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Companies take different strategies toward plant construction in North America

  • November 29, 2018
  • , NIKKEI Business Daily , p. 10
  • JMH Translation

There are many projects in North America to construct plants for liquefied natural gas (LNG) and chemicals using shale gas; however, engineering companies are facing a difficult situation due to labor shortages and cost increases. Across the board, the projects are triggering deficits. Chiyoda Corporation says they will selectively accept orders from now on. In contrast, JGC Corporation has formed partnerships with local construction companies and aims to accept repeat orders. Each company is searching for a growth path.


“We will learn from the past and devise an appropriate strategy,” said Chiyoda Corporation President Masaji Santo at the briefing on the financial results for the second quarter of FY2018 (ending March 31, 2019), revealing a cautious stance on future projects in North America.


In the construction of an LNG plan in Louisiana, they racked up huge additional construction costs in October because they were unable to secure enough skilled labor. He announced that the company forecasts a deficit of 105 billion yen for the fiscal year ending March 31, 2019.


A detailed cost analysis is performed for plant construction because the projects take several years to complete and require the construction of huge and complex facilities to process combustibles. Japanese engineering companies have very little experience in large-scale projects in the United States. What is more, the unemployment rate in the United States in September was 3.7%, among the lowest since 1969 thanks to the [recent] economic boom. Rough estimates indicate that the majority of projects do not turn a profit because of a shortage of labor.


For the immediate future, Chiyoda Corporation plans to place priority on orders in other geographical areas and on ensuring the profitability of unfilled orders, rather than on increasing orders in North America. The company received an order for an ethylene plant from “priority customer” ExxonMobil in September. President Santo says, “We have enough projects in Qatar and Southeast Asia” after that project.


In the fiscal year ended March 31, 2017, JGC Corporation finished with a loss for the first time in 19 years, because personnel expenses related to the construction of an ethylene plant in the United States grew. The company, however, will continue to take a positive stance, including establishing tie-ups with local engineering construction companies, with the aim of receiving new orders in America.


In October, JGC jointly received an order for an LNG plant on the scale of 1.6 trillion yen in Canada. Although some in the company expressed concerns about the risk of taking an order in a country with personnel expenses as high as those in the United States, Chairman Masayuki Sato emphasized, “I gave up my holiday and thoroughly investigated the details.”


For the Canada project, JGC will use its best people who have successfully completed difficult projects in Russia and the Arctic. To minimize onsite operations, the company will adopt the “modular construction method” wherever possible and manufacture segments of the plant in China or other countries where labor costs are comparatively low. “Onsite operations will be reduced by 70%,” says JGC President Tadashi Ishizuka.


Toyo Engineering is also incurring a loss on the construction of an ethylene plant now underway in the United States. The project was started in 2015 and will finally reach the test-run phase at the beginning of 2019. The facility is expected to be handed over [to the client] in fiscal 2018. President Haruo Nagamatsu says, however, “We will not do lump-sum contracts (where the construction costs are set in advance).” They will prioritize actual-cost orders, where they can ask the company ordering the project to cover fluctuations in the labor and materials costs.


With the appearance of North American shale gas on the energy market, the plant construction field has broadened. Japanese engineering construction companies have built unprecedentedly large plants in Southeast Asia and the Middle East and been bruised in the process. Will they be crushed by the entirely new difficulties posed by the boom in construction projects in industrialized nations or will they become mature and grow even tougher? The world’s resources and energy majors, the ones placing the project orders, are watching this more closely than anyone.


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