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Trump a Boon for Petrochemicals

Formosa Plastics’ Shift to America


Formosa Plastics’ Shift to America

Source:Formosa Plastics Corp.

With Donald Trump pledging to ease regulations on oil and gas businesses and a future energy secretary friendly to the industry, Taiwan’s Formosa Plastics Group is focusing its attention on the United States, perhaps to Taiwan’s detriment.



Formosa Plastics’ Shift to America

By Kuo-chen Lu
From CommonWealth Magazine (vol. 615 )

As Donald Trump prepared to become America’s president, the Formosa Plastics Group took advantage of its year-end banquet to display a five-year-old picture of former Texas Governor Rick Perry and Formosa Plastics Group Chairman William Wong.

It may have seemed bizarre that the Formosa Plastics Group would make the old photo public only now, but the timing was no coincidence, as Taiwan’s biggest petrochemical group plans to expand its presence in the United States.

The photo’s key connection to the present was that Perry has been nominated by Trump to lead the U.S. Department of Energy, pending U.S. Senate confirmation. American media find irony in the appointment, considering that Perry was chosen to lead an agency he once wanted to abolish.

In a debate during the Republican Party primary season in 2011, Perry advocated shutting down the agency (though he couldn’t remember its name), which is in part responsible for the development of nuclear power and the safe handling of nuclear materials.

Perry believes that restrictions on the energy industry should be lifted and new energy sources developed aggressively to provide cheaper power to families and businesses. As governor of Texas, Perry was known for recruiting companies to invest in the energy sector and turning the state into a center of fracking (the process of breaking up shale rack to release natural gas) and petrochemical investment.

The other headliner in the photo was William Wong, the head of one of the companies Perry pursued. Wong initiated the biggest investment ever made in the U.S. by the Formosa Plastics Group, of US$15 billion (about NT$467.9 billion), and about US$2 billion of that was precipitated by Perry.

Highly Supportive of the Petrochemical Sector

The story of how the paths of these two men converged starts in a small town near the Gulf of Mexico in southern Texas called Point Comfort, the location of the Formosa Plastics complex in the state.

As Formosa Plastics Corp. Chairman Jason Lin tells it, the first time Wong visited the Texas plant after becoming chairman of the Formosa Plastics Group in May 2012, Perry got wind of the visit and took a small plane from the capital Austin to Point Comfort to see Wong and share a meal with him at the Formosa Guest House.

Point Comfort is a very small town and had never been visited by the state’s governor, Lin recalls, but “Perry flew a long way here in a small plane to solicit investment.”    

At the dinner at the complex, Perry left Wong with a deep impression – that America has officials actively seeking investment who are very supportive of the petrochemical sector. So when Perry was nominated to head the Department of Energy, the Formosa Plastics Group pulled out the photo of Perry and Wong and shared the story of their encounter.

“Perry is very friendly toward Taiwan,” says Louis Huang, deputy counselor with Taiwan’s Bureau of Foreign Trade who previously served as an economic section chief at Taiwan’s office in Houston and attended the Perry-Wong dinner.

“When America successfully exploited shale gas through fracking and opened up exports of natural gas, it was first exported to five countries, including Japan and South Korea. Perry saw it as unfair that Taiwan was left out and urged the U.S. government to approve natural gas exports to Taiwan,” Huang says.     

The arrival on the scene of an energy secretary who is so supportive of the petroleum and petrochemical sectors bodes well for the petrochemical industry after Trump takes office.

Lower Shale Gas Extraction Costs

Beyond Perry’s nomination, other factors point to a bright future for the energy sector in Texas – the steady improvements made in shale oil and gas extraction technology, the growing amounts of shale oil and gas reserves being discovered, and Trump’s support for relaxing regulations related to energy and petrochemical businesses. It could even make Texas as influential in the energy field as the Middle East.

“In the past, horizontal piping used for extraction could only extend horizontally one mile, but now it can extend two miles, and wells that could only reach down one horizontal layer can now go down three layers. It’s like a tree with many branches hanging down,” says C.T. Lee, top advisor to the Formosa Plastics Group.             

These two technological revolutions have made extraction operations more efficient and brought costs down for shale gas producers. In recent years, OPEC (Organization of the Petroleum Exporting Countries) increased production to drive down crude oil prices and force American shale companies to cut production or pull out of the market. But by the beginning of 2016, international crude prices were down to US$30 a barrel, making the strategy a lose-lose proposition, and OPEC and non-OPEC producers have since joined hands in cutting oil production to pull prices back up.

 Formosa Plastics estimates it costs less than US$40 to produce a barrel of shale oil from the Eagle Ford shale formation in South Texas, so global crude prices have to exceed US$40 a barrel for oil production there to be profitable. Now that prices have risen above US$50 a barrel, oil companies are producing as much as they can, which will likely drive a supply boom that keeps oil prices from ever reaching US$100 a barrel again. Lower crude prices mean lower raw material prices and higher profits for the group’s petrochemical factories in the U.S.

Texas the New Middle East

Not only has technology improved, but more shale oil and gas reserves are being discovered in the United States.

In September 2016, oil exploration company Apache said it discovered a new field in West Texas near Reeves County holding more than 3 billion barrels of oil and 75 trillion cubic feet of natural gas. Then in November, the United States Geological Survey concluded that drillers could find 20 billion barrels of oil and 16 trillion cubic feet of natural gas under the Wolfcamp shale in the Permian Basin, also in West Texas. Other shale gas and oil fields also continue to be uncovered.

The part of the Eagle Ford shale area being developed by the Formosa Plastics Group was once barren but now generates large amounts of oil and natural gas, to the point that some natural gas has to be burned off on site. Visible in the distance as one approaches the area are several shale gas wells with flames flaring into the sky and a petrochemical factory under construction.

These wells are constantly growing in number. The Formosa Plastics Group estimates that 140 shale gas drilling rigs have been added since crude prices have tumbled to well below US$100 a barrel, and Formosa Plastics Corp.’s Lin sees great untapped potential in the state.

“In the future, Texas will become the new Middle East, the world’s most important source of crude oil and natural gas,” he asserts.

Rich in oil and natural gas with governors eager to mine those resources, the U.S. has become the new paradise for the petrochemical industry, and the Formosa Plastics Group is mobilizing to invest more in the country.

Shifting Away from Taiwan

But there is a difference from the company’s strategy in the past. When the Formosa Plastics Group first invested in the United States, the shareholdings of group founders Wang Yung-ching and Wang Yung-tsai exceeded those held by the company. Formosa Plastics Corp. only holds a 20 percent stake in FPC USA, while the Wang family holds the rest.

In the group’s new investment in the U.S., however, group subsidiaries Formosa Petrochemical Corp. and Formosa Chemicals & Fibre Corp. will both have a stake, their first in America. The two companies are planning to invest US$10 billion to build the Formosa Plastics Group’s fourth ethane cracker plant in the U.S. and downstream petrochemical factories in Louisiana, another important place for shale gas production. They have filed an application for an environmental impact assessment with Louisiana authorities.      

In addition, FPC USA and another group subsidiary, Nan Ya Plastics Corporation, are increasing their presence in Texas with a US$3.3 billion third phase expansion project.

These plans clearly indicate that the Formosa Plastics Group’s investment focus is quickly shifting to the U.S.

Once these investment projects have come to fruition, the group’s ethylene production in the United States will exceed that of its naphtha cracker petrochemical complex in Mailiao in Taiwan’s Yunlin County. The Taiwan complex, one of the biggest in the world, will diminish in importance, and Formosa Plastics’ investment in Taiwan will shrink, limited to lesser projects of smaller value.

The implications are clear – the petrochemical industry may soon emerge as the industry in Taiwan facing the biggest and clearest jolt from the new Trump administration.

Translated from the Chinese by Luke Sabatier