Pat Davies discusses negotiations with China
Excerpt from interview found here:
moneyweb.co.za
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MONEYWEB: China. You negotiated two projects, apparently, in China, or you’re looking at the them at the moment – $3bn per project. How long have you been talking to the Chinese on this, and when might we see the next step?
PAT DAVIES: We’ve been talking seriously to the Chinese since about 2004 on this one, and we’ve made very good progress. We have completed the first phase of the feasibility study. We’re negotiating the second phase, the more intensive feasibility study, which we will kick off in the middle of the year. So things are looking good. Our technology is in great demand. China has these enormous coal reserves. They’re very short of energy as we all know, and we have the key to unlock coal reserves and convert them into oil for them. So they’re very keen and we’re very keen. We would expect this to move ahead reasonably quickly once we get into the second feasibility study.
MONEYWEB: My colleague, Barry Sergeant, who was at your presentation today, was saying that using just 10% of China’s coal would be the equivalent through the Sasol process of actually the entire global oil production. What are the exact numbers?
PAT DAVIES: Those are the right numbers, but I think that what I did say this morning was that 10% of China’s current coal reserves would equate to the world’s proven oil reserves – not to current oil production, but to proven oil reserves. It's a fairly dramatic figure.
MONEYWEB: So in other words just take aside one tenth of the coal that China has, and they wouldn’t have to import any more oil?
PAT DAVIES: That’s exactly right, as long as they were using our technology to convert it into oil.
MONEYWEB: But that’s the other key, Pat, isn’t it? There’s lots of question marks over the protection of intellectual property, and that’s really what Sasol’s all about. How are you overcoming that hurdle?
PAT DAVIES: Yes, we’re giving it our very serious attention as part of the feasibility studies. We obviously have the assurances from the Chinese, and I think one must appreciate that they are moving along. They’ve signed up to the World Trade Organisation agreement. Many of their coal companies and other companies are listed on international markets, so they have to play the game. But I think an added comfort to us here is that it's not just a question of patents that Sasol owns. We have 50 years of experience in applying this technology. We’ve produced 1.5bn barrels of oil using this technology, so a lot of the intellectual property is tied up in know-how. So the Chinese, if they did, and I’m not suggesting they would, wanted to copy the technology, they’d find it fairly difficult to make it operate. We need to be clever about this, as well, Alec, of course, and if they wanted to move ahead more rapidly than we were prepared to co-invest with them, we would surely come to some form of master licensing arrangement, where they could go ahead and build these plants with our help, and we could negotiate some form of backing rights, for example, should we then at a later stage want to take up equity positions. But our philosophy is to try and make this as available as possible to take away any desire they might have to replicate our technology.
MONEYWEB: What is the potential for Sasol in China?
PAT DAVIES: Well, if you think about it, the two projects that we’re looking at at the moment are both 80 000 barrels a day – and that is equivalent to what we currently have in South Africa. And if it works for two projects it could work for 10 projects, so there is really blue sky there, and enormous opportunity for us.
MONEYWEB: And what’s holding it back? Anything to do with tax perhaps?
PAT DAVIES: We need the right kind of fiscal environment, the incentives. But we believe those are very achievable if one does a cost benefit analysis for China, the provision of certain tax incentives to make these projects work, because they are capital-intensive. It is still clearly in the interest of China, and we believe that we will be provided with the correct fiscal environment. But this tax negotiation takes understanding, and all of these things take a little time, but it seems to be moving ahead rather nicely at the moment.
MONEYWEB: And the idea from Sasol’s perspective is not only your technology you’ll put in there, but perhaps the investment as well?
PAT DAVIES: Yes, certainly in these first two projects that we’re talking about our preferred position is to take up to a 50% equity position in that, because we believe there’s a lot of money to be made.
MONEYWEB: You’ve done something similar in Qatar. Shouldn’t be too long before we see the first petroleum coming out of the gas fields that you’re tapping into there?
PAT DAVIES: Exactly. We’re staring in a couple of months’ time. It won’t be petroleum, of course. It's a very high-quality diesel there that will largely be produced from that, but we believe that the successful start-up of that plant will be a defining moment in the growth of what we believe will become a larger global industry, just as liquefied natural gas has become a global industry. So I think this is going to be a first real step where the technology is applied outside South Africa.
MONEYWEB: What about the Americans?
PAT DAVIES: The Americans are very keen, as well, because they have in fact even greater coal reserves than China does. They have the largest coal reserves in the world. They are very concerned about their energy security, and hence we’ve seen legislation which promotes and provides certain incentives to promote the kind of technology that we have to offer. So we’re in discussion with a number of parties there at the moment, doing some pre-feasibility work. But we suspect it's going to take quite some time before these incentives that are on the books are actually going to be translated into real delivery mechanisms that people like ourselves can access.
MONEYWEB: Now Pat, clearly in China you are dealing with the government. In America is it also a governmental negotiation that you have to go into?
PAT DAVIES: No, it's a multi-party negotiation in the US. We’re talking to the Department of Energy, the Department of Defense, which has an interest in this product for their purposes, obviously. And we’re talking to several coal-rich states, and we’re talking to a couple of large US companies, the names of which we haven’t disclosed yet but we will do once we’ve got a little bit further with the pre-feasibility work.
MONEYWEB: And, as with China, would that require partnerships?
PAT DAVIES: It certainly wouldn’t require partnerships with government, as it does in China. We would have a choice as to whether we go it alone or do it in partnership, and that’s some of the thinking we’re doing at the moment. We haven’t really landed on that yet.
MONEYWEB: Now on our own continent we’ve seen the Chinese, in fact, making big investments into Nigeria. You have got a plant in Nigeria which seems to have taken a bit longer to come on stream than you Qatar operation. What’s giving there?
PAT DAVIES: That has taken some time. First of all, I must point out it's not really our project. It's our technology that’s being used, and we certainly are providing some financing into that and we get reward on that financing. But the actual asset owners are the Nigerians and Chevron. It has taken longer. Decision-making has been a little slower and the site is a lot more difficult. It is in a swamp in a fairly remote area, and we’ve had to prepare that site. So we’ve reached the point now where the contract has been awarded, the contractors have done the engineering work. They’ve now moving onto the site and we expect that plant to come on line in 2009. It is moving ahead.
MONEYWEB: Are there any other opportunities on the African continent for you?
PAT DAVIES: We have been having a look at Algeria, but we’ve put that one on hold. The terms and conditions we were asked to bid under didn’t really suit our risk-reward profile that we were after. So that one is on hold. And then in Nigeria we’re doing a pre-feasibility study to expand that 34 000 barrels-a-day facility up to 100 000 barrels a day. So as far as gas to liquids is concerned, other countries might pop up. And of course we’re active in the upstream oil and gas business in Africa – in Mozambique, Nigeria, Gabon and Equatorial Guinea. So a lot of interest in Africa. And the point I’d like to make, Alec, is that we feel good about that. We feel our the money that we’re making we’re investing wisely, both in this country and internationally, and we’re doing our bit for the continent as well. And I think, given the challenges of this continent in terms of poverty, I think it's really important that an African company uses a home-grown technology that will ultimately add to the quality of lives of a lot of people on this continent.
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