Taiwanese giant Formosa Petrochemical Corp. expects its proposed St. James Parish complex could cost more than the $9.4 billion it projected — due to coronavirus pandemic-related delays and construction materials price hikes that a global credit rating agency already says could push the cost toward $12 billion.
If the rating agency's estimate proves correct, that would be a nearly 28% hike in the overall project cost. The estimated cost to build an ethylene project along the U.S. Gulf Coast was projected to increase by 2.7% in 2019 and 3.1% in 2020, according to Compass International. However, that was before the coronavirus pandemic began and impacted construction materials and prompted delays.
Formosa, the parent company of privately-held Louisiana-based FG LA LLC, began studying the feasibility of the petrochemical complex in 2015.
"The difficulty of evaluating construction costs is attributable to skyrocketing costs stemming from uncertainties related to the pandemic, which attributed to FG's (Formosa's) deferral of major construction until the pandemic has subsided and/or vaccine has proven working," Ky Lin, CEO of FG LA LLC, said in a statement. "FG is monitoring all relevant factors closely, and may adjust the total projected Sunshine Project cost when the uncertainties can be resolved accordingly in (the) future.”
Taiwan Ratings, an S&P Global Company, issued a credit rating in mid-October that estimated the chemical complex cost at more than $12 billion over two phases of the project. The credit rating agency also downgraded bonds for Formosa Plastics Group, a Taiwanese conglomerate, citing weak demand during the coronavirus pandemic with "limited recovery" in profitability in 2021 and 2022. The company outlook is still stable but the bonds were downgraded to AA- from AA.
Formosa's revenue is projected to drop by at least 25% in 2020 and the majority of its businesses to become unprofitable this year. The company's sales are expected to recover by 25% in 2021 when the price of oil rebounds, but weak demand is expected to linger.
"We believe that products such as ethylene, propylene, paraxylene and their downstream derivatives could be particularly at risk under the weak global demand," according to the credit rating agency.
The Formosa project sits just south of the Sunshine Bridge nearby the unincorporated community of Welcome. The complex is slated to be built in two phases and produce ethylene glycol, polyethylene, polypropylene and potentially propane dehydrogenation, the company told news outlets across Asia. Ethylene is used in the production of plastic material such as food packaging, sports equipment, health care supplies and technology devices. The new ethane cracker would produce 2.4 million tons of ethylene per year after 2024.
The reason that Formosa Group is interested in Louisiana for ethane crackers is because the company already produces ethylene from crude oil, also known as naphtha. Ethylene is also produced from natural gas, which is more plentiful and less expensive in the U.S. than naphtha is in Asia.
Spot Mont Belvieu ethylene prices were trading around 25 cents per pound this month, up from 18 cents per pound last year. That's a rebound from record lows of 12 cents per pound in April.
"This investment is to support the group's significant expansion, which is likely to improve its geographic diversity and cost structure," according to the rating agency. "However, this project and other expansions in Asia could keep Formosa Group's free cash flow negative and therefore elevate its debt leverage for an extended period after 2022 if profitability does not grow materially."
Formosa began preconstruction this year but had paused operations during the coronavirus pandemic. It had restarted construction efforts this summer but later decided to halt construction until the widespread availability of a vaccine.
Since then, a state district judge sent crucial air permits back to the Louisiana Department of Environmental Quality for further review, particularly to evaluate environmental justice questions surrounding the project.
Likewise, the U.S. Army Corps of Engineers suspended its wetlands permit for the facility along the Mississippi River to review its own analysis of alternative sites and failure to look at potential sites in neighboring Ascension Parish.
Formosa owns more than 3,000 acres across four properties in St. James Parish.
An expert in industrial project risk and financial outlook for petrochemical projects noticed the construction cost difference recently.
"The pandemic could be a factor in the cost increase," said Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis. "You have normal inflation but this was higher than the norm."
There are several factors of uncertainty amid a weaker market, prompting the question about the feasibility of the project. But delaying the project construction might bode well for its profitability.
"The delay may actually help them with that respect by entering the market a little later," Sanzillo said.
Formosa expects to create 1,200 full-time jobs, which would pay about $84,500 in average annual salary at the St. James Parish site. The project is expected to support 8,000 construction jobs.
In exchange for the new petrochemical complex, state and local government are expected to offer $1.5 billion of economic incentives. About $1.4 billion of that is tied to local property tax exemptions, which would be over a 10-year period. The Louisiana Board of Commerce and Industry approved the 100% property tax abatement in April 2018. The project was grandfathered in because it was discussed in 2015, before a rule change enacted by the governor in mid-2016 shifted authority to local entities for such project incentive agreements.
The project is estimated to generate $675 million in new state and local taxes through 2035. Other incentives include about $125 million for Quality Jobs Program rebates over a 10-year stretch in addition to $12 million as a performance-based loan, which turns into a grant if goals are met, and $9 million for job training.