South African firm says US$40 a barrel workable level, partner less conservative Plans by South Africa's Sasol and China's Shenhua Group to turn coal into liquid fuel on the mainland will be viable if the long-term price of crude oil stays above US$40 a barrel, according to a Sasol executive. However, Shenhua is less conservative, saying the project could work with oil at US$30 per barrel. That difference of opinion, plus the need to determine whether there will be enough water and government financial support for the project, suggests that the South African energy firm and China's largest coal company have some talking to do. In an interview, Andre de Ruyter, Sasol Synfuels International president of China ventures, appeared to indicate that the deal was not in danger of foundering over disagreements about the future of oil prices. 'I don't think you should focus on one number only,' he said. 'There are a number of areas, such as the prices of coal, electricity, water, land use rights and capital costs, which have important roles in determining financial viability.' He did not elaborate. 'Our initial indications at this stage [of the feasibility studies] are that we will need an oil price close to US$40 for the project to be profitable,' he said. Oil prices last week climbed above US$60 per barrel, off the August peak of US$78. Sasol, a world leader in producing synthetic fuels from coal since the days of apartheid in South Africa, signed an agreement in June to conduct second-stage feasibility studies on two coal-to-liquid-fuel projects in Shanxi province and Ningxia Hui autonomous region. Each could cost up to US$6 billion to build. Mr de Ruyter expects the second-stage studies to begin by the second quarter of next year and be completed by the end of 2008. The proposed projects are seen being able to produce 80,000 barrels of liquid fuel a day as early as 2012. Analysts say the oil price discrepancy may actually be the result of different coal price assumptions. Shenhua president Zhang Yuzhuo has said his company used an average ex-mine coal price of US$12.50 per tonne in its calculations. Some analysts say the joint venture might have to pay a premium to buy coal from Shenhua. Sasol is seeking to expand the use of coal-to-oil technology which was perfected decades ago but used commercially only in South Africa, for years subject to an oil embargo. The company hopes to win permission from the South African government to build an 80,000 barrel-per-day coal-to-liquid-fuel plant to raise its production capacity 50 per cent. It is also looking to build plants in coal-rich nations such as the United States, India and China. It plans to increase the head count at its new Beijing office to 30 from 17 by early next year. It will soon open an office in Mumbai. Both Sasol and Shenhua, which is building its own coal-to-oil plant in Inner Mongolia and talking to Royal Dutch Shell about potential coal-to-oil joint ventures, hope Beijing will provide policy support for their joint venture. South Africa formerly assisted its coal-to-oil industry with a levy of about 1.5 per cent of the retail price of a litre of petrol. Levies were typically applied when oil prices were in the mid-teens to mid-US$20s, Mr de Ruyter said. Sasol gave up the support in 2000. The South African government, which owns 22.5 per cent of Sasol, also provided interest-bearing loans and tax benefits to the company. Mr de Ruyter said Sasol would like to see some sort of floor price protection in China, but added: 'It's not as though Sasol is only asking [for benefits]. In return, China gets the benefit of commercially proven technology that has been around for over 50 years.' Mr Zhang said the Ministry of Finance and the National Development and Reform Commission are studying the question of support, taking into account employment creation and energy security enhancement. Although Beijing still imposes controls on domestic fuel prices, making it hard for oil refiners to increase profits, Mr de Ruyter expects the policy environment to be more favourable by the time the coal-to-oil plants are commissioned. He also expects that by then China will have imposed stricter emission standards, increasing demand for the low-sulphur fuel produced by coal-to-oil plants. However, in the short term, a more pressing issue for Shenhua and Sasol is availability of water. China's coal-rich regions are mostly in the north, which suffers from water shortages. To produce one tonne of liquid fuel from coal, 10 tonnes of water are needed. 'Even though we are getting guarantees both from the central and local governments that there will be enough water, in order to have an independent, scientific and objective conclusion ... we are about to engage an international company together with a local company to conduct a water resources study,' said Sasol China executive vice-president Chen Liming.