Some of the major industrial projects fueling Louisiana’s expected economic boom could be at risk if the price of oil continues to fall, says economist Loren Scott, including one of the largest in the pipeline: Sasol Ltd.’s gas-to-liquids complex outside Lake Charles that alone could represent as much as a $22 billion investment.
“The main thing is the Sasol [gas-to-liquid] plant. That’s more and more in jeopardy as the price falls,” Scott says.
Sasol Ltd. announced in October its final decision to move forward with an $8.1 billion ethane cracker project in Lake Charles, but the South African firm is still mulling over whether to build additional GTL facilities. Sasol is expected to announce a final decision in 2016. Among the factors it’s weighing are the potential overrun costs of the ethane cracker project. They’re also closely watching the difference in the price between oil and natural gas.
As the price of oil has continued to fall in recent weeks, the gap between the price of oil and natural gas has been closing. And as Scott explains, if the price of oil falls to below seven times the price of natural gas, they are about equal in cost of thermal energy content and it is no longer economically advantageous to pursue some natural gas projects.
Along with the Sasol project, Scott says he’s also worried about the viability of the Waller Marine and Tenaska LNG facility at the Port of Greater Baton Rouge, Lockheed Martin’s project at NASA’s Michoud Assembly facility and Harvey Gulf’s conversion of its fleet to liquefied natural gas, as well as its planned Port Fourchon bunkering facility.
Another economist, LSU’s Jim Richardson, says oil prices will have to fall more dramatically and stay depressed over a longer period of time for companies to pull out on potential investments.
“Companies are always evaluating major decisions, but it’s a longer term phenomenon than the episode we’re seeing. They’re interested in 20 to 30 years out,” Richardson says.
This morning, natural gas is priced at $4.06 per 1,000 cubic feet, with oil at $76.30 a barrel. That makes the price of oil roughly 18 times the price of gas.
“Unless the price of oil dips into the [$50- to $60-per-barrel range] and stays there for a long time, we’re not likely to see a change in the GTL investments,” Richardson says.
Meanwhile, Louisiana Chemical Association President Dan Borné says the drop in oil prices is good for chemical plants.
“Many of our clients use petroleum-based products,” Borné says. “If the price of oil goes down, that can be good for plants. It makes those type of products less expensive.”
Goldman Sachs Group Inc. announced last week it’s predicting oil to average $75 a barrel in the first quarter of next year.
“We should be worried already,” Scott says. “I don’t think it’s going to fall too far, but as it falls it starts putting those projects in jeopardy.” —Kelly Connelly