Sasol announced yesterday that it would be going ahead with an $8.1bn investment to build an ethane cracking plant in Louisiana. A cracker converts ethane into ethylene, which is one of the building blocks used in the manufacturing of plastics and chemicals. Alec Hogg spoke to Sasol’s Acting CFO, Paul Victor about the company’s decision to pursue an offshore investment instead of focusing on developing its operations within South Africa. At the end of the day, the money goes where the best potential for return on investment lies, in this case an ethane cracker in the United States holds the most promise for Sasol to see desirable returns. – LF
ALEC HOGG: Sasol’s $8.9bn Ethane Cracker Project has been given the green light. Joining us on the line to give us some more insights in this is Sasol’s Acting Chief Financial Officer, Paul Victor. Thanks Paul, for finding some time for us. We are debating here in the studio whether Sasol is giving us a vote on South Africa by making this enormous investment into the United States or whether it just happens to be that a global company is going where the best opportunities are available.
PAUL VICTOR: Well Alec, for us it’s a mixture of both. Our global strategy is about utilising feed stock opportunities and currently, with the ethane situation in America, that opportunity is quite ideal for a company like Sasol as well as for other global players. In the Southern African region, we have rather ambitious growth plans as well, specifically in South African and Mozambique. Our strategy is really, a balance between the two. This opportunity is in our project pipeline, ahead of the other opportunities but as we work our GTL-FEED studies up in Mozambique, we will hopefully, announce later (in the next decade) a potential investment in Mozambique in GTL as well.
ALEC HOGG: So this was the best internal rate of return…the best risk/reward ratio. You did all of your numbers. You’re going to invest roughly half of your market cap into the United States in this project. What were the alternatives, though? Who was also vying for that amount of capital?
PAUL VICTOR: As I’ve said, managing return on invested capital and managing the risk… We are looking at a couple of opportunities, globally. As you know, we’ve made the financial investment decision on this project but then there’s further big projects such as our ambitions in GTL in the U.S. as well, our venture in Canada that we’re looking at and our Southern African Strategy in terms of the upstream as well as the downstream integration. It’s really, a mix for us – looking at our preferred portfolio, what opportunities we can actually execute, and when and the U.S. Ethane Cracker is quite ideal.
ALEC HOGG: That wasn’t my question, but maybe I’ll be more specific. What happened to Mafuta? That was the big project we heard about so much in the past few years and now, it seems to have gone off the table.
PAUL VICTOR: There are a couple of angles to Mafuta, which one has to understand, such as that firstly, it’s still coal-fired (with the environmental issues that go along with it). I think the issue for us from an economic perspective is that it just doesn’t make money. The returns were in single digits on a big project like that. We failed to get sufficient other investors. The investment size was just too big for us. Ultimately, based on the economics as well as the potential environmental impact, we decided not to continue with that investment, going forward.
ALEC HOGG: It’s a new Sasol, isn’t it? In the past, we were looking to Sasol to make big investments in China. That was wiped off the board. There was lots of excitement in South Africa about Mafuta. You just explained that that didn’t work. Now you’re putting a lot of money into North American and you suggest that there could even be another investment into Canada. I guess that when you’re a global business, wherever you’re based in the world you have to look for the best opportunities. Maybe, if they aren’t available in your home market, you go elsewhere.
PAUL VICTOR: As I said, with regard to that, I don’t want to be explicit. We’re looking at the whole preferred portfolios. We do believe there are huge opportunities in Mozambique and South Africa so we can’t just take them off the table, and being a Proudly South African Company, we want to explore those opportunities and continue to contribute towards the South African economy. However, for now, these investments (on a balanced basis), just makes more sense for now.
ALEC HOGG: Sasol’s Acting Chief Financial Officer, Paul Victor.
