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South Africa's Sasol is the world's only commercial scale synthetic oil producer. Founded in 1950, they convert millions of tons of oil from coal each year. In 2011, high oil prices turned them into South Africa's second most valuable company, with stock returns of 1,000% since 2000. Then they took a massive swing on a multi billion dollar megaproject in Louisiana. It could have transformed them into an international chemicals giant. Instead, it smashed them to bits. In today's video, South Africa's synthetic oil giant and the $13 billion US megaproject that ruined it. One of the key reasons for Germany's defeat in World War I was that the country had no significant oil reserves. But Germany does have plenty of coal, especially a soft brown type called lignite. Being a younger type, coal, lignite has low carbon content and high moisture. It crumbles quite easily. So after World War I, the government began researching possible ways to turn these huge reserves of coal into oil. In 1923, Franz Fischer and Hans Tropsch discovered a method of doing so, and it is named after them. The Fischer Trops or FT process. FT is an indirect conversion, meaning that we first turn coal or natural gas into an intermediate product called syngas. This is done by burning coal in the presence of oxygen and steam. Syngas is primarily just hydrogen and carbon monoxide, along with a bunch of contaminants. The syngas is then purified of toxins and contaminants in a step called cleanup and shift. After this, we pass the syngas over a special catalyst, usually iron or cobalt, at a moderate temperature and pressure inside a special reactor. The syngas molecules break apart on the catalyst surface and then reassemble as chains of carbon and hydrogen. The end result is a hodgepodge of liquid and gas hydrocarbon byproducts, including fuel oil or gas. This chain reassembly process is random, but follows a distribution. The output mix can be tweaked using various catalysts and conditions. Both sides in World War II studied and implemented variants of the FT process, as well as other coal to oil technologies. It was a critical part of the German war machine, and the Japanese built a few plants too. The United States also invested money into synthetic fuels, passing the Synthetic Liquid Fuels act of 1944 to augment their existing oil supplies. But even during the war, and with massive German government tariffs, synthetic oil was never economically competitive, costing about two to three times more than imports. That disadvantage worsened after the war's end and with the emergence of major oil discoveries in the Middle East. The world shifted away from FT and it sort of faded, except in South Africa. Like Germany, South Africa has large reserves of coal, but no oil. So the country followed developments in the coal to oil technology space over in Germany quite closely. They saw it as a way to fulfill domestic energy needs while also building an industrial competence. In the 1930s, a large south African mining conglomerate called the Anglo Transvaal Consolidated Investment Company, or angloval, licensed the FT process and through a subsidiary called Satmar, built the first synthetic oil plant in the country. However, Satmar's oil, made from an oil shale rock called torbanite, was only competitive with the benefit of tariffs. The company lobbied the government for protections and financial support of about 16 million South African pounds to build a larger plant. The government was at first hesitant, still hoping to strike oil somewhere, until finally, in 1947, they passed an act and formed an advisory board. But gradually it dawned upon them that if this was going to be economically competitive, then it would have to be the single biggest industrial undertaking in the country's history. Angloval, for their part, was struggling to raise capital overseas for the project. Banks and economic development lenders questioned the economics of the FT process, even with the benefit of South Africa's cheap coal and labor. The fundraising got harder after the National Party, led by the descendants of Dutch and French settlers called Afrikaners, won the 1948 election and began to set up apartheid. It became increasingly clear that the project would require money and industrial protections that only the government can provide. If so, then the nationalist minded Afrikaners believed that such an asset should be state owned. A massive devaluation of the South African pound in 1949 made imports extremely expensive, further crippling the company's ability to handle the project. So in the end, the company decided to go back to mining gold. Thusly, the South African government acquired the FT process license from Anglovolt. Then in September 1950, they established the company South African Synthetic Oil Limited or Sasol, through its Industrial Development Corporation, or IDC. The official name was then changed to South African Coal, Oil and Gas Company because some people thought the term synthetic oil drew uncomfortable comparisons with fake oil and World War II Germans. But Sasol stuck and it eventually became the official name anyway. Sasol was celebrated as a step towards building a diversified, powerful industrial economy. South Africa, proponents said, had enough oil potential, meaning coal, to last for the next 500 years, the end of the country's energy concerns. The company's founding board of directors and management team was quite competent senior, stacked with engineers and experts inherited from the old angloval Synthetic Oil Organization. And because it was only indirectly owned by the government through the idc, it ran with largely little interference. Though Afrikaners did express concern about overrepresentation of English speakers and foreigners among the ranks. The company immediately faced struggles as it tried to build its first plant, which I shall refer to as Sasol 1. In 1952. With the aid of American engineers, Sasol 1 ran two types of Fischer Trops units. The first used a fixed bed reactor, pretty much like the ones that the Germans used here. The catalyst sits in tubes and the syngas flows through and round it. Five very large units of these were installed. Such reactors are simple and easy to run, but tend to suffer heating issues. It also tends to produce more higher boiling point materials like waxes and diesel oils, less so stuff to make gasoline. The second type reactor utilized an American design from M.W. kellogg called a fluid bed. Here the reactor is filled with small, almost sand like catalyst particles. Syngas then bubbles through it like as if it were a fluid. The fluid bed conceptually offered better mixing and superior thermal effects, but had never been commercialized before. It was completed in early 1955. Products were delivered in August and by November Sasol employees were filling their cars with Sasol petrol. But problems then forced a shutdown in early 1956. After American and German experts failed to troubleshoot, the Sasol's own experts took over and did a redesign. The final working design, completed in 1957, was uniquely South African. The Sasol Sinthal process. An impressive technical achievement. Sasol 1 was located in its own city called Sasselburg, about 50 miles outside Johannesburg. It sits near a titanic coal mine and reservoir, providing the site with key raw materials. By all measures, it was an impressive achievement. Nine lurgy type generators turning coal into syngas for the fixed and fluid bed reactors to turn into hydrocarbons. The build consumed 16 million man hours, 80,000 cubic meters of concrete and 320 kilometers of pipe. The thing also cost a whole lot of money. 100 million rand, or about half a billion dollars today. A substantial overrun. And despite having then unprecedented economies of scale, SASO I's five fixed bed reactors had the same capacity as 75 similar design reactors used during World War II. The company still turned an operating loss. Rather than trying to add more capacity to find economies of scale, Sasol instead diversified into fertilizers and synthetic rubber, tars, chemicals, explosives and plastics. The idea was to take advantage of the FT processes, various hydrocarbon byproducts, which presumably can be sold at higher value. The company remained in the red throughout the 1960s. But the government kept subsidizing Sasol with oil import tariffs and price for protections until eventually it showed a form of profitability. This was all for strategic reasons. The South African apartheid government wanted to save foreign currency for other imports. It also believed that it might one day lose its primary oil sources in the United States and Middle East. In December 1958, the first All Africa People's Conference made the first call for a worldwide trade and diplomatic boycott against South Africa for its racial segregation policies. Then in 1960, police opened fire on a group of unarmed protesters opposing apartheid laws. The Sharpeville massacre. Between 69 and 90 people were killed. The massacre triggered a massive uprising in the South African black population and international condemnation. In 1964, the first oil producing Middle east nation joined the boycott. Kuwait broke all diplomatic and commercial relations with South Africa, including oil shipments. Threats of further sanctions intensified. In 1973, the global energy crisis propelled SATSL forward, enabling it to build its largest complex yet. OPEC's oil embargoes caused prices to finally close the gap between South African imports and domestic synthetic oil, helping the company turn a sturdier profit. Despite Sasol's relatively minor contribution to the country's overall oil supply, about 30%. Increasing isolation and crisis moved the company to the center of South Africa's energy policy. Its unique coal to oil style garnered attention from abroad. It gave Sasol the oomph to finally make their next big expansion. In 1974, a second major plant called Sasol 2, located in a new area called Secunda Sasol 2 would have three times the capacity of its predecessor. It also cost a staggering $3.2 billion. Then, as Sasol 2 neared completion in 1979, the Shah of Iran fell. The new Iranian regime banned oil to South Africa, triggering a major crisis. Because Iran provided 90% of the country's imported oil. South Africa, to the dismay of many, evaded collapse thanks to existing oil stockpiles and open market purchases at high prices. But the panic motivated a third complex. Sasol iii. Located next to Sasol II in Secunda and basically a clone of it. Building this complex would cost an estimated $3.8 billion. To get the money, the increasingly impoverished South African government privatized Sasol the selling a 70% stake in the Johannesburg public markets. In the decade following privatization, Sasol occupied this strange space between public and private. On one hand, Sasol was a private company with many foreign investors. Yet on the other hand, its core synthetic oil business heavily depended on government market intervention, including Tariffs to artificially adjust the oil import price to match the synthetic oil price as well as guaranteed price floors. Moreover, the company's position at the core of the apartheid state's energy policy put it in the crosshairs of activists. In 1980, the refineries at Sasselburg and Secunda were both bombed by African nationalists. The company also struggled with labor turmoil. Trade unions agitated for better working hours and pay striking in 1987 and 1989. Both times the company cracked down with violence. Finally, in 1990, the National Party led government turns from apartheid. Black led political parties were unbanned. Nelson Mandela was released from jail and talks began leading to the country's first free elections in 1994. For Sasol, this meant massive change. In 1993, 41% of profits derived from its position in the protected oil market. With apartheid ending and economic sanctions, lifting this protected position would not last. But the new ANC led government opted for a slow phaseout of these subsidies, giving Sassell's management some time to figure things out. So what then to do? At first, Sasol considered exporting coal abroad. Sasolburg had a big underground coal mine, but the wider coal industry rejected working with them because because of the perception that they would leverage their taxpayer subsidies in synthetic oil to apply pricing pressure. So instead, Sasol embarked on a broad diversification into petrochemicals. This began with the 1995 acquisition of a wax business in Germany to form the division Sasol Wax and a merger of subsidiaries with another company in 1997 to form a joint venture producing aromatic chemicals like phenolics, as well as two other acquisitions to create Sasol Nitro, a maker of ammonia fertilizers and things that go boom. These diversifications seem to pay dividends for Sasol. Their chemicals division contributed about a third of total profits in 1995. In 2001, the company took another major step forward with the 1.3 billion euro acquisition of Condia, a German chemical firm with operations in Europe, mainland China and the United States. The latter included a facility in the area of Lake Charles, Louisiana. Another of Sasol's corporate strategies was to leverage their perceived technical R and D strengths for the growing natural gas industry. The center of that strategy was a technology called Gas to Liquid, or gtl. Natural gas is a common byproduct of oil production. But natural gas's gaseous nature made it difficult to transport. So they often flared it away for safety reasons. A bit wasteful, GTL turns that natural gas into liquid fuels and chemicals via syngas It's a riff on Sasol's original coal to oil process, except that you take in natural gas instead of coal. The economic justification for doing GTL and taking on the energy losses that come with it is to make that otherwise unmovable natural gas more transportable. Kind of like turning perishable milk into cheese. So in a way it competes with lng. To encourage their technology, Sasol struck a collaboration deal in 1999 with the American giant Chevron. Two years later, Sasol struck a joint venture agreement with Qatar to produce a GTL plant to rescue so called stranded natural gas. This eventually led to their first official overseas GTL plant in late 2003. The Oryx GTL project. The plant started operations in 2007 after a slight delay. Sasol, a 49% partner, hailed it as proof that GTL works. Lifting all of this were booming oil prices. After a long slump, oil prices started rising in 1999 due to geopolitical crises in the Middle east and and high demand in emerging economies like India and mainland China. When oil prices are high, Sasol's coal to oil processes mint money. Revenues soared from 11.5 billion USD in 2006 to 21 billion in 2011. Profits were good too, with operating margins at an excellent 20 to 26%. Why? Because oil prices were so high, coal was so cheap and Sasol's apartheid era plants in Secunda were fully depreciated. In 2011, Sassell appointed a new CEO, David Constable. Constable was Sassell's first outside CEO, coming from the engineering company Fleur. Upon joining, he looked at macroeconomic conditions and saw what he felt were the planets aligning on a massive opportunity. In 2008, technological advances in horizontal drilling and fracking were unlocking previously unreachable sources of natural gas, particularly in the United States. The shale revolution, as it was dubbed, caused US natural gas prices to fall from $12.3 per million British thermal units in mid 2008 to as low as $2.69 in 2009. They did recover a bit, but remained in the $4 range in 2011. Yet during this same time, the oil prices hovered at an eye watering $100 per barrel. Sasol saw the resulting price gap between oil and natural gas as an arbitrage opportunity since their technology can start with any carbon fuel, including natural gas. From there, an idea started to come together for a massive investment in the United States. One that can take in cheap US natural gas and turn it into into valuable petrochemicals that can be sold into the lucrative US market. This US growth program had compelling motivations. In 2011, about half of SAFL's profits came from selling plastics and refined petrochemicals. This was an opportunity to raise that proportion even more, moving away from oil to create a truly diversified chemicals giant. There was also a geographical diversification opportunity. Almost all of Sasol's revenues and profits then were being generated by assets based in South Africa. Producing in the United States can help on cost and operations. Moreover, Sasol already owned a facility and raw land in the Lake Charles area in the state of Louisiana. From the Condia transaction, expanding an existing site seemed better than starting from scratch. Lake Charles was also near many of America's largest oil fields, so lots of gas. The Louisiana state government also offered as much as a billion dollars in economic incentives. Considering all of this, Sasol and its management felt the time was right to try something big. In late 2011, Sasol announced its goal to build the Lake Charles Chemical Project, a fully integrated chemical complex. Constable did the media conference announcement alongside then Louisiana government Bobby Jindal. As originally announced, the Lake Charles Chemical Project would comprise of two facilities integrated together and dual tracked. The first half of the complex was a massive gas to liquids plant, the first of its kind in the United States. The GTL plant will take in cheap natural gas and churn out premium diesel fuel, naphtha, paraffin and other waxes. Initially estimated to cost about 8 to $10 billion, the GTL plant would be delivered over two phases in 20 and 2019. It would also create 850 direct jobs and 4,500 indirect jobs. The second half would be an ethane cracker. Yes, that is what they actually call it. Natural gas has several components, one of which is ethane. Ethane by itself is not very useful except for burning stuff, but crackers can break down or crack that ethane into molecules like ethylene using thermal or catalytic processes. Ethylene can then produce commercially valuable goods like plastics. The late 2011 estimate said that the Lake Charles ethane cracker would cost about $4.5 billion and start up in 2014. A generational swing for the fences if done right. Constable said that it will drive Sasol's growth for years to come. Ernst Oberholster, the company's managing director for new business development, told the financial times in 2011 the US has significant reserves of clean burning gas and because this supply has limited demand, the price is depressed and most commentators believed it will stay at reasonable levels. We are confident that with our view of future prices, the project will work. The announcement happened late 2011. The Sasol did not begin significant front end design work on an integrated project until a year later in December 2012. This was due to a long 18 month feasibility study. Lake Charles has two integrated projects. The ethane cracker technology was pretty standard, but the GTL plant ran a Sasol only process. It was big and complicated. And then there were labor shortages. Giants like Chevron, Exxon Mobil, Dow and ConocoPhillips were all trying to get projects built in Louis, Louisiana. And there was simply not enough workers. The full Lake Charles project was estimated to need 7,000 workers. A hard ask when the labor shortage situation was so bad that Conoco's CEO said in March 2013 that if you can spell shale, you can get a job. As a result, the cost estimates started rising. The GTL plant cost estimates rose about $3 billion to 11 to 14 billion. Estimates for the Cracker project rose $1. 2 billion to $5 to $7 billion in total. Internally, serious concerns were raised about Sasol's ability to deliver such a megaproject. In 2013, a South African law firm called Worksman Attorneys gave Constable an internal report detailing serious problems at an ongoing wax facility project in Sasolburg, South Africa. That wax factory was called FTWEP. Originally costed at a billion dollars, the build ran 40% over budget and resulted in a $100 million write down. Worksman's probe found that employees had deliberately hid bad news about progress. And that was South Africa. If Sasol can't deliver a $1 billion wax factory in their own backyard without major problems, how can they be expected to deliver a 20 billion dollar integrated chemical facility in another country 17 flight hours away? At this point, the company still had a chance to say no. Starting in March 2014, Sasol's stock went on a tear, breaking 600 rand per share. In August. Measured in USD, their market cap was $37 billion. Since 2000, the stock returned 1000%. So the management had the credibility to turn their backs on the project. But in late October 2014, they made the final investment decision to go forward with the ethane cracker. By then, things were already starting to go bad. Starting in mid-2014, oil prices pancaked from $100 per barrel to the mid-40s by the end of the year. Why? Short story US oil shale oil started to hit the market, but OPEC refused to cut production and yield market share. At the same time, economic issues in Europe and mainland China hurt oil demand, creating an oil glut. The price gap between natural gas and oil vanished, ruining the economics for new GTL plants. In a prescient move, Shell canceled the $20 billion GTL project in late 2013. In January 2015, Sasol announced that it would shelve the GTL portion of the Lake Charles chemical project. An oil executive told the Wall Street Journal that Sasol executives overly focused on natural gas prices going up. They never expected that oil prices would go down. The GTL plant was finally killed in 2017, along with plans for another facility to be built in Canada. But the ethane cracker and six downstream chemical units move forward despite ethylene prices also falling, the prevailing belief, as explained in an investor presentation, was that polyethylene demand would stay strong. Sassell also argued that their cracker was meaningfully different from the other crackers then being built in the area. Oh, by the way, in August 2016, Sasol raised the cost estimate for the ethane cracker yet again from 5 to 7 billion to $11 billion. An investor report noted that this was due to a combination of higher labor costs, higher contractor costs, too many rainy days and extra design work required when the Lake Charles site was found to have poorer ground foundations than anticipated. Constable told the press that Sasol was confident it was going to get delivered and that the $11 billion was a worst case scenario type estimate. 11 billion also happened to be more than half the company's $18 billion market cap at the time. Moreover, Constable was already out the door at Sasol. In June 2015, he announced that he would not extend his contract. It raised eyebrows considering he hadn't yet delivered the megaprojects that he started. Sasol's chairman said that the company wanted a leader with a long term view. One fund manager said in mid-2015 this is not usual. The announcement comes as a bit of surprise. It is concerning that David Constable's departure coincides with the implementation of Sasol's largest investment ever. This is not ideal and cause for concern. Constable's replacements were two Cogani Nkwaba, Sasol's cfo, and Stephen Russell Cornell, their EVP of international operations. As late as 2018, Sasol still held out the story that the plan for Lake Charles was being executed. In a 2018 interview with Bloomberg, the two co CEOs said that the facility would bring in over a billion dollars a year in revenue and transform the company into an international chemicals giant. CO CEO Tony Cornell said that they were already looking forward to doing bolt on acquisitions when Sasol reported their annual result in August 2018 he the project cost is still within the market guidelines of $11 billion and good progress is being made. So it came as a major surprise in early February 2019 when Sasol announced that they were pushing back the crackers start date by five months and raising the final cost by another $500 million to about 11.8 billion. Sasol management explained that as late as mid November 2018 they originally thought the plant construction to be on track and that it would be producing saleable product. Before 2019, small problems had been reported with the carbon steel phalanges, the rings connecting pipes together or joining pipes to pumps. But management thought those were contained one month delay at most. It soon became clear, however, that that the steel phalange problems inside the core ethane cracker as well as the ethylene oxide ethylene glycol units were far more extensive than anticipated. An external consultant had to be brought in and it was then realized the changes would need $210 million and two to three more months to fix. The engineering contractor firms had to issue 8,000 drawing revisions. The time delay was serious because it meant Sasol's cracker comes online the same year as three others from South Korea, Taiwan and Japan with 4.2 million tons of ethylene capacity, all scheduled to hit in 2019. Oversupply nightmares abounded. By now, Sasol's management had lost faith in its own team. After the February debacle, Sasol's big shareholders asked management if they were sure that this was. It turns out it wasn't. In May 2019, they announced that the cost estimate would rise another billion dollars to 12.6 to 12.9 billion. Some of the work done to fix the steel phalanges had damaged critical path activities inside the ethane cracker. The heat exchangers also suffered some corrosion. They had to fix all that, adding another $210 million. Another $180 million came from certain work contracts that Sasol discovered that it owed. Yeah, that one happens to me too. All the time. And most vexingly, $230 million of additional cost because Sasol duplicated how much money they were going to get from the Louisiana state government for finishing the project. Real first year analyst type error. Investors were rightly infuriated. And then, just to rub salt into the wound, in early 2019, South Korean chemicals giant Lotte finished their own ethane cracker, literally sitting right next to Sasol's, albeit smaller, for just $3 billion. In October 2019, co CEOs Inkwa Baba and Cornell and other members of the management team were fired. The company framed this move as taking responsibility for the failure. Fleetwood Grobler, EVP of the chemicals division, took over as CEO to retain cash for the project. Sasol also canceled the dividend. And then in 2020, the COVID pandemic hit. Lockdowns across the world caused oil prices to crash so hard they went negative for a bit. In August 2020, the company reported that revenues fell from 14.4 billion to 10.9. The company also reported a substantial $5 billion loss due to low prices, plus write downs in the base chemicals business and some South African assets. Sasol took on a lot of debt to finish the project. The $10 billion of debt threatened to take them down entirely. So a few months later, in October, they sold a 50% stake in the Lake Charles complex, which cost them $12.6 billion to build, to the American chemical company LyonDell Bissell for $2 billion. Lyondel Bissell also agreed to operate the plant. The last of the seven chemical plants in Lake Charles finally started up in November 2020. Long overdue today, in both home and abroad, Sasol faces major challenges. Back in South Africa, Sasol faces down daunting carbon emissions and ESG commitments. Their titanic plant as the Kunda, has been called the world's largest carbon emitter by volume. But shutting down their core business is not financially viable. Overseas. The chemicals business, once held up as the company's future, has suffered from a growth slowdown in chemicals post Covid debt from prior acquisitions and increased competition from China. It requires a brutal turnaround and a long and painful road to recovery lies ahead. New head Anja Gerber recently proposed to shut down or mothball four Sasol plants overseas. Today, Sasol's market capitalization stands at about $3.9 billion, having fallen 90% from its peak. It seems unlikely that the 70 year old synthetic oil icon is coming back to those heights anytime soon. Alright everyone, that's it for tonight. Thanks for watching. Subscribe to the channel. Sign up for the Patreon and I'll see you guys next time.