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Sasol confirms Lake Charles cost escalation to $11 billion

August 23, 2016
Chemical Value Chain

Sasol today announced the preliminary findings of its detailed review of the Lake Charles chemical project (LCCP) in Louisiana, which was initiated in March 2016.

The review confirmed that the project’s costs have escalated to $11 billion from the original estimates of $8.9 billion made in October 2014. The review involved 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 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 1.54 million ton per year ethane cracker, and six downstream chemical units–two polyethylene plants, one producing low-density polyethylene (LDPE) and the other linear LDPE–and an ethylene oxide/ethylene glycol (EO/EG) plant, which together will consume around two thirds of the ethylene produced by the steam cracker; and three smaller, higher-value derivative plants, which will produce specialty alcohols, ethoxylates and other products. The project is under construction adjacent to Sasol’s existing chemical operations.

The detailed review has confirmed a $2.1-billion cost escalation from the original estimates at the time of the final investment decision (FID), including site infrastructure and utility improvements. The project’s capital expenditure as of 30 June 2016 was $4.8 billion, and the overall project completion was around 50%.

The schedule remains the same with the first unit, the LLDPE plant, expected to begin operations in the second half of 2018, which will be followed by the ethane cracker and EO/EG later that year, with the LDPE unit shortly after that. This will result in over 80% of the total output from LCCP starting operations by early 2019. The remaining derivative units will reach beneficial operation by the second half of 2019, Sasol says.

The $2.1 billion capital cost increase comprises $750 million in increased site and civil costs; $680 million attributable to an increase in engineering, procurement and construction management contractor costs; and $670 million is attributable to an increase in labour costs. Sasol has identified savings opportunities which 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 to ensure that the project has a good probability of being completed within the updated capital cost estimate of $11 billion. Mitigation actions include improved productivity and construction that will be achieved through focused risk management processes, improved phasing of engineering, cost-effective mobilization of resources and synchronized workface planning; improved change management practices; and key project leadership personnel changes.

The expected returns from the LCCP have also been updated, taking into account the 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 dollar weighted average cost of capital of 8%, although below the returns expected at the time of FID in October 2014. An impairment review, in conjunction with the preparation of Sasol’s 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. An impairment of $65 million has been recognized for the 2016 financial year pertaining to the LDPE unit.

“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,” said Mandla Gantscho, chairman of Sasol Limited.

By Natasha Alperowicz

Source: Chemical Week

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