in an intended series of guidelines with respect to priority pollutants, which are intended to curb excessive pollution by industry. Guidelines are based on World Health Organization standards and provide maximum allowable concentration of ambient sulfur dioxide over certain time periods.
Some of our processes in South Africa, especially coal gasification, result in relatively high carbon dioxide emissions. South Africa is considered a developing country in terms of the Kyoto Protocol and, accordingly, it is largely exempt from the emissions reductions required under the Protocol. We are taking measures to reduce our emissions, among which will be the use of natural gas from Mozambique as of 2004 in lieu of coal, which we expect will significantly reduce sulfur dioxide emissions and hydrogen sulfide odors from gasification operations in the Vaal Triangle region. We also monitor air emissions at our plants to measure ambient air quality.
Waste and hazardous substances
Environment Conservation Act. The Environment Conservation Act establishes a licensing framework for the establishment, operation and closure of any waste disposal site. The Department of Environmental Affairs and Tourism is currently drafting a Waste Management Bill, which is expected to cover solid waste management and incorporate the principles of the Basel Convention on the trans-boundary movement of waste and published for public comment.
Hazardous Substances Act. The Hazardous Substances Act provides for the control of substances that may cause injury, ill-health or death to human beings by reason of their toxic, corrosive, irritant, strongly sensitizing or flammable nature. This Act also controls the use and handling of certain electronic and radioactive products. The Act includes licensing provisions for various activities relating to designated substances. Regulations promulgated under this Act cover the identification of hazardous substances and their transportation by road.
Other environmental legislation
The National Road Traffic Act and its regulations control road traffic matters, including provisions relating to the transportation of dangerous goods and substances. The Act provides specifications for road tankers, labeling, duties of responsible persons, compatibility of multi-loads, driver training and hazardous substance documentation.
The Explosives Act consolidates the laws relating to the manufacture, storage, sale, transport, importation, exportation and the use of the explosives. The Act imposes an authorization requirement for the manufacture and storage, as well as for the import, export and sale of explosives. This Act is currently under revision. The Explosives Bill of 2002 aims to ensure more comprehensive control over explosives.
The Fertilizers, Farm Feeds, Agricultural Remedies and Stock Remedies Act regulates the registration, importation, sale, acquisition, disposal or use of fertilizers, among other products. Regulations promulgated under this Act relate to the registration and sale of fertilizers.
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Health and safety regulation in South Africa
Occupational Health and Safety Act. The Occupational Health and Safety Act covers a number of areas of employment activity and use of machinery in South Africa, excluding mining activities. The principal objectives of the Act are to protect and provide for the health and safety of persons at work and the protection of persons against hazards arising out of or in connection with the activities of persons at work. The Act imposes various obligations on employers and others to maintain a safe workplace and minimize the exposure of employees and the public to workplace hazards and establish penalties and a system of administrative fines for non-compliance.
The Act requires employers to ensure the health and safety of their employees and all persons who may be directly affected by their activities. To promote the safe use of articles, products and substances in the workplace, a duty is placed on manufacturers, importers, sellers and suppliers to take necessary steps to ensure that appropriate information is available to the users of these articles, products and substances.
Mine Health and Safety Act. The principal objective of the Mine Health and Safety Act is to protect the health and safety of persons at mines. The Act requires that employers and others ensure that their operating and non-operating mines provide a safe and healthy working environment, determines penalties and a system of administrative fines for non-compliance and gives the Minister of Minerals and Energy the right to restrict or stop work at any mine and to require an employer to take steps to minimize health and safety risks at any mine.
Compensation for Occupational Injuries and Diseases Act. The purpose of this Act is to provide for compensation for disablement caused by occupational injuries or diseases sustained or contracted by employees in the course of their employment, or for death resulting from such injuries or diseases. The Act is administered by the Minister of Labor, through a Director-General who manages a compensation fund to which employers contribute, directly or indirectly. Where indirect contributions are made, these contributions are made to a mutual association, which acts as the insurer in respect of claims against the employers. All employers, with the exception of those in national, provincial and local government, are required either to register under the Act or to be fully insured against related liabilities.
Occupational Diseases in Mines and Works Act. This Act relates to the payment of compensation in respect of certain diseases contracted by persons employed in mines or at locations where activities ancillary to mining are conducted. Any mine (including the Sasol Mining operations) at which risk work takes place is deemed to be a controlled mine in respect of the employees for whom the employer is required to make payments to the fund for occupational diseases, in order to meet relevant claims. Persons who are employed in controlled mines are required to have a certificate of fitness, which must be renewed from time to time.
An amendment to the Occupational Diseases in Mines and Works Act came into effect on 22 January 2003. Under this amendment, the owner of a controlled mine is obliged to pay for an undetermined period for the costs incurred by a person in his service, or who was in his service at the commencement of the compensatable disease, in respect of medical costs required by such disease. Prior to the amendment, the owner was only liable for reasonable medical costs for a period of not more than two years from the date of the commencement of a compensatable disease and only in respect of a person in his service.
For further information, see "Item 6.C Board PracticesThe Risk and Safety, Health and Environment Committee" and "Group Safety, Health and Environment and Sustainable Development Forum."
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Germany
In Germany, we operate a number of plants and facilities for the storage, processing and transportation of chemical feedstock, products and wastes. These operations are subject to numerous laws and ordinances relating to safety, health and the protection of the environment.
General environmental care
The lack of a general Environmental Code in Germany means that no guideline legislation is available for general environmental care. In terms of the Act on the Assessment of Environmental Impacts, the environment impact assessment, or EIA, is an instrument of preventative environmental care that is legally binding. This has been introduced in existing public procedures for the licensing of, or considerable amendment to, certain projects of relevance to the environment, including chemical facilities. The EIA is based on the cooperation between the environmental authorities and the parties intending to carry out the project.
The Environmental Information Act guarantees everyone's access to official environmental information.
Issues relating to general environmental care are addressed by the environmental provisions of the Regional Planning Act and other specific and planning law designed to ensure environmental soundness, as well as by the Environmental Liability Act, which provides for liability in the case of environmental risks. Where human life or health is disturbed and where emissions have entered the soil, water or the air, the owner of a facility is liable, even if he or she is not at fault and irrespective of whether the damage was caused as a result of a hazardous incident or during normal operations. Damage resulting from force majeure is excluded from liability. The right to the restoration of the previous state also extends to nature and the landscape. Installations that pose a particular risk to the environment must have provisions for sufficient cover, an obligation which may be met by arranging liability insurance.
Criminal law provisions are included in the Act to Combat Environmental Crime, which targets a range of polluting activities, including water, soil and air pollution, environmentally damaging waste disposal and noise. It also addresses licensing of the operation of installations and the handling of hazardous substances and goods and particularly serious environmental offences.
Specific environmental protection legislation
Emission control. The guideline legislation to protect man and the environment from air pollution and noise pollution is the Federal Emission Control Act. This Act and the ordinances promulgated under it, provide the framework for environmental protection and the technical safety of installations. It provides for licensing for installations that are particularly susceptible to causing harmful environmental impacts, including chemical facilities or mineral oil refineries.
Regulation of hazardous substances. Provisions for the protection of man and the environment against the harmful effects of hazardous substances and preparations are provided in the Chemicals Act, the related Ordinances on the Prohibition of Certain Chemicals and the Hazardous Incidents Ordinance. New substances are subject, as laid down in European law, to a registration and notification obligation before they can be brought onto the market. Old substances that have been on the market since 1981 are assessed on the basis of a relevant European regulation. Hazardous substances and preparations must be classified, labeled and packed in line with their hazardous properties; their manufacture, marketing and use may be prohibited or limited.
The Chemicals Act is complemented by the Plant Protection Act in the version of 14 May 1998 and the Fertilizers Act, as well as by legislation on animal feedstuffs and human foodstuffs and by substance-related provisions in other areas of care of the environment. This also includes the provisions concerning the environmental impacts of genetic technology under the terms of the Genetic Technology Act.
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Avoidance, recovery and disposal of waste. The Closed Substance Cycle and Waste Management Act regulates the avoidance, recovery and disposal of waste. The aim of the Act is to promote an economy based on closed substance cycles, thus conserving resources, and to guarantee the environmentally sound disposal of waste. Wherever waste cannot be avoided, recovered or used to produce energy, it must be removed from the cycle and, as a matter of principle, be disposed of within Germany in a way that is not detrimental to the common good. Under law, waste is defined as a tangible item, which falls under one of the legally determined categories of waste, and which the owner is getting rid of, desires to get rid of or must get rid of.
The Waste Transportation Act regulates the transport of waste into, out of or through the area of application of the Act and creates the basis for the establishment of a solidarity fund to finance the return of waste exported illegally.
Water protection. The guideline legislation in the field of water protection is the Federal Water Act. This requires everyone to exercise adequate care when carrying out measures which may have an impact on a water body so that water pollution or any other negative effect on the water is prevented. Surface waters and groundwater are, as public utilities, subject to a public management and utilization code, which leaves the allocation of users' rights at official discretion.
The Waste Water Charges Act complements the Water Management Act. The Act authorizes an annually rising waste water charge linked to the toxicity of the discharged waste water. Water legislation promulgated by the Federal States goes beyond merely the enforcement of the framework of federal law to determine administrative procedures and regulate issues of private water law.
Water protection is also addressed directly or indirectly by substance-related provisions in other laws, including the Chemicals Act, the Fertilizers Act and the Waste Avoidance and Waste Management Act. They also comprise provisions through which water is indirectly protected via the soil and the air.
Soil protection. The protection and care of soil as an environmental medium and part of the ecosystem is promoted by a range of environmental provisions, primarily the Federal Soil Protection Act. Soil protection measures, preventative or remedial, aim at avoiding or reducing substance inputs into the soil, or removing already existing soil damage, and at addressing the extensive land consumption caused by soil sealing.
Health and safety
The Health and Safety at Work Act provides for protection of the health and safety of employees. It places the employer under a duty to assess the hazards at the workplace, to take appropriate preventive measures, and to instruct the employees about the measures used. The employer must take precautions for especially hazardous areas and situations and provide preventive occupational healthcare. This Act is complemented by the Safety at Work Act, which places employers under a duty to appoint appropriately qualified officers to support them in occupational health and safety matters, including ergonomic workplace design. Also, the Mining Act contains stipulations regarding the health protection of mine workers and is complemented by a special ordinance treating this topic.
United States
Environmental compliance
Sasol NA and Merisol are subject to numerous federal, state, and local laws and regulations that regulate the discharge of materials into the environment or that otherwise relate to the protection of human health and the environment. As with the chemical industry, generally, compliance with existing and anticipated environmental, health, safety, and process safety laws and regulations increases the overall cost of business, including capital costs to construct, maintain, and upgrade equipment and facilities. These laws and regulations have required, and are expected to continue to require, Sasol NA and Merisol to make
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significant expenditures of both a capital and expense nature. Environmental compliance expenditures for Sasol's share of Merisol and Sasol NA's manufacturing sites for the next five years are estimated to range from US$9 million to US$13 million per year.
Under the agreement for the acquisition of Sasol Chemie, we received an indemnification from the seller, RWE-DEA for most of the costs of operational compliance with respect to conditions existing on or before 1 March 2001 that we expect will survive until at least 1 March 2006.
The Louisiana Department of Environmental Quality (LDEQ) in 2000 issued to Sasol NA four violations of state and federal air emission laws and regulations. These allegations assert violations of air-based reporting and record-keeping requirements, as well as minor exceedances of permitted air emissions. Sasol NA expects that the cost of settling these and all other outstanding air-related violations which will include fines or penalties, will not be material.
Remedial action
Active and former manufacturing sites. Sasol NA has been investigating and remediating soil and groundwater contamination at the Lake Charles Chemical Complex (LCCC) and Baltimore Plant sites resulting from historical operations under orders issued by LDEQ and the Maryland Department of the Environment (MDE). The Vinyl Chloride Monomer (VCM) Plant which was sold to Georgia Gulf in 1999, is also subject to US Resource Conservation and Recovery Act (RCRA) corrective action requirements, and is expected to complete a Corrective Measures Study in 20042005. The Baltimore Plant is monitoring the natural attenuation of hydrocarbon contaminants in the groundwater and regularly reporting to MDE and is not being actively remediated. The current costs of monitoring the Baltimore Plant site and the VCM Plant site and any foreseeable remediation costs are not expected to be material.
In addition to Sasol NA's operating sites, Sasol NA also has retained liability to Georgia Gulf Corporation for the remediation of four manufacturing operations sold in November 1999 and located in Mansfield, Massachusetts, Aberdeen, Mississippi, Jeffersontown, Kentucky, and Oklahoma City, Oklahoma. The Mansfield site, which is still owned by Sasol NA, has been extensively investigated since 1991 and the remediation of groundwater is ongoing. The Aberdeen Plant site has also been investigated under several orders issued by state authorities. Property to the west of the Aberdeen Plant was purchased in 2002 and part of the plume migrating off-site was delineated and contained on-site during 2003. The need for further remediation is currently being investigated.
Under the agreement for the acquisition of Sasol Chemie, most of Sasol NA's costs of remediating contamination from historical operations at its active and sold sites are being indemnified by RWE-DEA, and will continue to be indemnified until at least 1 March 2023 in respect of Lake Charles and Baltimore, and in perpetuity in respect of the Mansfield, Aberdeen, Jefferstown and Oklahoma City sites. In addition to indemnities from RWE-DEA, Sasol NA also has indemnities from some of its predecessorsBritish Petroleum for Mansfield and Reichhold Chemical for Jeffersontownfor contamination resulting from those companies' operations at the sites. Sasol NA does not expect costs to address contamination at these sites to have a material effect on operations or results.
Calcasieu Estuary CERCLA Site. In June 1999, Sasol NA and other Calcasieu Parish industry members received letters from USEPA making demand under Section 107 of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for past costs and future remedial investigation, remediation, and restoration costs associated with the Calcasieu Estuary. The Calcasieu Estuary, which includes the Calcasieu River and several major tributaries (bayous) in the vicinity of Lake Charles, Louisiana, has received releases and discharges from Parish industry since the 1930s. Bayou Verdine has historically received releases and discharges from the Conoco Lake Charles Refinery beginning in the 1940s and from the LCCC beginning in the 1960s. The "Bayou Verdine Area of Concern" is one of the areas of concern of the Calcasieu Estuary CERCLA Site.
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In 1999 and 2000, Conoco and Sasol NA completed a voluntary joint remedial investigation of Bayou Verdine under the oversight of state and federal authorities. In 2001, Conoco and Sasol NA completed ecological and human health risk assessments of Bayou Verdine and in 2002 performed an Engineering Evaluation and Cost Analysis (EE/CA) of removal actions for Bayou Verdine under an Administrative Order on Consent (AOC) with USEPA. Sasol NA does not expect its share of costs associated with contamination at Bayou Verdine to be material.
In October 2002, Conoco, Sasol NA, and USEPA entered into a second AOC to perform a sediment removal action for a relatively small area of elevated EDC concentrations located near the confluence of Sasol NA's West Ditch and Bayou Verdine. The West Ditch Project was completed in July 2003 at a cost to Sasol NA of about US$2.0 million. To date, no third party claims have been filed in connection with the West Ditch Project.
The EE/CA also recommends removal actions for the "Main Channel Area" of Bayou Verdine. Conoco and Sasol NA intend to perform the Main Channel Removal Action under a Consent Decree which will be negotiated in 2004 and 2005. We expect that Conoco and Sasol will have to agree to pay some part of the agencies' past response costs, as well as the costs of natural resource restoration. Under a Consent Decree, Conoco and Sasol hope to resolve all of the government's CERCLA claims against the companies in connection with the Calcasieu Estuary and will receive protection against CERCLA contribution claims by other "Potentially Responsible Parties" against the companies. Sasol NA will pay 10% of the costs to remediate the Main Channel, any associated third-party claims, past agency response costs, and natural resource restoration costs.
Sasol NA's total estimated liability for its share of Bayou Verdine and the Calcasieu Estuary CERCLA Site is about US$4.0 million. Under the agreement for the acquisition of the Condea Group (now renamed Sasol Chemie), 80% of Sasol NA's Estuary-related remediation costs are expected to be indemnified by RWE-DEA, and will continue to be indemnified until 1 March 2023.
Mozambique
In Mozambique, we are in the process of constructing operating plants and facilities for the extraction, processing, storage and transportation of natural gas. These operations are subject to numerous laws and regulations.
Environmental, health and safety regulation. The Ministry for the Coordination of Environmental Affairs (MICOA) was created in 1994 to coordinate environmental affairs in Mozambique. In 1995, the Ministry drew up a National Environmental Management Program, which is a policy document outlining the priorities for environmental management and sustainable development in Mozambique. This Program contains a National Environmental Policy, a proposal for Framework Environmental Legislation and Environmental Legislation and an Environmental Strategy.
The Framework Environmental Law was enacted in July 1997. The aims of the Environmental Law are to provide a legal framework for the use and correct management of the environment and its components and to assure sustainable development in Mozambique. The Law is applicable to all public or private activities that may directly or indirectly influence the environment. It requires licensing of activities that are liable to cause significant environmental impacts. The granting of an environmental license is subject to the preparation and approval of an appropriate level of environmental impact study and management plan.
In terms of environmental protection and safety, the Petroleum Act No. 3/2001 requires that holders of exploration and production rights conduct petroleum operations in compliance with environmental and other applicable legislation.
During the environmental impact assessment process for our natural gas project, particular attention was paid to those aspects of the project that necessitate the permanent or temporary displacement of
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populations and communities. Furthermore, in an endeavor to preserve as much as possible of the natural heritage of the area, the clearing, dividing and exploitation of the natural vegetation cover was considered to establish the potential impact. Sensitive areas such as natural forests, zones of potential erosion, including dunes along the coastline, conservation and sensitive areas where habitats and ecosystems are endangered and wetlands were given special consideration.
The possible influence the overall project could have on various threatened species has been identified and avoided where possible. To preserve the aesthetic environment, the visual impact of the project on zones of outstanding landscape beauty was also considered. Specialist consultants were retained to advise on the identification of zones of archaeological, historical and cultural value that should be preserved. It is important to ensure that the current and future land-use of the areas affected by the natural gas project will not be detrimentally affected. Particular attention was paid to the protection of water sources in which groundwater is used for public consumption.
Public consultation was required as an integral part of the environmental impact assessment. A mechanism for receiving petitions was included to facilitate the voicing of public opinion. Having received public comments, the Environmental Impact Assessment consultant publicized them in accordance with MICOA requirements. This ensured that all affected stakeholders were properly informed. Furthermore, public hearings were also held at venues along the gas pipeline route and in the gas fields to take the consultation process down to the grassroots level.
Mineral Rights. Petroleum activities are regulated by the provisions of the Law Regulating Petroleum Activities. The National Directorate of Coal and Hydrocarbons administers and regulates petroleum operations on behalf of the government. The Mozambique government encourages the exploration and development of the country's hydrocarbon potential within a certain defined project framework.
In accordance with the constitution of Mozambique, the land and the natural resources of the soil and the subsoil of the territorial waters and continental shelf are the property of the state, which determines the conditions for their development and use.
The Petroleum Law creates a state enterprise, Empresa Nacional de Hidrocarbonetos de Mozambique, which is granted a monopoly with respect to many rights for the use, benefit, administration and disposal of hydrocarbons and may grant licenses to international investors to conduct exploration and production.
Other Countries
In a number of other countries, we are engaged in various activities that are regulated by local and international laws, regulations and treaties. In Italy, Malaysia, China and other countries, we operate plants and facilities for the storage, processing and transportation of chemical substances, including feedstock, products and wastes. In Qatar, Nigeria, Gabon, Equatorial Guinea and other countries, we are involved, or are in the process of being involved, in exploration, extraction, processing and transportation activities in connection with feedstock, products and waste relating to natural gas, petroleum and chemical substances. Our operations in the respective jurisdictions are subject to numerous laws and regulations relating to exploration and mining rights and the protection of safety, health and the environment.
4.C Organizational Structure
Sasol Limited is the ultimate parent of our Group. Our wholly owned subsidiary, Sasol Investment Company (Pty) Limited, a company incorporated in the Republic of South Africa, holds our interests in companies incorporated outside South Africa, including Sasol Chemie GmbH and Co. KG and Sasol Wax International (formerly Schümann Sasol International). A number of other majority-owned subsidiaries, including Sasol Mining (Pty) Limited, Sasol Chemical Industries Limited, Sasol Synfuels (Pty) Limited, Sasol Oil (Pty) Limited and Sasol Gas Holdings (Pty) Limited are incorporated in South Africa and hold
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our interests in the respective operations of our Group in South Africa. Sasol Technology (Pty) Ltd is responsible for the development of new business ventures, licensing and procurement of new technologies and Sasol Financing (Pty) Ltd is responsible for financing and treasury services and are also wholly-owned subsidiaries.
Sasol Chemie GmbH and Co. KG is a wholly owned, significant subsidiary of our Group. Sasol Chemie is a limited partnership constituted under the laws of Germany. Its corporate seat is in Hamburg, Germany and it is registered with the Commercial Register of the Local Court of Hamburg under registration number HRA 95497.
4.D Property, Plant and Equipment
We operate coal mines and a number of plants and facilities for the storage, processing and transportation of oil, chemicals and gas related raw materials, products and wastes.
Coal mining facilities. Our main coal mining facilities are located at:
For a detailed discussion regarding the use, capacity and products of these facilities see "Item 4.B Business OverviewSasol Mining". Pages M-1 to M-3 include maps showing the location of our coal properties and major manufacturing plants in South Africa.
Our Secunda facilities. Our main manufacturing facilities are located at Secunda and they are the base for numerous of our Synfuels operations and a range of our chemical industries operations, including explosives, fertilizers, monomers and polymers, solvents, alpha olefins and tar. The approximate size of this property is 82.5 million square meters. See "Item 4.B Business OverviewSasol Synfuels".
Our Sasolburg facilities. Our facilities at Sasolburg are the base for numerous of our chemical industries operations, including ammonia, explosives, mining chemicals, phenols, solvents, polymers, fertilizers, tars and waxes operations. The approximate total size of these properties is 51.4 million square meters.
The size of the Natref refinery, also based in Sasolburg, is approximately 1.1 million square meters. See "Item 4.B Business OverviewSasol's Liquid Fuels Business".
Our Mozambican Facilities. Our natural gas processing operations in Mozambique are operated by Sasol Petroleum Temane (a subsidiary of Sasol Petroleum International). These facilities, located some 700 km north of the Mozambican capital, Maputo, on a site of approximately 400,000 square meters, extract and process gas from the Temane gas field. The processed gas is supplied to the South African gas market, utilizing a newly installed high pressure pipeline, some 865 km in length.
Our facilities in Germany. Various operations of Sasol Olefins and Surfactants and Sasol Solvents are based at a number of locations in Germany. The most significant of these facilities are at Brunsbüttel (site size approximately 1.5 million square meters; plant size 500,000 square meters), Marl (site size approximately 160,000 square meters; plant size 75,000 square meters) and Moers site (site size approximately 808,000 square meters; plant size 400,000 square meters). Sasol Wax facilities are also based in Hamburg.
Other facilities in the rest of Europe. Various operations of Sasol Olefins and Surfactants are based at a number of locations in Italy. The main of these facilities are at Augusta (site size approximately 1.35 million square meters; plant size 220,000 square meters) and Terranova (site size approximately 185,000 square meters; plant size 75,000 square meters).
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Our facilities in the United States. Operations of Sasol Chemie are based at a number of locations in the United States. The most significant of these facilities are located at Lake Charles, Louisiana (site size approximately 3 million square meters; plant size 540,000 square meters) and in Baltimore, Maryland (site size approximately 293,000 square meters; plant size 255,000 square meters). Merisol also has operations based at Oil City, Pennsylvania, Houston and Winnie Texas.
With limited, immaterial exceptions, we own, or hold similar property rights on the properties described in this section. For more information regarding capital expenditure in respect of these properties and the related facilities and operations, see "Item 4.A History and Development of the CompanyCapital Expenditure".
MINING PROPERTIES AND OPERATIONS
Mine Systems and their Production Capacity
Sasol Mining operates seven mines whose production is sold to Sasol Synfuels and the international market. The production units, their annual nominated capacities and actual production values are indicated in the following table:
Nominated capacity and production
Mine |
Nominated capacity per year (Mt) |
2004 Actual production (Mt) |
||
---|---|---|---|---|
Middelbult Mine (Secunda) (1) | 8.5 | 8.51 | ||
Brandspruit Mine (Secunda)(1) | 8.2 | 8.37 | ||
Bosjesspruit Mine (Secunda)(1) | 8.0 | 8.18 | ||
Twistdraai Mine (Secunda)(1) | 6.0 | 6.21 | ||
Twistdraai Export Mine (Secunda) | 8.2 | 8.12 | ||
Syferfontein Mine (Secunda) | 11.0 | 6.79 | ||
Sigma Mine (Sasolburg) | 6.3 | 6.23 |
All mines employ the underground room and pillar mining method using continuous miners and at Sigma and Syferfontein this method is supplemented by opencast/strip mining (however both opencast operations terminated during the year). The Sigma Mine was first established in 1950. Production at the first two Secunda mines, Brandspruit and Bosjesspruit commenced in 1977. Twistdraai and Middelbult followed during the early 1980s, while Syferfontein started production in 1992. In 1996, the Export Mine at Twistdraai was commissioned. The original mine boundaries have been extended into new reserve areas with brownfield extensions facilitated by satellite shaft systems. All the production equipment is either replaced or overhauled on a regular basis according to a managed maintenance system that contributes significantly to lower production costs.
Processing operations
Export BusinessSecunda operations. The export business was initiated in August 1996 as part of a growth strategy. To date a total of 24 Mt of coal has been exported, beneficiated from 66 Mt at the Twistdraai Export Plant from 1996 through 2004. Coal is fed to the beneficiation plant from the existing Twistdraai Export Mine. The beneficiation plant produces primary export product with an ash content of approximately 10%, as well as secondary product for the Synfuels market.
The export beneficiation plant has a design throughput capacity of 8.5 Mt per year, but due to productivity improvements and minor alterations in the plant this figure is regularly exceeded. In 2004 9.1 Mt was fed through the plant. The plant consists of a primary and secondary stage. The primary stage
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comprises three modules with two feed streams each. The coal is fed at a rate of 580 tons per hour into two 800 millimeter (mm) diameter dense medium cyclones per feed stream. There are a total of 18 cyclones in the primary stage. The secondary stage consists of two modules with two 1,000 mm diameter dense medium cyclones.
The Run of Mine (ROM) coal is transported via overland conveyor belts to the export beneficiation plant from the Twistdraai export mine. The export product is loaded onto trains by means of a rapid load-out system, and then transported to the Richards Bay Coal Terminal in KwaZulu-Natal.
The existing capacity at the Richards Bay Coal Terminal is 72 Mt per year. Sasol Mining has a 5% share in this terminal, which relates to an existing entitlement of 3.6 Mt per year. The planned Richards Bay Coal Terminal Phase 5 expansion project will increase the total throughput capacity to 82 Mt. Sasol Mining's participation in this project, should result in a gross entitlement of 4.1 Mt per year. The increase in export product will be achieved, by increasing throughput and by the production of a second grade product containing 14% ash.
Sasol Coal SupplySecunda operations. Sasol Coal Supply operates the coal handling facility between Sasol Mines and Sasol Synfuels by stacking and blending coal on six stockpiles of 11 Kt each. The objectives are:
The daily coal supply to Sasol Synfuels is approximately 110 Kt. The total coal handled by Sasol Coal Supply, since production began in 1977 through 2004, amounts to 782 Mt.
The Sasol Coal Supply operation has a live stockpile capacity of 660 Kt that is turned over approximately 1.5 times per week. In addition there is a reserve stockpile capacity of 2.14 Mt. The installed conveyor belts, which feed into the operation, have a total length of 66 km, with the longest trajectory being 23 km. The coal is handled by six stackers and six reclaimers each with a capacity of 1.8 Kt per hour.
Source of electrical power
Electricity is supplied by Eskom, the state-owned power producer. The approximate monthly peak demand is 85 Mega Watts (MW). The total cost of electricity used in 2004 was approximately R113.4 million.
Location of Coal Deposits
Pages M-1 to M-3 include maps showing the location of coal properties and major manufacturing plants in South Africa.
Secunda Mining Complex
Secunda Mines are situated 145 km southeast of Johannesburg, adjacent to the town of Secunda in the Mpumalanga Province. The mines are connected to the Gauteng Province, the economic heartland of the country, by well-maintained roads, railways and an airport.
Secunda Mining Complex is part of the Highveld coal field in the western Mpumalanga Province. The coal is mined from five underground mines and a sixth, which is both a strip and underground mine (although the strip mine terminated coal production during the year). The principal mining method applied in the underground mines is room and pillar mining with limited total extraction of the coal pillars.
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Sigma operations (Sasolburg)
The Sigma operations are situated close to the town of Sasolburg on the northern boundary of the Free State Province, located about 100 km south of Johannesburg, and connected by well-maintained roads, railways and an airport. The operations consisted of a strip operation (which terminated coal production during the year) and an underground mine, established from the northern highwall of the pit. A new underground access to the remaining reserves in the southern highwall of the pit has been established. In addition, the establishment of the Mooikraal Mine some 22 km to the west of Sasolburg is on schedule.
Planned Capital Spending
Sasol Mining is pursuing a growth strategy, which will require capital expenditure in the long term. Some mines will be reaching the end of their economic life and will have to be replaced within the next five to ten years.
The five-year capital spending plan for Sasol Mining can be divided into four broad categories:
The table below presents potential capital spending for the next five financial years, which has not yet been approved by the board but has been considered in strategic planning:
Five-year Capital Spending
|
2005 |
2006 |
2007 |
2008 |
2009 |
|||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
|||||||||
Mine replacement and infrastructure capital spending | 418 | 211 | 211 | 163 | 187 | |||||
Operations capital spending | 339 | 327 | 252 | 226 | 289 | |||||
New Technology/New Business | 45 | 90 | 44 | 20 | | |||||
Environmental capital spending | | 2 | 104 | | | |||||
Total | 802 | 630 | 611 | 409 | 476 | |||||
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Coal Exploration Techniques
Sasol Mining's geology department employs several exploration techniques in assessing the geological risks associated with the coal deposits. These techniques are applied in a mutually supportive way to achieve an optimal geological model of the relevant coal seams targeted for production purposes. The Highveld Basin is considered to be structurally complex when compared to the active coal fields in South Africa. As a result, Sasol Mining has been basing its geological modeling on having sufficient and varied geological information, in order to achieve a high level of support to the production environment; an approach utilized for the last 25 years.
Present exploration techniques
Vertical diamond drilling. This is the primary exploration technique that is applied in all exploration areas, especially during reconnaissance phases. In and around operational mines, the average vertical borehole density varies from 1:10 to 1:15 (boreholes per hectare), while in medium term mining areas, the average borehole density is in the order of 1:25. The average drilling depth ranges from 200 to 250 meters. The major application of this technique is to locate horizon geometry, to identify coal quality and to gather structural information about dolerite dykes and sills, and the associated de-volatilization. This information is then modeled and forms the basis of further geological interpretation.
Directional drilling (surface to in-seam). Directional drilling from surface to in-seam has been successfully applied for several years, especially, for medium and long-term exploration areas. A circular area with a radius of approximately two kilometers (1,256 hectares) of coal deposits is covered by this method. The main objective of this approach is to locate dolerite dykes and steep dipping dolerite sills, as well as faults with displacements larger than the coal seam thickness.
Horizontal drilling. This technique is applied to all operational underground mines and supplies short-term (minimum three months) exploration coverage per mining section. No core is usually recovered, although core recovery is possible, if required. The main objective is to locate dolerite dykes and steep dipping sills. A drilling reach of up to one kilometer is possible, although the average length is usually 800 meters.
Aeromagnetic surveys. All exploration areas are usually aero-magnetically surveyed before the focused exploration is initiated. The main objective is to locate dolerite sills and dykes, as well as large-scale fault zones.
Airborne electro-magnetic surveys. Due to the occurrences of non-magnetic dolerite dykes and sills, it has been necessary to survey certain exploration areas electro-magnetically to pinpoint these structures for optimal mine layout plans.
Geophysical wireline surveys of directional boreholes. The present research has been highly successful. This technique is now being routinely applied with excellent information leading to increased confidence of the surface directional drilling results. This technique has also been applied in underground directional drilling with excellent results.
Secunda Operations Information
The coal supplied to Sasol Synfuels is the raw coal mined on the tied mines, and the secondary product from the export mines beneficiation plant. Pages M-1 and M-3 include maps showing the location of our Secunda coal operations.
The analytical work done on the sampling was initially, between 1965 and 1972, conducted at the Fuels Research Institute, and subsequently at the laboratories of the South African Bureau of Standards in Pretoria, South Africa, now called Coal and Mineral Technologies.
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Extensive geological exploration has been done in the coal resource areas. Every year additional exploration is undertaken to update and refine the geological models, which allows accurate forecasting of geological conditions, for the effective planning and utilization of coal resources.
Computation and storage of geological information
Geological information is stored in a Sequel Server database. Data validation and quality checking through several in-house methods is conducted regularly. Data modeling is conducted by manual interpretation and computer-derived geological models, using the Horizon module of ECS International's MINEX software. Reserves and composite qualities are computed using established and recognized geo-statistical techniques.
General stratigraphy
The principal coal horizon, the Number 4 Lower Coal Seam, provides some 90.8% of the total proven and probable reserve. The Number 4 Lower Coal Seam is one of six developed coal horizons in the Vryheid Formation of the Karoo Supergroup, a permo-carboniferous aged, primarily sedimentary sequence. The coal seams are numbered from the oldest to the youngest.
Characteristics of the Number 4 Lower Coal Seam. The Number 4 Lower Coal Seam is a bituminous hard coal characterized by the following borehole statistics:
The other potential coal seam is:
Mineable parameters
The underground mining parameters used to determine the extent of the reserves are indicated below:
Parameter |
Value |
|
---|---|---|
Minimum mining height (meters) | 1.8 | |
Maximum mining height (meters) (indication only) | 5.5 | |
Minimum mining depth (meters) | 40 | |
Primary safety factor(1) | 2.2 | |
Secondary safety factor(1) | 2.0 | |
Tertiary safety factor(1) | 1.8 | |
Minimum dry ash-free volatile content | 28% | |
Maximum air-dried ash content | 34% | |
Surface structure allowances | Depth/2.7 from the | |
perimeter of the structure |
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Production History. Since June 1977, when the first coal was produced, the build-up of production reached a plateau in 1984 of 29 Mt. Subsequently, the growth of the synfuels demand and the creation of the export business have resulted in production reaching 46.2 Mt in 2004.
Reserve Estimation (Remaining Reserves at 30 May 2004)
We have approximately 4.4 billion tons (Bt) of in situ proven and probable coal reserves in the Secunda Deposit and approximately 1.6 Bt of Recoverable reserves. The coal reserve estimations are set out in the table below:
Coal Reserve Estimations(1)Secunda Mining Complex
Reserve Block |
Gross in situ tons (Mt) |
Geological discount (Mt) |
Mine layout losses (Mt) |
Extraction rate (%) |
Recoverable Reserves(2) (Mt) |
Beneficiated Yield |
Proven/ Probable |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
B2N | 468.866 | 117.216 | 35.165 | 54.0 | 179.925 | 100% | Probable | |||||||
B2S | 401.367 | 120.410 | 28.096 | 48.0 | 127.782 | 100% | Probable | |||||||
B2 2 seam | 373.773 | 93.443 | 28.033 | 54.0 | 143.434 | 100% | Probable | |||||||
B3SS | 146.774 | 51.371 | 9.540 | 54.0 | 48.814 | 100% | Probable | |||||||
B5C | 259.643 | 41.543 | 21.810 | 49.0 | 101.261 | 100% | Proven | |||||||
B5E | 232.541 | 93.016 | 13.952 | 48.0 | 63.457 | 100% | Probable | |||||||
B5S | 206.754 | 62.026 | 14.473 | 49.0 | 67.195 | P35%, S50%(3) | Probable | |||||||
Block 8 | 641.910 | 128.383 | 177.376 | 55.0 | 195.912 | 100% | Probable | |||||||
Bosjesspruit | 456.426 | 91.285 | 137.581 | 58.0 | 142.348 | 100% | Proven | |||||||
Brandspruit | 148.128 | 22.219 | 29.293 | 55.0 | 59.163 | 100% | Proven | |||||||
Twistdraai | 191.481 | 13.404 | 25.558 | 58.0 | 93.558 | P38%, S46%(3) | Proven | |||||||
Syferfontein(4) | 358.902 | 43.068 | 53.872 | 56.0 | 154.826 | 100% | Proven | |||||||
Middelbult | 408.375 | 81.675 | 92.144 | 55.0 | 137.414 | 100% | Proven | |||||||
Secunda | 104.659 | 20.932 | 8.373 | 45.0 | 35.700 | 100% | Probable | |||||||
Total Sasol | 4,399.599 | 979.991 | 675.266 | 53.0 | 1,550.789 | |||||||||
Paragraph 4.3 states: A competent person is a person who is a member of the South African Council for Natural Scientific Professions (SACNASP),
Criteria for Proven and Probable:
Over and above the definitions for coal reserves, probable coal reserves, and proven coal reserves set forth in Industry Guide 7 under the Securities Act, which are included in our Glossary, we consider the following criteria to be pertinent to the classification of the reserves.
Probable reserves are those reserve areas where the drill hole spacing is sufficiently close in the context of the deposit under consideration where conceptual mine design can be applied, and for which all the legal and environmental aspects have been considered. Currently this classification results in a variable drill spacing depending on the complexity of the area being considered and is generally less than
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500 meters, although in some areas may extend to 880 meters. The influence of increased drilling in these areas should not materially change the underlying geostatistics of the area on the critical parameters such as seam floor, seam thickness, ash, and volatile content.
Proven reserves are those reserves for which the drill hole spacing is generally less than 350 meters, for which a complete mine design has been applied which includes layouts and schedules resulting in a full financial estimation of the reserve. This classification has been applied to areas in the production stage or for which a detailed feasibility study has been completed.
Legal rights on coalfields
Mineral rights were substituted with statutory rights in accordance with the transitional provisions of the Mineral and Petroleum Resources Development Act, 2002 (Act 28 of 2002), which came into effect on 1 May 2004. We therefore hold these statutory rights, to mine more than 98% of the mineral rights previously owned in the Secunda area. We hold four old order mining rights (previously Section 9 mining authorizations under the repealed Minerals Act), consisting of 157,000 hectares of coal rights. See "Item 4.B Business OverviewRegulation of Mining Activities in South Africa".
Sasolburg Operations
Exploration history
The Northern Free State area was first explored in the late 1930s. The exploration was conducted by drilling cored diamond boreholes over the current Sasolburg area. Some 600 boreholes were initially drilled by the South African government. The Sigma mine was established in 1950. Subsequent drilling by the General Mining and Finance Corporation in the 1960s identified more coal reserves in the southwest of the existing Sigma Mine and also extensions to the south and east. Pages M-1 and M-2 include maps showing the location of our Sasolburg coal operations.
Drilling conducted by Sasol Mining has continued to the present with some 2,813 boreholes having been drilled in total over the whole of the Northern Free State coal reserves. All analytical work was initially done by the state laboratory, the Fuels Research Institute. More recently, it was conducted by the laboratories of the South African Bureau of Standards in Pretoria (now Coal and Mineral Technology).
Coal seam geology
There are two primary coal seams of importance, the Number 2 Coal Seam and the Number 3 Coal Seam. These coal seams are separated by a carbonaceous mudstone to siltstone parting and consist of a number of coal plies and carbonaceous mudstone interburdens. The combined coal seams can attain a total thickness of over 30 meters. The individual coal plies are numbered from the base upwards and selected mining horizons are identified on the basis of the coal quality required. The major controlling factor on the coal development is the pre-Karoo basement.
Selective mining within coal seams implies that strict horizon control is exercised to maintain mining on the selected horizon. This has been done very successfully at the old Sigma underground operations, as well as, at the present Mohlolo underground operation. In the visible coal seam geology, a well-defined marker within the seam, assists in the identification and verification of the pre-determined horizon underground, even in areas where the coal seam is displaced because of faulting.
In general, the quality of the coal (the ash yield or the fixed carbon content) deteriorates from the base of the coal seam to the top of the coal seam.
In-seam occurrence of inorganic material is rare in the selected mineable area and may consist of carbonaceous mudstone lenses locally. Inorganic material occurs mainly towards the top of the coal seam, but has been excluded from the selected mineable horizon.
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Sigma Mine has been active since 1950 and has completed total extraction of room and pillar and longwall mining on both the major coal seams.
The operations are the Mohlolo underground mine, which was developed out of the northern highwall of the Wonderwater strip mine, the Mohlolo South underground mine developing out of the southern highwall and the Mooikraal block project on which construction has started. The current expected production (2004) is 1.7 Mt per year for the Mohlolo/Mooikraal sites.
Selected mining horizon
The determination of the selected mining horizon is driven primarily by the required coal quality for the steam process at Sasol Infrachem. In order to define the mining horizon, detailed sampling and descriptions of the coal seams are conducted. From this, both a visual and chemical correlation of the plies are made.
Reserve estimation
Sasol Mining has 31 Mt recoverable coal reserves for supply to Sasol Infrachem for steam generation.
Coal Reserve Estimations(1)Supply to Sasol Infrachem Sasolburg (30 May 2004)
Reserve area |
Coal seam |
Gross in situ tons (Mt) |
Geological discount (Mt) |
Mine layout losses (Mt) |
Extraction rate (%) |
Recoverable reserves (Mt)(2) |
Proven/ Probable |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mohlolo North | 3B/2B | 3.071 | 0.275 | 0.275 | 16% | 0.416 | Proven | |||||||
Mohlolo South | 2B | 6.582 | 0.996 | 0.817 | 36% | 1.715 | Proven | |||||||
Sub Total | 9.653 | 2.131 | ||||||||||||
Mooikraal | 3B | 81.320 | 1.626 | 5.692 | 39% | 28.860 | Proven | |||||||
Total | 90.973 | 30.991 | ||||||||||||
Oil and Gas Production and Exploration Operations
Sasol Petroleum International (SPI), our dedicated oil and gas exploration and production company, commenced full scale commercial production and supply of natural gas in Mozambique's Temane field during the first quarter in 2004 and made new discoveries in offshore Gabon and onshore Mozambique. As a result these operations qualified as significant in terms of current SEC and accounting standard definitions. Prior year information has not been included in the tables below as the operations were not significant.
The Etame oil field in offshore Gabon came into production in September 2002 and has since sustained a steady production at a rate of approximately 15,000 bbl/d. SPI retains a 27.75% shareholding in this field.
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Reserve and Production Disclosure (See supplemental oil and gas information to "Item 18Financial Statements" for further disclosures of oil and gas operations).
|
Crude Oil and Condensate Millions of Barrels Consolidated Operations |
Natural Gas Trillions of Cubic Feet Consolidated Operations |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mozambique |
Other Areas |
Total |
Mozambique |
Other Areas |
Total |
||||||
Proved Developed and Undeveloped Reserves | ||||||||||||
Opening volume derived from year end estimates | | 9.2 | 9.2 | 1.4 | | 1.4 | ||||||
Revisions | | | ||||||||||
Improved recovery | | | ||||||||||
Purchase of minerals | | | ||||||||||
Extensions and discoveries | | | ||||||||||
Production | | (1.5 | ) | (1.5 | ) | | | | ||||
Balance at 30 June 2004 | | 7.7 | 7.7 | 1.4 | | 1.4 | ||||||
Proved Developed Reserves | ||||||||||||
At 30 June 2004 | | 4.3 | 4.3 | 0.4 | 0.4 | |||||||
The oil and gas reserve estimations in this table were compiled by:
The table above records estimates of the reserve quantities held by Sasol, through its various operating entities under Sasol Petroleum International (Pty) Ltd.
The company currently has reserves in two fields:
In Gabon (included under Other), the company hold's a 27.75% interest in the offshore Etame field. An internally determined assessment of oil reserves was conducted at 31 December 2003. As the license held over this property is a Production Sharing Contract, reserves reported represent the net economic interest volumes attributable to the company, after deduction for royalties. Since the last assessment, a new production well (ET-5H) has been drilled and will contribute to revenues in the 2005 financial year. Sasol is not the operator.
In Mozambique, the company holds a 70% equity interest in the Pande and Temane gas fields. An internally determined assessment of gas reserves was conducted at 31 May 2004. Reserves reported represent the net economic interest volumes attributable to the company, after deduction of royalties. Additionally, the volumes booked are restricted to take-or-pay quantities defined in the gas sales contract agreement for the 25-year term, with an exclusion of condensate volumes.
A phased approach to field development has been followed and only the Temane field has been developed. It is planned to develop the Pande field and bring it into production during 2007. Sasol is the operator.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read this section along with our consolidated financial statements for the financial years ended and as at 30 June 2004, 30 June 2003 and 30 June 2002, including the accompanying notes, that are included in this annual report on Form 20-F. The following discussion of operating and financial review and prospects as well as our consolidated financial statements have been presented and prepared in accordance with US GAAP.
5.A Operating Results
Company and Business Overview. We are an integrated oil and gas group with substantial chemical interests, based in South Africa and operating in 23 other countries throughout the world. We are the leading provider of liquid fuels in South Africa in terms of both turnover and sales volumes and a major international producer of chemicals. We use a world-leading technology for the commercial production of synthetic fuels (synfuels) and chemicals from low-grade coal. We expect in the future to apply this technology to convert natural gas to diesel and chemicals. We manufacture over 200 fuel and chemical products, which we sell in more than 90 countries. We also operate coal mines to provide feedstock for our synfuels and chemical plants, manufacture and market synthetic gas (syngas) and operate the only inland crude oil refinery in South Africa. See Note 3 to "Item 18Financial Statements" for a geographic analysis of our operating results, assets and capital commitments.
During 2003, we completed the process of integrating the Sasol Chemie acquired businesses into the respective business units of Sasol Olefins and Surfactants and Sasol Solvents (previously included in the Sasol Chemical Industries segment), linked with internal organizational and management restructuring, which continued in 2004 for our other business units.
In conjunction with these changes, we also revised our internal financial reporting to our Group Executive Committee (GEC), to separately report on the businesses of Sasol Oil, (renamed Sasol's Liquid Fuels Business) and Sasol Gas, and due to the increased importance of our gas to liquids strategy, to separately report on Sasol Synfuels International. In addition, Sasol Nitro and Sasol Wax are now shown under "Other". Prior year segment information has been restated to conform with this presentation.
The Group has recently formed significant joint ventures to promote Sasol technology and products internationally. The Group is promoting and marketing its GTL process for converting remote or flared natural gas into new-generation, low-emissions GTL diesel, GTL naphtha and other products. It is envisaged that SSI through the recent development of the GTL plants in Qatar and Nigeria would contribute significantly to the Group results and will contribute to the growing of a global gas to liquids business in the future. Consequently the chief operating decision maker has chosen to include Sasol Synfuels International (SSI) as a reportable operating segment. SSI did not meet any of the quantitative thresholds but has been considered reportable and has been separately disclosed in terms of SFAS 131, Disclosures About Segments of an Enterprise and Related Information as the chief operating decision maker believes that the information about SSI would be useful to readers of the financial statements.
The formation of LFB included restructuring of Group activities as well as the acquisition of the remaining interest in Naledi Petroleum Holdings (Pty) Limited. In addition, Sasol Synfuels transferred its fuel blending plant and related storage facilities to LFB with the result that all fuel sales are now made by LFB. In addition, Sasol CarboTar (involved in the production and marketing of carbon and tar products) which was previously reported as part of the Sasol Oil and Gas reporting segment was transferred to the Sasol Synfuels reporting segment as it no longer forms part of LFB.
The financial information presented to our GEC, including the financial information in the reportable segments, is presented based on IFRS, adopted for our home country reporting. Since the IFRS financial information is the basis for segmental financial decisions, resource allocation and performance assessment, it forms the accounting basis for segmental reporting that is disclosed to the investing public. The IFRS
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segmental reporting information is reconciled to the amounts reported in our Group consolidated financial statements, prepared in accordance with US GAAP, for all years presented.
We divide our operations into the following segments:
Our business, operating results, cash flow and financial condition are subject to the influence of a number of external factors and conditions. These include conditions in the markets in which we sell our products, including the effect of fluctuation in the currency markets, most notably in the exchange rate between the Rand and the US dollar, fluctuation in the international price of crude oil and cyclicality in the prices of chemical products. Other factors which may influence our business and operating results
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include economic, social, political and regulatory conditions and developments in the countries in which we operate our facilities or market our products.
Exchange rate fluctuation
The Rand is our principal operating currency. However, a large part of our Group's turnover is denominated in US dollars and some part in euro, derived either from exports from South Africa or from our manufacturing and distribution operations outside South Africa. Also, a significant part of our revenues is determined by the US dollar, as petroleum prices in general and the price of most petroleum and chemical products in South Africa are based on global commodity and benchmark prices which are quoted in US dollars. Hence, a large part of our Group sales (approximately 90%) is denominated in US dollars or influenced by the underlying global commodity and benchmark prices which are quoted in US dollars, while about one third of our costs are Rand denominated. Furthermore, a significant part of our capital expenditure is also US dollar-denominated, as it is directed to investments outside South Africa. The rate of change in the PPI has been for many years above the rate of inflation in the United States. This, among other factors, resulted in a concomitant decline in the value of the Rand against the US dollar up until 2002, during which year the average exchange rate was 10.20 against the US dollar. However, since early 2002, due to a variety of reasons, the Rand has strengthened against the US dollar, reaching R6.545 at 14 October 2004. Whilst the exchange rate during the current year has been relatively less volatile than in previous years we are unable to forecast whether this will continue in the foreseeable future.
In addition, although the exchange rate of the Rand is primarily market-determined, its value at any time may not be an accurate reflection of the underlying value of the Rand, due to the potential effect of, among other factors, exchange controls. For more information regarding exchange controls in South Africa see "Item 10.D Exchange Controls".
Up until 2002, trends in our turnover and profits were significantly positively impacted by the Rand's decline against the US dollar. See "Item 5.A Operating ResultsCompany and Business OverviewExchange rate fluctuation". During 2003 and 2004, the Rand appreciated against the US dollar, negatively impacting our results. Similarly, the strengthening of the euro against the US dollar in the last two years has negatively impacted the profitability of our European operations where a large part of our costs are euro based and a significant part of our turnover is US dollar based.
Fluctuation in crude oil, natural gas, refining margins and petroleum products prices
Market prices for crude oil, natural gas and petroleum products may fluctuate as they are subject to local and international supply and demand fundamentals and factors over which we have no control. Worldwide supply conditions and the price levels of crude oil may be significantly influenced by international cartels, which control the production of a significant proportion of the worldwide supply of crude oil, and by political developments, especially in the Middle East. Other factors which may influence the aggregate demand and hence affect the markets and prices for petroleum products in regions which influence domestic fuel prices through the Basic Fuel Price (BFP) price formula (introduced on 1 April 2003 and currently in place for the calculation of the refinery gate price in South Africa) and/or where we market these products, may include changes in economic conditions, the price and availability of substitute fuels, changes in product inventory, product specifications and other factors. In recent years, prices for petroleum products have fluctuated widely. In recent months the price of crude oil has been at very high level. See "Item 5.DTrend Information".
A substantial proportion of our turnover is derived from sales of petroleum and petrochemical products. Through our equity participation in the Natref crude oil refinery, we are exposed to fluctuations in refinery margins resulting from differing fluctuations in international crude oil and petroleum product prices. We are also exposed to changes in absolute levels of international petroleum product prices through our synfuels operations. Fluctuations in international crude oil prices affect our results mainly through
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their indirect effect on the Basic Fuel Price (BFP) price formula. See "Item 4.B Business OverviewSasol Synfuels", "Sasol's Liquid Fuels Business" and "Sasol Petroleum International". Furthermore, prices of petrochemical products and natural gas are also affected by fluctuation in crude oil prices. Fluctuations and, in particular, decreases in the price of crude oil and petroleum products can have a material adverse effect on our business, operating results, cash flows and financial condition.
We use hedging instruments to protect against day to day US dollar price fluctuations affecting the acquisition cost of our crude oil needs, including Rand to US dollar exchange rate fluctuations. We have also, during the course of the 2004 year, hedged a portion of our synthetic fuel production in respect of the 2005 financial year. See "Item 8.B Significant Changes". While the use of these instruments may provide some protection against short-term fluctuation in crude oil prices it does not protect against longer term fluctuations in crude oil prices or differing trends between crude oil and petroleum product prices
Cyclicality in petrochemical products prices
The market for chemicals and especially products such as solvents, alkylates and polymers is cyclical. Typically, higher demand during peaks in the industry business cycles leads producers to increase their production capacity. Although peaks in the business cycle have been characterized by increased selling prices and higher operating margins, in the past such peaks have led to overcapacity and supply exceeding demand growth. Low periods in the business cycle are then characterized by decreasing prices and excess capacity, which can depress operating margins and may result in operating losses. We believe that some areas within the chemicals industry currently show overcapacity with the possibility of further capacity additions in the next few years.
Sustainability of wholesale petroleum products supply agreements and risks relating to the establishment of our retail service station network
Up until December 2003 we were party to the Main Supply and Blue Pump Agreements, which formed a series of long-term supply agreements with the major oil companies operating in South Africa, under which oil companies purchased certain of our petroleum products up to a maximum of 7,740 million liters per year. As a result, we sold more than 80% of our petroleum production to these oil companies under the Main Supply Agreements. Moreover, we were not allowed to market liquid fuels directly to the retail and commercial markets in South Africa, with the main exception of the so-called "Blue Pumps", which were Sasol-branded fuel pumps supplying our own fuels, located at service stations of other oil companies in designated regions. The Main Supply and Blue Pump Agreements terminated in December 2003, pursuant to a notice of termination filed by our company in 1998.
Following termination of the agreements, we have sold or removed the Blue Pumps and associated infrastructure from service stations owned by other oil companies, and have concluded new short-term arrangements with the oil companies to supply their petroleum products requirements in certain geographic areas. We have sold a substantial portion of our aggregate petroleum production to the oil companies under these arrangements. Further negotiations with these oil companies are ongoing. Furthermore, as a result of the termination of the agreements, the restrictions on our ability to market our petroleum products directly to the South African retail and commercial markets expired. During 2003 we commenced with the development of a service station network with a view to accessing the retail market in South Africa with our own Sasol brand, and, in order to enhance the profitability of this network, we are concentrating on developing high volume stations in growth areas. See "Item 4.B Business OverviewSasol's Liquid Fuel Business". We are also in negotiations with Petrolium Nasional Berhad ("Petronas") to combine our respective liquid fuels businesses in a joint venture which will provide us with further access to the South African retail market. See "Item 8.B Significant Changes".
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There are risks relating to countries in which we operate that could adversely affect our business, operating results, cash flows and financial condition.
Various of our subsidiaries, joint ventures and associates operate in countries and regions that are subject to significantly differing political, social, economic and market conditions. See "Item 18 Financial StatementsNote 3Segmental Analysis" for a description of the extent of our operations in the main countries and regions in which we operate. We are a South African domiciled company. About 60% of our operations are located and 48% of our sales are generated in South Africa.
Specific aspects of country risks that may have a material impact on our business, operating results, cash flows and financial condition include:
Whilst over recent years, rates of inflation and interest have been at relatively low levels, the economy of South Africa, though currently well managed, at various times in the past has had high rates of inflation and high interest rates compared to the United States and Europe. Should these conditions recur, this would increase our South African-based costs and decrease our operating margins. High interest rates could adversely affect our ability to ensure cost-effective debt financing in South Africa. For further information on interest rates and inflation, see "Item 5.A Operating ResultsCompany and Business OverviewThe South African economic, political, and regulatory environment".
South African law provides for exchange control regulations which restrict the export of capital from the Common Monetary Area, which includes South Africa, subject to SARB dispensation. These regulations apply to transactions involving South African residents, including both natural persons and legal entities. These regulations also affect our ability to borrow funds from non-South African sources for use in South Africa or to repay these funds from South Africa and, in some cases, our ability to guarantee the obligations of our subsidiaries with regard to these funds. These restrictions have affected the manner in which we have financed our acquisitions outside South Africa and the geographic distribution of our debt. See "Item 10.D Exchange Controls" and "Item 5.B Liquidity and Capital Resources".
HIV/AIDS and tuberculosis, which is exacerbated in the presence of HIV/AIDS, are the major healthcare challenges faced by our South African and other sub-Saharan operations. HIV infection among women in antenatal clinics around South Africa rose from 1% in 1990 to nearly 25% in 2000. Under South African law, we may not run tests to accurately establish the number of our employees who are infected with, or die from, AIDS related illnesses without the express consent of the people to be tested. However, based on the preliminary results of our voluntary counseling and testing programme, we estimate that between 10%15% of our South African workforce may be currently infected, with the highest concentration of infections in our mining operations. Based on an actuarial study, which excludes the positive impact of any prevention and management intervention program, we estimate that, while the percentage of infected employees may not rise significantly in the forthcoming years, there will be a significant increase in the number of AIDS-related fatalities. See "Item 6.D Employees".
We incur costs relating to the medical treatment and loss of infected personnel, as well as the related loss of productivity. We also incur costs relating to the recruitment and training of new personnel. We are not in a position to accurately quantify these costs. Based on our actuarial models, we estimate that the impact of HIV/AIDS on our payroll expenses should be less than 1% of our current payroll for our South African employees by the year 2007, when we expect prevalence rates to peak. This calculation is based on the estimated financial impact on production resulting from the projected prevalence of HIV/AIDS among our workforce, but does not take into account indirect costs of productivity losses. We are investing human
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and financial resources in connection with establishing and maintaining programs to address the HIV/AIDS problem. In September 2002, we launched the Sasol HIV/AIDS Response Programme ("SHARP"), which is our initiative to respond to the HIV/AIDS problem, in connection with which we committed a sum of R13 million during the 2004 year. Although, at present, we have no further commitments in connection with HIV/AIDS, apart from on-going funding of the SHARP programme and post-retirement healthcare contributions in respect of current employees who commenced service prior to 1 January 1998, we cannot assure you that the costs we are currently incurring and will incur in the future in connection with the HIV/AIDS problem, will not have a material adverse effect on our business and financial condition.
In some countries our operations are required to comply with local procurement, employment equity, ownership and other regulations which are designed to address country specific social and economic transformation issues. In this regard, the following South African specific initiatives apply which are intended to redress historical social and economic inequalities and stability.
As a leading and patriotic South African-based company, we embrace and will instigate or participate in initiatives to bring about meaningful transformation to assist in correcting the imbalances and injustices of the apartheid era. We consider these initiatives to be a strategic imperative and we recognise the risk of not vigorously pursuing them or of them not succeeding and adversely impacting on the long-term sustainable performance and reputation of our company.
As part of an initiative of the government of South Africa to advance the participation of historically disadvantaged South Africans in the country's economy, in November 2000, we became party to an agreement with the government and the liquid fuels industry, the Charter for the South African Petroleum and Liquid Fuels Industry on Empowering Historically Disadvantaged South Africans in the Petroleum and Liquid Fuels Industry (the Liquid Fuels Charter). The Charter deals with the following key matters:
See "Item 4.B Business OverviewSasol's Liquid Fuel Business" and "Empowerment of Historically Disadvantaged South Africans".
The Liquid Fuels Charter requires us, amongst other things, to ensure that historically disadvantaged South Africans hold at least 25% equity ownership of our liquid fuels business by the year 2010. Based on our experience with Black Economic Empowerment transactions over the past number of years, we believe that equity participation should take place through transactions at fair market value. However, we cannot assure you that this will occur and that this will not have a material adverse effect on our future business, operating results, cash flows and financial condition.
In October 2002, the government and representatives of South African mining companies and mineworkers' unions reached broad agreement on a charter (the Mining Charter), designed to facilitate the participation of historically disadvantaged South Africans in the country's mining industry. The Charter's stated objectives include the:
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The Charter, together with the recently published scorecard to facilitate the interpretation of and compliance with the Mining Charter, requires mining companies to ensure that historically disadvantaged South Africans hold at least 15% ownership of mining assets or equity in South Africa within 5 years and 26% ownership within 10 years from the effective date of the new Mineral and Petroleum Resources Development Act which was on 1 May 2004. The Charter further specifies that the mining industry is required to assist historically disadvantaged South Africans in securing finance to fund their equity participation up to an amount of R100 billion within the first five years after the implementation of the aforementioned Act. Beyond this R100 billion commitment, the Mining Charter requires that participation of historically disadvantaged South Africans should be increased towards the 26% target on a willing buyer-willing seller basis. See "Item 4.B Business OverviewSasol Mining" and "Empowerment of Historically Disadvantaged South Africans".
Various principles of the Mining Charter have been incorporated in regulations promulgated by the Minister of Minerals and Energy under the new Mineral and Petroleum Resources Development Act with respect to the South African mining industry. These regulations came into effect on 1 May 2004. We have commenced a process to apply for the conversion of our existing mining licenses under the new Mineral and Petroleum Resources Development Act. See below "New mining legislation may have an adverse effect on our mineral rights". When considering applications for the conversion of existing mining licenses under the Mineral and Petroleum Resources Development Act, the Minister of Minerals and Energy must take into account, among other factors, the applicant company's compliance with the Mining Charter. We intend to undertake any appropriate action required to ensure conversion of our existing mining rights under the Mineral and Petroleum Resources Development Act.
It is not currently known what financing arrangements may ultimately be put in place to support any transactions required in order to comply with the abovementioned Charters and we cannot assure you that we will not be required to participate in these arrangements.
It is also not currently known what additional costs we will incur to comply with the other requirements of both the Liquid Fuels and Mining Charters and we cannot assure you that these costs will not have a material adverse effect on our operating results and financial condition.
Other specific country risks that may have a material impact on our business include:
Some of the countries where we have already made, or other countries where we may consider making, investments are in various stages of developing institutions and legal and regulatory systems that
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are characteristic of parliamentary democracies. However, institutions in these countries may not yet be as firmly established as they are in parliamentary democracies in South Africa, the United States of America and some European countries. Some of these countries are also transitioning to a market economy and, as a result, experience changes in their economies and their government policies that could affect our investments in these countries. Moreover, the procedural safeguards of the new legal and regulatory regimes in these countries are still being developed and, therefore, existing laws and regulations may be applied inconsistently. In some circumstances, it may not be possible to obtain the legal remedies provided under those laws and regulations in a timely manner.
As the political, economic and legal environments remain subject to continuous development, investors in these countries face uncertainty as to the security of their investments. Any unexpected changes in the political or economic conditions in the countries in which we operate (including neighboring countries) may have a material adverse effect on the investments that we have made or may make in the future, which may in turn have a material adverse effect on our business, operating results, cash flows and financial condition.
Competition by products originating from countries with low production costs
A significant part of our chemical production facilities is located in developed countries, including the United States and Europe. Economic and political conditions in these countries result in relatively high labor costs and, in some regions, inflexible labor markets, compared to others. Increasing competition from regions with lower labor costs and feedstock prices, for example the Middle East and China, exercises pressure on the competitiveness of our chemical products and, therefore, on our profit margins and may result in withdrawal of particular products or closure of facilities. We cannot assure you that increasing competition by products originating from countries with low production costs will not result in withdrawal of our products or closure of our facilities, which may have a material adverse effect on our business, operating results, cash flows and financial condition.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported results of our operations. Actual results may differ from these estimates. Management believes that the following identified critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of our consolidated financial statements and are critical to the business operations and the understanding of the results of our operations. The discussion below of the critical accounting policies should be read in conjunction with the Significant Accounting Policies set out in Note 2 of "Item 18Financial Statements".
General
We evaluate our estimates, including those relating to trade receivables, inventories, investments, intangible assets, income taxes, pension and other post retirement benefits and contingencies and litigation on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making our judgments about carrying values of assets and liabilities that are not readily available from other sources.
Estimation of oil and gas reserves
The estimation of oil and gas reserves under SEC rules requires " geological and engineering data (that) demonstrate with reasonable certainty (reserves) to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made." Refer to Table 4, "Proved Reserve Quantity Information," on page F-102 for the estimates for the year ending 30 June 2004 and to Table 5, "Standardized Measure of Discounted Future
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Net Cash Flows", on page F-105 for estimates of proved-reserved values for year-end 30 June 2004, which were based on year-end prices at the time.
Estimates of oil and gas reserves are inherently imprecise, require the application of judgment and are subject to future revision. Accordingly, financial and accounting measures (such as the standardized measure of discounted cash flows, depreciation, depletion and amortization charges and decommissioning provisions), that are based on proved reserves are also subject to change.
Proved reserves are estimated by reference to available reservoir and well information, including production and pressure trends for producing reservoirs and, in some cases, subject to definitional limits, to similar data to other producing reservoirs. Proved reserves estimates are attributed to future development projects only where there is significant commitment to project funding and execution and for which applicable governmental and regulatory approvals have been secured or are reasonably certain to be secured. Furthermore, estimates of proved reserves only include volumes for which access to markets is assured with reasonable certainty. All proved reserves estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans.
Useful life of intangible assets
In assessing the recoverability of goodwill and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their fair value assessments change in the future, we may need to record impairment charges for these assets. Identifiable intangible assets, such as patents, trademarks and licenses, are currently amortized on a straight line basis, over their estimated useful lives.
Useful life of long-lived assets
In assessing the useful life of long-lived assets, we use estimates of future cash flows and expectations regarding the future utilization pattern of the assets to determine the depreciation to be charged on a straight line basis over the estimated useful lives of the assets. On a regular basis, we review the useful lives and economic capacity of the long-lived assets with reference to any events or circumstances that may indicate that an adjustment to the depreciation period is necessary.
Given the significance of long-lived assets to our financial statements, any change in the depreciation period could have a material impact on our results of operations and financial condition.
Impairment of long-lived assets
Long-lived assets are reviewed using economic valuations to calculate impairment losses whenever events or a change in circumstance indicate that the carrying amount may not be recoverable. In carrying out the economic valuations, an assessment is made of the future cash flows expected to be generated by the assets, taking into account current market conditions, the expected lives of the assets and our budgeting process. The actual outcome can vary significantly from our forecasts, thereby affecting our assessment of future cash flows. Assets whose carrying values exceed their estimated recoverable amount, determined on an undiscounted basis, are written down to an amount determined using discounted net future cash flows expected to be generated by the asset. The expected future cash flows are discounted at a credit adjusted rate based on government bonds in South Africa as well as inter-bank interest rate indices in the other geographic locations in which our assets are held.
Asset retirement and rehabilitation obligations
We have significant obligations to remove plant and equipment and rehabilitate land in areas in which we conduct operations upon termination of such operations. Removal and restoration obligations are
100
primarily associated with our mining and petrochemical operations around the world. The estimated fair value of dismantling and removing these facilities is accrued for as the obligation arises, if estimable, concurrent with the recognition of an increase in the related asset's carrying value. Estimating the future asset removal costs is complex and requires management to make estimates and judgments because most of the removal obligations will be fulfilled in the future and contracts and regulations often have vague descriptions of what constitutes removal. Further, management is required to determine the discount rate to be used in calculating the obligation based on the amount of the credit risk of the Group which varies depending on the underlying interest rate environment. Future asset removal costs are also influenced by changing removal technologies, political, environmental, safety, business relations and statutory considerations. The actual liability for rehabilitation costs can vary significantly from our estimate and, as a result, the liabilities that we report can vary significantly if our assessment of these costs changes.
Trade receivablesestimation of allowances for doubtful debts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In order to estimate the appropriate level for this allowance, we analyze historical bad debts, customer concentrations, current customer credit-worthiness, current economic trends and changes in our customer payment patterns. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. A considerable amount of judgment is required in assessing the ultimate realization of these trade receivables including the current credit-worthiness of each customer.
Employee benefits
We provide for our obligations and expenses for pension and provident funds as they apply to both defined contribution and defined benefit schemes, as well as post-retirement healthcare liabilities. The amount provided is determined based on a number of assumptions and in consultation with an independent actuary. These assumptions are described in Note 22 to "Item 18Financial Statements" and include, among others, the discount rate, the expected long-term rate of return on pension plan assets, healthcare inflation costs and rates of increase in compensation costs. The nature of the assumptions is inherently long-term, and future experience may differ from these estimates. For example, a one percentage point increase in assumed healthcare cost trend rates would increase the accumulated post retirement benefit obligation by R447 million to R2,918 million at 30 June 2004.
The Group includes the amortization of unrecognized gains and (losses) on the pension fund valuation as a component of net pension cost for the year if the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed the greater of
(the 10% corridor rule) whereas in respect of the post retirement healthcare valuation the Group accounting policy requires the immediate recognition of net actuarial gains and (losses).
While management believes that the assumptions used are appropriate, significant changes in the assumptions may materially affect our pension and other post retirement obligations and future expense.
Amortization of coal mining assets
We calculate amortization charges on coal mining assets using the units-of-production method, which is based on our proven and probable reserves, not exceeding the estimated useful lives of the mines. The lives of the mines are estimated by our geology department using interpretations of mineral reserves, as determined in accordance with Industry Guide 7 under the US Securities Act of 1933, as amended. The estimate of the total reserves of our mines could be materially different from the actual coal mined. The
101
actual usage by the mines may be impacted by changes in the factors used in determining the economic value of our mineral reserves, such as the coal price and foreign currency exchange rates. Any change in management's estimate of the total expected future lives of the mines would impact the amortization charge recorded in our consolidated financial statements, as well as our estimated asset retirement obligations as measured on the incremental method.
Inventory
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Fair value estimations of financial instruments
We base fair values of financial instruments on listed market prices, where available. If listed market prices are not available, fair value is determined based on other relevant factors, including dealers' price quotations and price quotations for similar instruments traded in different markets. Fair value for certain derivatives are based on pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as the time value and yield curve or fluctuation factors underlying the positions. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results.
Deferred taxation assets
We apply significant judgment in determining our provision for income taxes and our deferred tax assets and liabilities.
Temporary differences arise between the carrying values of assets and liabilities for accounting purposes and the amounts used for tax purposes. These temporary differences result in tax liabilities being recognized and deferred tax assets being considered based on the probability of our deferred tax assets being recoverable from future taxable income. To the extent that we believe that recovery is not likely, we establish a valuation allowance. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in applicable tax jurisdictions, based on estimates and assumptions. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize our deferred tax assets in the future, a valuation allowance may be required which would reduce income in the period that such determination was made.
Secondary Taxation on Companies
In South Africa, we pay both income tax and Secondary Taxation on Companies (STC). STC is levied on companies at a rate of 12.5% of dividends distributed. In the case of companies liquidated after 1 April 1993, STC is only payable on undistributed earnings earned after 1 April 1993. The tax becomes due and payable on declaration of a dividend.
We provide deferred tax on all temporary differences arising between the carrying values of assets and liabilities for accounting purposes and the amounts used for tax purposes unless there is a temporary difference that is specifically excluded in accordance with generally accepted accounting principles. Sasol does not provide deferred taxes related to STC until a dividend has been declared. We believe that this is consistent with the accounting principle that only allows the accrual of dividend payments after dividend declaration.
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We are aware that some non-Sasol companies with operations in South Africa record deferred taxes at the full distributed rate of 37.8%, the rate applied only if all earnings are distributed as dividends. If we were to provide for deferred taxes on the potential STC arising on our undistributed earnings, should these be declared as dividends, there would be an increase in deferred tax liabilities of R4,240 million at 30 June 2004 (2003R3,762 million; 2002R3,297 million) resulting in a net deferred tax liability of R8,910 million at 30 June 2004 (2003R8,755 million; 2002R8,386 million). Income tax expense would increase by R478 million resulting in total net income (earnings attributable to shareholders) of R4,880 million for the year ended 30 June 2004 (2003R465 million and R6,879 million; 2002R860 million and R8,574 million, respectively). The additional deferred tax liability would result in total shareholders' equity of R29,429 million at 30 June 2004 (2003R29,031 million; 2002R27,647 million). We expect that R1,877 million of undistributed earnings earned before 1 April 1993 of two dormant companies will be distributed without attracting STC of R209 million.
Commitments and contingencies
Management's current estimated range of liabilities relating to certain pending litigation and arbitration proceedings is based on claims for which management can reasonably estimate the amount of loss. We have recorded the estimated liability where such amount can be determined and the minimum liability related to those claims where there is a range of loss, and no amount within the range is more probable than the others. As additional information becomes available, we will assess the potential liability related to our pending litigation and arbitration proceedings and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operation and financial position.
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OUR RESULTS OF OPERATIONS FOR THE YEARS ENDED 30 JUNE 2004 AND 30 JUNE 2003
The financial results below are stated under US GAAP.
Results of Operations
Category |
2004 |
2003 |
Change |
Change |
|||||
---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
|||||||
Turnover | 58,808 | 63,769 | (4,961 | ) | (8 | ) | |||
Other operating income | 332 | 603 | (271 | ) | (45 | ) | |||
Net foreign exchange losses | (1,266 | ) | (2,437 | ) | 1,171 | 48 | |||
Operating costs and expenses | (49,135 | ) | (50,924 | ) | 1,789 | 4 | |||
Operating profit | 8,739 | 11,011 | (2,272 | ) | (21 | ) | |||
Net other expenses |
(63 |
) |
(64 |
) |
1 |
2 |
|||
Income before tax, losses of equity accounted investees, minority interest | 8,676 | 10,947 | (2,271 | ) | (21 | ) | |||
Income tax |
(3,177 |
) |
(3,915 |
) |
738 |
19 |
|||
Income after tax, but before losses of equity accounted investees, minority interest | 5,499 | 7,032 | (1,533 | ) | (22 | ) | |||
Losses of equity accounted investees | (49 | ) | (47 | ) | (2 | ) | (4 | ) | |
Minority interest |
(92 |
) |
(170 |
) |
78 |
46 |
|||
Earnings attributable to shareholders before cumulative effect of change in method of accounting | 5,358 | 6,815 | (1,457 | ) | (21 | ) | |||
Change in method of accounting for asset retirement obligations, net of tax of R227 million | | 529 | (529 | ) | 100 | ||||
Earnings attributable to shareholders | 5,358 | 7,344 | (1,986 | ) | (27 | ) | |||
Overview
Profits were again adversely affected by the stronger Rand against the US dollar and margin pressures in a challenging international trading environment. From an operational perspective, most of Sasol's businesses performed satisfactorily despite these conditions by advancing productivity, quality and cost-reduction initiatives. Higher average international oil prices and the benefit of cost reductions and productivity improvements partly offset the impact of the stronger Rand.
Accordingly, turnover decreased by 8% from R63,769 million to R58,808 million. In line with expectations, profit was down year-on-year. Operating profit decreased by 21% from R11,011 million to R8,739 million, while attributable earnings dropped by 27% from R7,344 million to R5,358 million.
The overriding impact on our results was the strength of the Rand, which was, on average 24% stronger against the US dollar compared to the previous year.
This impact was exacerbated by the unusually high energy and feedstock prices at our international operations and notably in Europe and the United States of America. In general, most of our chemical businesses endured severe margin pressures, with our global Sasol Olefins and Surfactants business suffering the most. The overall effect of the Rand's appreciation reduced operating profit by approximately R6 billion.
The average price of the dated Brent crude oil, increased by 12% from US$27.83/bbl to US$31.30/bbl compared to last year and partly offset the adverse impact described above. Several geopolitical factors drove oil prices upwards, including low petroleum inventories, robust Asian demand, unreliable Iraqi supplies, record US gasoline demand, the weaker US dollar and the escalation of political conflict in the Middle East.
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International refining margins also displayed significant improvements since mid-2003. The improved refining marginsthe highest since 2000were mainly supported by the US strong gasoline premiums and high natural gas prices, which supported residual fuel values.
We have undergone a two-year cycle in adverse conditions. This has motivated our businesses to operate their assets to full capacity and try to eradicate superfluous costs. Where we have direct control over costs and opportunities to improve our businesses, we have in general performed well, as the highlights indicate:
Several underperforming smaller businesses, as well as those businesses that no longer have the desired strategic fit, have been closed down or disposed of, or are in the process of being disposed. Sasol Nitro has focused its explosives activities in South Africa by disposing of its interests in Australia and North America. We have also sold Sasol Servo in Netherlands and have withdrawn from non-core elements of Sasol Wax.
Turnover
Turnover consists of the following categories:
Category |
2004 |
2003 |
Change |
Change |
|||||
---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
|||||||
Sale of products | 57,973 | 62,509 | (4,536 | ) | (7 | ) | |||
Services rendered | 517 | 502 | 15 | 3 | |||||
Commission and marketing income | 318 | 758 | (440 | ) | (58 | ) | |||
Total turnover | 58,808 | 63,769 | (4,961 | ) | (8 | ) | |||
Turnover for 2004 amounted to R58,808 million, a decrease of R4,961 million or 8%, compared to R63,769 million for 2003.
The net decrease of R4,961 million in turnover is mainly attributable to decreases in the sale of products of R4,536 million. Increases in product prices of R433 million, increases in crude oil prices of R2,330 million and volumes of R3,864 million, were more than offset by the negative currency effect of R11,113 million arising due to the appreciation of the Rand. Additionally, services rendered increased by R15 million and commissions and marketing income decreased by R440 million.
The average Rand to US dollar exchange rate, as quoted by the Federal Reserve Bank of New York of R6.88 in 2004, was 24% stronger than the average of R9.03 in 2003. The average crude oil price, of US$31.36/bbl in 2004 was 13% higher than the average of US$27.83/bbl in 2003. Our average US dollar refining margins in 2004 remained constant at the levels of 2003.
Other operating income
Other operating income in 2004 amounted to R332 million, which represents a decrease of R271 million or 45%, compared to R603 million in 2003.
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Net foreign exchange losses
Net foreign exchange losses for 2004 amounted to R1,266 million which represents a decrease of R1,171 million compared to a loss of R2,437 million in 2003. The decrease is mainly attributable to the continuing appreciation of the Rand against the US dollar over the two years, which was less severe in 2004.
Operating Costs and Expenses
Operating costs and expenses consists of the following categories:
Category |
2004 |
2003 |
Change |
Change |
|||||
---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
|||||||
Cost of products sold | 37,288 | 38,415 | (1,127 | ) | (3 | ) | |||
Cost of services rendered | 502 | 475 | 27 | 6 | |||||
Selling and distribution costs | 4,837 | 4,976 | (139 | ) | (3 | ) | |||
Administrative expenses | 3,605 | 4,402 | (797 | ) | (18 | ) | |||
Other operating expenses | 2,903 | 2,656 | 247 | 9 | |||||
Total operating costs and expenses | 49,135 | 50,924 | (1,789 | ) | (4 | ) | |||
Operating costs and expenses in 2004 amounted to R49,135 million, a decrease of R1,789 million or 4%, compared to R50,924 million in 2003.
Cost of products sold. The cost of products sold in 2004 amounted to R37,288 million, a decrease of R1,127 million or 3%, compared to R38,415 million in 2003. Compared to sales of products, the cost of products sold was 64% in 2004 and 61% in 2003.
Cost of services rendered. Cost of services rendered in 2004 amounted to R502 million, an increase of R27 million or 6%, compared to the R475 million in 2003.
Selling and distribution costs. These costs comprise marketing and distribution of products as well as advertising, salaries and expenses of marketing personnel, freight, railage and customs and excise duty. Selling and distribution costs in 2004 amounted to R4,837 million, a decrease of R139 million or 3%, compared to R4,976 million in 2003. Compared to sales of products, selling and distribution costs represented 8% in both 2004 and 2003.
Administrative expenses. These costs comprise expenditure of personnel and administrative functions, including accounting, information technology, human resources, legal and administration, as well as pension, post-retirement healthcare and Sasol Share Incentive Scheme costs. Administrative expenses in 2004 amounted to R3,605 million, a decrease of R797 million or 18%, compared to R4,402 million in 2003.
Other operating expenses. Other operating expenses (including impairments) in 2004 amounted to R2,903 million, an increase of R247 million or 9%, compared to R2,656 million in 2003. Other operating expenses excluding impairments amounted to R2,619 million in 2004, a decrease of R21 million, compared to R2,598 million in 2003. This decrease generally arose from cost savings initiated and implemented in previous years. Impairment of property, plant and equipment, intangible assets and investments for 2004 amounted to R284 million, compared to R58 million in 2003.
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Details are as follows:
Impairments
Item |
Segment |
2004 |
2003 |
||||
---|---|---|---|---|---|---|---|
|
|
(Rand in millions) |
|||||
Glycol Ethers Plant | Solvents | 13 | | ||||
Crotonaldehyde and Ethanol Plant | Solvents | 23 | | ||||
Sodium Hydrogen Sulfide and Ammonium Sulfide Plants | Solvents | 6 | | ||||
Sulfonation Plant | Olefins and Surfactants | 26 | | ||||
Poly Internal Olefins Plant | Olefins and Surfactants | 26 | | ||||
Fedmis Business | Nitro | 108 | | ||||
Mining Initiators Business | Nitro | 21 | | ||||
Other smaller assets | Other businesses | 30 | 5 | ||||
Total property, plant and equipment | 253 | 5 | |||||
Goodwill |
Nitro |
21 |
|
||||
Goodwill | Wax | | 48 | ||||
Other intangible assets | Other businesses | 5 | 5 | ||||
Total intangible assets | 26 | 53 | |||||
Held for sale investment | Other businesses | 5 | | ||||
Total investment | 5 | | |||||
Total | 284 | 58 | |||||
Some of the significant impairments included in the impairment charge of R253 million, above, for the year ended 30 June 2004 are in the following business segments:
Sasol SolventsR42 million
Glycol ethers plantGermanyAn impairment review performed on the assets of Sasol Germany, identified that the glycol ethers plant is not expected to generate future positive cash flows. Accordingly a net impairment charge of R13 million was recognised in the income statement.
Crotonaldehyde and Ethanol plantSouth AfricaThe crotonaldehyde plant will produce feedstock until October 2004 to meet existing contractual commitments. Thereafter, the plant will be shut-down and parts of the plant used in a new process to convert acetaldehyde into crude ethanol. The crotonaldehyde plant has thus been impaired to a carrying value approximating the value of the assets that will be used in the crude ethanol plant.
The ethanol plant has been mothballed since December 2003. Enhancements to the Secunda plant have resulted in this plant no longer producing any product and not being required for backup purposes. As there are no future cash flows expected to be generated from this plant, the plant was impaired to a zero book value. A total impairment charge in respect of these two plants of R23 million has been recognised in the income statement.
Sodium Hydrogen Sulphide and Ammonium Sulphide plantsSouth AfricaThe poor economic performance of the NaHS and ASD plants resulted in an impairment test being performed. The value in use for this asset was determined which is less than the carrying value and accordingly an impairment of R6 million was recognised in the income statement.
Sasol Olefins and SurfactantsR52 million
Sulphonation plantGermanyThe Marl sulphonation (LAS) units are running well below capacity. The lower sales volumes and resulting gross margin are not enough to support the associated fixed costs
107
and result in a net negative cash flow. Furthermore, the main Marl LAS unit is based on old batch technology and the resulting product quality has been acceptable in the past but is coming under scrutiny now from some major customers. The impairment test performed resulted in an impairment of R26 million.
Poly Internal Olefins (PIO) PlantItalyPIO is an olefins derivative used in the automotive lubricants market and the plant is situated on the Sarroch site of Sasol Italy. During the past two years, the PIO based lubricants, experienced severe competition from Poly Alpa Olefins (PAO) lubricants (quality leader) and a newcomer Hydrocracked Basestock (cost and price leader). As a consequence the PIO plant is operating below 50% of capacity which results in a net negative cash flow. An impairment test was carried out and an impairment of R26 million was recognised.
Nitro businesses (included in "Other businesses")R129 million
The assets of Fedmis have been written down to a potential scrap value resulting in a total impairment of R108 million due to a proposed disposal of Fedmis.
The change of operations to toll manufacturing results in certain assets in the remaining Sasol Mining Initiators (Pty) Limited (Sasol Mining Initiators Africa (Pty) Limited in particular) being impaired by R21 million.
Operating Profit
Turnover for 2004 decreased by R4,961 million or 8%, and other operating income decreased by R271 million or 45%. These decreases were partly offset by decreases in net foreign exchange losses of R1,171 million and in operating costs and expenses of R1,789 million which reduced the net effect on operating profit. This resulted in a decrease in operating profit of R2,272 million or 21% from R11,011 million in 2003 to R8,739 million in 2004.
Other Income/(Expenses)
Category |
2004 |
2003 |
Change |
Change |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||||||||||
Dividends received | 14 | 14 | 0 | 0 | ||||||||||||||
Interest received | 183 | 193 | (10 | ) | (5 | ) | ||||||||||||
Interest incurred | (1,450 | ) | (1,279 | ) | (171 | ) | (13 | ) | ||||||||||
Interest capitalized | 1,082 | 1,008 | 74 | 7 | ||||||||||||||
Finance costs | (368 | ) | (271 | ) | (97 | ) | (36 | ) | ||||||||||
Gain arising from issuance of subsidiary's shares | 108 | | 108 | 100 | ||||||||||||||
Net other expenses | (63 | ) | (64 | ) | 1 | 2 | ||||||||||||
Net other expenses in 2004 amounted to R63 million, compared to R64 million in 2003, a decrease of R1 million.
Interest incurred in 2004 amounted to R1,450 million, an increase of 13%, of which R1,082 million was capitalized, compared to interest incurred of R1,279 million in 2003, of which R1,008 million was capitalized. The increase in interest incurred was mainly a result of increased net borrowings. Capitalized interest increased due to increased investment in property, plant and equipment in 2004. Accordingly, finance costs expensed amounted to R368 million in 2004, an increase of R97 million or 36%, compared to finance costs of R271 million in 2003.
Interest income amounted to R183 million in 2004, a decrease of R10 million or 5%, compared to R193 million in 2003. This decrease is mainly attributable to translation differences on interest income
108
from investments in foreign countries due to the appreciation of the Rand against the US dollar, as well as lower average cash balances and declining interest rates.
In terms of the transaction to acquire the remaining interest in Naledi Petroleum Holdings (Pty) Limited (NPH), 22 shares were issued to some of the previous NPH shareholders which diluted our interest in Sasol Oil (Pty) Limited by approximately 2% and resulted in a gain of R108 million being realized.
Taxation
Taxation in 2004 amounted to R3,177 million, a decrease of R738 million or 19%, compared to R3,915 million in 2003. These amounts include a deferred tax benefit of R299 million in 2004 compared to a deferred tax expense of R114 million in 2003. The decrease in taxation is broadly in line with the decrease in net income before taxation. The effective tax rate was 36.4% in 2004 and 35.8% in 2003. The difference between the statutory tax rate of 30% and the effective tax rate results mainly from STC which is levied at a rate of 12.5%, differences in foreign tax rates, disallowed expenditure and the effect of changes in tax rates for 2004.
Losses of Equity Accounted Investees
Losses of equity accounted investees amounted to R49 million in 2004, an increase of R2 million or 4%, compared to R47 million in 2003. The loss of R49 million comprises mainly losses of R151 million incurred by some of our equity accounted investees, principally Sasol Chevron and Sasol Southwest Energy, offset by profits of approximately R102 million, mainly from Petlin, Merisol, and Fuel Firing Systems in 2004.
Minority Interest
Minority interest in 2004 amounted to R92 million, compared to R170 million in 2003. This is mainly attributable to the acquisition of the minority interest of Naledi Petroleum Holdings with effect from 1 January 2004.
Earnings Attributable to Shareholders
As a result of the factors discussed above, earnings attributable to shareholders in 2004 was R5,358 million, a decrease of R1,986 million or 27%, compared to R7,344 million in 2003.
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OUR RESULTS OF OPERATIONS FOR THE YEARS ENDED 30 JUNE 2003 AND 30 JUNE 2002
The financial results below are stated under US GAAP.
Results of Operations
|
2003 |
2002 |
Change |
Change |
|||||
---|---|---|---|---|---|---|---|---|---|
|
|||||||||
|
(Rand in millions) |
% |
|||||||
Turnover | 63,769 | 55,667 | 8,102 | 15 | |||||
Other operating income | 603 | 1,221 | (618 | ) | (51 | ) | |||
Net foreign exchange (losses)/gains | (2,437 | ) | 620 | (3,057 | ) | (493 | ) | ||
Operating costs and expenses | (50,924 | ) | (43,284 | ) | (7,640 | ) | 18 | ||
Operating profit | 11,011 | 14,224 | (3,213 | ) | (23 | ) | |||
Net other expense | (64 | ) | (46 | ) | (18 | ) | 39 | ||
Income before tax, (losses)/earnings of equity accounted investees, minority interest | 10,947 | 14,178 | (3,213 | ) | (23 | ) | |||
Income tax | (3,915 | ) | (4,723 | ) | 808 | (17 | ) | ||
Income after tax, but before (losses)/earnings of equity accounted investees, minority interest | 7,032 | 9,455 | (2,423 | ) | (26 | ) | |||
(Losses)/earnings of equity accounted investees | (47 | ) | 35 | (82 | ) | (234 | ) | ||
Minority interest | (170 | ) | (56 | ) | (114 | ) | 204 | ||
Earnings attributable to shareholders before cumulative effect of change in method of accounting | 6,815 | 9,434 | (2,619 | ) | (28 | ) | |||
Change in method of accounting for asset retirement obligations, net of tax of R227 million | 529 | | 529 | 100 | |||||
Earnings attributable to shareholders | 7,344 | 9,434 | (2,090 | ) | (22 | ) | |||
Turnover
Turnover consists of the following categories:
|
2003 |
2002 |
Change |
Change |
|||||
---|---|---|---|---|---|---|---|---|---|
|
|||||||||
|
(Rand in millions) |
% |
|||||||
Sale of products | 62,509 | 54,004 | 8,505 | 16 | |||||
Services rendered | 502 | 1,358 | (856 | ) | (63 | ) | |||
Commission and marketing | 758 | 305 | 453 | 149 | |||||
Total turnover | 63,769 | 55,667 | 8,102 | 15 | |||||
Turnover for 2003 amounted to R63,769 million, an increase of R8,102 million or 15%, compared to R55,667 million for 2002.
The net increase of R8,102 million in turnover is mainly attributable to increases in the sale of products of R11,350 million which consists of increases in product prices of R4,182 million, increases in crude oil prices of R1,592 million and volumes of R5,576 million, mainly due to Schümann Sasol being consolidated under US GAAP for the first time in 2003, following the acquisition of the additional 33.3% with effect 1 July 2002. These increases were partly offset by the negative currency effect of R2,845 million arising due to the appreciation of the Rand. Additionally, services rendered decreased by R856 million and commissions and marketing income increased by R453 million.
The average Rand to US dollar exchange rate of R9.04 in 2003, was 11% stronger than the average of R10.20 in 2002. The average crude oil price, of US$27.83/bbl in 2003 was 20% higher than the average of US$23.24/bbl in 2002. Our average US dollar refining margins in 2003 remained approximately constant at the levels of 2002.
110
The basket of international prices for our key chemical products, including those for ammonia, polymers, ethylene, solvents, phenolics and waxes, increased by more than 2% during 2003. The impact of the higher oil and chemical prices was mitigated by the appreciation of the Rand against the US dollar.
Other operating income
Other operating income in 2003 amounted to R603 million, which represents a decrease of R618 million or 51%, compared to R1,221 million in 2002. This decrease is mainly attributable to the non-recurrence of the insurance proceeds of R541 million which were received in the 2002 year in connection with the Natref fire, which occurred in June 2001.
Net foreign exchange (losses)/gains
Net foreign exchange losses for 2003 amounted to R2,437 million which represents a decrease of R3,057 million compared to a gain of R620 million in 2002. The decrease is mainly attributable to the appreciation of the Rand against the US dollar.
Operating Costs and Expenses
Operating costs and expenses consists of the following categories:
Category |
2003 |
2002 |
Change |
Change |
|||||
---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
|||||||
Cost of products sold | 38,415 | 30,949 | 7,466 | 24 | |||||
Cost of services rendered | 475 | 569 | (94 | ) | (17 | ) | |||
Selling and distribution costs | 4,976 | 4,296 | 680 | 16 | |||||
Administrative expenses | 4,402 | 4,265 | 137 | 3 | |||||
Other operating expenses | 2,656 | 3,205 | (549 | ) | (17 | ) | |||
Total operating costs and expenses | 50,924 | 43,284 | 7,640 | 18 | |||||
Operating costs and expenses in 2003 amounted to R50,924 million, an increase of R7,640 million or 18%, compared to R43,284 million in 2002.
Cost of products sold. The cost of products sold in 2003 amounted to R38,415 million, an increase of R7,466 million or 24%, compared to R30,949 million in 2002. This increase of R7,466 million is mainly due to an escalation of feedstock costs (the increase in PPI for 2003 was 9.5%) and an increase in volumes which was mainly due to Schümann Sasol being consolidated under US GAAP for the first time in 2003. Compared to sales of products, the cost of products sold was 61% in 2003 and 57% in 2002.
Cost of services rendered. Cost of services rendered in 2003 amounted to R475 million, a decrease of R94 million or 17%, compared to the R569 million in 2002.
Selling and distribution costs. These costs comprise marketing and distribution of products as well as advertising, salaries and expenses of marketing personnel, freight, railage and customs and excise duty. Selling and distribution costs in 2003 amounted to R4,976 million, an increase of R680 million or 16%, compared to R4,296 million in 2002. This increase is mainly attributable to escalation of costs and an increase in commissions paid. Compared to sales of products, selling and distribution costs represented 8% in both 2003 and 2002.
Administrative expenses. These costs comprise expenditure of personnel and administrative functions, including accounting, information technology, human resources, legal and administration, as well as pension, post-retirement healthcare and Sasol Share Incentive Scheme costs. Administrative expenses in 2003 amounted to R4,402 million, an increase of R137 million or 3%, compared to R4,265 million in 2002. This increase is mainly attributable to the escalation of payroll costs due to a general salary increase to South African-based employees of 8%, and an increase in net periodic pension cost of R238 million, partly
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offset by savings in other administrative expenses. Compared to turnover, administrative expenses represented 7% of product sales in 2003, and 8% in 2002.
Other operating expenses. Other operating expenses (including impairments) in 2003 amounted to R2,656 million, a decrease of R549 million or 17%, compared to R3,205 million in 2002. Other operating expenses excluding impairments amounted to R2,598 million in 2003, a decrease of R416 million or 14%, compared to R3,014 million in 2002. This decrease generally arose from cost savings initiated and implemented in previous years. Impairment of property, plant and equipment, intangible assets and investments for 2003 amounted to R58 million, compared to R191 million in 2002. Details are as follows:
Impairments
Item |
Segment |
2003 |
2002 |
||||
---|---|---|---|---|---|---|---|
|
|
(Rand in millions) |
|||||
Waxy oil cleanup and reductants | Wax | | 20 | ||||
Alcohol dehydration plant | Synfuels | | 24 | ||||
Other smaller assets | Other businesses | 5 | 6 | ||||
Interest capitalized(1) | | 5 | |||||
Total property, plant and equipment | 5 | 55 | |||||
Impairment of goodwill | Wax | 48 | | ||||
Other intangible assets | Other businesses | 5 | | ||||
Total intangible assets | 53 | | |||||
Sasol DHB Investment | Nitro | - | 136 | ||||
Total investment | | 136 | |||||
Total | 58 | 191 | |||||
Operating Profit
Turnover for 2003 increased by R8,102 million or 15% which was reduced by a decrease in other operating income of R618 million, an increase in net foreign exchange losses of R3,057 million and an increase in operating costs and expenses of R7,640 million. This resulted in a decrease in operating profit of R3,213 million or 23% from R14,224 million in 2002 to R11,011 million in 2003.
Other Income/(Expenses)
Category |
2003 |
2002 |
Change |
Change |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
|||||||||||||||
Dividends received | 14 | 3 | 11 | 367 | |||||||||||||
Interest received | 193 | 226 | (33 | ) | (15 | ) | |||||||||||
Interest incurred | (1,279 | ) | (836 | ) | (443 | ) | 53 | ||||||||||
Interest capitalized | 1,008 | 561 | 447 | 80 | |||||||||||||
Finance costs | (271 | ) | (275 | ) | 4 | 1 | |||||||||||
Net other expenses | (64 | ) | (46 | ) | (18 | ) | 39 | ||||||||||
Net other expenses in 2003 amounted to R64 million, compared to R46 million in 2002, an increase of R18 million.
Interest income amounted to R193 million in 2003, a decrease of R33 million or 15%, compared to R226 million in 2002. This decrease is mainly attributable to translation differences on interest income from investments in foreign countries due to the appreciation of the Rand against the US dollar, as well as lower average cash balances.
112
Interest incurred in 2003 amounted to R1,279 million, of which R1,008 million was capitalized, compared to interest incurred of R836 million in 2002, of which R561 million was capitalized. The increase in interest incurred was mainly a result of increased borrowings. Capitalized interest increased due to increased investment in property, plant and equipment in 2003. Accordingly, finance costs expensed amounted to R271 million in 2003, a decrease of R4 million or 1%, compared to finance costs expensed of R275 million in 2002.
Taxation
Taxation in 2003 amounted to R3,915 million, a decrease of R808 million or 17%, compared to R4,723 million in 2002. These amounts include a deferred tax expense of R114 million in 2003 and a deferred tax benefit of R18 million in 2002. The decrease in taxation is broadly in line with the decrease in net income before taxation. The effective tax rate was 35.8% in 2003 and 33.3% in 2002. The difference between the statutory tax rate of 30% and the effective tax rate results mainly from STC which is levied at a rate of 12.5%, differences in foreign tax rates, disallowed expenditure and exempt income for 2003.
(Losses)/Earnings of Equity Accounted Investees
Losses of equity accounted investees amounted to R47 million in 2003, a decrease of R82 million or 235%, compared to a profit of R35 million in 2002. This decrease is mainly attributable to losses of R169 million incurred by some of our equity accounted investees, principally Sasol Chevron and Petlin. These losses were offset by profits of R122 million, mainly from Merisol, Sasol Southwest Energy and Fuel Firing Systems in 2003. The acquisition of the remaining interest in Schümann Sasol with effect from 1 July 2002, resulted in it being reclassified from an equity accounted investee to a subsidiary. The effect of this is that the profits of Schümann Sasol of R76.9 million in 2002 are no longer offset against the net losses of equity accounted investees, as was the case in 2002.
Minority Interest
Minority interest in 2003 amounted to R170 million, compared to R56 million in 2002. This is mainly attributable to increased profit allocation arising from the improved results of Naledi Petroleum Holdings and Natref.
Earnings Attributable to Shareholders
As a result of the factors discussed above, earnings attributable to shareholders in 2003 was R7,344 million, a decrease of R2,090 million or 22%, compared to R9,434 million in 2002.
Segments Overview
We manage our business on the basis of the following segments:
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The following is a discussion of our segment results. Segmental financial performance is measured on a management basis which is prepared in accordance with IFRS. This approach is based on the way management organizes segments within our Group for making operating decisions and assessing performance. For more information on the reconciliation of segmental turnover and operating profit under IFRS to the corresponding amounts prepared under US GAAP, see below "Reconciliation of segmental results to US GAAP" and Note 3 to our consolidated financial statements.
During 2003, we completed the process of integrating the Sasol Chemie acquired businesses into the respective business units of Sasol Olefins and Surfactants and Sasol Solvents (previously included in the Sasol Chemical Industries segment), linked with internal organizational and management restructuring, which continued in 2004 for our other business units.
In conjunction with these changes, we also revised our internal financial reporting to our Group Executive Committee (GEC), to separately report on the businesses of Sasol Oil, (renamed Sasol's Liquid Fuels Business) and Sasol Gas, and due to the increase importance of our gas to liquids strategy to, separately report on Sasol Synfuels International. Prior year segmental information has been restated to conform with this presentation.
We believe that intersegment sales and transfers were entered into under terms and conditions substantially similar to terms and conditions which would have been negotiated with an independent third party.
Turnover per segment
2004 |
Sasol Mining |
Sasol Synfuels |
Sasol's LFB |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total segments 2004 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|||||||||||||||||||||
|
(Rand in millions except for percentages) |
||||||||||||||||||||
External turnover | 1,083 | 1,329 | 18,554 | 17,133 | 6,576 | 5,956 | 1,389 | 7 | 8,124 | 60,151 | |||||||||||
% of external turnover | 2% | 2% | 31% | 28% | 11% | 10% | 2% | | 14% | 100% | |||||||||||
Inter-segment turnover | 4,161 | 14,664 | 297 | 249 | 86 | 499 | 133 | | 3,609 | 23,698 | |||||||||||
% of inter-segment turnover | 18% | 62% | 1% | 1% | | 2% | | | 16% | 100% | |||||||||||
Aggregated turnover | 5,244 | 15,993 | 18,851 | 17,382 | 6,662 | 6,455 | 1,522 | 7 | 11,733 | 83,849 | |||||||||||
Eliminationinter-segment turnover | (23,698 | ) | |||||||||||||||||||
Total segment turnover | 60,151 | ||||||||||||||||||||
Turnover per segment
2003 Restated |
Sasol Mining |
Sasol Synfuels |
Sasol's LFB |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total segments 2003 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|||||||||||||||||||||
|
(Rand in millions except for percentages) |
||||||||||||||||||||
External turnover | 1,013 | 1,210 | 19,460 | 19,543 | 6,245 | 5,950 | 1,480 | 7 | 9,647 | 64,555 | |||||||||||
% of external turnover | 2% | 2% | 30% | 30% | 10% | 9% | 2% | | 15% | 100% | |||||||||||
Inter-segment turnover | 4,003 | 15,766 | 191 | 290 | 116 | 622 | 24 | | 2,906 | 23,918 | |||||||||||
% of inter-segment turnover | 17% | 66% | 1% | 1% | | 3% | | | 12% | 100% | |||||||||||
Aggregated turnover | 5,016 | 16,976 | 19,651 | 19,833 | 6,361 | 6,572 | 1,504 | 7 | 12,553 | 88,473 | |||||||||||
Eliminationinter-segment turnover | (23,918 | ) | |||||||||||||||||||
Total segment turnover | 64,555 | ||||||||||||||||||||
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2002 Restated |
Sasol Mining |
Sasol Synfuels |
Sasol's LFB |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total segments 2002 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|||||||||||||||||||||
|
(Rand in millions except for percentages) |
||||||||||||||||||||
External turnover | 1,239 | 898 | 16,865 | 19,129 | 5,580 | 5,666 | 1,271 | 176 | 8,766 | 59,590 | |||||||||||
% of external turnover | 2% | 2% | 28% | 32% | 9% | 10% | 2% | | 15% | 100% | |||||||||||
Inter-segment turnover | 3,651 | 14,847 | 121 | 254 | 115 | 139 | | | 2,606 | 21,733 | |||||||||||
% of inter-segment turnover | 17% | 68% | 1% | 1% | | 1% | | | 12% | 100% | |||||||||||
Aggregated turnover | 4,890 | 15,745 | 16,986 | 19,383 | 5,695 | 5,805 | 1,271 | 176 | 11,372 | 81,323 | |||||||||||
Eliminationinter-segment turnover | (21,733 | ) | |||||||||||||||||||
Total segment turnover | 59,590 | ||||||||||||||||||||
Turnover
In 2004 our total segmental turnover amounted to R60,151 million, compared to R64,555 million in 2003, a decrease of R4,404 million or 7%. Our inter-segmental turnover amounted to R23,698 million in 2004 compared to R23,918 million in 2003, a decrease of R220 million or 1%. On an aggregated basis, our external and inter-segmental turnover together amounted to R83,849 million in 2004, compared to R88,473 million in 2003, a decrease of R4,624 million or 5%. The percentage contribution of each segment, to the different categories of turnover, is shown in the table above.
In 2003 our total segmental turnover amounted to R64,555 million, compared to R59,590 million in 2002, an increase of R4,965 million or 8%. Our inter-segmental turnover amounted to R23,918 million in 2003, compared to R21,733 million in 2002, an increase of R2,185 million or 10%. On an aggregated basis, our external and inter-segmental turnover together amounted to R88,473 million in 2003, compared to R81,323 million in 2002, an increase of R7,150 million or 9%. The percentage contribution of each segment, to the different categories of turnover, is shown in the table above.
Operating profit/(loss) per segment
|
Sasol Mining |
Sasol Synfuels |
Sasol's LFB |
Sasol Olefins and Surfactants |
Sasol Polymers |
Sasol Solvents |
Sasol Gas |
Sasol Synfuels Int. |
Other |
Total segments |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||
|
(Rand in millions except for percentages) |
|||||||||||||||||||
Operating profit/(loss) 2004 | 1,194 | 5,512 | 1,429 | (67 | ) | 1,030 | 117 | 387 | (138 | ) | (150 | ) | 9,314 | |||||||
% of total segment | 13% | 59% | 15% | (1% | ) | 11% | 1% | 4% | (1% | ) | (1% | ) | 100% | |||||||
Operating profit/(loss) 2003 (restated) | 1,273 | 7,423 | 1,403 | (5 | ) | 884 | 436 | 535 | (180 | ) | 142 | 11,911 | ||||||||
% of total segment | 11% | 62% | 12% | | 7% | 4% | 4% | (2% | ) | 2% | 100% | |||||||||
Operating profit/(loss) 2002 (restated) | 1,327 | 7,467 | 2,069 | 1,201 | 912 | 786 | 432 | (76 | ) | 665 | 14,783 | |||||||||
% of total segment | 9% | 51% | 14% | 8% | 6% | 5% | 3% | (1% | ) | 5% | 100% |
Operating profit
In 2004, total segmental operating profit amounted to R9,314 million, compared to R11,911 million in 2003, a decrease of R2,597 million or 22%. The percentage contribution of each segment to operating profit is shown in the table above.
In 2003, total segmental operating profit amounted to R11,911 million, compared to R14,783 million in 2002, a decrease of R2,872 million or 19%. The percentage contribution of each segment to operating profit is shown in the table above.
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Segment discussion
Sasol Mining
Our results of operations for 2004 compared to 2003
Category |
2004 |
2003 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
(Rand in millions) | (%) | |||||||||
Turnover | ||||||||||
External | 1,083 | 1,013 | 70 | 7 | ||||||
Inter-segment | 4,161 | 4,003 | 158 | 4 | ||||||
Aggregated turnover | 5,244 | 5,016 | 228 | 5 | ||||||
Operating costs and expenses(1) | 4,050 | 3,743 | (307 | ) | (8 | ) | ||||
Operating profit | 1,194 | 1,273 | (79 | ) | (6 | ) |
Turnover. External turnover amounted to R1,083 million in 2004 (21% of aggregated Sasol Mining turnover), compared to R1,013 million in 2003 (20% of aggregated Sasol Mining turnover), an increase of R70 million or 7%. Inter-segment turnover amounted to R4,161 million in 2004 (79% of aggregated Sasol Mining turnover), compared to R4,003 million in 2003 (80% of aggregated Sasol Mining turnover), an increase of R158 million or 4%. On an aggregated basis, Sasol Mining's external and inter-segment turnover together amounted to R5,244 million in 2004, compared to R5,016 million in 2003, an increase of R228 million or 5%.
The increase in external turnover in 2004 of R70 million or 7% was mainly attributable to higher coal sales volumes of R65 million. The average increase in the US dollars coal price in turn increased turnover by R200 million, which was negated by the effect of the appreciation of the Rand of R237 million; changes in volumes resulted in increased turnover of R42 million.
The increase in inter-segment turnover in 2004 of R158 million or 4%, was mainly attributable to higher sales volumes of R93 million. An effort to improve the quality of coal sold, resulted in an increase in turnover of R47 million. The price of coal sold also increased turnover by R18 million. Inter-segment sales volumes of 47.0 Mt in 2004, were 1.2 Mt or 3% higher than in 2003.
Sasol Mining aggregated turnover of R5,244 million in 2004 represents 6% (20036%) of our total segmental aggregated turnover of R83,849 million (2003R88,473 million).
Operating costs and expenses. Operating costs and expenses of Sasol Mining amounted to R4,050 million in 2004, compared to R3,743 million in 2003, an increase of R307 million or 8%. The increase was mainly attributable to higher sales volumes and cost inflation, although mining costs per ton have still decreased over the last few years.
The renewal project which was initiated in 1998 has continued to contain operating costs. Since the initiation of the renewal project, per capita productivity has increased by a cumulative 41% (including a 6% year-to-year increase in 2004). Over the same period, cash mining costs per ton decreased by a cumulative 19% in real terms. Cash mining costs are defined as total mining production costs less non-cash costs, mainly depreciation and movements in rehabilitation provisions. See "Item 4.B Business OverviewSasol Mining."
Operating profit. Operating profit of Sasol Mining amounted to R1,194 million in 2004, compared to R1,273 million in 2003, a decrease of R79 million or 6%. The operating margin decreased from 25% in 2003, to 23% in 2004.
Sasol Mining operating profit represents 13% of our total segmental operating profit in 2004, compared to 11% in 2003.
116
Our results of operations for 2003 compared to 2002
Category |
2003 |
2002 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
(Rand in millions) | (%) | |||||||||
Turnover | ||||||||||
External | 1,013 | 1,239 | (226 | ) | (18 | ) | ||||
Inter-segment | 4,003 | 3,651 | 352 | 10 | ||||||
Aggregated turnover | 5,016 | 4,890 | 126 | 3 | ||||||
Operating costs and expenses(1) | 3,743 | 3,563 | (180 | ) | 5 | |||||
Operating profit | 1,273 | 1,327 | (54 | ) | (4 | ) |
Turnover. External turnover amounted to R1,013 million in 2003 (20% of aggregated Sasol Mining turnover), compared to R1,239 million in 2002 (25% of aggregated Sasol Mining turnover), a decrease of R226 million or 18%. Inter-segment turnover amounted to R4,003 million in 2003 (80% of aggregated Sasol Mining turnover), compared to R3,651 million in 2002 (75% of aggregated Sasol Mining turnover), an increase of R352 million or 10%. On an aggregated basis, Sasol Mining's external and inter-segment turnover together amounted to R5,016 million in 2003, compared to R4,890 million in 2002, an increase of R126 million or 3%.
The decrease in external turnover in 2003 of R226 million or 18% was mainly attributable to the appreciation of the Rand against the US dollar, resulting in a decrease in turnover of R98 million, and to lower US dollar export coal prices resulting in a decrease of R143 million, partially offset by higher sales volumes of R15 million. Volumes sold externally in 2003 were 3.6 Mt, compared to 3.5 Mt in 2002, a marginal increase of 3%.
The increase in inter-segment turnover in 2003 of R352 million or 10%, was mainly attributable to price increases of R380 million, due to annual contract price adjustments. The increase was partially offset by lower volumes of R28 million, due to lower consumption by Sasol Synfuels, the major user of our mining output. Inter-segment sales volumes of 45.8 Mt in 2003, were 1.3 Mt or 3% lower than respective volumes of 47.1 Mt in 2002. Sales to Sasol Synfuels were 39.4 Mt in 2003, compared to 40.8 Mt in 2002. Inter-segment turnover is recognized based on the same revenue recognition principles as for external turnover.
Sasol Mining aggregated turnover of R5,016 million in 2003 represents 6% (20026%) of our total segmental aggregated turnover of R88,473 million (2002R81,323 million).
Operating costs and expenses. Operating costs and expenses of Sasol Mining amounted to R3,743 million in 2003, compared to R3,563 million in 2002, an increase of R180 million or 5%. The increase was mainly a result of cost inflation of R108 million.
The renewal project which was initiated in 1998 has continued to contain operating costs. Since the initiation of the renewal project, per capita productivity has increased by a cumulative 33% (including a 3% increase in 2003). During the same period, cash mining costs per ton decreased by a cumulative 20%, (including a 4% decrease for 2003). Cash mining costs are defined as total mining production costs less non-cash costs, mainly depreciation and movements in rehabilitation provisions. See "Item 4.B Business OverviewSasol Mining."
Operating profit. Operating profit of Sasol Mining amounted to R1,273 million in 2003, compared to R1,327 million in 2002, a decrease of R54 million or 4%. The operating margin decreased from 27% in 2002, to 25% in 2003. These net decreases were mainly due to larger increases in operating costs and expenses compared to turnover mainly due to the appreciation of the Rand against the US dollar and significantly lower international US dollar export coal prices, which were partially offset by cost containment measures.
117
Sasol Mining operating profit represents 11% of our total segmental operating profit in 2003, compared to 9% in 2002.
Sasol Synfuels
Our results of operations for 2004 compared to 2003
Category |
2004 |
2003 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 1,329 | 1,210 | 119 | 10 | ||||||
Inter-segment | 14,664 | 15,766 | (1,102 | ) | (7 | ) | ||||
Aggregated turnover | 15,993 | 16,976 | (983 | ) | (6 | ) | ||||
Operating costs and expenses(1) | 10,481 | 9,553 | (928 | ) | 10 | |||||
Operating profit | 5,512 | 7,423 | (1,911 | ) | (26 | ) |
During the year ended 30 June 2004, we revised the reporting structure of the Group as a result of the operational changes in the business including the introduction of natural gas, the advancement of the gas-to-liquids projects and the restructuring of the LFB. The new reporting format is the basis in which we present our financial results by reporting segment. Prior year segmental information has been restated to conform with this presentation.
The formation of LFB included a restructuring of the Group's activities as well as the acquisition of the remaining interest in Naledi Petroleum Holdings (Pty) Limited. In addition, Sasol Synfuels transferred its fuel blending plant and related storage facilities to LFB with the result that all fuel sales are now made by LFB. In addition, Sasol CarboTar, which is involved in the production and marketing of carbon and tar products, was transferred to the Sasol Synfuels reporting segment from the Sasol Oil and Gas segment as it no longer forms part of LFB.
Turnover. External turnover amounted to R1,329 million in 2004 (8% of aggregated Sasol Synfuels turnover), compared to R1,210 million in 2003 (7% of aggregated Sasol Synfuels turnover), an increase of R119 million or 10%, mainly due to higher volumes of ammonia, sulfur and krypton xenon sales. Inter-segment turnover amounted to R14,664 million in 2004 (92% of aggregated Sasol Synfuels turnover), compared to R15,766 million in 2003 (93% of aggregated Sasol Synfuels turnover), a decrease of R1,102 million or 7%.
The decrease in Sasol Synfuels aggregated turnover of R983 million was mainly due to the appreciation of the Rand against the US dollar resulting in a negative effect of R4,692 million and other price variances of R88 million. This decrease was partially offset by a higher crude oil price of R2,913 million as well as higher sales volumes of R884 million. During 2004 the Rand/Dollar exchange rate averaged R6.88/US$ representing a strengthening of 24% against the average of R9.03/US$ during 2003. The derived crude oil price averaged US$ 28.85 a barrel, representing a 22% increase from an average US$ 23.67 a barrel in 2003.
Operating costs and expenses. Operating costs and expenses of Sasol Synfuels amounted to R10,481 million in 2004, compared to R9,553 million in 2003, an increase of R928 million or 10%. The increase is attributable to both higher production volumes, as well as sales volumes and the effect of unrealized profit on intersegment sales of R338 million as well as a loss on a hedging instrument of R54 million. Production volumes for 2004 increased to 7.7 Mt, an increase of 4% over 2003 production of 7.4 Mt. Sales volumes for 2004 increased to 7.9 Mt, an increase of 4% over 2003 sales of 7.6 Mt. Cash cost, defined as total production costs less non-cash costs, mainly depreciation and movements in asset
118
retirement provisions, per ton produced decreased in 2004 with 2.4% compared to 2003. The average per capita production rose by 9.1% to 1,357 tons per employee for 2004 compared to 1,244 tons for 2003.
Operating profit. Operating profit of Sasol Synfuels amounted to R5,512 million in 2004, compared to R7,423 million in 2003, a decrease of R1,911 million or 26%. The main reason for this decrease was a much stronger Rand/Dollar exchange rate during 2004 partly reduced by higher crude oil prices as will as higher sales volumes. The operating profit margin also decreased from 44% in 2003 to 34% in 2004 as a result of the above reasons.
Sasol Synfuels operating profit represents 59% of our total segmental operating profits for 2004, compared to 62% in 2003.
Our results of operations for 2003 compared to 2002
Category |
2003 |
2002 Restated |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 1,210 | 898 | 312 | 35 | ||||||
Inter-segment | 15,766 | 14,847 | 919 | 6 | ||||||
Aggregated turnover | 16,976 | 15,745 | 1,231 | 8 | ||||||
Operating costs and expenses(1) | 9,553 | 8,278 | (1,275 | ) | 15 | |||||
Operating profit | 7,423 | 7,467 | (44 | ) | (1 | ) |
Turnover. External turnover amounted to R1,210 million in 2003 (7% of aggregated Sasol Synfuels turnover), compared to R898 million in 2002 (6% of aggregated Sasol Synfuels turnover), an increase of R312 million or 35%. Inter-segment turnover amounted to R15,766 million in 2003 (93% of aggregated Sasol Synfuels turnover), compared to R14,847 million in 2002 (94% of aggregated Sasol Synfuels turnover), an increase of R919 million or 6%. On an aggregated basis, our external and inter-segment turnover together amounted to R16,976 million in 2003, compared to R15,745 million in 2002, an increase of R1,231million or 8%.
The increase in Sasol Synfuels aggregated turnover of R1,231 million was mainly due to a increase in crude oil prices (which affects the derived oil price on which Sasol Synfuels fuel product prices are based) of R2,275 million, and price increases in various non-oil related products of R173 million. This increase was largely offset by the Rand appreciating against the US dollar resulting in a negative effect of R1,190 million as well as a decrease in volumes of R27 million. During 2003, the derived crude oil price averaged US$ 23.67 a barrel, representing a 14% increase from an average US$20.83 a barrel in 2002.
The increase in external turnover in 2003 of R312 million or 35% is mainly attributable to the positive effect of the increase in crude oil prices of R1,297 million and other smaller price variances of R72 million, partly offset by the appreciation of the Rand against the US dollar, resulting in a negative effect of R4,692 million and other price variances of R93 million.
The increase in inter-segment turnover for 2003 of R919 million or 6% is mainly attributable to the increase in the crude oil prices of R978 million, increased sales volumes of R67 million and other smaller price variances of R102 million, partly offset by the appreciation of the Rand against the US dollar resulting in a negative currency effect of R228 million. Inter-segment turnover is priced at the fuel alternative value of Sasol Synfuels, and is recognized when the risks and rewards of ownership are transferred to the receiving segment.
Sasol Synfuels aggregated turnover of R16,976 million in 2003 represents 19% (200219%) of our total segmental aggregated turnover of R88,473 million (2002R81,323 million).
119
Operating costs and expenses. Operating costs and expenses of Sasol Synfuels amounted to R9,553 million in 2003, compared to R8,278 million in 2002, an increase of R1,275 million or 16%. The increase of 16% is attributable to the increase in cash cost per ton, due mainly to a longer than normal shutdown during January 2003. Cash cost per ton was restricted to 9.8%, which is slightly above the PPI of 9.5% for the year. Average per-capita production decreased by 4.8% from 1,344 t. to 1,280 t, mainly as a result of lower production volumes.
Operating profit. Operating profit of Sasol Synfuels amounted to R7,423 million in 2003, compared to R7,467 million, a decrease of R44 million or 1% arising from increases in turnover offset by cost increases. The operating margin was approximately 44% in 2003 compared to 48% in 2002.
Sasol Synfuels operating profit represents 62% of our total segmental operating profits for 2003, compared to 51% in 2002.
Sasol's Liquid Fuels Business
Our financial results of operations for 2004 compared to 2003
Category |
2004 |
2003 Restated |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 18,554 | 19,460 | (906 | ) | (5 | ) | ||||
Inter-segment | 297 | 191 | 106 | 55 | ||||||
Aggregated turnover | 18,851 | 19,651 | (800 | ) | (4 | ) | ||||
Operating costs and expenses(1) | 17,422 | 18,248 | 826 | (5 | ) | |||||
Operating profit | 1,429 | 1,403 | 26 | 2 |
During the year ended 30 June 2004, we revised the reporting structure of the Group as a result of the operational changes in the business including the introduction of natural gas, the advancement of the gas-to-liquids projects and the restructuring of the LFB. The new reporting format is the basis in which we present our financial results by reporting segment. Prior year segmental information has been restated to conform with this presentation.
The formation of LFB included a restructuring of the Group's activities as well as the acquisition of the remaining interest in Naledi Petroleum Holdings (Pty) Limited. In addition, Sasol Synfuels transferred its fuel blending plant and related storage facilities to LFB with the result that all fuel sales are now made by LFB. In addition, Sasol CarboTar, which is involved in the production and marketing of carbon and tar products, was transferred to the Sasol Synfuels reporting segment from the Sasol Oil and Gas segment, as it no longer forms part of LFB.
Turnover. External turnover amounted to R18,554 million in 2004 (98% of aggregated Sasol's Liquid Fuels Business turnover), compared to R19,460 million in 2003 (99% of aggregated Sasol's Liquid Fuels Business turnover), a decrease of R906 million or 5%. Inter-segment turnover amounted to R297 million in 2004 (2% of aggregated Sasol's Liquid Fuels Business turnover), compared to R191 million in 2003 (1% of aggregated Sasol's Liquid Fuels Business turnover), an increase of R106 million or 55%. On an aggregated basis, Sasol's Liquid Fuels Business' external and inter-segment turnover together amounted to R18,851 million in 2004, compared to R19,651 million in 2003, a net decrease of R800 million or 4%.
The net decrease in Sasol's Liquid Fuels Business aggregated turnover of R800 million was mainly due to the appreciation of the Rand against the US dollar (R4,344 million), offset by higher sales volumes (R1,747 million) and higher product prices (R1,754 million).
120
Operating costs and expenses. Operating costs and expenses of Sasol's Liquid Fuels Business amounted to R17,422 million in 2004, compared to R18,248 million in 2003, a decrease of R826 million or 5%. The decrease of 5% is mainly due to the strengthening of the Rand against the US dollar resulting in lower feed stock cost of R3,980 million reduced by increased costs as a result of higher production of R1,325 million and higher prices of feed stock, such as crude oil prices, of R1,498 million. Operating cost also increased as a result of the roll out of the Sasol Retail Convenience Centers and the Exel merger of R108 million, the amortization of fair value of the Exel contract of R55 million, depreciation of leases capitalized of R46 million, annual fixed cost escalations of R43 million and an increase in the provision for rehabilitation cost of R30 million.
Operating profit. The operating profit of Sasol's Liquid Fuels Business amounted to R1,429 million in 2004, compared to a profit of R1,403 million in 2003, an increase of R26 million or 2%.
Sasol's Liquid Fuels Business operating profit represents 15% of our total segmental operating profit in 2004 and 12% in 2003.
Our financial results of operations for 2003 compared to 2002
Category |
2003 |
2002 Restated |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 19,460 | 16,865 | 2,595 | 15 | ||||||
Inter-segment | 191 | 121 | 70 | 58 | ||||||
Aggregated turnover | 19,651 | 16,986 | 2,665 | 16 | ||||||
Operating costs and expenses(1) | 18,248 | 14,917 | (3,331 | ) | 22 | |||||
Operating profit | 1,403 | 2,069 | (666 | ) | (32 | ) |
Turnover. External turnover amounted to R19,460 million in 2003 (99% of aggregated Sasol's Liquid Fuels Business turnover), compared to R16,865 million in 2002 (99% of aggregated Sasol's Liquid Fuels Business turnover), an increase of R2,595 million or 15%. Inter-segment turnover amounted to R191 million in 2003 (1% of aggregated Sasol's Liquid Fuels Business turnover), compared to R121 million in 2002 (1% of aggregated Sasol's Liquid Fuels Business turnover), an increase of R70 million or 58%. On an aggregated basis, Sasol's Liquid Fuels Business' external and inter-segment turnover together amounted to R19,651 million in 2003, compared to R16,986 million in 2002, a net increase of R2,665 million or 16%.
The net increase in Sasol's Liquid Fuels Business aggregated turnover of R2,665 million was mainly due to higher sales volumes of R1,575 million whereas volumes were lower in the previous year as a result of the Natref fire. We experienced higher product prices of R2,842 million, reduced by the stronger Rand against the US dollar (R1,750 million).
Operating costs and expenses. Operating costs and expenses of Sasol's Liquid Fuels Business amounted to R18,248 million in 2003, compared to R14,917 million in 2002, an increase of R3,331 million or 22%. The increase of 22% is mainly attributable to an increase in the throughput of the Natref refinery after the refinery expansion resulting in higher feedstock and variable cost of R1,459 million, higher prices of feedstock of R2,975 million, reduced by the impact of the stronger Rand against the US dollar of R1,103 million.
Operating profit. The operating profit of Sasol's Liquid Fuels Business amounted to R1,403 million in 2003, compared to a profit of R2,069 million in 2002, a decrease of R666 million or 32%. Operating margin decreased from 29% in 2002, to 15% in 2003. These decreases were mainly due to the negative impact of the appreciation of the Rand against the US dollar.
121
Sasol's Liquid Fuels Business operating profit represents 12% of our total segmental operating profit in 2003 and 14% in 2002.
Sasol Olefins and Surfactants
Our results of operations for 2004 compared to 2003
Category |
2004 |
2003 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 17,133 | 19,543 | (2,410 | ) | (12 | ) | ||||
Inter-segment | 249 | 290 | (41 | ) | (14 | ) | ||||
Aggregated turnover | 17,382 | 19,833 | (2,451 | ) | (12 | ) | ||||
Operating costs and expenses(1) | 17,451 | 19,838 | 2,387 | (12 | ) | |||||
Operating loss | (67 | ) | (5 | ) | (62 | ) | 1,240 |
Turnover. External turnover amounted to R17,133 million in 2004, compared to R19,543 million in 2003, a net decrease of R2,410 million or 12%. Inter-segment turnover was R249 million in 2004 compared to R290 million in 2003, a decrease of R41 million or 14%. On an aggregated basis, Sasol Olefins and Surfactants external and inter-segment turnover amounted to R17,382 million in 2004 compared to R19,833 million in 2003, a net decrease of R2,451 or 12%.
The net decrease in Sasol Olefins and Surfactants aggregated turnover of R2,451 million was mainly due to the appreciation of the Rand against the euro and the US dollar, resulting in a negative effect of R3,663 million. This decrease was partially offset by sales volume increases of R1,424 million, which was partially offset by R212 million due to slightly lower product prices.
Sasol Olefins and Surfactants aggregated turnover of R17,382 million in 2004 (2003R19,833) represents 21% (2003 - 22%) of our total segmental aggregated turnover of R83,849 million (2003R88,473 million).
Operating costs and expenses. Operating costs and expenses of Sasol Olefins and Surfactants amounted to R17,451 million in 2004, compared to R19,838 million in 2003, a decrease of R2,387 million or 12%. This decrease is mainly attributable to the appreciation of the Rand against the euro and the US dollar resulting in a positive effect of R3,524 million. The cost position was further improved by the profit on sale of Sasol Servo. Negative cost variances totaled R1,184 million and were due to the effect of increased costs due to higher sales volumes of R752 million, higher chemical feedstock and crude oil related costs of R291 million, impairment of assets of R52 million, business restructuring cost of R46 million, and increased employee benefit costs.
Operating loss. Operating loss of Sasol Olefins and Surfactants amounted to R67 million in 2004, compared to a loss of R5 million in 2003, a increase of R62 million.
122
Our results of operations for 2003 compared to 2002
Category |
2003 |
2002 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 19,543 | 19,129 | 414 | 2 | ||||||
Inter-segment | 290 | 254 | 36 | 14 | ||||||
Aggregated turnover | 19,833 | 19,383 | 450 | 2 | ||||||
Operating costs and expenses(1) | 19,838 | 18,182 | (1,656 | ) | 9 | |||||
Operating (loss)/profit | (5 | ) | 1,201 | (1,206 | ) | (100 | ) |
Turnover. External turnover amounted to R19,543 million in 2003 (99% of aggregated turnover), compared to R19,129 million in 2002 (99% of aggregated turnover), an increase of R414 million or 2%. Inter-segment turnover amounted to R290 million in 2003 (1% of aggregated turnover), compared to R254 million in 2002 (1% of aggregated turnover), an increase of R36 million or 14%. On an aggregated basis, external and inter-segment turnover together amounted to R19,833 million in 2003, compared to R19,383 million in 2002, a net increase of R450 million or 2%.
The net increase in aggregated turnover of R450 million was mainly due to sales volume increases of R1,282 million and higher prices for crude oil related prices of R178 million due to higher crude oil prices. This increase was partially offset by the negative impact of lower chemical prices of R511 million and the appreciation of the Rand against the US dollar, resulting in a negative effect of R486 million.
The increase in external turnover in 2003 of R414 million or 2% is mainly attributable to higher sales volumes of R1,202 million and higher prices for crude oil related products of R178 million, partly offset by lower chemical prices of R505 million and the appreciation of the Rand and the euro against the US dollar resulting in a negative currency effect of R479 million.
The increase in inter-segment turnover for 2003 of R36 million or 14% is mainly attributable to higher sales volumes partly offset by lower chemical prices and the appreciation of the Rand and the euro against the US dollar.
Sasol Olefins and Surfactants aggregated turnover of R19,833 million in 2003 represents 26% (200227%) of our total segmental aggregated turnover of R77,274 million (2002R70,686 million).
Operating costs and expenses. Operating costs and expenses of Sasol Olefins and Surfactants amounted to R19,838 million in 2003, compared to R18,182 million in 2002, an increase of R1,656 million or 9%. This increase of 9% is mainly attributable to the effect of increased costs due to higher volumes of R1,101 million as well as depreciation of assets of R130 million, higher chemical feedstock and crude oil related costs of R749 million, partly offset by cost saving initiatives approximating R146 million and the appreciation of the Rand and the euro against the US dollar resulting in a positive effect of R201 million.
Operating (loss)/profit). Operating loss of Sasol Olefins and Surfactants amounted to R5 million in 2003, compared to a profit of R1,201 million in 2002, a decrease of R1,206 million or 100%. The decrease in profits is mainly attributable to a net reduction in sales prices of R333 million, an increase in chemical feedstock and crude oil related costs of R749 million increased depreciation of R130 million and the negative effect of the appreciation of the Rand and the euro against the US dollar of R278 million. This effect was partially reduced by the result of cost saving programs, and increased sales volumes of approximately R284 million.
Sasol Olefins and Surfactants operating loss represents nil% of our total segmental operating profits for 2003, compared to 8% in 2002.
123
Sasol Polymers
Our results of operations for 2004 compared to 2003
Category |
2004 |
2003 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 6,576 | 6,245 | 331 | 5 | ||||||
Inter-segment | 86 | 116 | (30 | ) | (26 | ) | ||||
Aggregated turnover | 6,662 | 6,361 | 301 | 5 | ||||||
Operating costs and expenses(1) | 5,632 | 5,477 | (155 | ) | 3 | |||||
Operating profit | 1,030 | 884 | 146 | 17 |
Turnover. External turnover amounted to R6,576 million in 2004 (99% of aggregated Sasol Polymers turnover), compared to R6,245 million in 2003 (98% of aggregated Sasol Polymers turnover), an increase of R331 million or 5%. Inter-segment turnover amounted to R86 million in 2004 (1% of aggregated Sasol Polymers turnover), compared to R116 million in 2003 (2% of aggregated Sasol Polymers turnover), a decrease of R30 million or 26%, attributable to decreased propylene sales volumes. On an aggregated basis, Sasol Polymers' external and inter-segment turnover together amounted to R6,662 million in 2004, compared to R6,361 million in 2003, an increase of R301 million or 5%.
The increase in Sasol Polymers aggregated turnover of R301 million, was mainly due to product dollar price increases of R1,126 million and increased sales volumes of R878 million partially offset by the appreciation of the Rand against the US dollar resulting in a negative effect of R1,703 million. Sales volumes from local operations increased by 10% and in addition the polyethylene plant in Malaysia which operated for a full twelve month period increased sales volumes by 141% compared to 2003.
Sasol Polymers aggregated turnover of R6,662 million in 2004 (2003-R6,361) represents 8% (20037%) of our total segmental aggregated turnover of R83,849 million (2003R88,473 million).
Operating costs and expenses. Operating costs and expenses of Sasol Polymers amounted to R5,632 million in 2004, compared to R5,477 million in 2003, an increase of R155 million or 3%. This increase is due to higher cost associated with the polyethylene plant in Malaysia of R254 million which has been operating for a full twelve month period in 2004, higher input cost as a result of higher oil prices of R300 million, higher cost due to inflation of R75 million and higher input cost of R155 million resulting from increased volumes. The appreciation of the Rand against the US dollar resulted in a positive effect of R537 million to partially offset these increases. In addition management initiated a cost reduction exercise which reduced cost by R92 million compared to the previous year.
Operating profit. Operating profit of Sasol Polymers amounted to R1,030 million in 2004, compared to R884 million in 2003, an increase of R146 million or 17%. The operating margin for 2004 is 15% compared to 14% for 2003.
Sasol Polymers operating profit represents 11% of our total segmental operating profits for 2004, compared to 7% in 2003.
124
Our results of operations for 2003 compared to 2002
Category |
2003 |
2002 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 6,245 | 5,580 | 665 | 12 | ||||||
Inter-segment | 116 | 115 | 1 | 1 | ||||||
Aggregated turnover | 6,361 | 5,695 | 666 | 12 | ||||||
Operating costs and expenses(1) | 5,477 | 4,783 | (694 | ) | 15 | |||||
Operating profit | 884 | 912 | (28 | ) | (3 | ) |
Turnover. External turnover amounted to R6,245 million in 2003 (98% of aggregated Sasol Polymers turnover), compared to R5,580 million in 2002 (98% of aggregated Sasol Polymers turnover), an increase of R665 million or 12%. Inter-segment turnover amounted to R116 million in 2003 (2% of aggregated Sasol Polymers turnover), compared to R115 million in 2002 (2% of aggregated Sasol Polymers turnover), an increase of R1 million or 1%. On an aggregated basis, Sasol Polymers' external and inter-segment turnover together amounted to R6,361 million in 2003, compared to R5,695 million in 2002, an increase of R666 million or 12%.
The increase in Sasol Polymers aggregated turnover of R666 million, was mainly due to product price increases of R994 million. This increase was partially offset by a decrease in sales volumes of R145 million and the appreciation of the Rand against the US dollar resulting in a negative effect of R183 million.
The increase in inter-segment turnover for 2003 of R1 million or 1% is attributable to increased sales volumes.
Sasol Polymers aggregated turnover of R6,361 million in 2003 represents 7% (20027%) of our total segmental aggregated turnover of R88,473 million (2002R81,323 million).
Operating costs and expenses. Operating costs and expenses of Sasol Polymers amounted to R5,477 million in 2003, compared to R4,783 million in 2002, an increase of R694 million or 15%. This increase of 15% is mainly attributable to the appreciation of the Rand against the US dollar which resulted in a negative effect of R380 million, and increased costs due to the commissioning of the polyethylene plant in Malaysia of R195 million. The remaining increase of R119 million is due to cost inflation.
Operating profit. Operating profit of Sasol Polymers amounted to R884 million in 2003, compared to R912 million in 2002, a decrease of R28 million or 3%. The operating margin for 2003 is 14% compared to 16% for 2002.
Sasol Polymers operating profit represents 7% of our total segmental operating profits for 2003, compared to 6% in 2002.
125
Sasol Solvents
Our results of operations for 2004 compared to 2003
Category |
2004 |
2003 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 5,956 | 5,950 | 6 | | ||||||
Inter-segment | 499 | 622 | (123 | ) | (20 | ) | ||||
Aggregated turnover | 6,455 | 6,572 | (117 | ) | (2 | ) | ||||
Operating costs and expenses(1) | 6,338 | 6,136 | (202 | ) | 3 | |||||
Operating profit | 117 | 436 | (319 | ) | (73 | ) |
Turnover. Sasol Solvents external turnover amounted to R5,956 million in 2004 (92% of aggregated Sasol Solvents turnover), compared to R5,950 million in 2003 (91% of aggregated Sasol Solvents turnover), an increase of R6 million. Inter-segment turnover amounted to R499 million in 2004 (8% of aggregated Sasol Solvents turnover), compared to R622 million in 2003 (9% of aggregated Sasol Solvents turnover), a decrease of R123 million or 20%. On an aggregated basis, Sasol Solvents' external and inter-segment turnover together amounted to R6,455 million in 2004, compared to R6,572 million in 2003, a decrease of R117 million or 2%.
The slight decrease in external turnover in 2004 of R6 million was mainly attributable to a decrease in prices of R363 million and the appreciation of the Rand against the US dollar resulting in a negative effect of R1,241 million, partly offset by an increase in sales volumes of R1,598 million.
The decrease in inter-segment turnover for 2004 of R123 million or 20% was mainly attributable to a decrease in sales volumes of R119 million and the appreciation of the Rand against the US dollar resulting in a negative effect of R86 million, partly offset by price increases of R90 million.
Sasol Solvents aggregated turnover of R6,455 million in 2004 represents 8% (20037%) of our total segmental aggregated turnover of R83,849 million (2003R88,473 million).
Operating costs and expenses. Operating costs and expenses of Sasol Solvents amounted to R6,338 million in 2004, compared to R6,136 million in 2003, an increase of R202 million or 3%. This net increase of 3% is mainly attributable to variable costs increases of R367 million as a result of higher prices (R137 million), higher volumes (R777 million) and an increase in the cost of feedstock due to higher crude oil prices of R212 million which was partly negated through the appreciation of the Rand against the US dollar (R741 million), offset by savings in fixed costs of R147 million due to the appreciation of the Rand against the US dollar resulting in a positive effect of R121 million, as well as various other savings amounting to R26 million. Depreciation on the n-Butanol plant for a full year after commissioning was higher by R55 million while losses incurred on translation of foreign exchange transactions was R49 million lower than the previous year. Other income was higher (R24 million).
Operating profit Operating profit of Sasol Solvents amounted to R117 million in 2004, compared to R436 million in 2003, a decrease of R319 million or 73%. The operating margin for 2004 was 2% compared to 7% for 2003. The reduction was primarily as a result of the lower turnover, higher depreciation (n-Butanol plant) and feedstock cost, partly negated by movements in fixed and variable cost.
Sasol Solvents operating profit represents 1% of our Group operating profits for 2004, compared to 4% in 2003.
126
Our results of operations for 2003 compared to 2002
Category |
2003 |
2002 |
Change |
Change |
||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Rand in millions) |
% |
||||||||
Turnover | ||||||||||
External | 5,950 | 5,666 | 284 | 5 | ||||||
Inter-segment | 622 | 139 | 483 | 347 | ||||||
Aggregated turnover | 6,572 | 5,805 | 767 | 13 | ||||||
Operating costs and expenses(1) | 6,136 | 5,019 | (1,117 | ) | 22 | |||||
Operating profit | 436 | 786 | (350 | ) | (45 | ) |
Turnover. External turnover amounted to R5,950 million in 2003 (91% of aggregated Sasol Solvents turnover), compared to R5,666 million in 2002 (98% of aggregated Sasol Solvents turnover), an increase of R284 million or 5%. Inter-segment turnover amounted to R622 million in 2003 (9% of aggregated Sasol Solvents turnover), compared to R139 million in 2002 (2% of aggregated Sasol Solvents turnover), an increase of R483 million or 347%. On an aggregated basis, Sasol Solvents' external and inter- segment turnover together amounted to R6,572 million in 2003, compared to R5,805 million in 2002, an increase of R767 million or 13%.
The net increase in Sasol Solvents aggregated turnover of R767 million was mainly due to price increases of R1,081 million and volume increases of R76 million. This increase was partially offset by the appreciation of the Rand against the US dollar resulting in a negative effect of R390 million.
The net increase in external turnover in 2003 of R284 million or 5% was mainly attributable to an increase in prices of R1,066 million partly offset by a decrease in sales volumes of R409 million and the appreciation of the Rand against the US dollar resulting in a negative effect of R373 million. The increase in inter-segment turnover for 2003 of R483 million or 347% was mainly attributable to increases in sales volumes of R459 million and price increases of R24 million.
Sasol Solvents aggregated turnover of R6,572 million in 2003 represents 9% (20028%) of our total segmental aggregated turnover of R77,274 million (2002R70,686 million).
Operating costs and expenses Operating costs and expenses of Sasol Solvents amounted to R6,136 million in 2003, compared to R5,019 million in 2002, an increase of R1,117 million or 22%. This increase of 22% is mainly attributable to increased costs due to higher volumes of R85 million, the commissioning of the n-Butanol plant of R315 million, an increase in the cost of feedstock due to higher crude oil prices of R350 million and translation losses of R367 million.
Operating profit. Operating profit of Sasol Solvents amounted to R436 million in 2003, compared to R786 million in 2002, a decrease of R350 million or 45%. The operating margin for 2003 was 7% compared to 14% for 2002.
Sasol Solvents operating profit represents 4% of our Group operating profits for 2003, compared to 5% in 2002.
127
Sasol Gas
Our results of operations for 2004 compared to 2003
Category |
2004 |
---|