Sasol has recently shared an update on the Lake Charles Chemicals Project (LCCP), which is situated in Louisiana, USA. According to the new plan, the cost estimate for the project has been revised to a range of 12.6 – 12.9 billion dollars which includes a contingency of 300 million dollars.
Johannesburg/South Africa – Sasol has recently updated its guidance for the Lake Charles Chemicals Project (LCCP) following a review process to assess the project costs and schedule.
• LCCP’s schedule remains on track with the Ethylene Glycol/Ethylene Oxide Unit due to achieve beneficial operation within days. The only revision to the schedule is the Guerbet Unit which will now be on stream in February 2020. As at the end of March 2019 project completion was at 96 % with construction completion at 89 %.
• Sasol remains confident that the longer term Ebitda outlook for the LCCP remains robust.
• The forecast total capital cost for the project has increased to 12.6 – 12.9 billion dollars, including a 300 million dollar contingency. The drivers of the changes in capital costs are understood and a series of mitigating actions are being taken to ensure delivery within the revised parameters.
• Sasol’s balance sheet is sufficiently robust and management actions are focused on deleveraging the balance sheet, simplifying the asset portfolio and executing its value based strategy.
In the Company’s trading statement, released by the Stock Exchange News Service on 8 February 2019, updated guidance was provided for LCCP’s schedule and capital costs, which were estimated in the range of 11.6 – 11.8 billion dollars. Following this announcement a number of changes were made to the management of LCCP, with project accountability immediately reassigned to the Executive Vice President of Chemicals, Fleetwood Grobler and the strengthening of its project controls organisation.
This team became concerned regarding the accuracy of the project’s cost forecast and, as a consequence, the firm’s third quarter Business Performance Metrics announcement in April 2019 indicated that the LCCP’s cost was tracking the upper end of the range. Management also initiated a full review of the costs and schedule until project completion with input from independent technical and financial advisers.
This review identified significant additional concerns related to the LCCP forecasting process and a marked increase in the projected total cost. The review also confirmed that the actual project expenditure as at 31 December 2018 amounting to 10.9 billion dollars was accurate and complete. Weaknesses in the project’s integrated controls were identified and are being remediated.
The Board has also commissioned a review to be conducted by independent external experts. This review will cover the circumstances that may have delayed the prompt identification and reporting of the above-mentioned matters. Upon conclusion of the review the Board will take appropriate action to address the findings.
Update on Key Project Parameters
The first derivative unit, Linear Low Density Polyethylene (LLDPE), achieved beneficial operation on 13 February 2019 and the plant continues to ramp up in line with expectations. The company achieved beneficial operation of the Ethylene Glycol unit (EG), with beneficial operation of the Ethylene Oxide unit (EO) expected in the coming days.
The Ethane Cracker is still expected to achieve beneficial operation in July 2019. The remainder of the LCCP schedule for beneficial operation is as previously indicated in February 2019 apart from the beneficial operation of the last derivative plant (Guerbet unit), which is expected to be one month later in February 2020. As of the end of March 2019, overall project completion was at 96 %, with construction completion at 89 % and capital expenditure on the project amounted to 11.4 billion dollars.
Following the review noted above, the cost estimate for LCCP has been revised to a range of 12.6 – 12.9 billion dollars which includes a contingency of 300 million dollars. The principal factors that impacted the revised cost estimate to complete LCCP are adjustments to the February 2019 cost forecast of approximately 530 million dollars and additional events and remaining work impacting February 2019 cost forecast – approximately 470 million dollars. A contingency of 300 million dollars has also been included.
Actions Taken to Date
This increase in the anticipated LCCP capital costs is extremely disappointing. Executive management has implemented several changes since February 2019 to further strengthen the oversight, leadership for the project and frequency of reporting. Actions include segregation of duties between project controls and finance functions and assigning a Senior Vice President to have responsibility for the LCCP project controls. Initiatives to improve decision making, transparency and documentation within the project management team are also in progress. The new project leadership has been instrumental in identifying and remediating these issues.
The reviews and investigations initiated by management to date indicate that the underlying control weaknesses are limited to LCCP.
The increase in the LCCP’s cost does not alter Sasol’s capital allocation strategy. The plan remains to reduce balance sheet gearing towards 30 % followed by an increase in the dividend pay-out ratio to 40 % and remains on track to occur between financial years 2020 to 2023. Over this period the anticipated contribution from the LCCP has been negatively impacted by a change in the short and medium term pricing outlook. Operating costs for the LCCP, although projected to be slightly elevated during start-up, are otherwise still in line with previous guidance. As a result the earnings before interest, tax, depreciation and amortisation (Ebitda) for financial year 2022 of 1,3 billion dollars have been revised to approximately 1 billion dollars. The long term market pricing outlook is still in support of a long term run rate Ebitda contribution from the LCCP of 1,3 billion dollars. The short term market outlook for ethane and product pricing remains volatile and estimates will be updated periodically.
As previously communicated to the market, the management has substantially completed the detailed asset review programme. This process forms a key part of the portfolio optimisation strategy, and has now progressed to the stage where the disposal of larger non-core assets can be accelerated. The Company will target the disposal of assets which have an aggregate net asset value exceeding 2 billion dollars. The safeguarding value will be prioritised through this process, and the financial metrics disclosed above do not rely on any asset disposals. Relevant disposals will therefore further support the deleveraging of the balance sheet, as well as simplification of the investment portfolio and increased focus in executing the firm’s value based strategy.