Why Sasol is delaying $14B fuel facility — the priciest industrial investment in Louisiana history

A decision on a $14 billion chunk of a project touted to be the most expensive industrial investment in Louisiana history was delayed Wednesday because of the collapse in oil prices.

South African energy giant Sasol said it will delay its final investment decision on its proposed gas-to-liquids plant in the Lake Charles area. Construction on the GTL facility already wasn’t expected to start for at least two years.

The GTL plant accounted for the bulk of Sasol’s planned historic $22 billion complex. The company already has greenlighted an $8.1 billion ethane cracker in the Westlake complex.

Sasol will continue to work on the gas-to-liquids project although “at a much slower pace,” President and Chief Executive Officer David Constable said.

David Dismukes, executive director of the LSU Center for Energy Studies, said Sasol’s announcement isn’t a big surprise.
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The GTL project’s economics were based on the price difference between natural gas and crude oil, and now that has collapsed, Dismukes said.

“You need that high differential to cover those billions in capital investment, and it’s not there,” Dismukes said. “You also have to factor in that you probably have a lot of risk and uncertainty associated with building a project like this.”

No one has attempted a project of this size and scale in North America, he said. The GTL project was a tough proposition to begin with, and it’s only grown more daunting given the current market conditions.

If built, the GTL plant will use natural gas to produce more than 96,000 barrels of ultra-clean-burning diesel, naphtha and other chemical products each day. The facility would create 750 permanent jobs, paying an average of $88,000 a year.

Sasol began studying the feasibility of the GTL project in late 2011, then announced it would begin engineering and design work on the project in late 2012. At the time, oil was around $100 a barrel and natural gas prices were around $2 per thousand cubic feet.

GTL projects make economic sense when there’s a substantial difference between the price of oil and natural gas, said Susan L. Starr, chief financial officer for energy consultants Muse, Stancil & Co. But falling oil prices have cut into that price difference, while also cutting into the price of refined products, like the diesel Sasol planned to produce in Westlake.

Sasol made the final investment decision on the ethane cracker in October. At the time, Constable described the move as “a defining moment” in the company’s history. The ethane cracker will break natural gas into smaller molecules to make ethylene for chemicals used in products such as detergents, lotions, cleaners, packaging, paints and adhesives. The cracker will create 500 direct jobs with the same average pay as the GTL plant.

In making its announcement to delay a decision on the gas-to-liquids plant, Sasol said it is formulating “a comprehensive plan” to conserve cash in the wake of plummeting oil prices.

The final details of the response plan and an update on the steps Sasol is taking to deal with the oil price collapse will be released March 9, when the company reports its results for the first half of its financial year.

Vishakh Mantri, lead chemical engineer for the U.S. Energy Information Administration, said oil prices are going to rise at some point, which will allow Sasol to move forward.

Louisiana Economic Development Secretary Stephen Moret also said the department and Sasol remain optimistic about the gas-to-liquids project.

Meanwhile, the state’s manufacturing investment outlook continues to be outstanding, regardless of whether Sasol builds the GTL facility, Moret said. LED has spent several weeks evaluating the impact of the oil price collapse on previously announced energy-related projects. Based on that review, LED expects the vast majority of previously announced manufacturing projects — well in excess of $62 billion — to proceed, even at the current oil price, Moret said.

Sasol’s announcement comes a little more than a year after Royal Dutch Shell plc abandoned plans for an Ascension Parish plant that would convert natural gas to diesel.

The estimated cost of the Shell plant began at $12.5 billion but quickly ballooned to more than $20 billion. Shell said the project’s cost rendered a U.S.-based gas-to-liquids project not viable.

The Shell plant would have been the largest single manufacturing project in the capital region’s history, and one of the largest in the state. The plant was projected to create 740 jobs with an average salary of $100,000 and 10,000 construction jobs at peak demand.