The South African energy company Sasol is currently facing an investor suit accusing the company of lying to investors about the true cost of a major petrochemical project. According to the complaint, the failure to account for the true cost of the company’s USD$13 billion Lake Charles Chemical Project (LCCP) led the construction and operation of the project to be plagued with control weaknesses, delays, and rising costs, and Sasol’s top-level management engaged in “improper and unethical behavior with respect to financial reporting.”
Major petrochemical plants like LCCP were supposed to be the next frontier for the oil and gas industry, with more than USD$200 billion spent on 343 petrochemical projects across the U. in the last ten years. Oil and gas companies like Exxon, Chevron, and Shell have made plastic production a central feature of their strategy for the energy transition, with big promises about new jobs in struggling regions.
But the next frontier is already looking like the “last frontier.” Tens of billions in promised Chinese investments never materialized, and the global Covid-19 pandemic is adding additional delays for investment and construction, though the Institute for Energy Economics and Financial Analysis (IEEFA) argues that these problems long precede the pandemic.
Shell’s Pennsylvania Petrochemicals Complex, the only remaining part of the “Appalachian energy and petrochemical renaissance” may also be less profitable than expected, with far less benefit to local communities than initially predicted. In June, IEEFA warned that Shell’s predictions for future demand, at a 3-4% range, are now unrealistic. Prices are lower than previously predicted, and the company faces challenges as a new entrant in an oversaturated market and depends on unstable partners in the fracking industry. While Shell has claimed that current risks will not affect the long-term outlook, the challenges that IEEFA highlights precede and would exist without the pandemic.
Petrochemical projects are highly capital-intensive and complex. As the case against Sasol suggests, even in typical conditions, unexpected expenses and scheduling difficulties can create pressure on executives to make or meet unrealistic goals. Carbon Tracker now predicts that plastic demand could peak far sooner than expected, and oil and gas companies have added extra pressure by counting on plastic demand growth to counter waning demand for fuel.
With growing pressure on executives to live up to big promises, company claims about petrochemical projects should be treated with even greater scrutiny, particularly amid the pandemic. In an alert about fraud schemes in the pandemic, the Associate of Certified Fraud Examiners warned that the pandemic could provide a convenient cover for executives feeling pressure to hide a bad bet. Companies could try to delay write offs by claiming that conditions will improve after the pandemic. Alternatively, some companies might try to write off other underperforming assets, blaming the pandemic for losses that are only marginally or not at all associated at all with the pandemic.
If companies attempt to hide challenges with petrochemical projects fraudulently, whistleblowers could play an important role in uncovering this deception. The internal probe at Sasol described a “culture of fear” that prevented employees from raising concerns within the company. However, employees can use the Dodd-Frank Securities and Exchange Commission (SEC) whistleblower program to confidentially report evidence of securities fraud directly to the SEC. In contrast to shareholder lawsuits, whistleblowers do not have to show harm to investors in order to report fraud, making them uniquely suited to provide early detection for fraudulent schemes. As the pressure builds, whistleblowers could provide an important line of defense against misleading statements, while protecting their identity and qualifying for a reward.