LCCP further strengthens our foundation
In 2018, our world-scale Lake Charles Chemicals Project (LCCP) in Louisiana in the US moved closer to completion, in support of the delivery of our value-based growth strategy. The LCCP will change the earnings profile of Sasol and diversify our risk. The project is a key enabler of our strategy.
The project - which consists of a 1,5 million ton per year ethane cracker and six downstream chemicals units, will change the game for Sasol. Once fully commissioned, it will triple our chemical production capacity in the US, enabling Sasol to further strengthen our position in a growing global chemicals market. It will represent approximately 35% of Sasol's total assets and have profound financial benefits to the Group.
Adds up to 20% or US$1,3 billion to our EBITDA by 2022.
EBIT GROWTH
By 30 June 2018, the project was 88% complete with construction execution 68% complete. Capital expenditure totalled US$9,85 billion of the US$11,13 billion approved cost. The decision in October 2014 to proceed with the LCCP was prompted by the change in the ethane supply situation in North America. This provided Sasol with an opportunity to unlock value by integrating its technology with a supply of abundant, low-cost feedstock by building an ethane cracker in an area with robust infrastructure and easy access to both US and international markets. Historically, most of Sasol's chemical production facilities have been in South Africa and Europe, as well as at the Lake Charles site.
The LCCP's product slate, technology and targeted end-use markets will be much more diverse than those of most other cracker projects under construction on the US Gulf Coast. This will allow us to participate in numerous markets, many of which are insulated from traditional chemical cycles, thereby supporting stable earnings throughout the LCCP's life.
ON TRACK FOR START-UP
We achieved first steam production in July 2018, a critical component to the operation of LCCP and a key enabler for further commissioning. The first unit of the project, the linear low-density polyethylene facility, is expected to achieve beneficial operation (BO) in the second half of the 2018 calendar year. It will be followed by the ethane cracker and ethylene oxide and mono ethylene glycol units, with the low-density polyethylene unit reaching BO shortly thereafter. This will result in over 80% of the total output from LCCP reaching BO by early in the 2019 calendar year. The remaining derivative units will reach BO by the second half of 2019.
LCCP IN NUMBERS
- Once the LCCP is fully operational, it is anticipated that over 700 full time jobs would have been created
- Currently there are more than 7 000 temporary construction workers on site
- Worked 43,9 million man hours with a recordable case rate of 0,09
- Over 1,4 million linear foot of above ground piping have been installed
- Over 4,2 million linear foot of cable has been installed
- Poured 251 000 cubic yard of concrete
MITIGATING RISKS, MAXIMISING RETURNS
With all engineering, procurement and fabrication essentially complete, we have mitigated most of the price risk on key equipment, with only schedule risk remaining. In mitigating the remaining construction and pre-commissioning risks, we are focused on labour productivity factors and rates. We are monitoring productivity levels continuously and, where required, developing interventions to support improvements. As we near the completion of construction of the major units, our emphasis is turning to pre-commissioning and commissioning activities, which entails the testing of equipment to ensure that systems are functioning as anticipated.
Our focus remains on commissioning, operations and business readiness. We will place the majority of our chemical products with existing customers and have also finalised contracts with selected distribution channel partners for our commodity chemicals. However, we continue to engage with prospective customers and new markets. Our focus has been to use the high-density polyethylene (HDPE) products from the new Gemini Plant (INEOS JV) to start the discussion with customers that also use linear low-density polyethylene (LLDPE) and lowdensity polyethylene (LDPE) thereby advancing discussions to place additional products with existing customers. We have updated the LCCP economics with the current view of long-term market assumptions obtained from independent market consultants.
Due to the uncertainty and volatility in the market, there are different views from independent market consultants on where ethane will be sourced from in the long term. In a scenario where ethane is obtained from areas closer to the Gulf, the Internal Rate of Return (IRR) approximates 8,0% – 8,5%. Where ethane is sourced further away from the Gulf, there are increases in the ethane price. In this scenario, the IRR approximates 5,2% – 5,7%. In both of these scenarios, an oil price of between 60 – 80 US$/bbl has been assumed. It should be noted, that these ranges are also infl uenced by the impact of our ethylene derivatives, market conditions, volumes and product pricing. Despite the wide range of views on the ethane price, the average EBITDA per annum differential for the scenarios at steady state is ~US$200 million and this is indicative of the strong cash fl ow generation ability of the project. Sasol’s forecasts and estimates on EBITDA are based on the assumption that ethane will be sourced from areas closer to the Gulf. At spot prices, using the last quarter of 2018 as a reference, the IRR is 8,5% – 8,9%. We expect the impact on the LCCP’s economics of the trade tariffs announced by the US and China to be limited as most of the LCCP procurement is complete. We are evaluating the Chinese government’s proposed tariffs and their potential impact on Sasol’s chemicals product portfolio, which we do not expect to be material. The project’s returns have been positively impacted by US tax reform and we expect it to contribute around 0,5% to IRR.
Once the LCCP is fully operational, we will investigate opportunities for debottlenecking and further derivatisation to improve efficiency and shift the product slate towards higher margin products. Typically, debottlenecking opportunities require relatively limited capital expenditure, while unlocking relatively high returns.