South Africa’s Sasol delays US $6 billion GTL plant amid oil plunge

February 01, 2015 | Petrochemicals, United States & Canada

Johannesburg, South Africa | – South Africa integrated energy and chemical company,  Sasol has decided to delay the final investment decision on its $6 billion large-scale, gas-to-liquids (GTL) plant near Lake Charles, Louisiana.

Sasol petrochemical plant, South Africa

Sasol petrochemical plant, South Africa

The company on Wednesday announced the decision comes as it is formulating a comprehensive plan to conserve cash in response to lower international oil prices.

“Albeit at a much slower pace, we will continue to progress the U.S. GTL facility. This will allow us to evaluate the possibility of phasing in the project in the most pragmatic and effective manner. North America and our home base in Southern Africa remain strategic investment destinations for Sasol,” said David Constable, President and Chief Executive Officer.

The refinery, which would convert natural gas to vehicle fuel, is the other half of Sasol’s estimated $14bn investment in a chemicals complex at Lake Charles, Louisiana, that the company started last year.

Sasol was initially scheduled to make the final decision on whether to proceed with the investment 24 months after the start of its ethane cracker plant, the decision for which was made in October last year. That period ends in October next year.

“The timing of the decision will take into consideration progress made with the execution of the company’s world-scale ethane cracker and derivatives complex, prevailing market conditions, and other strategic investment opportunities,” Mr Constable said.

It was not yet known how long the delay would be, and that decision would be taken by the board before Sasol published its interim results in March, company spokesman Alex Anderson said.

The oil price has dropped from nearly $115 a barrel in June to $49. Sasol revenue is directly linked to the market price.

The delay of the GTL refinery is one of many planned energy investments that have fallen victim to the low commodity price in recent months. Energy multinational Royal Dutch Shell and its local partner, Qatar Petroleum, said on January 15 they had decided not to proceed with the proposed Al Karaana GTL and petrochemicals project in Qatar.

In December 2013, Shell cancelled a planned $20bn, 140,000-barrels-a-day GTL plant it was going to build in Louisiana, citing future fuel price uncertainty and the potential cost of the project.

Sasol, however, said it would proceed with the ethane cracker now under construction. The first phase of Sasol’s complex, a 1.5-million-tonne-a-year ethylene plant that will cost an estimated $8.1bn, is under construction.

Sasol said this would continue with no delay. The plant will triple the company’s chemical production capacity in the US.

“Given the robust project economics, the Sasol team is confident that this facility is the first step in developing the site near Lake Charles into an integrated multi-asset, multi-business hub, which will enable future growth for several decades to come,” Mr Constable said.

It would take time for the oil price to correct, said Hanré Rossouw, a portfolio manager at Investec Asset Management’s Commodity Fund. “We’re looking at between six and 12 months for oil to recover.” That called for a continuous and realistic re-evaluation of the major projects that were a “significant” capital commitment for Sasol, he said.

In addition to delaying the GTL plant, Sasol will look at its operations and identify additional cash savings targeted over the next 30 months. “Those savings will come on top of the current target of at least R4bn in sustainable cost savings by 2016, which was confirmed last year as part of our business performance enhancement programme,” Mr Anderson said.

The focus will be on capital portfolio phasing and reductions, capital restructuring, working capital improvements, margin enhancement and further fixed-cost reductions.

The North American and Southern African markets remained strategic investment destinations for Sasol, Mr Constable said. Sasol would continue to advance its investments in both regions, including the mine replacement programme in SA and various gas and chemicals projects in Mozambique.