Engineering News

Formosa To Cut 2008 Capex By 30%
Friday, August 22, 2008

Formosa Petrochemical Corp. expects its capital expenditure in 2008 and next year to narrow from 2007 as the company awaits government approval for a fourth crude distillation unit, Chairman Wilfred Wang said Friday.

The company is also a tad cautious on the outlook for refining margins as the industry has been hit by the double whammy of slower economic growth and huge refining capacity additions in Asia, which will further squeeze margins.

But Formosa Petrochemical, Taiwan's only privately run refinery and operator of Asia's largest ethylene producer by capacity, expects to maintain a profitability lead over competitors thanks to a strong refining yield of 103% and as crude oil prices remain at US$100-US$120 a barrel in the near term.

Wang, President C.Y. Su and spokesman Lin Keh-yen talked to foreign reporters at the company's headquarters in Taipei.

About 50% of Formosa Petrochemical's revenue in 2007 came from exports. "This year, it will rise to around 65%," said Wang.

Analysts warned large global refining capacity worldwide, especially in Asia, which far outstrips demand, will put significant pressure on refining margins starting from early 2009. Credit Suisse estimated a total of 2.88 million barrels a day of refining capacity comes online in Asia from 2008 through 2010.

China Petroleum & Chemical Corp. (SNP), also known as Sinopec, said this week it has indefinitely suspended gasoline and diesel imports, in the latest indication China's domestic fuel shortage has eased.

At the same time, India's Reliance Petroleum Ltd. plans to start a 580,000 barrel-a-day refinery in Jamnagar in western India by the end of the year.

But demand should pick up ahead of winter, said Lin.

"We have no plans to cut capacity in the October-December period," said Lin. "Although China won't import immediately after the Olympics, it's still short on jet (fuel). Northeast Asia is long on gasoil, but not China."

Formosa Petrochemical will begin a 40-day maintenance Nov. 22 at some of its refining units, but will maintain crude runs at an average of 89% this year, only slightly lower than last year, said Su.

Wang said he expects Asian demand for middle distillates to hold in 2009.

Lin added Reliance Petroleum's Jamnagar refinery will likely export most of its products to Europe and Latin America, thus limiting the impact on Asia.

Still, Singapore's complex refining margins will likely fall next year by about US$2-US$3 a barrel, from an average of US$7-US$8 a barrel, said Lin.

The company expects to earn an average of $14 a barrel as refining margins, or income from processing a barrel of crude oil into fuels, in 2008. Formosa Petrochemical's refining margins may decline to $12-13 a barrel in 2009.

Formosa Petrochemical, like its larger domestic rival government-owned CPC Corp., is also losing money in the local market because of the government's price control on domestic oil products, but apart from maximizing exports, it can't leave the local market entirely, said Su.

"If we retreat, CPC's gasoline capacity isn't enough. Then they will have to import, and they will lose even more," said Su.

The company will maintain a "certain" domestic market share, but will not try to aggressively add gas stations. Formosa Petrochemical currently has a 20% local market share.

Wang said the company plans to cut capital expenditure in 2008 by 30% on year to NT$14 billion, as it has completed the fourth phase expansion of its integrated petrochemical complex in Mailiao in western Taiwan.

Capital expenditure will drop more than 70% to NT$4 billion next year, from NT$20 billion in 2007, he said.

Formosa Petrochemical plans to add another crude distillation unit with a capacity of 150,000 barrels a day at its Mailiao refinery. The Mailiao refinery has three CDUs with a combined capacity of 540,000 barrels a day.

The company plans to spend NT$60 billion on the No. 4 CDU, but environmental approval isn't likely anytime soon.

"I'm not optimistic about (getting approval in) 2009," said Su.

Wang also said the company is interested in investing in refinery and cracking operations in China and Vietnam, but apart from the needed approval from the Taiwan government, the company also needs to wait for "right conditions" in the Chinese market.

The Chinese government's restrictions on domestic gasoline prices and import and export quotas make investment in China unlikely in the near term. "Only when the market is relatively liberalized, will we invest," said Lin.

The Chinese government also wants Formosa Petrochemical to invest via a joint venture, but "we hope to do it ourselves," said Wang.

Lin said, "It doesn't matter what percentage they (China) hold (in a venture), they always get to decide" on how to run the venture.

The company is also studying investing in a petrochemical complex in Vietnam, and is also at "an early stage of studying oil sands exploration and production in Canada," but no conclusion has been reached yet, said Lin.

The logistics of oil sands, the high capital expenditure and the risk of carbon dioxide emissions tax are all high, said Wang.

Source: Dow Jones Newswires

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