Outcome of the Lake Charles Chemicals Project review
Sasol Limited
(Incorporated in the Republic of South Africa)
(Registration number 1979/003231/06)
Sasol Ordinary Share codes: JSE : SOL NYSE : SSL
Sasol Ordinary ISIN codes: ZAE000006896 US8038663006
Sasol BEE Ordinary Share code: JSE : SOLBE1
Sasol BEE Ordinary ISIN code: ZAE000151817
(“Sasol” or “the Company”)
Outcome of the Lake Charles Chemicals Project review
On 6 June 2016, Sasol announced the preliminary findings of
the detailed review of the Lake Charles Chemical Project
(LCCP), which was initiated in March 2016. The review has been
completed, and involved a verification of the details and
quantities of approximately 60 000 individual line items,
based on actual costs, detailed engineering, benchmarking
against other projects as well as actual field construction
productivity factors. These factors were then combined with
the updated execution strategy to prepare an updated project
cost and schedule. An independent third party review of the
estimate has also been carried out.
The LCCP consists of a world-scale 1,5 million ton per year
ethane cracker, and six downstream chemical units – two large
polymers plants (low-density and linear low-density
polyethylene) and an ethylene oxide/ethylene glycol plant,
which together will consume around two thirds of the ethylene
produced by the cracker; and three smaller, higher-value
derivative plants, which will produce specialty alcohols,
ethoxylates and other products. The project is under
construction near Lake Charles, Louisiana in the USA, adjacent
to Sasol’s existing chemical operations.
The detailed review has confirmed that the total capital cost
for the project is expected to be US$11 billion, which
includes site infrastructure and utility improvements. This is
an increase of $2,1 billion from the original estimate at the
time of final investment decision (FID) in October 2014. This
estimate includes a contingency, which measured against
industry norms for this stage of project completion, we
consider being sufficient to effectively take the project to
beneficial operation within the revised cost estimate. At 30
June 2016, the capital expenditure to date on LCCP was $4,8
billion, and the overall project completion was around 50%.
The schedule for LCCP remains the same as communicated on 6
June 2016. The first unit, the linear low-density polyethylene
unit, is expected to achieve beneficial operation in the
second half of calendar year 2018, which will be followed by
the ethane cracker and ethylene oxide and mono ethylene glycol
units later that year, with the low-density polyethylene unit
shortly thereafter. This will result in over 80% of the total
output from LCCP reaching beneficial operation by early 2019.
The remaining derivative units will reach beneficial operation
by the second half of 2019.
An investor fact sheet for the LCCP has been compiled, which
contains more granular information pertaining to the outcome
of the project review as well as updated capital cost, cash
flow, schedule execution, key project assumptions and other
relevant project information. The investor fact sheet is
posted under the LCCP tab in the Investor Centre section of
the Sasol website, <a href="http://www.sasol.com" target="_blank">www.sasol.com</a>. Please note that any forward
looking information contained in this investor fact sheet has
not been reviewed or reported on by Sasol’s external auditors.
The detailed review process has confirmed that the $2,1
billion capital cost increase is mostly attributable to the
following factors, in an approximately equal proportion:
* a significant increase in site and civil costs due to
much more ground works required to establish the site
compared to what was estimated at FID as a result of
poorer than anticipated subsurface conditions, 50 % more
weather day delays over the site construction period
compared to the average norm, and much lower field
productivity resulting from a conscious decision to
proceed with out-of-sequence site preparation activities
while waiting for a variation of permit conditions to be
granted. Site and civil works are now substantially
complete;
* an increase in the home office and construction costs of
the Engineering, Procurement, Construction and Management
Contractor (EPCm) mainly as a result of a increase in
contractor wage rates compared to what were assumed at
FID, lower engineering productivity, and an increase in
contractor engineering hours as a result of the increased
material quantities; and
* an increase in labour costs as a result of higher
quantities of material for installation, the decision to
change to a higher-skilled and thus higher cost crew mix
to enable planned labour productivity improvements for
the remainder of the project, and lump-sum contracts
placed at higher rates than estimated.
Notwithstanding these challenges, various other savings
opportunities have been identified and are being implemented
to mitigate the increase in the overall capital cost estimate.
With the project now over 50% complete, several changes have
been, or are in the process of being, implemented which are
intended to ensure that the project has a good probability of
being completed within the updated capital cost estimate of
$11 billion. Mitigation actions to ensure successful project
delivery, amongst others, include improved productivity and
construction readiness that will be achieved through focused
risk management processes, improved phasing of engineering,
cost-effective mobilisation of resources and synchronised
workface planning; improved change management practices; and
key project leadership personnel changes.
Although unplanned event-driven risks may still impact the
execution and cost of the project, we are confident that the
remaining construction, procurement, execution and business
readiness risks can be managed within the estimate as a result
of these changes.
Even though the expected capital expenditure for LCCP has
increased, we do not expect this to result in the Company
exceeding its self-imposed gearing targets. Details of the
project’s updated funding requirements have been included in
the LCCP investor fact sheet. Sasol will be publishing its
2016 financial year results on 12 September 2016, and will
provide an update on the group’s gearing levels and funding
plans at that time. The cash savings that have been achieved
from the Company’s low oil price Response Plan, and the cost
savings resulting from the Business Performance Enhancement
Programme, are both well ahead of previously communicated
targets.
The expected returns from the LCCP have also been updated,
taking into account our updated oil, natural gas and
petrochemical price forecasts as well as the revised cost and
schedule resulting from the review process. On an unlevered
basis, the returns from LCCP are expected to be slightly above
the Company’s US dollar weighted average cost of capital of
8%, although below the returns expected at the time of FID in
October 2014. We still consider the LCCP to be a sound
strategic investment that will return value to our
shareholders for many years into the future. Key project
assumptions, value contribution development and sensitivities
have been included in the LCCP investor fact sheet.
An impairment review, in conjunction with the preparation of
our annual financial statements, has been completed as a
result of the changes in macro-economic assumptions as well as
the expected increase in the LCCP capital cost estimate. In
terms of International Financial Reporting Standards, the
derivative units are separately tested for impairment. An
impairment of $65 million has been recognised for our 2016
financial year pertaining to the low-density polyethylene
unit.
The Chairman of the Sasol Limited Board of directors, Dr
Mandla Gantsho, said “The Lake Charles Chemicals Project is an
important part of Sasol’s prudent growth strategy, and the
substantial increase in the estimated capital cost has been an
issue of concern. The detailed project review was therefore
critical. We have taken decisive action to address the issues
raised and have learned lessons for the benefit of future
projects. This project still represents a world-scale
chemicals facility, based on a sustainable feedstock cost
advantage, and remains a value accretive pillar of our future
business."
Sasol will be hosting a conference call at 15:00 South African
time (09:00 Eastern time) on 24 August 2016 to discuss this
announcement, which will be webcast via Sasol’s website
<a href="http://www.sasol.com" target="_blank">www.sasol.com</a>.
23 August 2016
Johannesburg
Sponsor: Deutsche Securities (SA) Proprietary Limited
Disclaimer – Forward-looking statements: Sasol may, in this
document, make certain statements that are not historical
facts and relate to analyses and other information which are
based on forecasts of future results and estimates of amounts
not yet determinable. These statements may also relate to our
future prospects, developments and, business strategies and
industry dynamics including commodity prices. Examples of such
forward-looking statements include, but are not limited to,
statements regarding anticipated capital expenditure, project
completion schedule, availability of funding, impact on
gearing ratio and projected returns of our LCCP project, as
well as commodity prices, exchange rate fluctuations, volume
growth, increases in market share, total shareholder return,
executing our growth projects and cost reductions, including
in connection with our BPEP and RP. Words such as “believe”,
“anticipate”, “expect”, “intend", “seek”, “will”, “plan”,
“could”, “may”, “endeavour”, “target”, “forecast”, “consider”,
“project”, "confident" and similar expressions are intended to
identify such forward-looking statements, but are not the
exclusive means of identifying such statements. By their very
nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, and there are risks
that the predictions, forecasts, projections and other
forward-looking statements will not be achieved. If one or
more of these risks materialise, or should underlying
assumptions prove incorrect, our actual results may differ
materially from those anticipated. You should understand that
a number of important factors could cause actual results to
differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking
statements. These factors are discussed more fully herein and
in our most recent annual report on Form 20-F filed on 9
October 2015 and in other filings with the United States
Securities and Exchange Commission. The list of factors
discussed therein is not exhaustive; when relying on forward-
looking statements to make investment decisions, you should
carefully consider both these factors and other uncertainties
and events. Forward-looking statements apply only as of the
date on which they are made, and we do not undertake any
obligation to update or revise any of them, whether as a
result of new information, future events or otherwise.
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