Sasol secures site in Alberta

Last year Sasol bought a 50% stake in Montney shale holdings from Talisman Energy for $2bn. The timing wasn't great. The gas price fell dramatically soon after the acquisition following a huge surge in production thanks to improvements in technology. This forced Sasol to take a big write down worth CAD120 million and depreciation worth CAD 171 million of these particular assets which obviously had a negative impact on earnings.


This is a catch 22 situation for Sasol however because at this stage they own an asset in a JV which produces gas but the long term idea is to take this asset as a supply chain for a gas to liquids production plant. For this process, the cheaper gas is in relation to the oil price the better the profits. This article titled Sasol closer to building multibillion dollar gas to diesel plant from Moneyweb has shed some more light on Sasol's plans in Canada.


The article says that Sasol have now secured a site in Alberta where the plant can be built. The plant is estimated to cost a whopping CAD10 billion and could only be ready by 2020. This is why I would imagine Sasol affords such a low valuation relative to its earnings. Even though they have access to this extremely exciting and potentially game changing technology the Gas to Liquids plants take a long time to build and are very expensive.

With time comes uncertainty. What will the gas to oil price be in 2020? Will oil even be such a sought after product in 7 years time? In the interim however the asset is still producing gas which is an energy source I believe has a lot of potential for future energy supply. And since Sasol took that huge write down the gas price has increased significantly. This could be earnings enhancing in the next reporting period.

Whether Sasol take the huge decision to build the plant falls to the highly regarded management. They certainly aren't rushing into anything and are still only in the feasibility stage. I would still expect oil to be a very important product in the next few decades and with the vast amounts of gas around the world and the ever improving technology I wouldn't expect the gas price to spiral out of control even if it does increase as an energy source. I fully endorse this strategy as Sasol continues to innovate and take advantage of its unique technological expertise.