business review

Sasol Oil
strategic business unit

Profile    Sasol Oil markets the Group’s liquid fuels and lubricants. Sasol Synthetic Fuels (SSF) and the joint-venture National Petroleum Refiners of South Africa (Natref) crude oil refinery manufacture the fuels, including petrol, diesel, jet fuel, fuel alcohol, illuminating kerosene and fuel oils. The division oversees Sasol’s interests in both Natref and Tosas, the joint-venture bituminous products manufacturer and marketer. Sasol Oil markets Sasol Formula 100 Dual Fuel™ petrol through 1 650 Blue Pumps in South Africa’s industrial heartland.

Business review  In keeping with its upward trend of recent years, Sasol Oil achieved further growth in sales and a 53% increase in operating profit, up from R773 million to R1 183 million. The division’s gratifying performance resulted from higher dollar refining margins, the rand’s depreciation against the US dollar and further improved operational and commercial efficiency. Production and distribution costs were contained well below inflation.

The low point of the year was the Natref fire in June. Two people died and the crude distillation unit (CDU) was damaged. The refinery is likely to return to full production in October 2001. The impact on operating profit of the incident amounted to R80 million. The financial impact of the fire in the year ahead will be insignificant.

South African fuels market under pressure  The South African fuels market was under severe pressure due to the sharp rise in the oil price and a change in spending patterns in the South African economy. It is estimated that the market for petrol and diesel declined by 0,8% during the year. The surrounding African states also used less fuel, mainly because of the collapse of the Zimbabwean market. Total sales of products to oil marketing companies, exports and sales through Sasol Blue Pumps decreased by 2,2%.

Stable refining marred by fire  The Sasol/Total South Africa joint-venture oil refining company, National Petroleum Refiners of South Africa (Natref), performed well for almost the entire year. Natref has long been an exceptionally safe and productive refinery. This status was often verified by inspections and benchmarking by Sasol, and TotalFinaElf. The cause of the fire, which extensively damaged the CDU’s pipeworks and cables, is being investigated. Positive measures to prevent a recurrence of such incidents are being implemented.

The refinery’s performance has otherwise been pleasing. The 92% white product yield was a new record. Natref achieved major improvements in energy efficiency and reduced atmospheric emissions.

The R700 million Natref 2000 expansion project is expected to achieve its June 2002 commissioning target. It will enable a 22% increase in daily capacity to 107 000 barrels of oil. The project team exploited the CDU setback by executing many of the key project tie-ins ahead of schedule. Maintenance teams are using the unscheduled downtime to undertake mandatory shutdown and inspection work. This will reduce shutdown periods in the year ahead.

Excellent maintenance of customer supplies  Sasol supplied 9,0 billion litres of liquid fuels to 175 major customers, most notably Shell, Engen, BP, Caltex, Total South Africa, Exel and Tepco. Although such volumes continue to be supplied under the existing Main Supply Agreement, discussions have started with some of these customers to negotiate new agreements. The present fuel marketing and distribution agreements will terminate at the end of 2003. This creates exciting possibilities for Sasol and its customers to enter into new, more suitable commercial supply agreements.

The Supply and Trading bulk marketing and logistical operation recorded a 1,8% decrease in liquid fuels sales mainly as a result of the lower sales in the local market. The Main Supply Agreement continues to restrict liquid fuel sales in South Africa.

Export sales to neighbouring countries increased by 45,5% despite Zimbabwe’s difficulties. That country’s fuel consumption has more than halved because of foreign exchange constraints. Payments for all export sales to date have been honoured. Fuel exports and fuel sales to South African oil companies, beyond contracted volumes, are expected to grow over the next two years. The shortage of production capacity, due to the fire at Natref, will, however, limit growth during the first few months.

Dual Fuel™ success  Although the Sasol Blue Pump petrol market declined by 2%, the Blue Pump market share over the period since the launch of Dual Fuel™, increased by 0,3%. This is a major achievement in a market characterised by fierce competition that has been intensified by the entry of new oil companies.

To prepare for the changing market demand and the shift from leaded to unleaded petrol, Sasol changed entirely to unleaded petrol in the form of its Formula 100 Dual Fuel™ in March 2001. This was done after extensive research to develop an additive package suitable for South African conditions and market requirements. Motorists welcomed the Dual Fuel™ launch as an innovative way to satisfy their needs.

Sasol Oil renewed its sponsorship of the South African Under-23 soccer squad under the Sasol brand name of Amaglug-glug™. This four-year commitment, along with a new advertising campaign and continuing expenditure on Sasol-branded taxi ranks, has elevated brand awareness. A recent market survey established that the first-mentioned brand awareness of Sasol in the black consumer market increased to a record 31%, a considerable lead on the second highest competitor at 21%.

The recent period of unusually high petrol and diesel prices has increased fuel conservation among South African motorists. With the expectation of modest economic growth and fuel price stabilisation, growth in consumption of petrol and diesel are likely to resume in the year ahead.

The long-standing Main Supply and Blue Pump agreements between Sasol and South African oil companies have prohibited Sasol from operating its own branded service station network. The company is progressing with
far-sighted plans to have a Sasol-branded service station network in place by 2004.

The encouraging interest in Sasol’s plans from service station developers and fuel franchisees continues to rise. Sasol Oil has the advantage of growing a network from a low base. It therefore has the opportunity to concentrate exclusively on developing high-volume service stations in growth areas to ensure an optimum return on investment.

Sasol Oil and Mozambique’s state oil company, Petromoc, signed an agreement to develop a joint-venture fuels marketing company. The company intends to develop 20 service stations and attain a 10% share of the Mozambican fuel market within its first five years. This venture is a bold step in the strategy to expand into direct fuel marketing in Southern Africa. The Africa retail marketing team is also investigating opportunities to expand in Zimbabwe and Zambia.

Growth for lubricants and fuel oils  Total lubricant sales volumes increased by 6,5% in a highly competitive market. This resulted from the commitment to delivering excellent service and value-for-money solutions. Excluding marine and process oils, consumption of lubricants in South Africa decreased by 1% in 2000. Sasol Oil has increased its annual lubricant sales 500-fold from 24 000 litres to 12 million litres over the last decade. The margins for lubricants, however, were pressured by the higher costs of importing base oils.

Natref and SSF continue to produce high-quality fuel oils. The unique combination of fuel oils is complemented by Sasol Oil’s closeness to major industrial customers. A range of fuel oils can be blended to suit individual customer requirements, whether the emphasis is on quality or cost. Operating profit increased on the strength of the oil price and a 12% increase in sales volume.

Bitumen set for more growth  The future of the Southern African bitumen market is generally positive. The South African National Road Agency has identified 18 new toll road projects. Demand for bitumen products is expected to increase because the Government is to allocate additional funds for the repair of flood-damaged roads.

Tosas, the Total/Sasol joint-venture bitumen and secondary products marketer, experienced a slowdown in business activities due to the rand’s depreciation and fluctuating product prices. The industry is currently characterised by aggressive price competition. Tosas, however, is well positioned to harvest potential growth in the Southern African road binder market through superior products and astute marketing efforts. Tosas’
Arm-R-Shield™, a modified binder, gives excellent results when following a sound road maintenance strategy.

New fuel grades planned  Changes to South African fuel specifications, as well as the oil industry regulatory environment, are expected during the next few years. Sasol, together with the South African Petroleum Industry Association (Sapia), is participating in, and contributing to, this process driven by the Department of Minerals and Energy.

Sasol is also engaged in research to improve the quality of fuel and ensure that future consumer needs will be met. The development of new diesel-engine technology has created the need for an ultra-clean diesel in South Africa.

Sasol has consulted extensively for the introduction of a second ultra-clean diesel grade. Introduction of this new diesel grade early in 2002 has now been approved. This will give the consumer a choice to either use the new standard grade or the ultra-pure grade. Sasol will be able to supply this new diesel from its factories in Secunda.

Prospects  Given the exceptional circumstances prevalent in the international petroleum products market during the year under review, Sasol’s refining businesses are not expected to repeat their spectacular performances in the year ahead. The slowdown in demand for petrol in the domestic market, however, has already stabilised. This factor, along with the positive impact of expected lower fuel prices, will restimulate growth in fuel consumption. The unique properties of Sasol’s Dual Fuel™ petrol and synthetically produced diesel will increasingly provide the company with a strong advantage in marketing the Group’s fuels.

Plans to develop a Sasol-branded service station network will be advanced further. New marketing initiatives in neighbouring countries will be also pursued extensively.