Sasol's CEO Hosts CFO Newsletter Conference (Transcript)

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Sasol Ltd. (NYSE:SSL)

CFO Newsletter Conference Transcript

June 10, 2013 9:00 AM ET

Executives

David Constable - Chief Executive Officer

Christine Ramon - Chief Financial Officer

Andre de Ruyter - Senior Group Executive, Global Chemicals and North American Operations

Lean Strauss - Senior Group Executive, International Energy, New Business Development and Technology

Bernard Klingenberg - Group Executive, Southern African Operations

Analysts

Caroline Learmonth - ABSA Capital

Gerhard Engelbrecht - Macquarie

Nishal Ramloutan - UBS

Nic Dinham - BNP

Alex Comer - JP Morgan

Operator

Good morning and good afternoon, ladies and gentlemen. And welcome to Sasol’s CFO Newsletter Conference Call. Opening remarks will be made by David Constable, Chief Executive Officer; and Christine Ramon, Chief Financial Officer. This will then be followed by a Q&A session. A copy of the CFO newsletter released on Friday is available on Sasol’s Investor Center webpage www.sasol.com.

I would now like to hand the call over to David Constable. Please go ahead, sir.

David Constable

Thanks very much, Operator. Good morning, good afternoon and good evening, everyone. And thank you for joining us for today’s conference call. I’m calling in from Washington, D.C. as this week certain members of the group executive and I have meetings with key representatives from the White House Administration, Senate and Congress. The focus of our engagements over the next couple of days is to build alignment and strengthen support for our U.S. growth program.

Joining me on the call from Sasol are Christine Ramon, our Chief Financial Officer, who is in Johannesburg; Andre de Ruyter, our Senior Group Executive for Global Chemicals and North American Operations, who is with me here in D.C.; Lean Strauss, our Senior Group Executive for International Energy, New Business Development and Technology; and Bernard Klingenberg, Group Executive for Southern African Operations, both of whom are with Christine in Johannesburg.

After I have kicked off the call, Christine will take you through our financial and operational highlights to the end of March 2013. We’ll then facilitate any questions you may have.

For us, at Sasol, the first nine months of FY ‘13 was all about focusing both the management team and the organization on the urgent and the important. As much as we are looking to strengthen our Southern African base through our nurture and grow strategy, we are equally focused on expanding internationally, most notably in the U.S.

Given the number of critical projects we must deliver on and to ensure that we do not take our eye off the ball, we’re categorizing our strategic priorities into two distinct groupings. First, our near-term priorities, which the entire organization must drive forward and second, our growth priorities, which include a razor-sharp focus on our group-wide capital projects.

Turning to the first category, the near-term priorities, here we have stepped up our cost optimization drive. As you will recall in January we kicked off a diagnostic study into what is causing the concerning cost creep we are seeing in many of our businesses and enterprise functions.

The first phase of the project which we call Project Phoenix is now complete. At the end of May, the GEC approved the second phase and we are excited about the potential benefits it can deliver to the bottom line.

We are also in the process of overhauling our Group-wide operating model to ensure that we become a more effective, efficient and competitive organization in the coming years. We’ll be able to provide you with more color on Project Phoenix and our operating model work in September after we have closed off our analysis and finalize the path forward.

Next, as we drive to become more competitive and as we look to retain and attract future talent, embedding a high performance culture where our employees are engaged, enabled and accountable is critically important.

Finally and linked to a high performing organization is talent development and succession planning. This includes at the top management level. As we evolve as a company we must have the right people with the right skill sets in the right positions.

Looking at the second category our growth priorities, here we continue to advance in a measured and responsible fashion, as you’ll have seen from our recent decisions to reduce participation in our Uzbekistan GTL joint venture and to divest from our exploration licenses in Papua New Guinea.

With respect to growth priorities, world-class project execution is also critically important. As we discussed at our Investor Strategy Days in April to deliver our capital projects on time and within budget, we are increasing the use of integrated project management teams. This allows us to leverage the expertise, capabilities and experience of external industry specialists across all project disciplines.

Turning back to this past quarter, we had some very positive results across the Group. We continued to achieve important milestones in the areas of safety, operations and on our U.S. Mega Projects.

Under safety, the Group’s recordable case rate for employees and service providers stood at 0.30 at the end of March that’s the lowest level ever recorded in the company’s 63-year history.

Equally important, we continue to maintain a solid operational performance at Synfuels and at our flagship GTL facility in Qatar. Noteworthy, here is that ORYX continues to improve, with an average run rate last month above 106% of design capacity.

And with respect to our U.S. growth program, our integrated project management team is in place and we are working hard to secure environmental permits, which are on the critical path.

On the flip side and disappointingly, we encountered a delay in the disposal of our Arya Polymers assets in Iran. Notwithstanding, we remain fully committed to wrap-up the sale as soon as practical.

In addition, we continue to experience execution challenges on our brownfields FT Wax Expansion Project. The setback we’ve experienced on FTWEP is disappointing. We have looked at what went wrong from the outset of this project when it was sanctioned in 2009. We not only reviewed contractor actions and factors outside of our control, we also evaluated our own performance.

Our capital excellence program that was started in 2011 has come a long way in addressing the root causes of our project execution issues in South Africa. While the Wax expansion project is under pressure, it is also important to contextualize this.

When looking at our project portfolio of more than US$4 billion post-FID, we are in line with global norms. Approximately 80% of our projects come in below budget and more than 50% are delivered within the original committed schedule.

Now before handing over to Christine, I would like to take this opportunity to acknowledge a Sasol colleague and friend, Lean Strauss. Over his 31-year career at Sasol and through his professional and personal contributions, Lean has helped drive the organization in its transition from a largely South African company in the 1980s to the expanding and thriving international business it is today.

Now after over three decades of dedicated service, Lean is setting his sights on a lifestyle change and a well-deserved retirement. On behalf of all of us at Sasol, I would like to extend our sincere thanks and appreciation to you, Lean, every best wish to you and your family.

But this is not a goodbye. I’m very pleased to confirm that Lean has concluded an exclusive energy and petrochemical industry advisory agreement with Sasol. In doing so, Lean will continue to support me and Sasol as a trusted industry advisor as we take the company forward.

Let me now hand over to Christine who will run through our financial and operational performance in more detail. Christine?

Christine Ramon

Thank you, David. Good morning and good afternoon to everyone, and thank you for joining us on the call today. I would like to take you through some of the key financial and operational highlights from today’s announcement before we open the call for question.

On 9th of April we celebrated our 10-year anniversary listing on the New York Stock Exchange which has been extremely successful for Sasol. Through this listing we have accessed the U.S. capital market and grown our shareholder base in the U.S. resulting in our ADR share price increasing by almost five fold.

During our very Strategy Days held during April in New York and Cape Town, we were able to showcase our U.S. investment proposition. Our U.S. Mega Projects comprise approximately three quarters of Sasol’s current market capitalization and is expected to deliver significant value to shareholders over the coming years with the ethane cracker expected to come first on stream in the 2017 calendar year and the US GTL project phased thereafter.

We have delivered on an overall solid operational performance for the first nine months of the 2013 financial year benefiting from a weaker rand, despite a still volatile macro environment. The average Brent crude oil price softened compared to the prior year comparable period.

Chemical prices remained depressed, negatively impacting our chemical businesses, where demand continues to remain soft. Recent indications are that chemical prices are beginning to stabilize. Demand and margins in the U.S. have improved, however, Europe continues to remain soft.

On the volumes front, Sasol Synfuels continues to deliver a strong operational performance and is expected to achieve the top end of the guidance at 7.4 million tons for the full financial year.

ORYX has achieved 75% of its design capacity for the 10-month period to April 2013 and factoring in the impact of the scheduled shutdown is expected to achieve 80% of design capacity for the full year. The plant stabilized quickly after startup and has achieved 106% of design capacity in May.

As regard to Arya, we expect Arya to achieve 80% of its nameplate capacity. As David indicated, we continue to make progress albeit slower than initially anticipated on our disposal of our interest in Arya Sasol Polymers Company. We have concluded memorandum of understanding with an interested party regarding the disposal of Arya and affidavit of asset we are finalizing closing activities.

Further losses relating to the foreign currency translation reserve of approximately US$100 million will be recognized in income once we have finally divested from Arya. The devaluation of the Iranian currency may further negatively impact our earnings.

There may be further impairments linked to the fair value of the ASPC asset as a result of the deteriorating Iranian environment and the accounting requirement to recognize operating profits for the period since October 2012, which may not be recuperated through the divestiture process and disposal value.

Furthermore, we continue to focus on those factors within our control including cost containment, operational efficiencies and margin improvement. However, our current cost inflation is expected to be well above normal producers’ price index inflation trends for the 2013 calendar year.

Sasol Synfuels’ cash unit costs remain under pressure as a result of higher coal feedstock prices which is largely internal, as well as increased energy, labor and maintenance costs. Sasol Synfuels’ current cost inflation per unit was however largely in line with PPI inflation, excluding the coal feedstock and the abnormal electricity price increases.

As David indicated, we are actively looking at opportunities to reduce and contain our cost base sustainably. This analysis will be used together with procurement and maintenance cost reduction strategies, underpinned by drive for shared services. At the year-end results announcement in September, we should be in a position to give you clearer cost reduction targets.

We remain confident that based on the production guidance and our macroeconomic assumptions, we will deliver solid operational performance and earnings for the 2013 financial year compared to the reported attributable earnings of 23.6 billion rand in the 2012 financial year and that exclude major one-off items such as the impact resulting from the Arya disposal.

An update on earnings guidance will be provided once we have a reasonable degree of certainty on the full year results for the 2013 financial year, taking into account any adjustments arising from our year-end reporting closure process, as well as re-measurement effects. The potential impairment of our investment in Arya, as well as other possible impairments are not expected to have an impact on headline earnings per share.

With that summary, David, I will now hand back to you to open the call for questions.

David Constable

Thanks Christine. And will the operator send over the questions to us and we’ll answer the questions for you.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. Our first question comes from Caroline Learmonth from ABSA Capital. Please go ahead with your question.

Caroline Learmonth - ABSA Capital

Thank you. Question, first of all, on the wax expansion project, which has suffered significant increase in budgeted cost. Can you explain exactly what the increases relate to? You talk about it’s not been helped by the strike activity and civil unrest, but can you go into a bit of detail as to why the costs have increased so much? And then you talk about reassessing the economics of the project. Does that mean the project no longer meets your hurdle rate? And there’s a risk of potential impairment. Does that mean we could see perhaps billions of rands in terms of impairment, given the size of the project?

And then the second questions relate to UGTL Uzbekistan. So can you explain in a little bit more detail why you’re reducing your stake to the 25.5%? And what the timing’s going to be on that, who you are selling it to? And then does that indicate to us that you may exit the project and do the economics still work on that project? Thank you.

David Constable

Okay. Thanks Caroline. We brought -- we’ll start with the wax expansion project and maybe a high-level overview on how we’ve seen the cost increases in the schedule move out on us. And I think I’ll ask Andre to take us through that brownfield complexity, the scope increases the quantities increasing, if you could Andre?

Andre De Ruyter

Thanks Caroline. Couple of reasons, as David has indicated, we have been building this project on this onsite, which is a site more than 50 years old and we have encountered a number of brownfields issues in terms of utilities, pipelines, cables et cetera that has extended the civil works quite for this project very significantly.

We’ve also had issues that relate to cost estimation and this is caused by the fact that this is a 150-year plant. So there is no clear reference for this plant. And as a result, cost estimation has had its challenges on this project.

In addition, team has relied on good officers of EPCM contract in this instance. And we have had to beef up our cost control measures and management systems quite considerably in order to improve full costing and predictability. Two major issues that are relevant to the South African projects, in particular are the fact that productivity has been significantly worse than we had anticipated at the commencement of the contract.

And this obviously has translated into higher cost of labor rights with unit of work produced. In addition, as you referenced in your question, Caroline, labor unrest has been a feature with wildcat strikes adding to substantial labor delays. Also after completion and resolution of strikes, we have had to encounter significant decreases in labor productivity which has attained to extend scope and schedule.

Lastly, the project has been quite sensitive to macro variables in particular, exchange rates and as corporate assumptions in this regard change, the project economics have had to be updated as well. As a consequence, we are at present reassessing the economics of the -- we are unable to give you detailed guidance as to what any impairment would be. Further updates in this regard will follow a new course.

David Constable

Thanks Andre. I’d just like to add that from an overall project portfolio perspective, the company as I mentioned in my opening remarks are doing very well. We’ve got a lot of positives recently on the 17th reformer, the 10th SAS reactor, 16th oxygen train, the four gasifiers, all of these in South Africa. The Sasolburg gas engine plant and also a lot of our mine replacement projects are going extremely well.

And with capital expense being put in place in 2011, our portfolio office which scrubs our project, project management office, which looks at execution and our academy which trains our sponsors and project directors, with all that in place we now, we are very comfortable that going forward, our project is in much better place.

C3 stabilization is the first project that is well on track and doing very well. So I just want to add that to give you comfort that our projects are coming along, many others are on track, tetramization 1 in Lake Charles is doing very well. And also the gas engine power plant in Mozambique, we see that coming online next year right on schedule as well.

So I want to give some comfort with the -- at the same time balancing the disappointment on FT wax. I think you have answered the hurdle economics question. So we’ll turn to Uzbekistan and the fact there is, we always we continue as Christine mentioned many times, we continue to prioritize our portfolio, our rolling capital plant and obviously with the magnitude of Sasol’s growth portfolio combined with a significant sustenance capital expenditure in our South African operations, we obviously have to keep a close eye on our CapEx and rolling that altogether and looking at Uzbekistan, we decided to take a decision with the -- to reduce our participation in that project to 25.5% which timing wise Caroline will take place at the end of feed.

So through the end of feed, we are at the 44.5% mark and then at the end of feed, we’ll reduce to 25.5%. Who that partner will be, we’re working with the joint venture with Uzbekneftegaz and Petronas to look at who the partner that will be bringing in and that will give you more information as soon as possible. We are not executing the project. It’s very robust, returns with a very strong and we are comfortable proceeding at this new level later in the year. Thanks very much.

Caroline Learmonth - ABSA Capital

Thank you.

David Constable

Operator.

Operator

Thank you. Our next question comes from Gerhard Engelbrecht from Macquarie. Please go ahead with your question.

Gerhard Engelbrecht - Macquarie

Good afternoon. Excuse me. Thank you. David, I wonder if you could give us a look into the future of production at Synfuels. Where do you see production going? You are now saying that the expansion project will commence second half 2014. What is your target production at the site, when the project is completed?

Maybe on the growth cost, Christine, you mentioned growth costs, in the narrative, could you maybe tell us when you’ll start capitalizing these costs? I think all the projects are now beyond -- are beyond feasibility, and what are these growth costs that you still expense refer to?

And then lastly, can you just give us maybe a basis for coal prices, internal coal prices, going forward. And how do you see that increasing? And how is your BEE partner in Sasol Mining contributing to the 14 billion rand capital projects that you’re doing?

David Constable

Thanks Gerhard. I’ll leave the second two questions to Christine. The first question, Synfuels production as we’re guiding, we’re guiding this year to the top end of the range, which will as you know is 7.2 million tons to 7.4 million tons. And as we finished off the GHHRS which the first pair is coming online this month actually and the second pair will be coming online about a year from now. And we’ll see targeted production up as we discuss before in the 7.5 range or slightly above that mark, once we’ve finished off the growth projects. Christine, would you like to talk about the growth cost and also the coal prices.

Christine Ramon

Okay. I’ll have to get back to you, Gerhard, on the internal coal prices. But I think, certainly as we got most of my -- they are capitalized from the feed phase of the project. So by and large, feed costs are capitalized. In terms of added growth, I mean, they all had the opportunity, business opportunity that we are looking at, both in the energy and chemical food project. And so those are the growth costs that would be up to feasibility phase that we will be expensing. But it will be much to be spend, again the growth costs that were related to the U.S. GTL projects and the ethane crackers. So the growth costs are expected to decrease quite significantly.

And as regards on quantum of internal coal prices, I’ll get back to you in that regard. Your question also related to the BEE partner contribution. And I think that importantly is that with these non-replacement programs as you know, the process are adjusted from central mining and charged onto central synfuels. Clearly, what that transfer price adjustments include and this is per agreement with Sasol Mining is that it incorporates a return on invasive capital and for the investment program and clearly that is adjusted at the end of the every reporting period depending on how much capital has been expend.

Through that, I think clearly the BEE partner contribute. Well, they are receiving the returns of the contribution would then be in form of the equity stake that they actually hold in the mining business. And clearly, it’s been the profitability of the mining business has determined been through the cash flow while the profitability and dividend is determined through the cash flow from the mining business. And they will prove that the BEE partner does actually contribute to the share of capital in the business. I think quite importantly is that all of this business done at an ongoing basis.

Gerhard Engelbrecht - Macquarie

Okay. Thank you guys. I’d love to maybe catch up with you, just a little bit more to understand that a little bit better. Thank you.

Christine Ramon

Okay. Thanks.

David Constable

Okay. Thanks Christine.

Christine Ramon

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Nishal Ramloutan from UBS. Please go ahead with your question.

Nishal Ramloutan - UBS

Hi. Good day everybody. Just on the Uzbekistan project, do you have the option of completely walking away from Uzbekistan or are there any agreements that actually requires you to still remain in the project? And then also on the wax project, I mean, based on, obviously, the high CapEx numbers and what you’re seeing in terms of the macroenvironment in the wax market. Is it more of an indication that you probably wouldn’t meet your hurdle rate on that project? And will you even meet your cost of capital on that project?

David Constable

Thanks Nishal for the question. I’ll start off on Uzbekistan and hand over to Andre for wax -- wax markets. On Uzbekistan, all the partners have the opportunity or the ability to exit the project at given stages of the project. For example, at the end of feed that’s a gate that we have to go through as the joint venture with all of our partners. And so that’s a possibility but as I said earlier that is not our intention.

We believe that the product is robust from what we seen now and from what we’re seeing from the EPC bids that are coming in on the project, which look very encouraging. So, I think going forward, we’re in pretty good shape there. And the next step is project financing, right, with the project information memorandum most likely being issued here in the next several weeks and seeing what the financing is going to look like to allow us to proceed further on the projects. And of course, as I said, it will be signing up a new partner with the joint venture as well. Andre, wax markets?

Andre De Ruyter

All right. Thanks David. It just a point up that wax prices that’s we are currently achieving in the market and also forecasting as a result of this achievements going forward are significantly higher than assumed during project sanction. So we’ve been able to make up quite a bit of ground in terms of the revenue that we receive in euros.

However, as I indicated earlier on the major challenge that we have is with volatile macroeconomic assumptions in particular forecasting what the rand is going to do or not going to do. And as we update these assumptions, we are going to review the project economics taking into regard delays in schedule and also capital cost overruns. And this will then dictate whether or not we will have to incur an impairment on this project.

At this point in time, there is a possibility that an impairment will have to be taken on this project. I cannot indicate what the magnitude of an impairment, if any, will be.

Christine Ramon

If I can just clarify because there seems to be to be questions around hurdle rate and around cost of capital. Quite importantly is that currently the project is below the weighted average cost of capital, that is actually is impaired. And so what Andre is saying, is that there is a real risk of impairment on the project. But, clearly, this can only be assessed once all the critical assumptions have been reviewed, and that’s in the process of happening as part of the year in closure process.

Nishal Ramloutan - UBS

Okay. Thanks.

David Constable

Thanks, Andre. Thanks Christine.

Nishal Ramloutan - UBS

So a just a follow-up on Uzbekistan, in terms of resources, would you still need to provide full resources, even though you have decreased your shareholding in that entity? And would you still be the operators of the GTL in Uzbekistan?

David Constable

Lean, can you take that question for us.

Lean Strauss

Yeah. Hi. We intend to continue to be the operators. So as far as the other commercial arrangements are concerned, everything stays intact. There is no changes to that.

Nishal Ramloutan - UBS

Okay. Thank you.

David Constable

Thanks, Nishal. Operator

Operator

Thank you. Our next question comes from the Nic Dinham from BNP. Please go ahead with your question.

Nic Dinham - BNP

Hi. Good afternoon, Dave. Just a couple of questions. There is a fairly simplistic question to ask about the gas production from Canada, and that is why produce the gas in the first place if you continue to make losses on it? There must be obviously something behind that contractually-based but maybe you could just expand on that a little? And also in the same area, there was a lot more gas produced than what you originally indicated, maybe you could explain that just a little bit?

The next question would be about ORYX GTL’s 80% utilization rate, which is well below what you predicted six months ago and that must be a disappointment for an established technology?

And finally, I think a little bit about, could you expand a little bit on the Nersa Gas Act implementation coming up in 2014? You’ve explained a little bit, but could you tell us how you see the net impact on that business on a profit basis? Thank you.

David Constable

Okay. Thanks Nic. Three questions Canada ORYX and Nersa, and I think for the best way to answer that first, those first two question is with Lean. Lean if you could take the gas production and why we’re producing, of course we’re de-risking there and ramped down to just three rigs in Canada and then go on to ORYX and our utilization rate there.

Lean Strauss

Yeah. Nic, Lean here. I think David already gave you a good guidance there that we continue to de-risk the gas field. We have seen an increase in, or let me say production of late it’s been higher than budget, so the gas flows are better than we have estimated. So we are very pleased with that.

But the losses are very much driven by the depreciation that we have on the gas field. Remember, the purchase price for the gas fields, the acquisition price from Talisman is also depreciated and that makes a huge contribution to the depreciation charge that we see.

As far ORYX is concerned, we’re very pleased with production in general. I think for the first six months of the financial year we were 93% of designed capacity which was above our guidance of 80% to 90%. The 80% to 90% was affected by the plant shutdown which happened in February, March and few days in April.

Unfortunately, the shutdown took about 10 days longer than planned and half of that was contribute to significant sandstorms that we had, we had handful days which we could not work because of sandstorms and we unfortunately also had a fire on the superlative. But everything is back to normal and I think has been indicated by Dave both everything we see we are very pleased with the production we have seen in May another 6% of capacity.

David Constable

Thanks Lean. Yeah. Very good performance at ORYX on a proven technology and we are very pleased overall. Bernard, we are going to talk little bit about the Nersa Gas Act at March 26, 2014, we have to have the new gas pricing in place both overall and by class along with, it’s going to be an unbundled price, so we’ll have to add the tariffs to that and could you comment little bit more about the path forward on that.

Bernard Klingenberg

Thanks David. Nic, as you said in the Nersa that we’re in the process of finalizing the new pricing mechanisms. We actually close to being done on that and have started or we’ll start with the engagement process with the external customers in this regard. And that will unfold in the next few weeks, and we need to be ready as we say in the note to implement the new prices in March next year. So that engagement process has not started with individual customers on the details of the pricing forward for each of that.

David Constable

I think, I think…

Nic Dinham - BNP

I’m looking for a bit of an indication as to how the impact will be on your profits as they appear at the moment?

David Constable

Yeah. Nic, I think the bottom line is we expect total neutrality on with respect to revenues and operating profits. So we are in good shape and we’ve been able to not be any worse off if you will and going forward we’re in good shape as far as that’s concern.

Nic Dinham - BNP

Thanks.

David Constable

Thanks, Nic.

Operator

Thank you. Our next question comes from Alex Comer from JP Morgan. Please go ahead with your question.

Alex Comer - JP Morgan

Hi, guys. Can you here me.

David Constable

Yeah. Go ahead Alex.

Alex Comer - JP Morgan

Yeah. Couple of quick questions. Just on Project Phoenix, clearly you’ll give more details later, but I’m just wondering, I mean, are we talking about sort of meaningful cost savings here, is this going to be 100 millions of rand or billions of rand? That’s the first question.

And then on project costs and the higher sort of expectations on wax? I mean, yeah, you say 80% of your products come in on budget? I mean, that seems a high percentage from my perspective?

And I’m just wondering, I mean, what sort of sanctions do you take, on the project teams when they get these things wrong, they get and we overrun? What confidence can you give us with some Clean Fuels 2 isn’t going to end up being to 20 billion rand or whatever, given what seems to be a fairly consistent problem with regard to labor productivity and unrest. Maybe you can answer those questions? Thanks.

David Constable

Yeah. Thanks. Thanks Alex. On Phoenix, we’re -- as I said, we’re excited about the potential cost savings that we can drive across the corporation both in the businesses and in the functions, as well as some restructuring that we want to do to ensure the sustainable savings going forward.

And I think I can just say right now that it will be a meaningful reduction, it will be significant, and we look forward to giving you more details in September at the year end results.

Alex Comer - JP Morgan

Okay.

David Constable

Project costs, that 80% under budgets, we use a p50, right, probability of under earning half the time or over earning half the time. So we are well ahead of our p50 mark on that’s at 80% below budget.

With respect to going forward in South Africa, like I said, capital excellence has really been able to help us from the scrubbing standpoint and in driving execution to the Project Management Office. And so the other thing we’re doing is setting up a model very similar to what we’re doing in the U.S.

So on the major Tier 1 projects in South Africa, you will see an integrated project management team that includes external specialists with systems and capability that will allow us to keep track of these large projects and keep them on track.

So, I think, with that that new model on the large projects, we’re going to be in a much better position. Obviously the risks remain out there. We have -- we’ll continue to have labor risk and productivity risk, and we’ll have to manage that through and bringing on the appropriate skills on to the project and that always going to take a lot of planning both internally and externally on the integrated project management team. Andre?

Andre De Ruyter

David, if I can just add to that in terms of consequence management that we have implemented on the project team, we have made 14 major changes to the composition of the project team, six of those changes are in the top management of the managing contractor, where we’ve really asked the contractor question to change out many of its top senior individuals on the project, as well as its South African representation. And then we have made eight changes where we have removed Sasol individuals from the project team and substituted them with others. So there has been a significant consequence management on this.

Alex Comer - JP Morgan

Thanks Andre.

David Constable

Okay. Thanks Alex.

Christine Ramon

I think….

David Constable

One more.

Christine Ramon

David?

David Constable

Yeah. Go ahead Christine.

Christine Ramon

Sorry, I just want to [Technical Difficulty] summary this year end. I just wanted to clarify that on Project Phoenix that there is timeframe that’s attached to the delivery of the saving. So, I think, once you put the targets at we also be clear on the timeframes because we certainly don’t expect all of the sustainable savings to be delivered in year one.

Alex Comer - JP Morgan

Sure.

David Constable

Thanks Christine. Thank you.

Christine Ramon

Thanks.

Alex Comer - JP Morgan

Yeah. Just one quick question just on Phoenix, obviously 60% of your cost is labor, where Phoenix has less that labor cost?

David Constable

Sorry, Alex, we’ll -- what to labor cost?

Alex Comer - JP Morgan

I just think that your cost on labor, I’m just wondering if Project Phoenix will effect that labor cost?

David Constable

Well, as a percentage we’ll have to see. It will certainly, as I said before, we’re going to have a meaningful reduction in our cost and labor will be a part of that, but I don’t want venture what percentage that would make it. Thanks.

Alex Comer - JP Morgan

Thank you.

David Constable

Thank you.

Alex Comer - JP Morgan

Okay.

Operator

(Operator Instructions) Thank you. We have a follow-up question from Caroline Learmonth from ABSA Capital. Please go ahead.

Caroline Learmonth - ABSA Capital

Thank you. You mention in the statement around upcoming wage negotiations. Can you just remind us, what’s the timing on that and at the moment, do you anticipate any issues out of that process?

And then, secondly, just looking at your Synfuels production, obviously it wasn’t as strong in the third quarter versus the first half, but it sounds like you’re still comfortable you’re getting to the upper end of guidance for the full year. So what makes you so confident on that?

And then you’ve ordered long lead equipment for your ethane cracker. So how much is that in terms of U.S. dollars?

And then just finally, on the Clean Fuels compliance, you’ve given now some CapEx guidance. Is there any requirement or do you know yet what the operational impact is going to be on Synfuels and Natref in terms of volumes? Thank you.

David Constable

Thanks Caroline. Let me see if I can. I’ll start on wage negotiations. They’ve gotten underway at the end of May and they should run through the end of July of this year. And I guess, I can characterize them as being, it looks like a similar situation to last year with double-digit increase request coming across from the year-end to this point, but right now some cautious optimism that we can get to a similar place as last year, but certainly a risk on the upside there. But right now they are in -- we’re in process and seeing a similar discussion to last year and it will run through July.

On Synfuels third quarter versus first half, I’ll ask that Bernard just touch on that and the comfort levels that we have based on what he is seeing out at plant. Bernard?

Bernard Klingenberg

Thanks David. This is Bernard. Yeah. The third quarter were one of the small issues that wasn’t as strong as the first half of the year but subsequent to that we’ve seen very good production runs and it is the 10th of June, so as I sit here, I’m still thinking about the last three weeks that I can, we’re very confident that the way the plant is running at the moment that we can give a fairly confident view that we’ll reach the target in the guidance.

Caroline Learmonth - ABSA Capital

Thank you very much.

David Constable

Thanks Bernard. And then on the, I guess the crack gas compressor numbers, Andre maybe you can touch on that over on Lake Charles project.

Andre De Ruyter

Yeah. Thanks David. Yeah, we have ordered major components already prior to the taking of FID so all of these orders are subject to cancellation clauses. Maximum total walk away costs are in the order of about $20 million should we decide not to take FID on this project.

David Constable

Thanks Andre. And then on and Bernard help me here, but let me just start on the Clean Fuels 2 program. I think Caroline guided to $11.7 billion for both Natref and Synfuels. Natref has been about $6.4 billion of that and Synfuels has been about $5.3 billion. So not quite half and half but that’s where we’re going to be at.

Natref volumes are going to be remain -- will remain unchanged. And then there will be a slight loss at Secunda as a result of the compliant with Clean Fuels 2. The benzene is going to be converted to allowable components with Natref, right. And then the additional sulphur that we’ll be taking out of the fuel will be sold to existing customers as an input into fertilizer and other production processes. And in Secunda, the benzene is going to be removed from the petrol steam and used as feed for in our turbines to generate electricity. So that’s what we’re planning out there at Natref and Secunda.

Caroline Learmonth - ABSA Capital

Thank you.

David Constable

Thanks Caroline.

Operator

Thank you. We have a follow-up question from Nic Dinham from BNP. Please go ahead sir.

Nic Dinham - BNP

Hi. Just one or two more please. You mentioned a water license and Sasol Coal. Could you -- is this issue now finished or is it still on the table? And when do you have to resolve this by, for it not to have an impact on your coal operation or your coal projects?

David Constable

Water license at Sasol coal, I guess I’ll ask if anyone there Johannesburg has an answer to that if not we’ll have to get back to Nic on that.

Christine Ramon

Sorry. We didn’t hear the question can you start please? Can you repeat the question please?

David Constable

Go ahead.

Nic Dinham - BNP

Yeah. Sorry. The water license that you’ve mentioned in your disclosures about hard impact or potential impact. My question is has the water license issue been resolved? If it hasn’t been resolved, when do you expect it to be resolved and maybe you could add some color as to what it’s all about? And would it have an impact on your project if it doesn’t get resolved? That’s a linked question to that.

Lean Strauss

David, maybe I can just give a comment here. I am not sure about the water license problem that we have. I think what we have is just water sense initiative where we’re trying to save water by doing work in communities that are close to our factories and which we had used those phases of part for this. We are currently paid. What we would like to do in future is to do not get paid for this water but to be given allocations offset against maybe future potential use of additional water. But we don’t have as far as I know any problems in the short term with any water license and so forth. That is just a proactive initiative from our side to save the country water for future use.

Nic Dinham - BNP

Okay. Sorry, I think I’ll have to get back to you on that one because it’s linked to the Sasol coal project. Finally, sorry, if I could just ask you, Lean, one more question about the follow-up question on the gas expenditures on Canada. Do you have timelines for the balance, how much capital do you have to spend and when do you have to spend that by to fulfill your side of the deal?

David Constable

Yeah. That’s Lean you can chip in here. Certainly it depends on our -- with our partners we agree on an annual calendar year budget for development on those fields. And the timing depends on what we agree to together and of course so that can run out quite some time. But I guess the current estimates, Lean, are over the next couple of years to finish off those payments.

Lean Strauss

David absolutely correct. As you’ve indicated, we’ve had for the first three years we had a big emphasis on de-risking. Going forward, we will much more focus on the economics of developing the field to make sure that we meet our hurdle rate. But there is no minimum requirements. I mean we can reduce our activities if we feel so. What we’ve seen, what is an uptick on gas prices, we’ve see now constant gas prices above $4 which is encouraging. Also more and more signs of liquids in the field and that will drive our decision on how fast we develop. But that’s a unanimous decision in the joint venture.

Nic Dinham - BNP

Thanks Lean. Thanks David.

Lean Strauss

Okay. Thank you.

Operator

Thanks. We have no further question at this time, please continue with any further points you wish to raise.

David Constable

Thanks Operator. I guess we’ll just close up the call and then with that let me thank everyone who joined us today on the call. And I am looking forward to seeing everyone during our year-end results road shows in September. As we have stated, we remain confident that based on our current assumptions and excluding once off impacts we’re going to be delivering a solid operational performance and earnings for FY’13 as compared to FY’12. So thank you again and have a good day. Thanks very much.

Operator

Thank you ladies and gentlemen. That concludes today’s Sasol’s CFO Newsletter Conference Call. Thank you for your participation. You may now disconnect.

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