Sasol Limited (NYSE:SSL)
Investor Strategy Day Conference Call
April 9, 2013 10:30 am ET
Raj Naidu – Executive-Investor Relations and Shareholder Value Management
David E. Constable – Chief Executive Officer
Christine Ramon – Chief Financial Officer
André de Ruyter – Senior Group Executive-Global Chemicals and North American Operations
Giullean Johann Strauss – Senior Group Executive- International Energy, New Business Development & Technology
Alex R. Comer – JPMorgan Securities Plc
All right, welcome everyone to our Investor Day. Just apologies for the late start, we just wanted to other attendees the opportunity to arrive, some people were running a little bit late. So want to give apologies. So that and apologies to the people in the webcast for that as well. So, good morning and welcome to the Sasol Limited Investor Strategy Day on our 10-year New York Stock Exchange listing.
My name is Raj Naidu and I am the Head of Investor Relations at Sasol. And today we have David Constable, our Chief Executive Officer; Christine Ramon, our Chief Financial Officer and Executive Director. We have André de Ruyter, our Senior Group Executive for Chemicals and North American operations. Lean Strauss, our Senior Group Executive for international energy, new business development. And we also delighted to have Nolita Fakude, another Executive Director in attendance as well.
The structure of today is as follows. We’ll have a presentation in two parts with Q&A following each part. So I’ll just ask you to please direct your questions to the relevant segment and save general questions just to the end to the final Q&A session. We’ll have an informal lunch after that Q&A session at the back of the room, where you’ll have a chance to interact with management. And for those of you that are waiting here for the closing ceremony, you’re requested to remain in this area. So you have few minutes to catch up with the office and also make use of the New York Stock Exchange Wi-Fi facilities. The closing ceremony will happen in a room behind us at 3 o'clock, so you are invited to join us for cocktails from the 3 o'clock. And you’ll be direct accordingly by the New York Stock Exchange officials.
I just wanted to draw your attention in your presentation to the forward-looking statements as is customary. And before David sets the scene for the presentation, I'd like to invite the New York Stock Exchange to give us the safety briefing.
Unidentified Company Representative
Good morning folks. I’m one of the five safety directors for 11 Wall Street. Welcome to New York Stock. My name is [Frank Bavaro]. I’ll be very quick. There are three egress points from this floor. They’re all stairways. Behind us those – behind those two double doors to the right is the C stairway that terminates on Broad Street. And to the north end over here, the B stairway, that terminates on Broad Street. And then we have the A stairway at the reception desk when you come off the elevator cars, the A stairway that would terminate at Wall Street.
If by some chance there was an emergency or fire signal, you’d see strobe lights and speaker announcements directing you to the exit facilities along with the events personnel.
Elevators are off limits for a number of reasons. The stairways are the means of egress in case there is a fire emergency on this floor. Again, C stairway behind you, B stairway to the north end and A stairway to the west side by the reception area by the elevator cars. Thank you very much and enjoy your stay at NYSE.
David E. Constable
Good morning, everyone. Thank you for taking the time to join us this morning and be with us for our Investor Strategy Day here at the New York Stock Exchange. And I also thank you to those of you on the phone calling in form wherever you maybe. Not only is it important investor engagement for us at Sasol as Raj mentioned, in addition, today is a significant milestone in the company's 63 year history. This afternoon we’ll be celebrating the 10th anniversary of our listing on the NYSE with the closing bell ceremony and, as Raj mentioned, the cocktail event after that. Hope that all of you here will be able to join us as we commemorate the occasion.
With this in mind, we just take a quick moment to look at a short video which highlights some of Sasol’s key milestones and achievements over the years.
Great. As you can see from the video, Sasol has grown dramatically over the past six decades. What lies ahead will result in the further advancement of our company’s progress across many fronts and across continents.
So as much as we are celebrating our past achievements, today is also very much about the company’s future. Once commissioned, the U.S growth projects will be showcasing this morning will grow the company’s production volumes by more than 75% and will cement our position in the country across several industry sectors.
Now let’s turn to what we’ll cover in today's session. In broad terms, our agenda for the next 3.5 hours comprised two distinct halves. In the first half and it’s probably setting the scene, I will highlight the key strategic names that have come to epitomized the last two years for us at Sasol. Here I will also talk to our strategic review, development and execution process.
To close off the first half, Christine will focus on three key elements, which underpin our financing considerations. First, capital allocation and our portfolio management process. Second, the importance of prioritizing our pipeline and projects. And third, our funding considerations and timing to ensure that we remain within our targeted gearing levels and that we deliver on our progressive dividend policy. We’ll then open up for any questions that you may have before we adjourn for a break.
Looking at the second half of our session, here is where we will focus on our North American priorities and projects and our unique value proposition. Our decision to precede the front-end engineering and design in both our Lake Charles Chemical Project or LCCP and our U.S. gas-to-liquids value-added chemicals conflicts were informed by detailed project feasibility studies and a robust interrogation of the analyses presented by the project teams at the end of last year.
Today, we will share with you the work we’ve been doing since the project announcements in December, to ensure that both projects can be successfully competed utilizing a phased execution approach. We’ll provide you a feedback on the key project role players and structures we have put in place. We will also share our overall implementation approach.
I’ll kick off the second half with an overview of our U.S. project priority areas and then hand it over to Lean who will talk us through our technology and feedstock advantages. From there, André will provide greater clarity on why our U.S. projects make for a compelling business case, when we look at the markets we will be operating in.
André will also talk specifically to our project execution capability. I’ll come back up to close up our formal presentation, and then we’ll open it up to any further questions you may have. By the end of this session, our objective is to have given you greater insight into these important U.S. growth initiatives, so that we are collectively aligned going forward.
Our last Investor Strategy Day was on April 5 in New York just over two years ago. The focus in 2011 was on highlighting our technology-driven fuels and chemicals growth, which makes us both unique and compelling investment propositions. The team showcased our Canadian gas acquisitions and our GTL aspirations. We spoke at a concept level of the importance of identifying great new global project opportunities.
Now, I joined the Company soon thereafter. My primary mandate is to ensure that we maximize long-term shareholder value as measured by TSR and that as the management team; the decision we take now will stand the test of time and deliver outstanding results.
To achieve this, the past couple of years can be broken into three distinct phases. The first phase is about goal-setting and consolidation, which ramps throughout financial year 2012. Here, we refocused the organization on our common objectives and introduced, streamlined in less bureaucratic structures. We also started the process of embedding a high performance values-driven culture to the introduction of our revised company values and refined strategic agenda.
To ensure that we’re able to compete more effectively, the second phase is all about stepping up our prioritization efforts to enable the company to focus on the important and the urgent. Here, we prioritize enhancing operational reliability and stability. We drove production efficiencies, particularly in our international chemicals businesses and we took a hard and skeptical look at our portfolio projects.
Having completed the prioritization work, it was evidenced that given our current position, we had to adopt a multi-pronged approach to our third and current phase, delivery and growth. In Sasol terms, we’ve heard that the dual focus to regional growth strategy is being one of nurture and grow in Southern Africa where the emphasis is as much on maintaining and enhancing our existing asset base, as it is on growing in new areas here most notably in power generation both in South Africa and Mozambique.
Looking to North America, here we speak of expand and deliver, as we set out to advance on several fronts. In the context of our U.S. projects specifically, to achieve the business success we’re aiming for, we need to deliver on our projects milestones in full, on budget, on schedule and with the quality required to ensure successful plan start-ups in ongoing operations.
Turning to our existing operations, particularly in South Africa, we have sharpened our ongoing focus on optimizing cost across the group. Our cost containment diagnostic work is almost complete, where after we will take the necessary steps to ensure that our cost base is fit for purpose and sustainable.
Now all that I’ve spoken to you so far relates to the near to medium-term. however, our definition of victory of growing shareholder value sustainably is as dependent on our current strategies as it is on our longer-term strategic direction.
Here, our strategic review, development and execution process is paramount. 14 months ago, we embarked on an extensive corporate strategy evaluation process. The evaluation is largely driven by three key factors. First, the significant changes in the global environment of the past four to five years, not only in the context of the persisting financial crisis, but also given changing market dynamics, certain governments becoming far more interventionist and the general climate particularly in the Africa of socio-political unrest.
Second, as we move forward on game-changing projects, which will come to fruition later this decade, we need to be confident that pursuing a GTL and chemicals focus will remain robust over several decades. And finally, we know that it will deliver meaningful results over the long-term. We need to better understand and plan for a future that takes our company well beyond 2020.
We started by defining and properly understanding our business and regional growth opportunities, where do we want to play, what regions and what do we want to be playing. Will it be CTL or coal-to-liquids, LNG, non-integrated upstream oil and gas production, mobility technologies, or possibly regional power generation? To answer these questions about the future, our strategy review and development process comprise three stages.
As a part of stage one, the team reviewed all of our businesses to determine our current reality, so that we had a good sense of where we stand as an organization today. A lot of time was also spent on developing scenarios to determine what the world might look like decades from now.
Here, the team focused on regional dynamics, and alternative energy penetration. This stage culminated in a piece of work, which we call to envisioning the future, and important step would set our possible Sasol futures and answer the questions such as, where will we find ourselves, what do we want to be known for and how have we evolved as an organization.
In stage two, we tested and shaped the way, these futures can be reached. Of course, scenarios are not meant to be an exact picture of the world, but rather possible options as how the future is likely to unfold.
Finally, in stage three, the team proposed a set of strategic path for Sasol, which not only confirm the robustness of our current near to medium-term strategy, but also made it abundantly clear that natural gas, gas-to-liquids and chemicals will remain in our Company’s longer-term future.
If we look at our current strategic agenda what we have in place now, most of you will remember that it comprises two pillars. First, our foundation pillar which talks to our existing businesses and current operations in Africa, Europe, the Americas, Asia and the Middle East. This pillar places a strong emphasis on our Sasol people, our assets and our South African transformation journey.
Second, our growth pillar emphasizes what we must focus on to grow sustainably into the future. What will help us achieve sustainable profitability? I’d like to draw your attention to two key areas where we introduced clear shifts in our thinking, which will impact our future strategic direction.
First, a year ago, we took an important decision to accelerate GTL, gas-to-liquids with selective CTL, coal-to-liquids growth. Today, you’ll see that we no longer reference coal-to-liquids growth. Second, we understand it as the world is moving towards lower carbon energy alternatives and new value proposition for us is in power generation and low carbon electricity. We have some way to go here as we first seek to develop and then grow this profitable new source of revenue. At the end of the day, the pillars of our strategic agenda and the imperatives we prioritize as a company all propel us to our definition of victory to grow shareholder value sustainably.
Now again, our main topic for today is obviously our two U.S. growth projects. And with that in mind, to give you better feel for the business rationale underpinning our project decisions, we will take you through five of the key investment considerations we take into account to ensure that the business cases for these projects are sound and well thought out.
First of all, we ask whether we have access to adequate funding in the required timeframe to maintain our targeted gearing and progressive dividend policy. Second, we determine whether we have a technology or manufacturing platform that is better than our competitors’. Two, we have a look at the technology themselves, but also the scale of the plans in question and whether we have the requisite, operating know-how. Next, we consider whether we have access to low-cost feedstock that provides us with a competitive advantage over the long-term.
Fourth, we assess where we have our product, our market position that provides us with a compelling business case. And finally very importantly, we evaluate whether we have the required project execution capability to deliver the project in questions. If we consider our proposed investment in the United States, we are very encouraged by the answers we have to these critically important questions, and I believe that after you’ve heard from Christine, Lean and André on these key factors, you will feel the same way.
Now as part of our financing consideration, as I said earlier, Christine will discuss our portfolio management and prioritization process. It’s clear that our U.S. growth projects are sizable. This being the case, the management team embarked upon a thorough review of our entire project portfolio and commenced a carefully considered prioritization process. The purpose of this exercise was a simple one, to ensure that we prioritize the projects that can unlock the maximum value for our shareholders over the long-term. Based on our extensive review, and particularly, the financial and human capital requirements of our various projects as well as our near to longer-term strategic directions, we were unanimous as a management team, as was the board to proceed with the fieldwork on the U.S. projects, thereby prioritizing them over our proposed Canada GTL venture.
As part of our strategic capital allocation determinations, we give due consideration to creating the right balance between investing the company’s capital for long-term benefit and returning cash to the company’s shareholders. Over and above the project funding requirements, our investment decisions are guided by a rigorous, gated business development and implementation process.
Christine is going to walk us through both of these aspects right now. Christine?
Thank you, David and good morning everyone. It’s certainly my pleasure to be here with you today on a true spring day in New York. As David has already spoken to our U.S. projects that we’ve recently moved into FEED on the third of December last year, we announced that both the U.S. GTL projects as well as the ethane cracker, advanced into FEED phase and that was the state that we also see that we were prioritizing the projects in Sasol. as you are aware, Canada GTL was actually also passed, had also completed the feasibility study and we decided to put Canada GTL on hold and give priority to the two projects in Lake Charles.
Currently, the market has been very interested in how we plan on executing and funding our growth strategy as well as managing the targeted gearing range going forward from a long-term perspective. So as David has referenced, today I will focus on our strategic capital allocation, our capital governance procedures, and portfolio management procedures as well as our funding plans and how we intend to manage the balance sheet gearing over the long-term. I will give you comfort that we will be managing the balance sheet gearing within our targeted range, net debt to equity of 20% to 40% taken into the account, the phasing upon U.S. growth projects as well as our progressive dividend policy and catering for a buffer for volatility.
So before moving to the specifics of our capital governance and portfolio management procedures, I will touch more holistically on our value enhancing strategic capital allocation procedures. As the left graph demonstrates, we have a healthy cash generating ability in Sasol, and that has allowed us to successfully sustain our current operation as well as fund our growth aspirations while still delivering very attractive returns to shareholders without the need to dispose our any assets.
The strategic allocation of capital has resulted in as delivering on our return on invested capital as shown in the right-hand graph, well ahead of our weighted average cost of capital throughout the cycle. the only exception was in financial year 2009 and as you know that that was marking the debt of an unprecedented economic process at which time the entire market was affected by these events. But clearly, this demonstrates a proven track record and our ability to sustain long-term shareholder value.
So we have some of the proceeds in place to ensure that we do allocate our capital optimally and our ultimate goal is to grow long-term shareholder value. if one looked at the first block in terms of how we use our capital, it’s very important that we do invest capital back into our business to support our Group’s strategic agenda. we not only consider the allocation of capital between sustenance and growth CapEx, but also between business and geographic diversification, which I'll talk more to you a bit later.
When one looks at the second block of capital allocation, that’s mergers and acquisition activity, I think clearly suffice to say that this is not a big focus for us at this point in time. and we do assess M&A activity on a case-by-case basis.
In the recent part, we might have mentioned to you that we were focused on looking at potential upstream acquisitions in the U.S., however, we have put that on hold for now, and we are really focusing on funding our organic growth projects as stated in our project pipeline.
The third block talks to other uses of group capital, which includes returning cash to shareholders in the form of dividends and share buybacks. And I think quite importantly here is we do restrain a backup within our targeted gearing range for volatility given that we are a business that is exposed to commodity prices.
Quite importantly is we continually rank and prioritize the various uses of cash based on available group capital to ensure that we grow shareholder value and like I’ve demonstrated previously we’ve demonstrated quiet a proven track record in that regard. And our focus certainly going forward from the capital prioritization perspective is really looking at how can we improve and optimize our strategic allocation of capital to ensure that we continue to maximize long-term shareholder value.
So moving into the more specifics of our capital governance and portfolio management processes, we’ve always spoken in the past two years to a capital excellence program. We are applying world-class practices in the areas of portfolio management, project execution support and we’ve actually recently also established a project academy.
Clearly, the overall objectives here is to improve the allocation of capital towards projects that are aligned with our Sasol’s group strategy as David has spoken to and really focus on the projects that deliver the highest return for our shareholders.
And as the slide demonstrate is that this is a continuous review process or a continuous review and looking at ways of how we can allocate and improve the way we allocate capital and ensure that we have a more robust and streamlined capital governance process, which I’ll also talk to you in the next slide.
So, all our capital projects are characterized either as sustenance capital or as growth in nature. Sustenance projects have characteristics of either being mandatory or discretionary. And clearly what this does is it allows the initial phase of project prioritization to take place in our group. So, clearly enhancing operational performance and accelerating sustainable growth does require that we prioritize mandatory sustenance. So, clearly we want to stay in business and to continue to produce the volumes that we are producing. And so clearly the mandatory sustenance CapEx is required. And we clearly aim to minimize the discretionary sustenance projects that do not need our hurdle rate.
So, clearly projects thereafter are ranked on a risk versus return approach and financial returns are being weighed up against various prioritization criteria, which includes project risk and execution capability, the robustness of the business case, project maturity and Sasol’s competitive advantage in terms of technology feedstock and markets. And both Lean and André will actually talk to these various aspects a bit later on in the presentation.
But clearly what this does is when we do this robustness checking, it allows us being to select the optimal portfolio of projects within the constraints of the available capital and people resources.
Over the next 10 years, more specifically, approximately 70% of our projected capital spend will be related to growth projects with the balance being allocated to mandatory and discretionary sustenance projects whilst approximately of the total 60% of our total capital spend will then be focused on downstream projects, which is clearly aligned to our accelerated gas-to-liquids growth ambition and in the balance a fairly evenly spread between upstream and chemical projects.
Financial returns are a key consideration when we do a safety project. We require the targeted investment returns compensates for potential risks to ensure that projects are economically viable and provide a battle for volatility. The standard hurdle rate that we target on an unlevered basis is 1.3 times WACC for all discretionary sustenance and growth projects.
We do not apply hurdle rate to the mandatory sustenance projects and in particular this relates to environmental projects that are typically difficult to justify economic viability and an example of this is the clean fuels to specifications project FFO and this applies to South Africa.
I think quite importantly is that Russian capital is an approach that we’ve actually strengthened, governance processes that we strengthened recently I’d say in the past sort of 18 months. And this is really when we entered into this project prioritization phase, we’ve always done project prioritization, but we become a lot of more stringent about how we do it clearly with these very vast growth projects that we’re having to fund going forward. We want to ensure that we have sufficient capital available for (inaudible) growth projects going forward.
As you probably aware, our group weighted average cost of capital is currently 12.95%, just to repeat that for the (inaudible) 12.95% in South African Rand and 8% in Europe and 8% in the U.S. dollar terms. And that takes that standard and – so that’s the weighted average cost of capital and in the standard hurdle rates on these projects comprises and we added 30% premium on the weighted average cost of capital and that will take the hurdle rate to 16.84% in South Africa, and then 10.4% in Europe and the U.S. respectively.
I think quite importantly is that when we go into higher risk countries, we do calculate – we do make country risk premium adjustments to make sure that the returns on these projects adequately compensate full country’s specific risk and as you all aware, we do have some high risk countries in our growth portfolios and you can rest assured that the returns or costs are a bit higher than the 10.4% that we require for the U.S.
Over the long-term, in general, approximately 80% of all our new capital investment projects are being required to meet our hurdle rates. And then one moves to the right hand side of the slide, they also have a mechanism that we actually use apart from financial returns to mitigate the project investment group. And what this includes is project financing, investment structures, lump sum EPC contracts, long-term feedstock arrangements and we would make business themes, we also then would consider the introduction of JV partners.
Just to (inaudible) slide, quite – we take capital allocation in the company very seriously and we’ve got a robust system in place to govern capital allocation in the group. So just a reference on capital excellence program again, we have implemented the more robust and streamlined capital governance process, which aims to improve the group IRR on capital project and how do we do this? It’s really bad looking and how do we reduce capital cost and optimize project timeline? So we’ve got a BD&I model, business development and implementation model that you’re probably familiar with and that has been in existence for more than a decade in its current form.
It is based on a traditional staged gate approach that’s associated with project life cycle and it uses internationally accepted terminology and methodologies and it’s routinely benchmarked against our peers. We have standardized the format of economic valuations and capital applications to improve the efficiency of the gate governance process in our group by ensuring that the necessary information is available to make and fund decision making.
So at each decision gates, so the decision gates are actually reflected on the left hand side of the slide. A disciplined process is actually followed to ensure that the business case is robust and reliable and optimal in terms of both direct and indirect returns. The gate approval process has also been optimized to reduce the impact on the project schedule with several weeks at each decision gate.
I think quite importantly, and I think both Lean and André will refer to this a bit later, is that we’ve also improved our focus on improved front end loading in the projects as well as project controls and quality assurance between decision gates. And clearly this is going to help us to freeze the scope on projects and make capital estimates more reliable.
I think quite importantly is that this program has now been underway for about two years and we’ve already started to see some significant early gains based on a large sample of projects that have been executed from about 2007 onwards and that comes to especially in terms of lower capital cost that we’ve received – seen as well as more competitive schedule on projects.
I’ve already spoken about capital excellence and the significant early gains that we’ve seen. So in addition to establishing world-class practices in the areas of project execution, delivery and portfolio management, we’re also optimizing returns through our procurement and contracting strategies. And that’s in the form of best country sourcing. We continuously reviewed the progress and the performance on our portfolio of projects to determine if our strategic objectives have been realized and whether any adjustments are required.
Quite important is the Monte Carlo analysis that we actually do for our projects. And this is the job of our capital scrubbing and optimization team, which actually ensures that we remain focused on the higher return projects. But they also conduct very detailed reviews to ensure that our project business place remains robust and it does involve the reviews of the project drivers as indicated and this is just an illustrative example of demonstrating the sensitivities of project drivers to be economics of the projects.
And this is quite important because at the different staged gates, these are actually reviewed and robustness checked. And this certainly should give you as shareholders comfort that we have got quite a robust project review process in place, which focuses on enhancing returns from our portfolio of projects.
So we’ll get asked about our long-term oil price view and our view is supported by the fundamentals. Our 10-year nominal oil price assumption, sorry, just to point out, we have not shown the Sasol assumption on the slide. So this is a broader panel view that we actually always referred to. And our nominal oil price assumption is at the middle of the range of the 10-year panel view.
We have got product conservative view that 10-year real oil price assumption that we do use in our project economics is below $100 a barrel. When we do strict these assumptions, we do use a real oil price that’s actually closer to $90 a barrel and that’s driven by the marginal cost of production. And as you know, this is supported then by the Venezuelan crude production, the Canadian tar sands and clearly also the Saudi’s budget revenues.
So clearly André will also be talking to this a bit later and in terms of how this relates to WTI and our product pricing that this should give you the comfort that we do take quite a conservative view on the oil price going forward.
In terms of what is our long-term gas price view, as you know, gas is clearly the feedstock in our GTL plant. And in terms of the gas price assumptions when we compare ourselves to the panel, we certainly also broadly inline with the average panel view over the long-term. And I think what’s more important to us is not only just looking at it individually as an oil price view to gas price view, it’s really looking at what the oil to gas ratio is. And we’re quite comfortable that at 16 times oil to gas ratio, it is very supportive of our long-term GTL value proposition at which we will meet our hurdle rate requirement.
And Lean will talk more to what is the long-term view for the oil gas price ratio going forward, but when one looks at it, we’re very comfortable with our GTL value proposition. And then when we actually make investment decisions clearly relating to GTL, we actually do use a higher gas price assumption, which talks to more conservatism and when we look at our upstream development in particular in Canada, we then use a lower gas price assumption, which also supports our conservative view going forward.
So we know that the markets have been very interested as to how we’re going to fund our long-term growth strategy and how will this impact our balance sheet. As you know, our gearing is currently very low and as we continue to advance our North American growth strategy, which is going to comprise a significant portion of the Group CapEx over the next 10 years, our gearing wing will be reaching our targeted gearing range by 2015.
So this is a rather complex slide and I’m just going to guide you. The left-hand axis refers to the proportion of CapEx that we’ve been spending over the next 10 years and the right-hand axis actually refers to gearing levels. So wing one actually looks at how is the CapEx going to change over the next 10 years. Currently, we spend approximately 60% of our capital in South Africa, which is the dark blue and you can see that the plant is a percentage of the total over the next 10-year period quite significantly.
I mean that’s really, North America is really where the focus of the capital spend is going to be going forward. So as you can see at the end of the 10-year horizon, wing one actually looks as a proportion of the total, quite a significant portion of CapEx spend will actually be spent in North America over the next 10-year periods, which have been supportive of these growth projects going forward.
The red perforated line refers to gearing. So we’re at about [66.6%] gearing at this point in time and as these growth projects advance, we intend making the final investment decision for the ethane cracker by the middle of next calendar year. so clearly that’s when the spend will start picking up. And at the U.S. GTL, we intend making the final investment decision for that 18 to 24 months after the final investment decision for the ethane cracker and clearly within we reach our targeted gearing range that is our 20% to 40% target and we reach that targeted gearing range already then by 2015.
But I think what should really give you comfort is that over the entire horizon, we, actually with all our projects in the pipeline catering both for Sasol-owned projects in South Africa as well as the U.S. growth projects and we’ve got Uzbekistan in which we have a 44.5% equity interest. That’s all catered for in the funding plan and we are able to manage the balance sheet gearing well within the targeted range even at the peak and funding requirements of the gearing and you can see it actually take this quite significantly after that.
Quite importantly then is, do we do have headroom in our balance sheet to cater for not only funding the growth projects, but also for paying our progressive dividend policy, and I’ll talk more to that just now and it allows us flexibility to cater for a buffer for volatility.
Another important point that I’d like to make is that as $90 oil, we’re also able to manage our balance sheet quite well below a 50% gearing even though it does peak over this period here. but I think this also gives our financiers quite a lot of comfort that we’re able to maintain our credit rating and manage the balance sheet of the company.
So in terms of maintaining flexibility to fund capital investment, we are actively considering all alternatives to fund our capital investments. And so we consider internal options and what we have done on the internal option side is that we have phased the capital expenditure as I indicated of the ethane cracker. It’s been given impetus stress and the U.S. GTL has been phased after the ethane cracker.
We also look at through our capital excellence program, the reduction of CapEx and enhancing project economics. and as you know, a big focus for management in the Company is cost optimization. So we are busy with a diagnostic analysis at this point in time. But we believe that we will be able to achieve quite significant savings over the next few years in terms of saving cost in the Company, and certainly, that will add more buffer to our balance sheet. And then I think we will be in a position by the end of the financial year at our next results presentation to put out some firm targets with relation to cost savings going forward.
I think quite important is that as we’re maintaining flexibility and it’s important 10.1 considers the internal option, they do come attached with their own set of risks and costs and also there will be a lasted effect that to the potential loss of synergies, once capital projects are phased as well and there is more work that’s actually being done in this regard in particular with the focus on the U.S. projects.
In terms of our debt options, which is the second block on the slide there. we do follow a pure project funding strategy. So for example in (inaudible), we are targeting at least 50% project financing there. And for our U.S. projects, we’ve recently appointed the financial advisor for the ethane cracker project, and through that also all funding alternatives will be considered and they include project financing, export credit agency financing, bank loan and as you’re aware, we’ve recently, last year November, we issued our $1 billion bond it was 3.5 times oversubscribed, 4.5% healed. and so clearly, we have a lot of appetite in the market for further Sasol bonds. So we will certainly consider this as part of the options going forward, clearly, ranking the funding alternatives as to what would be more cost effective and (inaudible).
I think that the last block that does talk to potential equity options. We do not think that this is viable at this point in time. I think it is something that we have considered. But we believe that equity funding frees the commissioning and renting up at our projects would be extremely expensive to pursue. So at this point in time, it’s not an excess part of our consideration. But I think suffice to say that we have considered all options and will continue to do so going forward. I think quite importantly as what we would like to do and what we will aim to do with the U.S. projects is certainly to raise our profile in these markets. We’re certainly seeing a good up tick in the U.S. shareholder base inertia and so we’d certainly like to capitalize on that, and attract more both institutional and retail shareholders into our shareholder base. So you can certainly expect to see us spending more time over here.
So we’ve demonstrated that we have a strong track record of delivering consistent returns to our shareholders, and we are very committed to our progressive dividend policy. As you saw at the interim results, despite a decline of 13% in our earnings per share, we maintained our interim dividend in line with the prior year.
And this is actually quite an important message. What it does tell you is that we do have an underpin in our dividend. So the full-year underpin in our dividend is $1,750, and what the progressive dividend policy means, what the relevant caveat is that we aim to maintain and grow our dividend going forward.
And this is quite important, because we actually cater for this in our long-term targeted gearing range. We realized that the progressive dividend policy is a key value driver for our share plan, and our dividend yield. Certainly in the past couple of years, it has been around 4.5%. And as you can see, David delivered a total shareholder return over the past five years in grand turn at about 29%, which positions Sasol quite competitively with our peer group.
So what the slide shows is that our dividend yield positions us competitively, and we show, which is the peer group fee ranging from the MSCI, emerging markets energy index swapped through to the JSE Top 40 and Top 10 companies. so you can see that Sasol is very competitively positioned there. And we certainly aim to consistently deliver sustainable value to our shareholders.
In summary, what we’ve demonstrated is that we have followed strategic capital allocation procedures that have delivered enhancing value for our shareholders. We have a rigorous streamlined capital governance and portfolio management process that does enable robust investment decision-making, whereby we allocate capital to projects that are lined with our group’s strategy and does deliver the highest risk-adjusted return for our shareholders.
We are comfortable that we will manage the long-term gearing within our targeted range of 20% to 40% net debt to equity. Taking into account, the phasing of our U.S. growth project, our progressive dividend policy as well as catering for a buffer for volatility and lastly, it does allow us to continue to consistently return superior returns to our shareholders through our attractive progressive dividends and competitive dividend yield on a total shareholder return basis.
So on that note, I’d like to end my section. and I think at this point, both David and I will handle any questions that you have on this part of the presentation.
Unidentified Company Representative
So any questions on strategy or…?
David E. Constable
Christine’s talk on portfolio management and funding, question from Alex. Good morning, Alex.
Alex R. Comer – JPMorgan Securities Plc
Good morning, David. Christine, just on some of your assumptions on the oil and the gas price, looking forward to some of the other pages in the presentation, given a figure 1.4 – sorry, $14 billion for the GTL plant, assuming a 10% per term then that means after tax you’re looking for maybe $1.4 billion of profit. so pretax is about $2 billion. If you divide that by the number of barrels, it looks like your return requirement is about $57 a barrel. With operating cost at $20 and let’s say gas price is $5.5, you’re going to need something like $130 a barrel selling price, which means gives (inaudible) spread of $40 a barrel. Do you think that that’s realistic?
I think André will talk more to product pricing, but the point is that in the past year, diesel prices were averaging at around $130 a barrel. And I think we’re not selling oil, we’re actually selling diesel. But – André, do you want to comment? I think let André – André will reinforce that later on in the presentation, but that’s absolutely right, Alex. I think clearly that talks to project assumptions.
I think returns on invested capital, we’re also conscious of that and like we’ve demonstrated we’ve delivered a hit of WACC over the period. but I think when one looks at return on invested capital; you can expect that to come down from before. I think we’ve been in a fairly low capital investment phase in Sasol up until now. and as we start making these big investments, the ROIC is going to decline over the next period, so at least the next five years or so.
Alex R. Comer – JPMorgan Securities Plc
Can I just confirm – thanks for the chart on the leverage by the way, very helpful? Does that include Uzbekistan?
Alex R. Comer – JPMorgan Securities Plc
Okay. And the size of the GTL project within that?
Yes. That’s $4.2 billion end of job cost and our share is 44.5%. So that is definitely included in it. Unlike, we said for Uzbekistan, clearly, we will keep you informed on whatever decisions we make going forward. But we did target by the end of this calendar year to make decisions on the project going forward.
Alex R. Comer – JPMorgan Securities Plc
On this leverage target for North America, is that a 96,000 barrels a day GTL project that you’ve got in there till 2020?
Yeah. It’s at least 96,000 barrels a day. And I think Lean is going to give you a bit more flavor. I want to feel Lean’s thunder, but it’s at least 96,000 barrels that’s being catered for.
Alex R. Comer – JPMorgan Securities Plc
David E. Constable
Question up front here. Second row?
You’ve discussed your portfolio management process, but I seem to recall two years ago, when you were last here, you’d made a two shale gas transactions with Talisman, which have not sort of quite turned out as I think you had hoped. So can you sort of just help us what you learn from that or was that part of this process or can you just guide us through that experience please?
Okay, you know two years, just over two years ago, we actually made the first acquisition and then we made the second acquisition about three months after that. We felt very happy with our shale gas acquisitions. And Lean will talk to in his presentation, in essence, the shale gas acquisition provides us the feedstock price hedge cover for the GTL plant in the U.S. We have about approximately two-thirds cover for the feedstock requirements for our GTL in the U.S. So we’re very happy with that and we believe that it would still, I believe, value enhancing, value accretive acquisitions for our shareholders.
David E. Constable
Yeah, I think, once we make the final decisions on the GTL downstream plants that will change the impairment picture as well in those facilities and the gas price looks like it’s going in the right direction as well. So we are very happy. It’s a sought-after field as well as the LNG activity picks up in the West Coast of Canada, there is a lot of interest in those fields up there as well. Question here.
Dave and Christine, can you may be share with us how the company will look on a capital employed effort over the next five or six years after all those investment and maybe compare that to how the capital is employed around the world today?
Yeah. So like I’ve shown you on the gearing slide, currently we spent about 60% of our spent in South Africa. It is going to change quite significantly after restarting these thing in the ethane cracker, as a matter of fact; you would have seen the announcement yesterday or the day before that we’ve already placed the long lead for the compressor crack compressor. So it is going to change after I preferred to talk sort of in after 7 to 10 years because this is once the GTL would have been completed. And we expect for let’s just say at least 50% of our asset base to be outside South Africa. I mean in ethane what we’re doing is, if you just take the ethane cracker and the GTL, it’s comprised of 75% of the market capitalization of Sasol today. And so similarly when one looks at we’ll be going to be getting our operating profit from at least 50% of the operating profit also in the same time horizon will be from outside South Africa. So these are cost significant game changers for Sasol going forward and we’re very excited about it.
Another way to look at it, our Synfield plant planned for this year is 7.2 million tons to 7.4 million tons for the financial year and when we have these plants on up and running in Louisiana; it will be approximately 6 million tons coming out of the Louisiana plant. So it is a game changer for us and really balances us outside of South Africa as well (inaudible)
David E. Constable
Any other question before we take a quick break? Very good. I guess, we’ll come back at in 15 minutes, which will be five to the hour, we could. Thanks very much everyone.
David E. Constable
Okay, welcome back everyone. We’ve got a quicker shift. Okay, we’re going to move from the back.
Lake Charles in Southwest Louisiana has been a key U.S. Sasol location for over a decade now. It's close to the Texas-Louisiana border and it’s equidistance from our U.S. corporate headquarters in Houston, as it is to Louisiana's state capital Baton Rouge. We find ourselves in the heart of an industrialized area where we have a long history with the local communities dating back to when Condea Vista, our predecessor first operated the facility some 50 years ago.
The people of Calcasieu Parish are passionate about the petrochemical industry and it has created a wide range of employment opportunities for them and also brought with it improved infrastructure and educational facilities.
Today Lake Charles is a growing chemical and energy hub with several industry players within close proximity to each other. We are currently the seventh largest employer in the region and with the completion of our U.S. growth projects, we will move up to number two and possibly even number one.
Equally important, we have a great working relationship with Louisiana Economic Development or LED and the governor Bobby Jindal. In our experience, Louisiana is a state that understands the challenges of business, particularly those challenges encountered by the energy and chemical sectors. As a result of this understanding, the LED has created a legislative environment which attracts new business and provides the private sector with the opportunity to expand and flourish. Both the governor and the LED are strong supporters of Sasol and our U.S. growth program.
Later this year, in June, our entire Sasol board will have the opportunity to meet with governor Jindal when we hold our quarterly board meeting in Baton Rouge, coupled with a site visit to Lake Charles. In addition, the U.S. federal government and particularly the Department of Commerce and the State Department have been welcoming and encouraging. We’ll be spending time in Washington tomorrow and Thursday to further strengthen the relationships we’ve already developed and to establish new ones with White House advisors and industry bodies.
Given the nature and scale of our U.S. projects and their particular significance to the company, it’s important that we have a clear line of sight right up to the Board of Sasol Limited. After all the board will be taking the final investment decisions starting with the ethane cracker as Christine said in the second quarter of 2014. And the Board, together with the group executive committee will be fully apprised of developments to facilitate a firm decision-making as we progress these projects.
On large-scale programs and initiatives, it’s easy to get into siloed thinking. So to avoid this, a single mandating committee has been set up to oversee both projects. The Man Com as we refer to it, it is chaired by André De Ruyter, who is the GEC member ultimately responsible for the successful completion of both projects. The Man Com has direct line of sight, a three-core direction setting committee. First, the steering committee, comprising the effected Sasol business managing directors who will source their product requirements from the new facilities once commissioned. Next, the executive committee, who oversees the projects from a deliverables cost, schedule and quality perspective including the structuring of the critically important EPC contracts. And the technical contract approval committee, who will provide technology oversight and approval of license for packages.
Common across the three communities is that they all report into a single and overarching project sponsor. Similarly what is essential is that the executive committee has direct line of sight of the day-to-day activities of both the LCCP and U.S. GTL project teams, who in turn ensures feedback and alignment between the two teams.
Now from a cost experience of working in an EPC contracting environment, the following guiding principles are essential to getting projects out of the starting blocks correctly. First, one has to appoint the very best people for the job at hand, both internally and externally. This point cannot be over emphasized enough without seasoned and hardened specialists, even the simplest jobs can quickly go up the rails. Next, you have to have a robust owner scheme in place with strong project knowledge, in this case, the U.S. Gulf Coast, strong local project knowledge on the Gulf.
We’ve accomplished this with our integrated project management team or IPMT as we refer to it, comprising once again both the internal and external specialists and in most cases, industry veterans with decades of experience. These individuals bring with them their expertise, along with world-class project controls and management systems. Serving up and overlooked the project team, Sasol understand industry's best practice from the outset and avoided all cost, the missteps others have taken in the past.
Based on our own work as well as third-party expert assessments, we know that we must do the following. Number 1, we must drive a mindset of zero scope changes post EPC contract award. By failing to free the project scope at the appropriate time and here let me be clear, it should also not be done too early. By failing to freeze our project scope, unnecessary and costly rework and a large measure of confusion and frustration will only serve to hinder the projects performance from a cost and schedule perspective.
Number two, ensure a single point of accountability internally and a single point of accountability externally. We must avoid a situation where too many Chiefs deadlines are missed, fingers are pointed and balls are dropped. Number three, implement a robust yet flexible contracting strategy. As much as one needs a clear contracting strategy, we should never be hamstring by an approach that straightjackets us. In the world of mega projects that run over years to complete, circumstances can change which will inevitably require change in strategy but not a change in scope.
Number four, secure top class agreements coupled with realistic incentives and strong trust-based relationships with contractors that have your best interest in mind. These agreements and the sentence governed what are all important partnerships.
Number five, have better market intelligence than our contractors and our competitors. To be ahead of the curve we must have access to as much relevant information as possible. This allows the owners team to preempt areas of concern to make alternative plans.
Number six, avoid the risks inherent in a hardly contested labor market. Here developing an independent craft labor strategy is imperative, as we don’t know what to watch out for and what our alternatives are with craft labor. Now I deliberately avoided speaking to what we’re doing about ensuring that our project teams live by these guiding principles, I'll leave that for André, to color in for us when he comes up little later.
So, turning again to look at our storyline for the second half of today's session, Lean will come up to talk us through the technology and feedstock components of our investment considerations. He will remind us of our unique GTL value proposition and what we are doing to further enhance the site after improving technology. Here Lean will highlight the achievements of our flagship ORYX GTL facility in Qatar and to our past GTL achievements, with places in good stead in the U.S. as we moved down a very similar path. He will then tackle our feedstock considerations and why Lake Charles from a long-term feedstock perspective is in a very advantageous position.
Next, André will talk specifically to our market strategy and what makes our businesses cases for both projects so compelling. He will then spend some time unpacking what the teams are doing to ensure that we embed the guiding principles we are prioritizing in the near-term. Here the strong focus is on our project execution capability, including the lessons learned in relation to other U.S. Gulf Coast projects.
But before we get there, let me hand over to Lean who’ll come up and talk about technology and feedstock. Lean?
Giullean Johann Strauss
Yeah, it’s a lovely spring day, but I must admit I’ve got mixed feelings about this lovely day because I am responsible for the Montney investments and gas in this. I was very pleased with the cold wave that we had for the last couple of months, because that opus to the rise in gas price of above $4 per million btu. So I wouldn’t have mind, if there was a little bit more conference up time to come, but this is just a note.
I am going to touch three topics with you. As David just mentioned, I am going to give you a very short overview about gas-to-liquids or GTL as we refer to it, where we are doing it, what projects we have in the pipeline and what technology advancements we are planning. Second, I will give you a review about the feedstock situations and how Montney investment helps us to make our integrated project more robust. And lastly, I'll give you a short overview of the characteristics about the GTL plant that we’re planning for Louisiana.
It is a very sophistic flowchart of how gas-to-liquids or GTL works. We use natural gas as feedstock. We can use conventional or unconventional gas, shale gas, coal-bed methane as well. Once we’ve got the gas at the plant, we put it through the forming process to make synthetic gas. Essentially we break up the gas in its chemical molecules of carbon monoxide and hydrogen and to that we add oxygen and we form a new chemical value chain.
We then take that chemical chain and we put it through our GTL synthesis process. This is our proprietary technology, in South Africa we’ve got to work which is magic medicines. So this is where we use our magic and we react the gas within our reactor with our proprietary catalyst. Our reactor is very special, it’s 60 meters long and 10 meters wide, it weighs 2000 tons. It is at least three times larger than what our competitors have and that gives us the significant economy subject.
Then we use a global catalyst which we’ve also developed ourselves and that improved over time. So we need 10 million scf of gas to produce one barrel of product and that's very important. We will show you some price ratios but whenever you model, remember we make product and I'm going to give you some color on the products we are making, or we need the bcf of gas a day to produce 100,000 barrels a day for what we are planning in Louisiana.
After we put the synthetic gas through our reactor, we make a chemical substance, a waxy substance. Now this substance, we traditionally and so far have put through a very simplified refinery, this is the technology that is off the shelf which we licensed from Chevron and we make fuel products from that. These are world-class fuel products. They meet and exceed Euro V specification.
The typical product mix is 75% diesel, 20% naphtha and 5% LPG. We've got some further advances and then I’m going to show you what we're planning for Louisiana. I'll show you how that product mix are being advanced. Where are we implementing GTL? Our first plant that we’ve introduced with the joint is the ORYX plant in Qatar, which is a joint venture with Qatar Petroleum. It's a 32,400 barrel a day plant, so it’s got two trains of 16,000 barrel each. Each reactor can produce 16,000 barrels a day of product.
We already have produced more than 45 million barrels of product at this plant and I know some of you have some recollection of teething problems that we had at that plant. I would like to assure you that, that plant today operates extremely efficiently. It's one of the best performing plants in our organization.
In 2012 it hit the best safety record in our group. It has Zero RCR, zero recordable case rate. For six months, the production exceeded the designed capacity, so we exceeded the 16,000 barrel per day per train and for nine months we have more than 99% availability. So I just want to assure you, the plant works perfectly. We fixed all the glitches that we had in that plant and our technology also works extremely well. The feedstock conversion we're achieving today is better than what we've targeted. For instance, we produced more than 80% diesel from the process in Qatar.
In the pipeline we have two projects, the first one is the one in Nigeria, which is the partnership between Chevron and NNPC, the Nigerian National Petroleum Company. This is ORYX look alike, so it's a carbon copy of what we have in ORYX. We are already in the process of commissioning this plant and we planned beneficial operation by the end of this year.
Christine have also made reference to our plant in Uzbekistan which is the partnership with Uzbekneftegaz and Petronas. Now this is an enhanced ORYX. It is the same kit. It's the same reactor, it's the same reformers. We’ve just been able to extract more product from the same equipment that we have and we're going to produce 38,000 barrels a day from this plant, so the trains that are producing 16,000 barrels in Qatar will be producing 19,000 in Uzbekistan.
As Christine have indicated, we will be completing the front-end engineering design during the second half of this year which will then put us in a position to consider a final investment decision.
One of the biggest challenges for GTL, I'm sure the question that is already been raised is the capable intensity of these projects and we obviously recognize that. So we’ve got very focused process and settle to see how we can advance and enhance the value proposition of our GTL process. And we’ve identified three many levers; improving the capital productivity; improving the product value; and driving the technology improvement.
In terms of our improving capital productivity, I’m going to give a little bit more color to this but what we are looking is to operate the plant with less capital. Instead of building all the equipments ourselves, instead of having all the utilities processed ourselves, we can buy this over-the-fence by reducing the amount of money that we have to spend ourselves, like buying oxygen, like buying hydrogen over-the-fence and longer-term we’re also looking at buying even the synthesis gas over-the-fence to reduce our own capital spend.
We also look at aspects like modernization, by which we will manufacture the bulk of the plant in places where it's the cheapest, not necessarily in the U.S. but in places like India or Korea where the cost of manufacturing these plants are much cheaper. And we're also looking at long-term partnerships and alliances with suppliers to see how we can construct our relationship to bring down the manufacturing cost of these plants. We are also looking at improving the product value and that is by not only making fuels. The fuels that have got a limited margin which is set by market forces, so we are looking at ways to use the waxy substance that we have and make different products from that, that's more very enhancing. And I'll show you exactly what we’re planning for like Lake Charles later on in my presentation.
And then also we are looking to improve the technology itself, the technology that we've been improving since 1950. And here we look at aspects like reactor intensification and I'll show you a slide on that, improving the catalyst, we are planning to introduce the third generation catalyst next year. We are already manufacturing the catalyst and it will be commercially used in ORYX, as from 2014 and we believe it can drive down the cost of catalyst and the operating cost by about 30%. Then we’re also looking at improving the reforming technology by using the waste heat we have in the process more efficiently.
So the next picture thus gives you some flavor of how we have developed the reactor size of our GTL plant. Back in the 1980s we produced 100 barrels a day from a 1 meter diameter plant, in the 90's we made it 5 meters and we took it to 2,500 barrels a day. In ORYX, the plant is now 60 meters x 10 meters and we produce 16,000 barrels a day.
In Uzbekistan, ethylene shell goes to 19,000 barrels a day. And what this signal so far is that by just increasing the shell by 2 meters, the new shell will be essentially the same 62 meters, we can expect at least 24,000 barrels a day and that's what we're planning for Louisiana. And I’m going to give some more color on that.
But we also know today that that reactor essentially can produce 50,000 barrels a day and this distinguish us significantly from other players in the market, because their reactor sizes are at best 30% or 25% our size. So what you can see from this is Sasol has done significant advancement to get the economies of scale from our GTL conversion reactor.
I’ll then move on to feedstock and this is all about shale and what shell has done to the U.S. and the benefits that it also will have for our process. This graph just shows the impact that shale gas has over the last decades and potentially what it will have over the decades to come on the supply of gas in the North American market. 10 years ago, shale was less than 2% of the U.S. gas supply. By 2009, we've accounted for 14%. Today it's more than a third already of U.S. gas supply and predictions are that it will go to 40% by the end of this decade. So firstly, we made the availability of dry gas ethane and also the dry methane gas and ethane quite easily available for processes like our sales and chemical process.
Today the ethane supply in the U.S. market is about 1.2 million barrels, predictions are by the time that when we started up our ethane cracker it will be at 2 million barrels a day of which we need roughly 100,000 barrels level a day. We already have had expressions of interest to supply ethane to us that exceeds that 100,000 barrels a day and as far as we think, dry gas for our GTL plant, I can assure you everybody wants to supply as we go down to limited markets, it's very easy to sign contracts for supply of ethane to our GTL plant.
Now very importantly, what does this mean to the economics? You can see that I've shown you the graphs of what the experts believe long-term gas prices or long-term oil prices would be. Very importantly, when we look at the economics of GTL, we should not look at the cost of gas or the price of oil, each the combination of the ratio. How much oil is more expensive than gas?
Now if you look at the long-term expert predictions, you will see that the oil to gas ratio that they predict is around 25. The EIA is more conservative with a forecast of about roughly 20. If you take our well scaled plant, we need a ratio of about 60 to achieve our hurdle rate for our GTL investments. So we believe that the market conditions in the U.S will be quite conducive going forward. And André is going to show you a very interesting slide on how the product prices look in the U.S despite the fact that over supply of shale oil and WTI being described in certain blocks.
But right we know that we cannot rely on the predictions of experts. So when the opportunity came and we could make an investment in shale gas, we took the opportunity to bet for the Montney gas in Canada. And what that allows us is to buy between 7.5 and 10 tcf of contingent resources, in a joint venture with Talisman. The good characteristic for us about shale gas is that you can increase and decrease production according to market conditions. When we bought the assets gas prices were more favorable and we immediately ramped up production by using a level drilling rigs. When the prices came down, we scaled back our production activity and currently we only have three drilling rigs in operation. But we continue to de-risk the asset because we want to be in a position as the market wrap up again, we can immediately use the opportunity of producing oil/gas.
So we want to be in a position that we can – that we understand the geology very well, as we know exactly which wells we can produce commercially at $3, $4, $4.5, $5, so that we can ramp up our production as gas prices move up in the future.
Christine said that we’re very happy with our investments. Talisman is a good operator. The drilling and completion cost has come down quite significantly and we are approaching the investment assumptions that we’ve made at the time of making the investment. Lastly we have produced 129 million scf a day on average. This will come down this year because of the reduction in the number of rigs that we employ.
But most importantly, this investment gives us the ability to price hitch our feedstock for GTL, if we look at this investment on an integrated basis with GTL. We roughly have a two thirds price cover, because that’s the volume that we can link directly to the feedstock’s that we need in GTL. We don’t think we need more at this stage, because we’ve modeled the economics on a integrated basis. And what you see on the left hand side of the graph is, on a standalone basis as gas prices increase obviously the value of GTL continues, because the feedstock becomes more expensive. But the economic value of the Montney gas production increases as it benefits from higher gas prices.
On the right hand side, you see the economics on a integrated basis when we combine the two. And what this graph shows you that that is a very robust situation for us. And gas prices can go as high as $9 per million btu. And we will still sustain our hurdle of 80 in terms of hidden investment. So our investment in Montney has made our integrated investment for the GTL plant extremely robust.
If I then move onto the GTL investment we are planning for Lake Charles, as David already mentioned, we are phasing this now behind the ethane cracker. We have signaled when we announced the project going into feed a nine play capacity of 96,000 barrels a day. Now for those of you who brought this very exact models to understand the last decimal of our IRR that we can expect of this I’ve got some good news for you.
You can add at least another 5% because we’re very confident that this plant will produce between 5% and 10% more than the nameplate capacity that we signaled to you in December of last year. Also the gas requirement is less than the normal rule of thumb economics we have given you in the past. The gas requirement will be between 9 million and 9.5 million btu to produce a barrel of product.
The capital range is $11 billion to $14 billion, but very importantly, this is including the chemical value adds on the project. So the standalone GTL plant is not $14 billion, it's less, that $11 billion to $14 billion range include the kits that we're going to put into Lake Charles to extract paraffin to produce wax and to produce synthetic base oils.
And I'm going to give you some color on the margin you can expect from this. Operating cost, we believe it will be below $20 and then very importantly, we also have significant incentives from the Louisiana government which also should put in your modeling and you can go to their website and see how much they value the incentives they give us.
Importantly, our GTL plant exceeds the hurdle rates on a standalone basis. We don't need to put in the chemical value adds or the incentives just on a fuel production basis it meets the hurdle rate. We're also going to put in enough capacity that we can now operate at a 100% in fuel mode, if by some unforeseen reason we cannot run our chemical value at the full capacity.
Now, very importantly, in the past as I said our product mix were only fuels. We're going to take about 30% of our fuel mix and make chemical value out of that in Louisiana. So we're going to produce paraffin, we're going to produce wax and we're going to produce synthetic base oils which gives us a significantly higher margin than we get from our fuel mix. It's significantly higher than what we get from diesel, diesel sits between 15% to 20% of our brine and I can assure the margin on these products is significantly higher than that, so that is quite value advancing for our GTL investment in Louisiana.
Ladies and gentlemen, in conclusion, our GTL value proposition gives us the unique opportunity to arbitrage between gas and oil. We have seen that relationship to be as close as 40 in the past and who knows what will it be in the future. We've got significant technology enhancements to make the cost of producing our GTL products cheaper.
We make world-class products, the products we make in ORYX attracts premiums against standard products produced from refined oil. We have the ability to put in these chemical value adds as it’s quite economic enhancing and we have a integrated value chain that protects us against the impact of high gas price.
With that we have Lake Charles, with world class infrastructure, support of government, a comparative labor and contact to markets, access to multiple markets and abundant feedstock. Ladies and gentlemen if that doesn't make a good compelling investment case, I don’t know.
With that I’m going to call André to tell you about the markets and the capabilities it is going to create to both of these plants. Thank you very much.
André de Ruyter
Great. That’s a tough act to follow right to hold that enthusiasm that comes but excited about what we’re about to do. This is a unique opportunity for Sasol. It is as David said, an opportunity to spend three quarters of our market capitalization, significantly grow this business in a very short period of time and build up Sasol to a very higher level of performance both in terms of profitability, as well as in terms of volume. But it also comes as challenges, we don’t underestimate that spending this amount of money in a responsible way, making sure that we deliver value to shareholders is going to be a challenge, but we think that we are very well positioned both in terms of markets, as well as our execution capability to meet these challenges in the right way.
So let me start by looking at the markets and I think here we are in a uniquely advantageous position as well and I’ll unpack some of our differentiated ethylene derivatives for you, which we believe distinguishes us from other players that are pursuing cracker projects in the U.S. Gulf.
To my mind, the most important curve in the chemical industry is the cost curve, where are we on the cost curve? Our estimate is that U.S. ethane based on the abundant supplies of ethane that Lean referred to earlier we will have a lower foot cost curve position on a sustainable basis going forward.
If you obviously include the naphtha crackers, then the U.S. average is higher but we are going to be playing in that segment of the cost curve. We further think that our position will be enhanced by the fact that we're going to rebuilding a world scale cracker, we're going to be building a 1.55 million ton ethane cracker and this will give us significant economies of scale and thereby improve our cash cost position.
You may have read that there are significant numbers of projects pursuing exactly this opportunity and you may ask yourself or you may want to ask me later on, so let me preempt the question, what happens if all of these projects come online as scheduled? Won't the U.S. be structurally long on ethylene thereby the pressing margins and putting us in a margin squeeze? And the answer to that is, if you look at all of these projects and you make the assumption that all of them will impact ethylene, we don't think they will, we think there is quite a bit of fostering going on, there is quite a bit of testing the waters to understand exactly what the opportunity is. Then in 2016, ‘17 and '18, we will see capacity additions to U.S. ethylene production capacity of about between 9% and 11% per annum.
So those are substantial capacity additions. However, if you look at the global ethylene supply demand balance and taking in to account the fact that global ethylene demand grows more or less in a multiple of global GDP, the latest IHS forecast estimates a growth in ethylene demand globally of about 4% per annum, the U.S. capacity additions will add on average about 2% to global supply.
So in spite of the fact that there are these substantial projects being pursued in the U.S. we don't think that it will lead to a situation where we will be so long on ethylene, that it will have a negative impact on our market position.
I think also quite importantly is that we were conservative in modeling the cost competitiveness of our project. In order to ensure that we are not dependent entirely on cheap ethane going forward, we assume that ethane pricing in the U.S. will be equivalent to propane prices. For those of you familiar with this market, even though ethane today is trading at about $0.24, $0.25 per gallon, so in other words more or less equivalent to natural gas energy value. Propane is trading at a premium to that.
Typically it’s double to 150% of the price of ethane. And if we take that assumption and we put a propane equivalent ethane price into our model, we still meet our required rates of return. So, very conservative assumption, and it speaks to the overall robustness of our investment.
Moving on now to the flow scheme and later unpack some of the derivatives and I thing this is again what distinguishes us from the other cracker projects that are being spoken about. A number of the other cracker projects are going to be based primarily on very, very large polyethylene blasts. And we don’t argue with them, these are experienced companies, but we think that we bring something different to the mix that puts us in an advantage position.
But first of all let me draw your attention mainly to the crackers, I mentioned that is 1.55 million tons truly world scale. I think its right there at the size limitation. However, we’re not taking a scale of risk, what we’ve done in order to improve the reliability of the cracker and starting up and also to reduce the engineering time, we have taken a design that has already being executed. So it’s essentially an off the shelf design that we are going to take and implement. It’s been done before, so we’re not taking undue scale of risk on that.
We are then going to be producing ethylene oxide and MEG. At this point in time, in Lake Charles we’re bringing in ethylene oxide from a remote site and those of you familiar with ethylene oxide will understand that this is a pretty hazardous chemical and not something that you want to rail around the country. So this is going to be not only a cost advantage to us but also from a safety, health and environmental perspective and improvement.
Then we have unique proprietary technology and Ziegler Alcohol sphere where we produce a wide range of different alcohols with C numbers ranging from about C6 to C22.
In the mid-cut alcohol range, we compete with oleochemical-based alcohols, so that's the commodity stuff. But in terms of the profitability of Ziegler Alcohols, we make our money on the wings of this distribution curve and this is a unique position that we occupy today and we look to expand on that market opportunity.
We’ll also be going to take ethylene and through our proprietary tetramerisation process, we are going to convert that to 1-Octene. 1-Octene is a co-monomer that is used in the production of polyethylene. Delaware in particular is our biggest customer in this and they have already signed up to take the volume associated with this facility. So again very low market risk attached to that.
The ethylene oxide in Ziegler Alcohol will be oxalated and we will also be producing Guerbet Alcohols. Now Guerbet Alcohols is a highly specialized product, its global market size is about 100,000 tons per annum globally. So that's just a bit of cream in the coffee if you will.
Then we're going to be doing about 900 kilotons per annum of polyethylene, and you would have seen recent announcements that we’ve signed a licensing agreement with innovation Univation as well as with ExxonMobil. So we’re making quite good progress on executing these projects. There will be a fraction of ethylene that we are going to place in the merchant market. We are today from our existing 450,000 ton per annum cracker in Lake Charles marketing ethylene into the merchant markets. So this is not new for us, it’s not an undue risk, it's something that we do today and we're quite comfortable accepting that market risk.
Just a bit of background on the capital numbers. This entire complex will cost between $500 billion to $700 billion. David referenced the fact that we're going to take FID on this by the second half of calendar 2014 and we then aim to have this complex up and running by the end of calendar ’16, beginning of calendar ‘17.
So overall quite an aggressive schedule, but we think that as Christine said, having placed our order for the crack gas compressor, we are ahead of the curve here and we have captured early move advantage which is important from two different perspectives. The first one is that the sooner you come online the longer you will capture the advantage of low priced ethane and also you will be able to void the over heated label market which is one of the significant challenges which I'll be addressing a little later on when I talk about execution.
Now you’ve seen this slide before about our relatively conservative oil price assumptions and one of the questions that people always ask us now, I can go out buy in North Dakota today a barrel of oil for $55 a barrel. All right, so how can you assume an oil price north of $90 a barrel and will this not impact your profitability on GTL in particular. And the answer is that we do not sell oil, I think Christine used that very phrase, we sell diesel.
Even though oil prices in the U.S. today are quite appraised particularly WTI and we know about Cushing logistics constraint that is causing that depressed price at this point in time, but also in terms of issues relating to refining capacity and also overproduction of volumes in areas that do not have ready access to logistics to place those products in the market.
What is happening is that, in the U.S. diesel prices are in lockstep with global diesel markets and that’s purely because this is a commodity that is fungible, you can transport it all over the world and any refiner in the U.S. that does not make this sort of crack spread on its diesel or just export it. So there is market discipline attached to that and obviously with our location on the Gulf Coast we have that as an alternative, and initially we intend to export a fairly substantial portion of the diesel predominately to Europe, but overtime we intend to penetrate the low emission diesel market for which one is able to get a premium particularly in Texas.
Again you may ask the question well, the U.S. is today a net exporter of diesel. Even though the U.S. consumes about 17% of global metal distillate demand which is about 4.3 million barrels per day. It exports about 1 million barrels of diesel and other metal distillates per day. So is that not a disadvantage for us? Our estimates is that with the increasing dieselization of the U.S. economy, more heavy trucks and even more passenger cars moving towards diesel even though it is a very slow process to win the American motorist off the big gasoline engines, we understand that we are now banking on it, but we think that by about 2025, you will see the U.S. being a net importer of diesel, so that’s coincides quite nicely with the time where we will be penetrating the market.
Moving on then to the GTL plant, there is the flow scheme and a bit more detail, Lean already spoke about this, quickly some numbers attached to this, 11 billion to 14 billion, I may just also stress that this is a pre-optimized capital number, so we are looking at additional opportunities to reduce that capital number. If we are able to secure the supply of oxygen over-the-fence, and we have received very serious proposals from all four of the major vendors of air separation equipment. We will be able to reduce capital cost on this project by about $1 billion, and we are pursuing other opportunities as well to further reduce the burden.
Now again the challenge is but doesn’t that increase your OpEx and the beauty of the air separation units and buying oxygen over-the-fence, is that the air separation unit will make its money not so much out of the oxygen, but out of the Argon that is a by-product and as an inert gas commands a significant premium, and it’s not a business that we understand or that we know or that we are active in, and therefore we are quite happy to get the benefit in terms of lower oxygen pricing to our plant by enabling the production of Argon by the oxygen vendor.
So FID will be taken on this about 18 to 24 months after we have taken FID on the cracker, there will be about 48 month construction period and that brings us to a start-up date of round about the end of 2019 beginning of 2020.
To some respects on the process you can see there that we are going to extract a medium wax fraction. This medium wax fraction will be taken to our wax plant that we have in Hamburg in Germany, increasingly we see that refineries that produce Group I and Group II base oils are being shut down, and they are being replaced by Group III and Group IV base oils, and this creates a situation where the supply of medium wax is coming under pressure. So this secures feedstock for our wax business in Hamburg.
A similar consideration applies to paraffin extraction; paraffin is used in the production of LAB, linear alkyl benzene, which is a workhorse type of commodity chemical used in the detergent industry. And we will be able to produce our own paraffins and no longer will we have to depend on the supply of kerosene, there is a huge reduction in working capital instantaneous of course once off, however the important thing is that our plants in Augusta and in Lake Charles, LAB plants will move from second and third quarter respectively to first quarter, based on the cost advantage that cheaper paraffin will provide us.
We not subsidizing the chemical business, let me stretch that. We are not going to create an artificial advantage for chemicals and in the process disadvantage the fuel business. We are transferring all of these feedstocks into the chemical value-adds at fuel alternative value. So it comes at the diesel price and that imposes a market discipline on what we’re doing and even at that high transfer price, as Lean said, these value-adds are significantly are enhancing on the project overall.
And then the last very important one, of course, is base oils. We have the capability and we have already extensively piloted this to extract base oils from our GTL feedstock and it’s a great opportunity, again, for the very same reason that wax feedstock is coming under pressure Group III and Group IV base oils are in higher demand and therefore this is a great opportunity for us to play into that market. Again, just the emphasis is there on the flexibility to allow us to move in and out of fuel and chemical markets as the needs of the market dictate, right.
Moving on then to our key markets and how we see our competitiveness, we look at feedstock, technology and markets and you can see that in our current state we are not all that well positioned. We are in a situation we’ve been not backward integrated where we have some dependency particularly on other technology vendors and in particular on feedstock. That is where we have the biggest exposure. By building these plants, you will see that on polyethylene we have really a first quartile cost competitiveness on a global basis. So from a feedstock supply point of view, we are looking very good.
Technology, obviously re-licensing, which have been not better or worse than anybody else and from a market perspective these volumes will be replacing the volumes that we currently place in the market from our plant in Iran. And just as an aside for those of you are concerned about our investment in Iran, I may mention that we are in the final throes of exiting from Iran. We have a sign agreement. We’ve got the regulatory approvals and we have a drop-dead date by the end of this financial year. So by June of this year we will be out of Iran and all of the strings to that country will be cut. So that’s something that we are looking forward to, to be frank, but that market position will then be replaced.
On tetramerization we’ve got great technology and a great market, but our feedstock position is under threat. We aim to rectify that. The same on alcohols, the same on LAB, I’ve already elaborated on that and wax, the same. The important one though is GTL diesel. Lean has indicated that we’re doing extremely well in ORYX today. So all the lights are green on all three of those metrics and ORYX today and we aim just to grow our volume and to expand on our competitive technology in Lake Charles, right.
This is the exciting part of it namely the products that we can make. Now the question is how do we build this? And this is not a challenge that we take lightly because if you look at mega projects, irrespective of we are in the world, they are very challenging and they typically have a history of cost over rents, of delays, of all sorts of challenges that crop up and eventually depress the IRR that you’re able to achieve on such a project.
So we are very aware of these challenges and we’ve spent a lot of time internally, but also using external resources, external experts, particularly US Gulf experts to come in and advice us and tell us what are the potholes, what do we have to watch after, but more importantly what do we do to now in order to prevent all theses risks from materializing? I can’t stand here today and give you an absolute guarantee that we will be successful in this, but I can give you the assurance that we have taken extreme care in identifying all of these risks and making sure that we have ways in which we can mitigate them.
So, let’s move on to some of these risks, we looked at recent mega projects in the Gulf and what went wrong with them. We’ve taken a look at the appropriate contracting strategy, it’s very often tempting to move into a lump-sum EPC contract, and put all of the risks on the contractor. I’ll guess what the contractor is going to impose a significant premium, risk premium on the price that he requires from you. So, there is a balance and therefore our contracting strategy needs to be modulated quite carefully in order to make sure that there is an appropriate risk reward with the right incentives for the contractor to perform on cost and schedule in order to secure optimal execution.
The loss risk here is the one that’s I’m personally most concerned about, and that is the availability of craft labor in the Gulf. Just in our knack of the woods, we are away of some $53 billion in projects being pursued in South West Louisiana, now that’s an enormous number of projects. And these are huge requirement on craft labor to execute these projects. And this is one of the issues that we spend a lot of time and trying to assess and analyze and understand very thoroughly in order for us to mitigate that risk.
One of the typical engineering induced risks that we final project of this nature is that engineers think to be optimist born optimist, they said that the technology will work and that will be much cheaper to build. Experience, however suggest somewhat otherwise and therefore we have been conservative in our capital cost assumptions, I couldn’t, again tell you that the numbers that we’re quoting has a fair degree of conservatism both in that. If you think but you don’t like surprises should try my boss.
Right, also I think one of the key cost mitigation elements that we build into this project. Is that we will not go out with bespoke Sasol specifications into the market. We will be using industry standard specifications, and this enables us to go to an equipment vendor and negotiate effectively off the shelf type of equipment specifications, and this gives us a significant cost advantage. We know from having interacted with these vendors that some of the others are slightly less flexible and the specification requirements and that’s reflected in the price of that. So this is another way in which we manage capital cost.
Reference has been made a couple of times to the stage gate process, I’m not going to talk to that again, but then we’re going to take our time on engineering, very often the approach to these mega projects, particularly when you want to capture a first move market advantage is to go with a ready, fire, aim approach. So in other words you start construction as quickly as you can, and you catch up with the engineering afterwards, now that is a recipe for diaster. So, we are going to be very careful and very deliberate and when we pull the trigger on starting construction, we are not going to take risks on engineering catching up with construction later on.
We are not going to be parachuting in bunch of experts from South Africa to do this project. We understand that this is the U.S. that is slightly different here. And we understand that the resources available in the U.S. are highly skilled, highly experienced in local condition. So, we are going to be aiming for a balance of about 38 Sasol experts and this is, and I’m not expecting you to read all the fine prints on this organization diagram. But just to give you a feel for the salt and pepper mix between South African resources, primarily technology experts and local Gulf project execution specialist.
In order to make sure that, we don’t come in here with an arrogant attitude of we’ll show you how to done, we are going to learn from the local experts and for that purpose we have concluded an agreement with an internationally recognized engineering company that has both the resources, experience as well as the systems very importantly to measure and manage independently of the EPC contractor progress. Very often what happens is, if you put the EPC contractor in charge of measuring and managing his own progress, we have very optimistic reports, were about 90% of the project schedule and towards the end you are taken by surprise with a significantly inflated bill for the completion of the project. And, we’re going to go into this very stringently measuring and managing our EPC contractors to make sure that we have a firm control over this project.
We’re also in a very fortunate position that we have an existing employee base in Lake Charles. So we have what we like to call [satellitized] employees. Right, they know, how we think and they know how we operate and they are about 450 of these engineers already working for us today. So, we aim to leverage those bring them in as early as possible, we’ve already identified the team that‘s going to operate these plants, they are part of the design team. They are making contributions to specifying equipment to identifying what works well in turnaround situations in order to improve the online availability of the plant. So, we are leveraging off our existing resources.
So, all in all, I think we’ve got a project team that is experienced. They’re strong. They’ve got a lot of local knowledge, but they also have the appropriate Sasol technology experience in order to have the best of both worlds.
Moving onto execution risks, I’ve said that we’re not going to turn, and sort until we know, what our engineering definition is? That’s one of the easiest ways in which you can in enhance the predictability of both cost and schedule. The scope for FEED is frozen. Sasol is a technology company, so we’ve a lot of very innovative engineers, and they like to improve continuously, but at some point in time you have to put a full stop behind innovation, and you have to start construction. And then you cannot entertain further technology enhancements.
We are going to be building a plant that is technologically proven. We’re not going to take significant stake out risks. We’re quite comfortable, I’m quite comfortable in leaving some glory for subsequent generations, if they’re able to come up with greater innovations, and debottlenecking, improving efficiencies, my major aim is to deliver these plants and get them up and running within cost and on schedule. And, to do that you don’t want scope changes. Scope changes, single biggest factor in schedule delays as well as cost overrun. So, we’re going to be very disciplined on this.
Modularization; this is a key strategy for us, we’re going to talk a little about that later on, known technologies it’s proven stuff, we do this today, so it’s not as though we’re going to be scaling up or experimenting with technologies. I’ve referenced oxygen over-the-fence, I’ve referenced our local employees and then again really understanding fundamentally what can go wrong on this mega projects, and trying to preempt and air out those challenges.
Moving on then to the GTL schedule, I’ve given you a flavor of that and you’ve heard that we’ve extended, re-phased the GTL schedule by a period of between 18 and 24 months, and while that has benefits in terms of enabling us to keep our gearing under control, and meeting our self imposed gearing targets. It also allows us to further mitigate the predictability risk that is inherent in a mega project by doing more upfront engineering, and this is a very useful graph to consider in terms of enhancing predictability. You can get to about 10% improvement on estimate accuracy just by doing more upfront engineering, and on a project of this size and scale, predictability is all important. So, we’re going to go and use the 18 months with the lot of UK and attention to making sure that we know exactly. Are we going to hit off this challenge.
Now, I reference the fact that an overview to labor market is the single biggest risk to this project, as far as I’m concerned, so what are we doing about, and how are we managing it. And one the key strategy is through modularization, so what we do is we develop packages that we can outsource for fabrication in other U.S. locations or in low-cost countries, for example, Korea and other locations, which we can then ship into Lake Charles and assemble on-site.
This opportunity is substantially bigger than one would image. We have identified more than 325 different modules that we can fabricate and that totals about 82,000 tons of equipment that we will be able to fabricate off site and assemble on-site. And as you can see from this manpower loading curve what it does, if you stick build it, but otherwise do everything on-site instead of having modularized construction approaches, you have a very, very high labor peak right there. Modularization enables you to reduce that labor peak quite significantly and that substantially mitigates the risk of having to operate in an overheated labor market.
We estimated that of the 20 million or so man hours required for the construction of the cracker project and the ethylene derivatives, we can reduce that by about 4.5 million man hours, just by following this modularization strategy. So that’s quite an important advantage for us. However, this is not the only way in which we mitigate this risk. You may have seen recent media reports that the Government of Louisiana, they would refer to the fact that they have been extremely supportive and how they’ve accommodated us that they are going to invest $20 million in a training facility.
This training facility will initially be entirely dedicated us to train cost labor. They will also subsequently train operators to work in our facilities and this will also mitigate the risk of having to bring in cost labor from outside of the Lake Charles area by training up local people. Obviously creating local jobs will also give us good local support. Then furthermore, early mover advantage is also critical in order to secure the labor required. The sooner that you’re able to sign new contracts, get people on-site and start working the better in terms of securing the available labor.
This presentation would not be complete without a picture of what the site will look like just to or in take you a little bit. That over there is our existing site. This is a ConocoPhillips refinery, but you can see there that this is right adjacent to our current facility and this gives a fantastic advantage to us in terms of having people on-site who are actually familiar with operating chemical plants in that part of the world. We have a very procured and secured options on a total of 1,925 acres, which is the land requirement that we will need in order to both build the GTL and the cracker as well as have lay down areas and marshalling yards.
I can also draw your attention to the fact that this black line over there that is a shipping channel. It’s our intention to bring the shipping channel or to use the shipping channel to bring up these off site fabricated modules, land it right there and then it’s a pretty short hop, skip and a jump. It’s about a mile and a half from there to the site.
So you can see from a logistics point of view comparing it, for example, to an inland site like in Canada this is pretty easy stuff to execute. Obviously, we’ll have to work very closely with local sheriff to get his permission to bring some of these big modules down the road, but there is very active local support. The community of Westlake, which is this part there, they are people very familiar with the petrochemical industry, they’re very familiar with Sasol. We are, at this point in time, the seventh biggest employer in the Westlake area. That will go up to number one or number two when we start up these plants. So there’s a lot of local support that we can count on as we execute these projects.
Obviously we need to get environmental permits. We need to get wetland permits, we need to get air emission permits, and we need to get water permits. The wetland permit we will obtain from the U.S. Army Corps of Engineers, we’ve already engaged with them. They are at this point in time under significant pressure, the New Orleans office, because of the large number of applications that they received and we therefore engaging with them in order to augment the resources, and help them to process our application.
So that is pretty much in hand, the air emission permit and the water permit, we will obtain it from the DEQ, the Department of Environmental Quality that is a state of the Louisiana Department, who operates under delegated authority of the Environmental Protection Agency with whom we have also engaged in Washington. We are not asking for any wavers. We’re not asking for any special treatment. We will comply fully with all environmental legislation, all environmental requirements. So, we anticipate that provided, we’re able to keep the support of the local community that the approval process for permitting should be from a technical evaluation point of view relatively uncontroversial. So, this is the process that we are following there.
Right, my final slide, if I look at a summary, I think hopefully, I have convinced you that we’ve got great access to markets. We have signed agreements and letter of intent with our existing customers, large creditable customers; Procter & Gamble, Dow, companies of that stature with whom we have existing relationships. We have a portfolio of different products that is differentiated from our competitors, and there is a nice spread between commodity products and more specialized products. And then from our execution capability point of view, we’re bringing aboard the necessary experience, we’ve got independent experts helping us, and for those of you who have been following Sasol for a while, hopefully you will give us credit for taking notes from our previous mistakes on project execution, and by trying to do this in the right way.
So, with that that brings me to the end of my presentation and I’m pleased to hand over to David for some closing remarks. Thank you, David.
David E. Constable
Thanks to Lean and André for excellent presentation, very excitingly on your talking. And André, hopefully the audience now can see, why we’ve chosen you as the responsible manager to take care of these projects and deliver them on time and on schedule, well done, thank you.
I think also, I’ll say that back on, I think with André slide 56, it was our key markets and products, he was very transparent as we’ve tried to be all day actually, very transparent talking about our feedstock, current feedstock situation in chemical specifically not so much in detail, of course but in chemicals specifically. But I do have to say and mention and complement, the chemicals businesses and André’s managing directors, what a great job they have done in renegotiating our products supply contracts and where we can get back losses on feedstock pricing that changes in a volatile market that we’re in so, well done there as well. So, we do our best on that current situation that we are in.
Okay, I think, I just got a few things to wrap up; we’ve covered quite a lot of ground over the past few hours. All I’d like to do now is leave you with some important, I think what we believe to be important takeaways. And then we’ll open up to the floor for any other questions that you may have.
Today, we provided you with some insight as to why we are confident that our U.S. growth prices make great business sense. And let me recap the drivers that make these prices so compelling for us.
First LCCP, we maintained by pursuing chemicals growth in the United States, we can take full advantage of the feedstock opportunities along the Gulf Coast. I want to realize we strongly believe this will further strengthens us over our value proposition. From our vantage point, the Lake Charles chemical project will first established an Ethylene based chemicals facility with the balance product portfolio.
Second, we’ll be able to leverage a well entrenched market position, where there is a clear and existing demand for our unique products. Next to the LCCP, we will maintain our strategic position in alcohol, ethoxylates and octene. And we will further grow our octene market share. Similarly, we will be able to expand our polymers global footprint, not with standing the divestiture of our polymers production capacity inherent.
Next and very importantly, we would be able to create a sustainable competitive advantage by positioning ourselves in the lowest third of the global ethylene cash cost curve.
Finally, we’ll be able to produce currently tolled ethylene oxide there by improving not only our cost base and overall operational efficiency as André said we’ll also ensure improved safety and sustainability of the site. It’s our view that by extracting additional value from our chemicals business, we are in a great position to make the most of a diverse suite of products, which enables us to spread our risk while we maximize value.
Turning to our U.S. GTL business drivers here; the favorable new U.S. Natural Gas market dynamics and feedstock abundance places in an advantage position from the outset, if we coupled this feedstock advantage with our unique GTL and value-add technologies, we are well placed to strengthen our existing market position with superior products.
Next by co-existing in the same chemicals complex is that of our existing operations in Lake Charles, and by leveraging synergies with the chemicals project, our ability to take advantage of both shared services and an established infrastructure will provide the U.S. GTL project with an additional boost.
Finally, through our U.S. GTL facility from a products and markets perspective, we will be able to number 1; enter into a lucrative and rapidly developing premium base oils market. Two tap in one of the lowest cost paraffin and LAB value chains globally. And, number 3, produce high quality waxes to support our differentiation strategy.
Importantly, in the context of both LCCP and U.S. GTL, through our innovative energy in chemicals technologies, we will provide United States with world class cleaner burning fuel, contribute to the country’s energy security, enhance downstream manufacturing capacity and diversify the utilization of domestic gas resources.
Turning back to our investment considerations that ran through our presentation today, first from a financing point of view through a prioritized product portfolio, we will be able to manage our balance sheet within our targeted gearing levels and through our extremely successful bond issuance in the $1 billion. It’s clear that there is a good market appetite for Sasol debt.
Turning to our technology considerations, Number 1, we’re able to replicate, what is a great performing flagship GTL facility, our ORYX plant in Qatar, number 2 our technology value proposition is superior and one which is internationally recognizes both a leading and proven technology, and number 3 as regards to our cracker project, we were able to utilize off the shelf cracker and derivative product designs.
Looking at our feedstock position here the fact at the U.S. is access to low cost ethane and natural gas places that’s been an extremely favorable long-term position when we look at both our Lake Charles chemicals and GTL projects. In addition, our Canadian gas assets provide us with a natural feedstock hedge. And, key there is a strong arbitrage between global diesel and natural gas prices, which play directly into our value proposition.
Next into our market position, first we have a well established and uniquely diversified marketing position in the ethylene value chain. Number two, looking at diesel and naphtha in particular, we were able to deliver superior product offerings, which result in good market positioning, and number three we’ve have a balanced portfolio of commodity and differentiated products again as André mentioned. In addition, being based on the U.S. Gulf Coast, we also have easy access to offshore customers.
To the last consideration, our project execution capability, here first of all we’re putting a U.S. based integrated project management team in place, comprising both Sasol technical specialist and seasoned engineering construction experts with proven project management systems and local knowledge. Second, we’ve appointed an independent and reputable EPC industry partners, and we’re appointing world class contractors with strong track records of project delivery in the U.S. Gulf Coast.
And finally, we’re focused on embedding guiding principles to ensure that we’ve learned from the lessons of others including the development of informed and measured contracting strategies to mitigate both cost and schedule overrun risks. Taking all this into account, the management team and I are confident, that based on the information we have today and subject to the outcomes of our FEED work, our strategic growth price in the U.S. will deliver sustainable results.
In closing, Sasol has a great future ahead of it, provided we work hard and remain focused and continue to deliver results that will serve to maximize shareholder value. It is certainly exiting time ahead for Sasol and the future looks very bright indeed.
I think we now like to open it up, we’ve got about, I guess maybe 15 minutes. 15 minutes of question-and-answer, presenters could join us, join me on stage at the table we could take some questions from the audience. And then we’ll be adjourned for lunch. Thanks.
Okay, thanks Christine. First question Alex and then up to the front here…
Alex R. Comer – JPMorgan Securities Plc
Okay, just a couple of quick questions, I don’t know if you can get the slight back up there, but on slide 47, just on the costs on the GTL plant, I think you got less than $20 a barrel there, is that like your capital cost, is that call a end of job cost or start-up cost or is that the real cost today. And the reason I am asking you because and I think that’s quite a lot below what you’re currently achieving at ORYX, and I think when we saw a similar presentations on the ORYX project, we were looking operating cost quite about $8 a barrel may obviously gone up this quarter. So what makes you think you can deliver that $20 a barrel operating cost that’s the first question?
David E. Constable
Okay, let’s start with that, Lean maybe we can talk to that and catalyst and what drives that $20.
Giullean Johann Strauss
I thank you for the question, you’re quite right the operating cash fixed cost of capacity in the high 20s and the year below 20. I think, firstly this economics of scale that will help us in the cost. Secondly because of new generation catalyst, we will be introducing in Qatar, from next year we’ll see a drop in Qatar, a significant drop in cash cost. And thirdly, our cost structure of labor will be lower in Lake Charles. In Qatari, a significant categorization project 40% of per use Qatari with salary across different then we will be experiencing here in Lake Charles.
Alex R. Comer – JPMorgan Securities Plc
Okay, just to understand on these projects well, are you going to shipping material amounts of product back to Europe for world cup here is that more like, I take from this flow chart.
David E. Constable
Sorry, which slide you want?
Alex R. Comer – JPMorgan Securities Plc
It seems to me that you’re talking about moving wax back to Germany and Italy
David E. Constable
Yeah, all correct on the paraffins as well as on the wax, all of the wax will go to Hamburg initially, we are going to look at further wax facilities some of which will be based in the U.S. but initially all of that will go into Hamburg. And for the paraffin fraction that we will be extracting roughly half of that will go to our LAB plant in Augusta in Italy.
Alex R. Comer – JPMorgan Securities Plc
You put a lot of information data out on the chemical project, and with regard to there is downstream products you are producing, roughly speaking what sort of spread you think above Ethylene you’re going to make from those investments on average?
David E. Constable
The way we look at it, is that we are portion to every ethylene derivative to relevant volume fraction in the cracker. So we don’t have ethylene transfer price per se, we have integrated value chains above ethane. So there is a crack spread and then there is a final product margin. And this will obviously vary depending on the commodity in question and also depending on where we are in the cycle for that commodity. But it’s clear that each of those commodities will significantly exceed our required hurdle rate on that integrated base.
Alex R. Comer – JPMorgan Securities Plc
Thanks, Alex. We will take a question up at the front here in the second row, please.
André talked about an amount that Louisiana was spending on a training facility, can you discuss what other incentive that state has given you for this project to go forward?
David E. Constable
Yeah, I think Lean mentioned that, it will be on the website the LED, Louisiana Economic Development websites, which will go into quite a bit of detail on it. They are substantial incentives, property tax incentives, payroll incentives. So job payroll rebates and in some, it goes to both the GTL project and the ethane cracker. Again, as André said, it’s not required to meet our hurdle rates, but it certainly enhances the returns of the projects and I think you can find more detail there. It’s at the website, André, LED?
André de Ruyter
André de Ruyter
What we have disclosed as part of our road show. So I think we can do so here as well is that the total nominal value of these incentives over a 10-year period after start up of facilities is in excess of $2 billion.
And it’s for both projects.
André de Ruyter
Yes. It’s about two-thirds GTL, one-third cracker.
André de Ruyter
Just to a portion that’s relatively speaking.
André de Ruyter
But again the point, just to stress the point that David made, we do not require this to meet our required rates of return. This is on top of the sound business case that we have already.
Okay. Another one up in the front.
As a percent of your business lines, what percent currently is derived from products that come from coal and the percent which is derived from products that come from gas, because there is some cost difference and what are you projecting the future ratio between these two feedstocks will be when this project is completed?
David E. Constable
Christine, do you want to speak to that?
Yes. Thanks for the question. Our current operations in South Africa, which you know, the core of operations is actually the Synfuels business in South Africa and most of the feedstock requirements, about 90% of the feedstock into their business is coal and about 10% is gas from Mozambique into that business. As a percentage of the overall mix of Sasol business, I’d say and the cyclical factors here, because chemicals in a normal life cycle contributes about 30%, I’d say, to our group operating profit. Even in this past period, our Synfuels business or South African Energy business is rather, because it is a value chain business contributed about approximately 90%, 88% to be exact to our group operating profit.
I think quite importantly is we do have the joint venture in Qatar, the ORYX GTL joint venture and that now contributes about 90% of our group operating profit. So that’s quite important. So I think in shorter term 90% of the current operating profit is coal-based from (inaudible) coal base and they say [9%] is gas based. I think certainly going forward into the future it’s going to be, like I said, in excess of 50% of our operating profits then will be from outside South Africa and if I have to look at the overall mix after a 10-year period I’d prefer to say what is going to be energy related and what is going to be chemicals related and we anticipate the split being approximately 70% energy and 30% chemicals taking into account the big step out growth projects as well. And clearly, as you know, the growth project was to stick to both the chemicals and energy, is on gas base.
All gas driven, right.
André de Ruyter
Perhaps I can just add another angle to that question because I think what you are aiming at is the relative cheapness of coal as a feedstock compared to natural gas. However when we look at growing the Company using our FT technology and that is why CTL has essentially dropped off the radar screen for intense purposes. CTL technology is 40% more capital intensive because of the need to gasify coal and therefore in spite of the fact that on a heat equivalent basis gas is more expensive than coal. On a total all-in capital cost basis as well, you will find that gas is more competitive and that’s why are pursuing a gas-to-liquid strategy rather than coal-to-liquid, apart from the fact that carbon emissions are significantly lower with GTL than with CTL.
Okay, thanks André, thanks Christine. Other questions in the room, Alex.
Alex R. Comer – JPMorgan Securities Plc
I just want to add one further question just to understand this gearing CapEx targets chart. Is that assumed to drilling out of the Montney gas field proportionately? So for instance the gas price stayed low and you didn’t need to drill these out then the CapEx spending and the gearing will be much lower, is that correct?
And so the drilling of the Montney is actually included in the figures that actually gave you over here. And clearly it’s a long-term plan and it aligns to the development plan that Lean actually showed we be actually trying to align the development the feedstock of comments for the GTL.
Alex R. Comer – JPMorgan Securities Plc
But if we get to say 20, 18, 19 or whatever on the gas price is still pretty low. Are you going to drill out anyway to just sort of cover yourself?
Well, I think clearly a lot we’ve done in the sort of short to medium term, I’d say, for the next sort of two years, this year and next year. We will probably keep it at three rigs. So, I think we can add to the receipts of going forward, I think clearly we’ve said in some experts panel views into our future development plans, but these development plans has to be agreed on a calendar year basis. That’s really been agreed for 2013 now, and we will have to assess this as we go forward.
André de Ruyter
And a very low gas price at the end of the decade, we’d most likely, we most hit in the ground and go to the market…
Alex R. Comer – JPMorgan Securities Plc
Good, any other questions. Very good, well, thanks for joining again, thanks for joining us today everyone. I am looking forward to visiting with you over lunch, if you can stay for lunch. And we can have some more discussions, and then if you can’t make it, we have the cocktail event after the closing ceremony. Of course, we’re closing the market before. So, hope to see you then as well. Thanks again for joining us. Thanks.
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