SASOL rakes in profits while SA feels the pinch

Posted on October 2, 2010


It would be quite laughable were it not so serious, that government ministers such as the department of energy’s Buyelwa Sonjica say that they and the administration have their “hands tied” regarding fuel price fluctuations and increases. The same argument is put forward by Eskom, backed by the government, regarding the need to make consumers pay much more for electricity in order to cover the R300 billion needed for infrastructure development over the next decade.

When, toward the end of last month, Sonjica announced the latest fuel price hike, she excused it by asking: “What can we do?” She then went on the act “decisively” by removing an initially proposed 5.4 cent wholesale margin from the latest overall fuel price increase.

However, being “mindful of crude oil prices” — the reason there may be a slight downward adjustment next month — she still announced price hikes ranging from 63 cents to 75 cents a litre for various grades of motor fuel and 49 cents for that cooking and heating essential of the poor, paraffin. Government, the minister maintained, was doing all it could.

But this last statement is only true if the current fuel pricing structure is accepted and if the country has no way of escaping being held to ransom by oil suppliers and the variable and soaring prices on the global oil market. Because taxes can always be adjusted downwards or dropped. Subsidies can also be introduced although this would not have a major impact on the price of fuel unless it crippled the fiscus in the process,.

However, there is Sasol, our much vaunted fuel-from-coal developer and supplier. This company provides anywhere between 23 per cent and more than 30 per cent of our liquid fuel requirements. Some estimates put Sasol’s contribution to the country’s fuel consumption as high as 38 per cent of the country’s fuel demand, but a Department of Finance task team reported in July 2006 that it was 23 per cent or 45 000 barrels of oil per day.

Whichever way it is looked at, this is a substantial proportion of our oil and, therefore, liquid fuel requirement. Sasol also sells this fuel into the local market at the same price demanded for fuel made from imported oil. So it is no surprise that this company — 40 per of it now owned by investors outside of South Africa — records profits of some R100 million a day.

According to the latest estimates, Sasol’s accumulated profits for the six years to June 2009 will come in at a whopping R112 billion. The company’s annual report forecasts that the net after tax income to shareholders will next year be R44 billion, an increase of R19 billion on the figure for this year.

But these are merely new profit records. Sasol has been reporting massive returns for years. In its 2006 annual report, for example, it noted that, although it had produced only 1 per cent more product, operating profit had increased by 44 per cent to R20.7 billion, with R10.406 billion going to shareholders.

That was because of the higher oil price, a price which has continued to escalate. It has done so for the basic reason that world demand continues to rise while production has almost certainly reached a plateau — and is poised to decline.

Since 2006, the price has gone still higher — and the profits of Sasol have followed suit. Which is hardly surprising since this coal-to-fuel operation probably produces liquid fuel — petrol and diesel — at the equivalent of anywhere between $15 and $25 a barrel, with most estimates being at the lower level, although the exact figure is a commercial secret.

This was a technology grabbed at by the former apartheid regime when it feared being isolated by the world and possibly having to weather sanctions which would involve oil. So a German-developed technology was imported to South Africa and improved. But despite the improvements, it was still, in the early years, an expensive exercise.

Forty or 50 years ago oil, which cost no more than $10 a barrel for benchmark crude, tended to be widely regarded as some sort of infinite resource. At that time, oil from coal cost closer to $30 a barrel. That meant massive subsidies, which the apartheid state was prepared to pay to ensure a degree of fuel independence.

But when the state pays subsidies, it is the taxpayers who bear the burden. So for years, taxpayers of this country, across the board, paid to maintain an enterprise that, in market terms, was uneconomic. But it produced fuel. And it did so from a copious natural resource of relatively cheaply mined coal.

Then came 1973 and the now legendary oil price shock. Suddenly, a commodity that had provided cheap fuel to power the industries and motorised vehicles of the world became quite expensive — and promised to be even more costly in future.

By 1979, with steadily rising oil pries established, Sasol became profitable. And with profitability came privatisation, with the state recouping a tiny proportion of the taxpayers’ money spent on developing the enterprise. Although the state retained a holding — the Public Investment Corporation and the Industrial Development Corporation still hold, between them, 26.3 per cent of shares — a number of shrewd investors set themselves up to make large amounts of money.

Increasingly, in recent years, those investors have come from outside the country. The local holdings of shares in Sasol have shrunk by about 10 per cent over the past two years, with 40 per cent of dividends now flowing abroad, helping to boost our already frightening current account deficit.

Because of the huge profits accruing to Sasol, finance minister Trevor Manuel set up a task team in 2006 to see whether a “windfall tax” on such massive profits should be levied. Such a tax could be used to alleviate poverty and perhaps provide some relief to hard pressed consumers.

But last year Manuel turned down this opportunity. He did so on the basis that it would not be “in the interest of a conducive environment for additional investments in domestic fuel security”. The fact that future investments by Sasol, like the coal to oil plant nearing completion in Qatar, are likely to be outside South Africa, was apparently discounted.

Apart from murmurs in the labour movement, there has also been no mention of possibly renationalising Sasol which, under public ownership was also efficient. But a windfall tax was at least considered — and thrown out.

In the same way, the treasury discounted calls, mainly from within from the labour movement, for government to step forward with a grant of R300 billion over ten years to fund the infrastructure requirements of Eskom. Such money, from state coffers, already comes from taxpayers, the same people who are now being made to pay for the infrastructure upgrade through increased electricity tariffs.

But, as Cape Town tax consultant, Desmond Robson points out: by making us pay more for electricity will not only result in Eskom receiving its R300 billion, it will also result in the government creaming off another R42 billion in value added tax, since VAT is charged on electricity provision.

Policy alternatives were considered — and choices made. Neither Sonjica, Manuel nor the rest of the government therefore have their hands tied when it comes to policy responses. They have choices, especially regarding fuel prices and funding for electricity infrastructure — and they have made them.

We, as voters and consumers need to be aware of the available choices in order to decide whether or not they are in our interests; whether they may, perhaps, make the already rich richer at the expense of the poor or whether they are truly for the benefit of the majority.

* Originally published 06/2008

Posted in: Archive - 2008