Sasol’s $21bn US bet: Arbitraging cheap shale gas – WSJ Business Editor

The Wall Street Journal's Business Editor Dennis Berman recently wrote a lengthy piece on Sasol's investment into the US, reputedly the biggest into Obamaland by any foreign investor. Setting up this interview was a reminder of how difficult it is to co-ordinate diaries across time zones – one of the smaller of the challenges the soon-to-be sleep deprived Sasol's CEO David Constable and his team can look forward to when the $21bn investment hits its straps. We finally got our diaries together this afternoon and what followed were fascinating insights into a SA corporate champion from one of America's most influential business journalists. Berman admits he'd never heard of Sasol before "stumbling across this deal" – but says the group is certainly no longer hidden. Not least because the project will create up to 1 500 jobs paying at around $90 000 a year in one of the most impoverished regions in the USA. No surprise that the US state of Louisiana, which is kicking in $2bn of incentives and a tax holiday of ten years, is rather fond of the Johannesburg-headquartered group right now. – AH

DENNIS BERMAN: I have been following the fracking story for quite a while. It's really changing a number of things here in the US. Obviously, our energy independence has improved as we draw more gas from out of the ground. This has had a positive effect on the energy prices. It's brought a lot of new industry to the US. It's created a lot of new jobs – new opportunities. We are putting that gas and oil on the railroads, on trucks, getting it to where it can be refined and eventually – if the laws are changed – we'll be able to export some of that oil as well. There are some downsides, too, to all this but there's no doubt that as far as economic story goes, this is certainly one of the biggest ones of the last ten years.

ALEC HOGG: The focus on Sasol, a South African company, which we hear on our side, is the biggest foreign investor in the United States. Is that accurate?

DENNIS BERMAN: Well, I'd say it could be. It might be. I have to back up and say I had never heard of Sasol prior to stumbling across this deal. It's my job to know every company in the world, and for some reason, Sasol had avoided detection. However, it's avoiding detection no longer because it has plans to spend upward of $21bn here in the US doing two things: basically, taking that gas, cracking it into ethylene, and then turning ethylene into other products. Most of it is used in plastics and other consumer products, things that we find around our house and don't pay much attention to. The more interesting part though, is the 'gas-to-liquids' plant. I know there's one in South Africa and that turns natural gas into diesel fuel and a bunch of other components/products. $21bn…I don't know if it's the single biggest foreign investment in the US, but it's certainly one of the single biggest in the US. It is massive in scale, scope, and ambition, for sure.

ALEC HOGG: Well, if it's big enough to hit the Wall Street Journal in the way that it did, it certainly is relevant. The siting of the plant that Sasol's looking at in Louisiana: is this a big deal for the State as well?

DENNIS BERMAN: A big deal for the State…it's about three thousand acres in a place called Marshville in Louisiana, which is just outside of Lake Charles, which has a long history of petro-chemical development. The State is going to be offering direct incentives and tax breaks upwards of $2bn over time, if all this is built as projected. There's an immense flow of capital flowing into Louisiana – upwards of $90bn, probably over $100bn for the projects over the next five to ten years. There are equivalent developments going on in Texas, all along the Gulf Coast there on the southern part of the United States, so the lure of cheap gas, and the infrastructure in the US and this is what David Constable, Sasol's CEO told me about – the deep pipelines and the transportation, the rule of law – is that it's just a good place to do business, believe it or not the US. And that's what made it attractive for Sasol to invest in a plant in Louisiana.

ALEC HOGG: Dennis, maybe you can give us some indication. How big will this development be? How many people might be employed? What contribution might it make to the Louisiana economy?

DENNIS BERMAN: Well, the estimates are… For construction, which is a lengthy process, of course – up to 7 000 people will be employed there. Once all the construction's over, there'll probably be around one thousand/fifteen hundred people. That's a lot of jobs paying upwards of $90 000, which is a very good wage. The interesting part for Louisiana is this sort of reality…despite all this natural resource wealth and petro-chemical business, it really is the second or third most impoverished state in the United States. What they're doing is they're giving ten-year tax abatements to a number of these developments so they don't have to pay taxes for the first ten years. Once that ten-year period is breached and they start paying taxes, then that should flow into the coffers of schools, governments, roads, and all the things you think citizens should benefit from. Louisiana's had a very long history of giving a lot to industry and in some ways, not getting the best out of it.

ALEC HOGG: Well, I suppose the incentivisation by individual States in America is one of the huge benefits you have in your country, but there's a lot more, as well. You did mention the rule of law, the sanctity of contracts etc. It's quite interesting from a Sasol perspective. It wasn't long ago they were teasing us by saying they would be going into China. Then of course, they withdrew from Iran and moved to the United States as part of – maybe it's a bigger story here – of reindustrialisation.

DENNIS BERMAN: It is no doubt, a bigger story of industrialisation in the United States. I think companies like Sasol are pretty agnostic. If they can make a business and make a buck somewhere, they will do it wherever they can. Of course, as you know Sasol is in Uzbekistan, has a huge gas-to-liquids plant in Qatar, and worked for quite some time in Iran, so they will go where the opportunity is. I don't think they necessarily want to do business in the US for its own sake, but if they can, they will, and that to me is the interesting part of this whole dynamic. There's a lot of economic benefit, but this capital will flow around the world where the opportunity is. Qatar is in some ways an easier place to do business because the rule of law is in a way, a royal decree and if they pave the way for you, it's a lot easier and the gas is even cheaper over there than it is here in the US. I did think it was remarkable though, that from a political standpoint, for foreign investors to spend $21bn to take money out of Iran and to put it in the US – that's politically powerful and rather significant symbol of what's changing here.

ALEC HOGG: And to put it into an industrial plant…I guess that's the other big part of it. Obviously, as the Business Editor of the Wall Street Journal, you follow industry manufacturing, etc. Are you seeing others doing the same kind of thing because of this cheaper energy/cheaper oil and gas that you're getting in the US?

DENNIS BERMAN: Oh, there are dozen more/20 more projects in Louisiana alone, all kinds of things – finishing paper, creating all kinds of chemical products, doing LNG or CNG transport. Many companies are willing to put in a lot of capital here in the US. This should be a net economic benefit to the US. However, I don't think it is enough to get the US. economy and workforce back to the unemployment levels that it was at before the recession hit in 2008.   It's therefore a lot, but it's not necessarily enough to revive the economy to where it was about six or seven years ago.

ALEC HOGG: But it's interesting when one takes it from a South African perspective. We have a lot of shale gas in this country as well. It has been explored in the past. Of course, it was only after the American innovation that we were able to use it in some way. We're in the process now of starting to unlock what, for this country, is almost as much of a reserve as the US has itself. Presumably, from your standpoint, this would be a big boost for an economy, which is literally 1/75th of the US's size.

DENNIS BERMAN: I would think so. I would think there would be even a lot more than that. I think there would be less room for producing and products, and more just as a natural resource that can be shipped over, either East or West. It can be shipped up to Europe or across Asia. That to me is the opportunity for South Africa – the ability to build LNG terminals/export terminals that are expensive and take a lot of work. No doubt, that's an opportunity but it's going to take someone putting forth a lot of money to do it.

ALEC HOGG: Probably Sasol, bringing in some of its investment back home?

DENNIS BERMAN: I have to say, I've been worrying about the coal-to-liquid plant in South Africa. I think that's still running. Is that right?

ALEC HOGG: Indeed. It produces 30 percent of this country's petrol.

DENNIS BERMAN: That is a dirty business, converting coal. It produces a lot of carbon and many pollutants. Even the gas-to-liquids process is basically a pretty dirty process, so if you can wean yourself off that coal-to-liquid to gas-to-liquid, that would certainly be an environmental improvement for South Africa.

ALEC HOGG: Just to close off with, have there been environmental issues with this investment in Louisiana?

DENNIS BERMAN: Well, they haven't really started yet, but if you look at the permitting papers put forward to the State, even though this is the height of energy technology, there are some environmental consequences. One thing that showed up, was that the amount of benzene – a very toxic chemical/by-product that will be produced by the gas-to-liquids plant – is about 85 times that of what they call the 'threshold amount', which is basically the amount at which the government starts reviewing it for environmental impact. There are many things such as benzene and a host of other chemical pollutants that can be produced, and the amount of carbon emissions from these plants – overall – once it's done, will probably be one of the top 20 carbon-producing facilities in all of the United States, which is saying something given the size of this economy. In some ways, it is a bit (I hate the word) baroque, to basically construct a whole edifice for arbitraging the costs between gas and oil.

ALEC HOGG: Fascinating insights. Dennis Berman is the Business Editor of the Wall Street Journal. Thanks for joining us this afternoon.

DENNIS BERMAN: I love to visit South Africa. I'll look you up if I get there.