Sasol cracks major US fracking deal
A $20-billion investment in a facility in Louisiana, prompted by the North American shale boom, will be a world first in some respects.
It will be Sasol’s largest investment yet; the biggest single investment in Louisiana’s history; and the largest foreign direct investor manufacturing project in the history of the United States.
Sasol’s move to join the boom in hydraulic fracturing, or fracking, that is transforming the energy landscape in the US comes as the South African government prepares to grant the first prospecting licences here.
A Louisiana state official told the Mail & Guardian the project cannot start until all permits have been obtained from the department of environmental quality.
Part of the second-largest shale deposit in the US falls within the borders of the state. Louisiana is the second-largest natural gas-producing state after Texas.
Sasol’s investment will be to expand its existing facility, a chemicals plant, in Lake Charles, an industrial hub in Louisiana, where it will develop an ethane cracker and derivatives units, followed by a gas-to-liquids (GTL) plant.
The cracker project, with an estimated cost of between $5-billion and $7-billion, is expected to begin in 2017.
The cracker (a processing plant) will convert ethane, a constituent of natural gas, into ethylene (producing an estimated 1.5-million tonnes a year), which can be used to produce a wide range of chemical feedstock for products such as cool drink cans and detergents.
The gas-to-liquids plant, with an estimated cost of between $11-billion and $14-billion, will produce fuel from natural gas and other by-products.
Only Sasol and Shell have the proven technology to produce fuel from gas on such a large scale.
Sasol will not extract the gas itself but will buy it from suppliers in the area who use drilling and/or fracking.
Both projects are expected to have a significant economic spin-off for the state, worth an estimated $42.6-billion over the next 20 years.
In an interview with the M&G, Sasol’s chief executive and executive director, David Constable, said that at the peak of the construction phase between 7 000 and 7 500 jobs will be created on site, after which between 12 000 and 15 000 permanent jobs, with an average annual salary of between $80 000 to $85 000, will be created.
The state of Louisiana will pay the company a special incentive of $257-million in grants, including giving it millions of dollars in tax breaks, a $20-million worker training facility and a $115-million payment to the company for land and infrastructure.
But the funding is not without contention. According to an article in a New Orleans daily paper, the Times Picayune, when the land and infrastructure payment is made in 2018 and 2019, state tax revenues will be negative — which is according to the Louisiana Economic Development’s own projections, and will throw a spanner into the budgeting plan for those outlying years.
However, officials say the cumulative tax revenues will be positive. The report said it is expected that incentives will not be handed over to Sasol until the project begins to yield positive tax revenues to the state.
The state is also offering other incentives that Sasol will take advantage of. All in all, they could be north of $1-billion in total value over the life of the project, Sasol’s head of global chemicals and North American operations, André de Ruyter, told the Engineering News.
But it is the cheap gas, not the grants, that have convinced Sasol of the soundness of the investment.
“It is very nice, obviously,” Constable said. “We have had great support from the state.”
However, he said, the project meets and exceeds Sasol’s investment criteria given a wide range of economic scenarios.
“We don’t need the incentive but [it] is appreciated and makes things much smoother.”
Most crackers run off other, more costly fossil fuels, so developing a gas-run cracker, at least at current low gas prices, would give any company the competitive edge.
“The cracker is a no-brainer,” said Guy Antoine, an investment analyst at Element Investment Managers, noting that the sell-side estimates of what this option is worth make it exceptionally worthwhile.
“The cracker can take that gas, turn it into chemicals and ultimately plastics — the technology is so attractive because the capital outlay is less.
Energy landscape turned upside down
“The energy landscape in the US has been turned upside down,” Constable said. “[The US] is in a very strong position right now and the manufacturing industry is coming back with a vengeance.”
Antoine said the only concern is that, because of the rush for petrochemical companies to build these plants, in future, there may be too much capacity.
Owen Ncomo, an executive partner at Inkunzi investments, said there is always a risk of capital costs rising.
“If the US dollar weakens and they have to import equipment, they risk the cost of the project rising.”
The gas-to-liquids plant is a riskier project should the gas price rise and the oil price drop, and analysts are divided over whether Sasol will recover the cost of building the plant.
The price differential between the oil and gas price is key for the project to succeed, Antoine said.
The difference spiked in early 2012 when oil prices shot up and natural gas prices fell to around $2 a mmBtu (million British thermal units) and the ratio was 1:30.
Currently, Brent crude oil is at $108 a barrel and natural gas is at 3.74 per mmBtu, a ratio of 1:28.8.
Sasol, Constable said, can afford for the ratio to go as low as 1:16.
Constable said the company expected ethane feedstock pricing to stay low over the next few decades and was also “very comfortable with economics on the GTL plant”, although it requires a relatively low natural gas price and a relatively high oil diesel price.
“We also have value-add products off GTL which enhance the economics nicely … analysts often miss that.”
The possibility of the oil price sinking and the natural gas price rising can never be ruled out as some believe the shale boom will be short-lived and, according to Antoine, the market expects oil to decline to $88 dollars a barrel.
“It is risky. You have to take a market view on what gas prices and oil [will be]. Gas prices have a higher historic volatility than oil prices do,” Antoine said.
Although Constable said the company sees the gas and oil prices staying above the 1:16 ratio in the long term, they have sought to de-risk the project further.
Shale assets in Canada owned by Sasol through a joint venture with Talisman acts as a “natural hedge”, Constable said.
A high gas price could mean losses in the Louisiana facility but will be offset by profits made by fracking and selling gas in the north.
“If all goes well, which we expect … it [the cracker] will be starting up in 2017,” Constable said. “There is a very high probability of proceeding.”
Sasol has begun ordering equipment for the cracker and applications for an air permit and wetlands permit have been submitted.
“We are confident we will receive the permits in January and April respectively. It’s going very well on that front. We have got a lot of support from the state and Washington … it looks very good right now.”
The final investment decision on the gas-to-liquids plant will be taken 18 to 24 months after the cracker.
Constable said Sasol chose to phase in the projects to take care of the balance sheet and to make sure it had the right financial and human resources.
Sasol, with the use of its exclusive technology, is investing in a number of other gas-to-liquids offshore projects and, by the end of the decade, Constable said, it will be a much larger company, adding 70% to 75% more volumes for the group overall.
Sasol’s Oryx gas-to-liquids plant in Qatar is said to be performing exceptionally well and ran at 108% capacity in July.
This, Constable said, was proof that Sasol’s gas-to-liquids technology is fully commercialised and ready to be rolled out elsewhere in the world.
Not gaining traction
In Escravos, Nigeria, Sasol’s third gas-to-liquids plant is close to being commissioned and, in Uzbekistan, Sasol, as part of a joint venture, is in the final stages of planning a facility that will convert gas reserves into transport fuel.
But a coal-to-liquids plant in the Waterberg does not seem to be gaining much traction — it is simply not as economically viable as the gas-to-liquids projects.
“The capital costs are much more, therefore the economics are much more challenging,” Constable said.
Coal-to-liquids plants need to be near a coal mine, and adequate water and infrastructure need to be in place.
Coal to liquids requires a gasification process but using natural gas from the start removes that step and the costs associated with it.
Sasol’s investments offshore, and particularly the Lake Charles expansion, is “absolutely positive,” Ncomo said. “In my view they have diversified their risk.”
Antoine agreed: “Sasol, since being privatised, have taken their proprietary technology and tried to monetise that.”
Constable said Sasol’s focus is in Southern Africa until 2050. “We have a firm rooted in South Africa; we are not going anywhere.”
He said Sasol was keeping a close eye on the Karoo and the government’s interministerial committee on fracking.
The production of shale gas in South Africa “would change the energy landscape in the region”, he said.
“That would drive more feedstock for our Sasolburg and Secunda plants, and we would look at gas to power plants too.”
He said Sasol would also be keen to get involved with the extraction if the water and other environmental challenges can be overcome.