Mega US project floors Sasol executives
When Sasol announced in 2014 that it would build an $8.1bn (R118bn) ethane cracker and derivatives complex at its Lake Charles site in Louisiana, US, it seemed the South African energy and chemical darling was on its way to becoming a global force. But the past five years tell a different story.Since announcing the Lake Charles Chemicals Project its share price has fallen more than 50% as cost overruns, delays and most recently a second postponement by Sasol of its results have prompted some analysts and shareholders to call for new management.Zaid Paruk, a portfolio manager and analyst at Aeon Investment, said: "We believe current management are of a poor quality with a brash attitude. It appears investors are frustrated with the management team and would like to see not only one but both CEOs relieved of their duties, which we agree with."Sasol has two CEOs, Stephen Cornell and Bongani Nqwababa.Last month Allan Gray and Coronation fund managers began pushing for management changes, asking for Cornell, who is paid more than Nqwababa and is more closely involved in the Lake Charles project, to be removed, Bloomberg reported.Allan Gray declined to comment this week on questions from Business Times regarding demands for changes to Sasol's management. Coronation did not respond to requests for comment, nor did the Public Investment Corporation, which owns shares in Sasol. Zama Luthuli, divisional executive for corporate affairs at the Industrial Development Corporation (IDC), which also holds shares in Sasol said: "We have not formulated a position regarding the impact of the cost overruns of this project because Sasol has yet to produce its financial results." Paruk said the recent results postponements and the cost overruns reflected poorly on Sasol, as well as its executive and nonexecutive directors, who must be held accountable. "The indication to the market is of an erratic and disorganised culture and an inability to conduct and manage global operations." Paruk said that though Sasol's plans to deal with its problems could prove to be effective in the long term, the culture at Sasol needed to change and reliability and trustworthiness should be priorities. The most recent problem for investors was a second postponement of the company's results, a delay the group said was necessary to allow for a review of internal controls at Lake Charles to be completed. Sasol spokesperson Alex Anderson said the board had commissioned a review by independent external experts. It would cover the circumstances that may have delayed the prompt identification and reporting of the revised cost estimate.The results are now due to be released no later than October 31.At the heart of the company's problems were cost and schedule overruns that saw the cost of the Lake Charles project go from $8.1bn to a projected $12.9bn.Asked who did the initial costing, Andersen said Sasol's own project teams, cost engineers and quantity surveyors, and a number of service providers were involved.Stephen Sparks, a senior historical studies lecturer at the University of Johannesburg, who has researched Sasol's history, said part of the problem may be due to the group underestimating labour costs.Business Times reported earlier this year that heavy rain, incomplete engineering work and defective carbon-steel forgings, as well as high absenteeism surrounding US national holidays, were factors in the delays late last year. But instead of being resolved, the problems seem to have been compounded. Sparks said the problems at Lake Charles were typical of such mega-projects, which tend to have cost overruns and encounter difficulties because of their size. "That partly is the answer and I don't think that's a cop-out," he said.One of Sasol's other problems was its inability to communicate effectively with its shareholders, which Sparks said was based on the company's roots as an apartheid-era parastatal when it was operating in a less transparent context and could rely on government funding.But now, as a listed company accountable to shareholders, who are increasingly impatient about seeing shareholder value, this was the first mega-project that the group had undertaken without government support.Sasol listed on the JSE in 1979."It went 'private' but didn't give up its special state subsidisation," Sparks said. "It still enjoys some of that today (a source of ongoing controversy) but nothing like it once did. "When it built Sasol 2 and 3, it could count on a special relationship with the state and financial support that went with it. It may enjoy some inducements in Louisiana, but nothing from the South African state in the same way."He said this means Sasol depends on the market to a much greater extent than it used to and this subjects it to market scrutiny."This matters for two reasons: ballooning costs mattered not quite so much when the state was backing earlier mega-projects, and there was less transparency under apartheid - even if it was listed on the JSE, there was always certain information which it didn't have to disclose, that could be hidden behind 'state security' laws," Sparks said."So I think it may partly also be a cultural legacy problem - that Sasol became accustomed to operating behind a veil of sorts, what with anti-apartheid sanctions [and so on]."Sasol's share price has recovered by almost 7% since the announcement last week of the second delay in the release of results, indicating some investors are hopeful that the group's problems will be resolved.