$11bn the ‘worst-case’ capex scenario for Louisiana project

24th June 2016

By: Terence Creamer

Creamer Media Editor

  

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Outgoing Sasol CEO David Constable has described the possible increase, from $8.9-billion to $11-billion, in the capital budget for the Lake Charles Chemicals Project (LCCP), in Louisiana, as the “worst-case” scenario.

Speaking to investors following the release of a preliminary finding of an ongoing LCCP review, Constable stressed that the report would be finalised only in the third quarter of 2016 and that efforts were being made to reduce the capital expenditure (capex) from the preliminary estimate.

The announcement of likely capex and schedule overruns, together with a trading update that included further impairments of its share in the Montney shale-gas properties, precipitated a sharp fall in the JSE-listed energy and chemicals group’s share price.

Sasol is investing in a 1.5-million-ton-a-year ethane cracker, as well as six downstream chemical projects at the Lake Charles complex. The integrated facility includes two large-scale polymer plants, an ethylene oxide/ethylene glycol plant and three higher-value derivative plants to produce speciality alcohols, ethoxylates and other products.

Investors expressed concern about Sasol’s management of the project and raised questions about the possible impact the overruns could have on future dividends and Sasol’s gearing target, as well as its capital programme in Mozambique, where it recently began fresh drilling for gas and oil.

Constable stressed that the company had taken a “conservative” view on both the overruns and the outlook for ethane prices and said he was confident that the capex overruns could be reduced.

Sasol CFO and incoming joint CEO Bongani Nqwababa, who, together with Stephen Cornell, will take over from Constable on July 1, indicated that Sasol was also looking to various “levers” to ensure it did not breach its self-imposed gearing ceiling of 44%, while retaining its dividend-paying status. The company tightened its dividend policy in 2015 to a cover of 2.2 to 2.8 times.

Nqwababa indicated that higher volumes and cost reductions in 2016 could lower the gearing opening position to between 15% and 20%, while it was also targeting variable cost savings of up to $5-billion. More detail would be provided at the group’s results on September 12.

Constable indicated that the cost increases related largely to construction delays caused by higher-than-expected rainfall, higher labour costs and certain of the lump-sum bid contract prices being higher than originally estimated, as well as quantities of bulk materials being in excess of those included in the original estimate.

He noted that there had been 46 more rain days than the ten-year average of 135 rain days in a year, while bulk material quantities were currently estimated to be higher than what had been anticipated when the final investment decision was made in October 2014.

It was still a “work in progress” to finalise bulk materials quantities and Constable was optimistic that some savings would be made to help reduce the overall capex figure.

Sasol would not be drawn on what the lower limit of the revised capex could be, saying only that $11-billion was the “upper end of the range” and that the verification work currently under way was designed to determine by how much it could be lowered.

Constable said he did not expect the overruns to affect the roll-out of its drilling campaign in Mozambique, where it is also planning expansions to its Central Processing Facility (CPF), in Temane.

Sasol had approved investments of $1.4-billion in the Southern African country to drill 12 new gas and oil wells, as well as to add a fifth gas train at the CPF and to expand the plant’s liquid petroleum gas and liquid concentrate production.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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