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Sasol says Louisiana cracker stress tested for ‘extreme scenarios’

3rd February 2015

By: Terence Creamer

Creamer Media Editor

  

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South African energy and chemicals group Sasol insists that it has “stress tested” the $8.9-billion ethane cracker and derivatives complex it is currently building in the US against a number of parameters and that the project’s economics remain “robust, even under extreme scenarios”.

Speaking to investors during a site visit to the Lake Charles facility in Louisiana, acting CFO Paul Victor acknowledged that the project could not achieve the group’s internal rate of return dollar hurdle rate of 10.4% even at $80/bl.

However, he stressed that the oil price was but one factor underpinning the project’s economics, with ethane feedstock prices, which were currently depressed, also having a major bearing.

Sasol remained convinced that the project’s long-term fundamentals – including access to competitive and reliable ethane feedstock, arising primarily from the expansion of America’s shale gas industry – remained intact.

Therefore, the 1.5-million-ton-a-year cracker, together with an aspiration to develop Lake Charles into an integrated, multiasset site, similar to its Secunda complex, would receive priority treatment in the upcoming review of the group’s capital expenditure (capex) portfolio.

The review was formally initiated in January in response to the fall in international oil prices and was being premised on oil prices remaining “lower for longer”.

It would target cash savings over a 30-month period that would be additional to the R4-billion in sustainable cost savings that Sasol had already committed to by 2016. The JSE-listed company intended securing the fresh savings from “capital portfolio phasing and reductions, capital restructuring, working capital improvements, margin enhancement and further fixed-cost reductions”.

Victor said it was premature to provide details as to what the response plan could mean for Sasol’s capex portfolio, which was expected to rise from R50-billion in 2015 to R65-billion in its 2016 financial year. However, an update would be provided during the company’s March 9 results presentation.

The cracker’s updated price tag was likely to be a major influencing factor on the composition of the revised portfolio, particularly given the group’s commitment to a peak-gearing threshold of 40%. Sasol had previously indicated that it would spend R20-billion on the cracker during its 2015 financial year.

But executive VP for international operations Steve Cornell reported that there could also be some cost benefits for the project as a result of the weaker oil price, which has resulted in the delay or cancellation of other, mostly upstream, projects in North America.

Describing the timing as “fortuitous”, Cornell indicated that its was interrogating various savings, highlighting that its contracting strategy included a mix of reimbursable and lump-sum contracts.

Likewise, Sasol was pursuing a flexible approach to its feedstock, having secured 70% of the plant’s ethane supply through three- to five-year supply contracts and aiming to secure the balance opportunistically through short-term contracts, or through spot-market purchases.

He is also not overly concerned about supplies tightening up in the near-term, or about the logistics associated with supplying the world-scale cracker: “We’ve got the ethane supply contracted, we’ve got the pipeline capacity to move it contracted, and we've got storage at each end contracted.”

Construction of the plant, which has attracted significant incentives from the State of Louisiana, was already under way, with beneficial operations scheduled to begin in late 2017 and for the facility – which would also comprise six downstream plants to add further value to a portion of the ethylene produced – to ramp up to full production by mid-2018. Besides ethylene, the project had been designed to produce a variety of other so-called performance chemicals, which commanded a market premium.

However, part of the incentive package available is also contingent on Sasol proceeding with a large-scale gas-to-liquids investment at the same Lake Charles complex – a decision Sasol had decided to delay in light of the fall in the oil price.

Cornell expressed optimism, though, that the oil-price environment might well have rebounded by the time the project began operating, with Victor indicating that Sasol did not expect the prices to settle at current levels, despite its view that energy prices could remain weaker than had been the case prior to the recent sharp pullback.

Edited by Creamer Media Reporter

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