Sasol pursuing flexible US cracker funding plan to leave GTL headroom

12th November 2014

By: Terence Creamer

Creamer Media Editor

  

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In a reversal of traditional foreign-investment flows, an African company is poised to make the largest-ever capital investment into the southern US State of Louisiana, with a second, even bigger, investment under investigation.

JSE-listed energy and chemicals group Sasol is poised to invest nearly $9-billion into Lake Charles, which is the largest city on the Calcasieu river, linked to the Gulf of Mexico, some 50 km away, through the Calcasieu Ship Channel.

Site preparations are already under way for a $8.1-billion, 1.5-million-ton-a-year ethane cracker and derivatives complex, and Sasol will invest a further $800-million to acquire the land and build the infrastructure required to establish Lake Charles as an integrated, multi-asset site.

The South African company is putting the final touches to a funding plan that is designed to leave headroom for a possible 96 000 bbl/d gas-to-liquids (GTL) investment at the same Lake Charles complex – an area where the group already has a 455 000 t/y operational ethane cracker, acquired in 2001 from Condea Vista.

The GTL project could involve an investment of between $11-billion to $14-billion, but a final investment decision is only expected towards the end of 2016 at the earliest.

Both projects have received strong backing from the Louisiana and Federal governments, which have reportedly worked with Sasol to remove obstacles to the securing of environmental and construction permits, all of which are now in hand.

In September 2011, Governor Bobby Jindal even participated in a joint announcement where Sasol confirmed that it planned to investigate the development of both a world-scale ethane cracker and GTL project.

US Secretary of Commerce Penny Pritzker described it as a “landmark investment” and highlighted the fact that SelectUSA, a government-wide programme housed within the Department of Commerce, had worked closely with the state through the Louisiana Economic Development office to advocate for the investment.

The projects, Sasol indicated, would seek to take advantage of abundant and competitively priced gas in the territory – a direct spin-off from the country’s large-scale investments into shale-gas production.

The US Embassy in South Africa told Engineering News Online that the US Department of Energy’s initial investment in promoting the development of shale oil and gas technology helped convince industry to make it commercial. This, in turn, had led to an energy “boom”, which had created significant new opportunities across the spectrum of oil and gas resources.

The Embassy was also excited about the prospects for GTL it would be a “significant investment in terms of bringing a very advanced, very important energy technology to the US”.

“We have been working very hard to make our energy markets as competitive as possible in part to foster innovation in providing the energy we need to keep our economy growing. We are very pleased that Sasol is convinced that its technology can contribute to our further innovation and growth, for our mutual benefit.”

Sasol CEO David Constable has underlined the benefits to Louisiana, including job creation, new exports and a strengthening of downstream manufacturing. But having come in for criticism at home by those concerned that the company may be entering a disinvestment phase, he has also moved to highlight the economic spinoffs for shareholders, “67% of whom are located in South Africa”.

CFO Paul Victor tells Engineering News Online that some of these benefits will flow directly through dividends. However, he also emphasises the indirect knowledge-acquisition benefits, which could be deployed on future ventures in Southern Africa, including in gas-rich Mozambique.

No capital, Victor assures, will flow out of South Africa to fund the US Cracker with the group’s capital contributions for the cracker to arise from non-repatriated earnings from offshore operations and foreign debt. The funding plan has been canvassed with and approved by the South African Reserve Bank.

The funding plan is yet to be finalised, but it is expected that 60% of the project will be financed using dollar-denominated debt, secured off the strength of Sasol’s ungeared balance sheet and at rates aligned to the project’s investment-grade rating. The group had R37-billion of net cash on hand at the end of June 2014 and its migration into a targeted debt-to-equity range of between 20% and 40% is only just beginning, notwithstanding the major Northern American foray.

Victor says a phased funding model is being prepared to ensure there is sufficient flexibility to cater for the GTL project, should it proceed. However, the equity contribution for the second project, which will convert gas into clean diesel and speciality chemicals, will probably be materially higher, owing to factors such as the size of the project as well as the potential risk associated with technology and project execution. Sasol may also consider potential equity partners ahead of any final investment decision.

EXECUTION & ECONOMICS

The immediate priority, however, relates to the execution of the cracker project, which involves off-the-shelf technology that can more easily be project financed.

Major site works are expected to begin in earnest in January 2015 and as many as 24 000 permanent and nonpermanent jobs are anticipated to be created by the cracker and GTL projects. Sasol’s own North American employee base is expected to double to around 550 people as the projects unfold.

The staffing expansion is justified on the basis that up to a targeted 50% of the group’s operating profit will be derived from offshore operations by 2025. In the year to June 30, 2014, Sasol reported an operating profit of R41.7-billion, with offshore operations contributing around 20%.

A joint venture known as Fluor Technip Integrated has been selected as the primary engineering, procurement, and construction management contractor and Sasol is supplementing its own project management team with skills from WorleyParsons, of Australia.

A modular construction model has been adopted with the main long lead items having already been ordered so as to meet the end-2017 schedule for project completion. Construction will be followed by a 12 to 18 months ramp-up of the plant to full production.

The facility will consume 100 000 bbl/d of ethane supplied through a pipeline connected to a central processing facility located in Mont Belvieu, Texas, about 190 km away. Two-thirds of the cracker’s output will be in the form of polyethylene, with the balance divided into a mix of higher-margin speciality chemicals used to produce products such as detergents, cosmetics, coatings, lubricants, antifreeze and others.

The polyethylene output will be exposed to the vagaries of the commodity cycles, including any sustained period of lower oil prices, while the speciality chemicals will be far less susceptible to such cycles.

Victor reports that the project’s economics have been stress tested at sustained low oil and high ethane prices, set at a propane price ceiling level. Even at such levels, the project has a high probability of meeting the group’s 10.4% hurdle rate in dollar terms.

“So we can sustain a low oil and a high ethane price,” Victor reports, adding that Sasol did not foresee major upstream pricing and supply risks, owing to the abundance of gas sources in the US. “This investment positions Sasol well to become an even bigger global player in the chemicals market.”

Edited by Creamer Media Reporter

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