Sasol joint CEO Stephen Cornell insists that the “fundamentals” of the Lake Charles Chemical Project (LCCP), in the US state of Louisiana, remain intact despite confirmation that the project’s costs have increased to the ‘worst case’ projection of $11-billion, from an initial forecast of $8.9-billion.
The JSE-listed energy and chemicals group is building a 1.5-million-ton-a-year ethane cracker, as well as six downstream chemical units in Louisiana. Besides the cracker, the LCCP incorporates two large polymers plants, an ethylene oxide/ethylene glycol plant and three smaller, higher-value derivative plants, which will produce specialty alcohols, ethoxylates and other products.
Cornell tells Engineering News Online that the new estimate follows an intensive third-party review of the project, which is 50% complete, and that the figure is consistent with guidance provided by the company in June.
However, at the time, then CEO David Constable also told investors that the revised estimate was “conservative” and that the $11-billion figure was at the “upper end of the range”.
In the event, the increase represents a significant $2.1-billion increase on the estimate published at the time of final investment decision in October 2014. In addition, the project schedule, which has been weather afflicted, has also been moved out, with 80% of the total output from LCCP reaching beneficial operation by early 2019. Sasol had initially expected the project to be completed before the end of 2018.
“Of course everybody would have been happier if [the increase] was lower, but I’m not disappointed because we were consistent in our earlier messaging that it could be this much,” Cornell said in an interview.
He adds that the new figure includes “appropriate levels of contingency” for a project that still has over two years to run.
Following the cost review and adjustments to the macroeconomic and product assumptions, Sasol had also lowered its return expectations to slightly above the company’s US dollar weighted average cost of capital of 8%. Initially the project was expected to exceed the group’s hurdle rate of 10.4%.
“We did the original economics in late 2014, so the crude and product markets, which are based on crude derivatives, were all in a different space. So it’s not just the cost, but all of the factors combined that have lowered the overall return.”
Nevertheless, Cornell insists that the fundamental drivers – converting low-cost feedstock into higher-value chemicals – of the project remain in place.
“The fundamentals of this being a sound project remain unchanged,” he insists, adding that the LCCP “fits perfectly with our strategy and continues to make very sound financial sense in terms of the long-term security of the company.”
Cornell also stresses that the funding plan has not changed as a result of the cost and schedule changes.
“This is all funded outside of South Africa, so there is no impact in terms of moving rand to the US. We have offshore funds available and the balance sheet still looks manageable. So we don’t see any change in how we are going to fund, we don’t see any change in our dividend policy . . . so in terms of funding, no change.”