LONDON (ICIS)—The deal for LyondellBasell to take a 50% stake in Sasol’s Lake Charles, Louisiana, base chemicals operations includes an option for the firm to take full ownership of the assets in future, CEO Bob Patel said on Friday.
The two companies announced on Friday that they would form a 50/50 joint venture that would see LyondellBasell take a 50% stake in the ethane cracker and polyethylene production units at the site for $2bn, as Sasol moves to sell down assets to cut debt and shore up its balance sheet.
The arrangement includes an option for LyondellBasell to take full ownership of the assets in future, leaving Sasol holding the more specialised Guerbet and Ziegler alcohols, surfactants, and ethoxylates assets at the site.
There are no strict terms for such a deal, or a deadline that would require LyondellBasell to choose to exercise the option or not, but it remains “the interest of the parties”, according to Patel.
“The agreements do not set out a formal process, but [there is] potential to acquire the JV assets in full sometime down the line,” he said, speaking on a briefing call.
LyondellBasell will market 100% of the base chemicals product from the site.
Whereas Sasol had been understood to be planning to the bulk of product from the site into the US, where supply was already high due to the glut of new capacity built on the Gulf Coast to capitalise on cheap shale-derived feedstocks, LyondellBasell is planning to distribute globally.
“The idea is to maximise value, wherever we can do that,” Patel said.
Between the Sasol deal and the 50/50 polyolefin complex joint venture in China with the Liaoning Bora Enterprise Group, the company has vastly expanded its capacity without having to build a new production site from scratch.
“We are essentially acquiring full capacity of a new and operational world-scale cracker complex with little exposure to risks from project execution,” Patel said.
Following conclusion of the deal, expected to close by the end of the year, and the return to operations of the Lake Charles low-density polyethylene (LDPE) unit, expected this month, LyondellBasell project that its global annual capacity will total 17m tonnes of olefins and 16m tonnes of polyolefins.
There are also scope to debottleneck operations and drive synergies, which the company expects will accrue to $50m in the next three years.
The company has no plans to begin building any new integrated cracker plants in North America for the foreseeable future, Patel said, and at present there are no other assets with the kind of strategic advantage offered by the Sasol and Bora joint ventures, he added.
The deal is a good one for LyondellBasell, according to ICIS senior predictive analyst Ciaran Healy.
"This seems to be a really good move by LyondellBasell. They have acquired newly built capacity close to the bottom of the global cost curve at a lower capital expenditure per tonne than would likely be required to build an equivalent greenfield unit and without having to wait," he said.
"The additional value to LyondellBasell of being able to direct the polyethylene produced through its own global networks will likely also be substantial," he added.
The purchase price was indicative of current bottom of cycle PE pricing, Patel said, noting that that the replacement cost of the units if the company had full ownership on a low-cost basis would stand at around $6bn, indicating that a 50% stake would be worth $3bn.
The total cost of the Lake Charles complex, including the performance chemicals assets outside the joint venture, is expected to stand at $12.6bn-12.9bn.
Despite oversupply and the economic impact of the coronavirus pandemic, PE demand in some markets has ticked up, and project delays may also be set to tighten conditions if that trend continues, according to Patel.
“I do think that we are at the bottom of the PE cycle and as there have been many public announcements of delays and cancellation of projects… we are seeing good growth even in a pandemic,” he said.
China PE demand growth has almost returned to normal year on year at around 4-5%, and consumption in the US has ticked up 1.5% over the same period, he added.
Focus article by Tom Brown.
Additional reporting by Joseph Chang.
Thumbnail image shows polyethylene, a plastic made at the Lake Charles complex. Photo by Shutterstock