Oil Prices Kill an $11 Billion Bayou Plan

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A good example of how in the free market a company has to react and bight the bullet when commodity prices go the wrong way.

By Patrick McGroarty And Alison Sider | www.wsj.com | Jan. 28, 2015

South African energy giant Sasol Ltd. said Wednesday it was shelving an $11 billion project on Louisiana’s Gulf Coast, imperiling one of the largest foreign investments on U.S.soil because of the plunge in oil prices.

Sasol has spent years planning to expand its chemical factory outside Lake Charles, La., into a sprawling facility to turn natural gas into industrial compounds and diesel fuel. In October, the company committed $8 billion for equipment that produces ethylene, which is used to make plastics and other products.

That plant is still going forward, but Sasol said on Wednesday that a bigger project, to use natural gas rather than crude to make diesel, is on hold.

Plummeting oil prices have forced it to push back its own 2016 deadline for deciding whether to build the unusual and expensive plant now that oil prices have fallen from over $100 a barrel to under $50.

“This will allow us to evaluate the possibility of phasing in the project in the most pragmatic and effective manner,” Sasol Chief Executive David Constable said in a statement.

Sasol’s shares on the Johannesburg stock exchange have shed about a third of their value since crude prices started a precipitous decline in June.

Sasol’s change of heart shows how crashing oil prices have buffeted a range of energy companies, which have postponed or abandoned projects worth billions of dollars. For example, Royal Dutch Shell PLC this month dropped plans for a multibillion-dollar petrochemical plant in natural-gas rich Qatar. Companies that find and drill for oil have also said they will slash capital spending and cut thousands of jobs.

The Sasol natural-gas-to-diesel plant, which would be one of only a handful in the world, relied on oil prices remaining high compared to natural-gas prices, which have been very low in the U.S. since the shale boom began in 2008.

When Sasol said it was thinking of building a gas-to-diesel plant in Louisiana in 2012, a barrel of oil was worth around 40 times as much as a million British thermal units of natural gas; today the ratio trades at about 17. Sasol said that ratio must be at least 16 for the project to make economic sense.

“We have a surplus of gas and a surplus of crude—both are down in the dumps,” said Sandy Fielden, an analyst with energy consultancy RBN Energy LLC. “Until that situation improves, the economics of such a plant aren’t good.”

As natural gas began flowing from shale fields to the Gulf Coast, the U.S. prepared for an investment boom that the American Chemistry Council, a trade body, estimated could be worth $137 billion from 2010 to 2023.

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