Shortcomings of leadership behind Sasol’s fall from former glory
Cost overruns and problems at wax project have made investors wary of escalating costs at the Lake Charles plant in the US
South Africans have long been reminded of Sasol’s outsize economic significance to their country: A town south of Johannesburg bears the company’s name, and a stylised drawing of one of Sasol’s refineries decorated the R50 note until a few years ago.
Established in 1950 by a government that was increasingly becoming isolated by apartheid, Sasol helped shield SA from the sanctions that choked off oil supplies by employing technology used by the Germans in World War 2 to transform coal into fuel and chemicals.
After privatisation in 1979, it grew to become SA’s biggest company by revenue — a behemoth on the JSE — and pursued projects in the US, Qatar and China, becoming an international integrated energy and chemicals company. But Sasol’s struggle to break with a long-standing command culture, in which executives are rarely questioned, threatens to bring the global expansion of one of SA’s most successful corporations to a halt.
Shareholders turned on Sasol in the aftermath of huge cost overruns and delays at a chemical facility that is now nearing completion in Louisiana. The company fired co-CEOs Stephen Cornell and Bongani Nqwababa in October, saying a “culture of fear’’ of managers overseeing the Lake Charles project had contributed to its failures.
“Their credibility definitely has been dented,” says Asief Mohamed, founder and chief investment officer at Cape Town’s Aeon Investment Management, which in 2019 wrote Sasol demanding the dismissal of the co-CEOs.
“We would freak out if they came with another project.” Fleetwood Grobler, the company veteran who took over as CEO, wants to reset “the tone from the top” and speed cultural change, Sasol representatives said in an e-mailed response to questions.
Grobler has met with dozens of company leaders and has committed to “listen and be open to dialogue with everyone,” they said. Grobler’s predecessors had grappled with culture, too. Nqwababa told business school students in a June 2018 speech in Johannesburg that executives were trying to develop “inspiring, authentic leadership rooted in trust, respect and engagement.”
He described the existing leadership style as “command and control” saying that resulted in a “fear to speak and silence.” The cost of the Lake Charles plant, which was greenlighted in 2014, ballooned to $12.9bn from an initial estimate of $3.5bn. An independent review found that “excess deference” to managers meant problems were ignored until they spiralled out of control, the company revealed alongside the executive changes it said were necessary to reset trust with investors. The new CEO may face a long road in winning back investor confidence, however, with the stock near its lowest since the 2008 financial crisis.
David Shapiro, deputy chair of Johannesburg’s Sasfin Securities, says: “Where do you get that kind of destruction of value? This is the result of taking your eye off the ball and being very sloppy.”
While the Lake Charles ethane cracker — a plant that takes a component of natural gas and processes it into ethylene — has captured investors’ attention of late, a billion-dollar wax project in Sasolburg provided warning signs about potential cultural problems earlier. The plant known as FTWEP (Fischer-Tropsch Wax Expansion Plant), whose first phase of development was completed in 2015, produces wax for use in everything from inks and candles to road construction. The initial development incurred a cost overrun of about 40%, for which Sasol took a R1.5bn writedown.
An internal probe conducted for Sasol in 2013 by law firm Werksmans Attorneys, a copy of which was seen by Bloomberg, cautioned that based on management of the wax plant project investors might conclude that Sasol was now capable of carrying out the much bigger Lake Charles endeavour. The report showed how employees concealed bad news about the wax plant from the board and made overly optimistic assumptions on expected profits from the project. While e-mail communication about problems with the project was being exchanged between management in Sasol’s chemical division as early as August 2012, the issues were not made clear to the board until May 2013, according to the report.
The law firm referred to issues with transparency, conflicts of interest, and “potentially gross negligence”. It found “attempts at withholding information from business units and from the Sasol board and that there are attempts to make the picture that is FTWEP look better than it actually is”.
CFO Paul Victor had cautioned against giving investors too much detail about the problems with the wax facility, saying in a February 2013 e-mail that it would “not go down well,” according to the probe. Victor was financial controller at the time. Sasol sees little link between the problems at the wax project, and Lake Charles. Company representatives said the governance and leadership shortcomings identified related to Lake Charles should not be imputed to other segments of the company. The spokespeople also dismissed conclusions delivered by Werksmans on the wax project. They said Werksmans was advising on regulatory compliance matters and undertook a legal and forensic investigation into certain share dealings; any observations on the wax plant would have been “superficial and of little or no value,” they said.
Final investment decision
Victor was “merely providing his input” on a possible loss, the spokespeople said. The 2013 warning by Werksmans about troubles with the wax project proved prescient for Lake Charles, where costs rose before and throughout construction. By 2014, when a final investment decision was announced, the cost of Lake Charles was put at $8.1bn. In June 2016, then-CEO David Constable raised the cost estimate to $11bn, saying that was a “worst-case scenario.” He was not around to see the project through, departing as previously planned the following month. Constable, in an e-mailed response to questions, stood by the decision to move ahead with Lake Charles, arguing that it expanded Sasol geographically and reduced its dependence on coal-based feedstock, while diversifying the company more into chemicals — with new markets and good margins — and said that the project would take advantage of an “extremely favourable corporate tax regime”.
Shortly after taking over from Constable, Cornell and Nqwababa said the ground conditions at Lake Charles had not been fully anticipated and more work would be needed; Sasol’s engineers were more accustomed to SA’s comparatively dry highveld grasslands. By last year, the cost of Lake Charles had risen to its current cost estimate of nearly $13bn, and the company commissioned an independent review of the project.
Lake Charles, which is 99% complete, continues to dog Sasol. An explosion at the facility in January led Sasol to trim its estimate of the project’s annual contribution to earnings before interest, tax, depreciation and amortisation by as much as $250m. That followed a previous reduction in August over technical issues and delays. A weak macroeconomic environment also led Sasol to warn in January that first-half earnings will plunge as much as 79%.
It will take Sasol a decade of no more mishaps to get its credibility back, says Casparus Treurnicht, a fund manager at Gryphon Asset Management in Cape Town. “You’ve almost written this project down to zero,” he says of Lake Charles.