Formosa Petrochemical and the Sunshine Project: Environmental Justice Risks in 2022

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Summary

 

In 2022, a client requested that Responsible Alpha develop 12 case studies and the underlying business, economic, and investment analysis used by 123 environmental, indigenous rights, and racial justice organizations in their letter to the Honorable Gary Gensler, Chair, U.S. Securities and Exchange Commission on the proposed rule "The Enhancement and Standardization of Climate-Related Disclosures for Investors."

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Responsible Alpha's analysis suggests investors need companies to disclose their climate-related financial risks and strategies for managing them, their greenhouse gas (GHG) emissions, their plans to remain viable or thrive in a low-carbon future economy, and their financial resilience across these dimensions, as it relates to and is in support of the communities where these companies exist, and their impacts are often felt and underreported. To further buttress and support this analysis, Responsible Alpha wrote 12 business cases of which the case below on Formosa Petrochemical is one.

 

Formosa Petrochemical Corporations (“FPCC”) owns 57 percent in FG Inc., and FG Inc. owns 100% of FG LA LLC (“Sunshine Project”). According to Moody’s Orbis, FPCC is the global ultimate owner of the Sunshine Project. A Global Ultimate Owner (“GUO”) is the individual or entity at the top of a corporate ownership structure with ultimate legal liability.

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Note on ownership: Formosa Petrochemical Corporation is 75.82% owned by three other publicly traded corporations: 

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• Formosa Plastics Corporation (1301 TT Equity) owns 28.56% of FPCC. 

• Formosa Chemicals & Fibre Corporation (1326 TT Equity) owns 24.15% of FPCC. 

• Nan Ya Plastics Corporation (1303 TT Equity) owns 23.11% of FPCC. 

 

Together, these four closely owned Taiwan-based companies – Formosa Plastics Corporation, Nan Ya Plastics Corporation, Formosa Chemicals & Fibre Corporation, and FPCC are engaged in oil refining and the manufacture of a wide range of chemicals and electronic materials, generating a combined EBITDA of $4.1 billion in 2020. 

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The Sunshine Project was created in 2017 to be the operator of a proposed petrochemical plant on a 2,400-acre site in St. James Parish, Louisiana called the Sunshine Project. The Sunshine Project is a $9.4 billion petrochemical plant, now forecast to cost at least $12 billion. This complex will use ethane, a byproduct of fracking, as the feedstock to produce various plastics (polyethylene, polypropylene, polymer and ethylene glycol).

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The Sunshine Project is located in St James Parish’s Fifth District, between State Road 3127 and State Road 18, on the west bank of the Mississippi River, at approximately 30.056, -90.901, and one mile from the local elementary school. 

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The Sunshine Project is planned to be built in two phases with an estimated total investment of around $9.4 billion originally, now raised to $12 billion. 

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The first phase would include:

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• 1.2 million ton/year ethane cracker. 

• 400,000 ton/year linear low-density polyethylene (LLDPE) plant. 

• 400,000 ton/year high density polyethylene (HDPE) plant.  

• 800,000 ton/year ethylene glycol (EG) plant. 

• 600,000 ton/year propane dehydrogenation (PDH) plant. 

• 600,000 ton/year polypropylene (PP) plant. 

 

The second phase of the project would include: 

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• 1.2 million ton/year ethane cracker. 

• 400,000 ton/year HDPE plant. 

• 400,000 ton/year LLDPE plant. 

• 800,000 ton/year EG plant.

 

In total, this would be equivalent to adding 13,628,091 tons annually in greenhouse gas (GhG) emissions (see Annex 1: Table 1). 

 

When completed the Sunshine Project would be the largest new single source of GhG emissions in the US. It would double toxic air pollution in St James Parish.  

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Finally, the Sunshine Project enjoys the support of Louisiana Governor John Bel Edwards.  However, the US Army Corps of Engineers (ACE), which has regulatory authority for development along the Mississippi River, is feeling pressure, including from several northeastern state Attorneys General raising environmental justice concerns. The ACE has rescinded permits already issued and placed the project on hold for at least two years to produce a thorough Environmental Impact Statement including consultation with affected communities.

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Company Overview 

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Formosa Petrochemical Corporation refines crude oil and markets petroleum and petrochemical products.  The Company operates refineries and naphtha cracking plants that provide products such as gasoline, diesel, jet fuel, fuel oil, naphtha, ethylene, and liquefied petroleum gas.  FPCC also owns three utility centers and generates electricity. 

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Formosa Petrochemical Corporation (FPCC) is second only to Chinese Petroleum Corporation for oil refining in Taiwan. The company produces refined petroleum products (jet fuel, liquid petroleum gas, and gasoline) and petrochemicals (ethylene, propylene, and butadiene) from its naphtha cracking operations. It owns gas stations through subsidiary Formosa Oil. FPCC also sells electricity and steam from its co-generation plants. Its engineering and maintenance divisions carry out planning, construction, and daily maintenance services on behalf of group companies.      

    

Climate Risks  

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When completed the Sunshine Project would be the largest new single source of GhG emissions in the US. It would double toxic air pollution in St James Parish. This project would be equivalent to adding 13,628,091 tons annually in greenhouse gas (GhG) emissions (see Annex 1: Table 1). 

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Forty percent of St. James Parish is classified as wetlands. Loss of absorptive capacity from wetlands and climate change contributed to severe flooding in St. James Parish in 2016.

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Community Risks 

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If the Sunshine Project is built, estimated total permanent jobs (excluding temporary construction jobs) would be 1,200 new jobs. But this has a cost of $150 million in annual property taxes reduction totaling $1.5 billion over ten years, which equals an enormous amount of lost money for schools, libraries, climate resilience, healthcare and services in a community that is already being devastated by hurricanes and toxic chemical pollution. In 2018, St. James Parish had $24 million in lost tax revenue and $9.8 million in lost school funding from Louisiana’s Industrial Tax Exemption Program (ITEP).

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The Louisiana Industrial Ad Valorem Tax Exemption Program (ITEP) is a state incentive program, which offers a tax incentive for manufacturers who make a commitment to jobs and payroll in the state. With approval by the Board of Commerce and Industry and local governmental entities, the program provides an 80% property tax abatement for an initial term of five years and the option to renew for five additional years at 80% property tax abatement on a manufacturer’s qualifying capital investment related to the manufacturing process in the state. 

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For more information see Annex 2 and Table 3, Table 4 and Table 5.

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Environmental Risks 

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Proceeding with the project presents an exceptional environmental justice risk on top of the climate risk the project has. St. James Parish is recorded in the 2020 Census as being composed of a population that is 49 percent White and 47 percent Black.  The parish has a poverty rate of 17 percent between 2015-2019. In 2000 the per capita income was $14,381, and 20.7 percent of the population lived under the poverty line. Out of the total people living in poverty, 27.7 percent are under the age of 18 and 15.1 percent are 65 or older.  

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According to data from the U.S. EPAʼs Risk-Screening Environmental Indicators (RSEI) database, the Cancer Hazard of facilities in St. James Parish has increased by nearly 800 percent over the last decade (2007 – 2018). Each year, the Sunshine Project would be permitted to emit 86,000 kilograms of benzene, 1,3-butadiene, acetaldehyde, formaldehyde, and ethylene oxide – all known carcinogens. There are already twelve toxic petrochemical facilities within a 10-mile radius of the planned project, which forms part of an 85-mile stretch of the Mississippi River, predominantly inhabited by historic Black neighborhoods, that is widely known as “Cancer Alley.” The complex will be built adjacent to a residential area of the 5th District and one mile from an elementary school that serves an almost entirely Black student population.

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For more information, see Annex 1: Table 2 and Figure 1. 

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Risks Facing Formosa Petrochemical Corporation and the Sunshine Project 

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• The Formosa Petrochemical Corporation and Subsidiaries Consolidated Financial Statements for the period from January 1, 2021, to September 30, 2021, and for the period from January 1, 2020, to September 30, 2020, contain no appropriate disclosures on climate related risk management.

• April 23, 2018. Gov. John Bel Edwards and Formosa Petrochemical Corporation executive Keh-Yen Lin announced the company has selected St. James Parish in Louisiana for a $9.4 billion chemical manufacturing complex and has purchased a 2,400-acre site along the west bank of the Mississippi River. To secure the project, the State of Louisiana offered a competitive incentive package that would include a $12 million performance-based grant to offset infrastructure costs.

• March 11, 2019: Formosa Group announced a $150 million investment in its FG LA cracker that FPCC owns a 57% stake. 

• September 23, 2019: J.P.Morgan states the Sunshine Project costs $10.5 billion, not $9.4 billion.

• Oct 30, 2019. ProPublica releases report of investigation into discriminatory plant siting in Cancer Alley favoring poor rural areas that tend to be majority black.

• January 15, 2020: J.P.Morgan states “Sunshine project FID (final investment decision) by March 2020: FPCC (Formosa Petrochemical Corporation) mentioned that they expect the Sunshine project to take FID by March 2020, with construction expected to start “no later” than 2Q20.”

• February 2, 2021: J.P.Morgan states “While management is confident to regain the permit in 2H21, construction might be delayed in 2022 due to sluggish rollout of COVID-19 vaccines in the US”.

• On a related note, in July 2017, Diane Wilson, a retired shrimper, sued Formosa Plastics (1301 TT Equity) and won a $50 million judgement against the company because of its toxic chemical and nurdle pollution of the region’s shrimp fisheries. U.S. District Judge Kenneth M. Hoyt ruled against Formosa calling the company a "serial offender". Interestingly, Formosa Plastics is a frequent recipient of Chapter 313 property tax limitations in Texas. 

 

Risks Facing Formosa Petrochemical and FG LA’s Investors and Lenders 

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• In 2020, the Norwegian Government Pension Fund announced the exclusion of Formosa Chemicals and Fibre (1326 TT Equity) from its portfolio citing “unacceptable risk for violation of human rights. 

• April 27, 2021. RISE St. James issues an open letter to banks and finance managers asking that they not invest in FG LA LLC or the Sunshine Project.  

• S&P Global stated, when assessing all four interlocking companies (Formosa Petrochemical, Nan Ya Plastics Corporation, Formosa Chemicals & Fibre Corporation, and Formosa Plastics Corporation) with a material ownership in the Sunshine Project: “We forecast the four companies' aggregate ratio of debt to EBITDA will fall below 1.0x over 2021-2022 and rise slightly to 1.2x-1.4x for 2023 if they decide to go ahead with a planned chemical complex project in the U.S. state of Louisiana. This is materially lower than our previous projection of 2.0x-3.0x for the same period.”

• S&P Global is clear in its credit outlook for Formosa Petrochemical, stating that a delay or cancellation of the Sunshine Project would “strengthen the financial buffer for the ratings.” In fact, S&P forecasts that pursuing the project would weaken FPCC credit outlook, potentially pushing its ratio of debt to EBITDA below 1.0x than the base case of 2.0x-3.0x if they choose to not pursue the project. The project clearly weakens the credit profile for FPCC putting lenders and bondholders at greater risk.  

• According to S&P Global, without the debt overhang from financing the project, the four companies and FPCC could “repay and refinance its debt faster” and “The cancellation of the project could prevent deterioration in the group's debt leverage during what would have been the construction period”. 

 

Transition risks include ongoing exposure to litigation due to toxic releases, and its reported high GhG emissions, which are out of line with current administration policies regarding the Paris Agreement and the need to reduce GhG emissions as a matter of priority. The Sunshine Project will use the oversupply of fracking gas as a feedstock for plastics production. In addition to GhG emissions public sentiment and consumer preference is turning away from single use plastics in view of the ocean plastics pollution issue.  

 

Regulation to curtail plastics use and reduced consumer demand may pose market risks to the Sunshine Project also. RISE St James argues in an open letter to bankers that The Formosa Group of interlocking corporations – Formosa Petrochemical Corporation, Nan Ya Plastics, Formosa Chemicals & Fibre Corporation, and Formosa Plastics Corporation – are serial offenders, citing $650 million in fines and penalties across a dozen sites, and averaging $10 million a year in fines to address environmental and worker safety violations.  

 

Finally, climate risks must be understood to include secondary risks from the production of GhG emissions, because the toxic releases and GhG production are one and the same process. In this line of reasoning, poisoning the environment and communities through toxic emissions is a climate impact. As such it should be disclosed, along with the costs of remediation.  

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Annex 1: Climate Risks and Environmental Risks 
 

Table 1: Emissions permitted for the proposed St. James Complex.

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