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Oil industry merger
=Tribunal to end Sasol's uncertainty=

Business Report, February 21, 2006

 * By Ann Crotty**

If anyone could advise finance minister Trevor Manuel on a possible windfall tax on Sasol's synthetic fuel production it would surely be competition tribunal chairman David Lewis, who has been immersed in all things Sasol for the past three months.

Indeed, over the past 12 months Lewis and his two tribunal colleagues, Norman Manoim and Yasmin Carrim, have probably had more exposure to the local oil industry than any other "outsiders" ever.

In addition to the lengthy process of pre-hearings, which began early last year, they have attended 18 days of hearings, trawled through an estimated 1.9 million pages of supporting documentation and presumably also had to contemplate and re-contemplate thousands of pages of transcripts of the 18 days of hearings.

In fact, they probably know considerably more about the industry than they ever really wanted to know.

Later this week Lewis will release the tribunal's ruling on the proposed merger between Sasol Oil and Engen to create Uhambo Oil. Uhambo Oil would have annual revenue of about R33 billion, 48 percent of the country's fuel production capacity and 34 percent of the market.

Sasol and Engen's parent, Petronas, will each own 37.5 percent, with a black empowerment group owning the remaining 25 percent.

In a break with tradition, the ruling will include the tribunal's reasons. Generally, the ruling is announced within 10 days of the end of the hearing and the reasons are released within 20 days of the ruling.

Given the enormous complexity of this particular case and all of the evidence that had to be considered, Lewis was able to secure the agreement of all the parties involved to an extension to the time frames.

For those of you who may have forgotten what the deal is about here is a brief recap. Sasol, which was created by the old apartheid government in a bid to secure oil supplies in the face of increasing hostility from the international community, finds itself with a huge amount of oil refining capacity in the inland region of the country.

This situation was part of the original big plan by government in terms of which Sasol's refining capacity would be fed by its own synfuel production facilities and topped up by fuel product that was imported from the international market and piped to the inland region.

The plan included restrictions on foreign oil companies setting up refining capacity inland. French-owned Total, which has 36 percent of Natref, is the only company with a stake in an inland refinery.

Because Sasol was created to protect the supply of fuel to the country, the focus of its development and the subsidies it received from the government were on the synfuel and refining end of the business.

So generous was the support from the government that parties opposing the proposed merger between Sasol and Engen described the government as Sasol's "fairy godmother" who raised Sasol on a "diet of state steroids".

The structure of the highly regulated national industry seemed designed to ensure that Sasol, even after privatisation in the late 1970s, would be a viable business. But with deregulation now on the horizon, although increasingly distant horizon, Sasol was keen to secure a stronger position in the retail end of the industry and not just be a supplier to the retail outlets.

For a variety of reasons it had only limited success in setting up its own Sasol retail chain. It had unsuccessful negotiations with other oil companies until it managed to persuade Malaysia-based Petronas of the benefits of a merger.

The proposed transaction will see Sasol combining its refining capacity with Engen's retail network to create a balanced entity. But this balance has grave implications for the other oil companies that, over the years, have developed a co-dependency relationship with Sasol.

Shell, Total, BP and Caltex have opposed the merger on the grounds that once it has its own retail outlets, Sasol will no longer be required to supply them. Or will supply them on very unfavourable terms.

Their major worry relates to the crucial Gauteng market, where, except for Total's stake in Natref, they have no refining capacity and have relied heavily on Sasol for supply of refined product. As the department of minerals and energy pointed out, an important aspect of the functioning of this industry was that everyone lacked balance.

The worry for the other oil companies is that transporting the refined product from the coast is not only expensive but, more significantly, is hugely constrained in the short to medium term. The cheapest option is the pipeline, but Sasol enjoys a favourable position with regard to the limited capacity that is currently available and additional capacity will be available by 2010 at the earliest.

Rail is apparently a seriously problematic option. And as anyone who travels on our roads will appreciate, the road option is also problematic as well as expensive.

So Sasol's erstwhile mates argue that a balanced Sasol Oil/Engen entity will do irreparable damage to their valuable Gauteng operations and so should not be allowed to happen.

As is to be expected, Sasol argues that the deal will have significant benefits, including a boost to black empowerment.

So, whatever way the tribunal rules, powerful parties will be unhappy.


 * From: http://www.busrep.co.za/index.php?fSectionId=553&fArticleId=3122101**

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