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Business

Falling energy prices put plant plans on ice

Despite record order backlogs, Japanese engineering companies face a troubling trend.

TOKYO -- Low crude oil prices and a soft market for liquefied natural gas are causing energy companies to shelve or cancel plant construction, giving engineering companies headaches.

     Major Japanese engineering companies had seemed poised to win project orders related to Saudi Arabia's Ras Tanura refinery and an American gas-to-liquids plant. But the energy companies behind the projects recently pushed back their plans.

     Declining prices for energy are the main culprit.

     "At any rate, we'd like crude oil prices to stabilize," Petroleum Association of Japan President Yasushi Kimura told a news conference Wednesday. The repercussions of low oil prices have cast a shadow on overseas projects involving petroleum wholesalers as well.

     The LNG supply-demand balance has worsened. Spot prices of LNG bound for Japan, the world's largest LNG importer, have fallen to around $7 per million British thermal units -- the lowest level in four and a half years. Crude oil prices have dropped sharply as well. Oil has started trading above $50 a barrel at times in February, but OPEC members have made no moves to cut output.

     Delayed projects are not engineering companies' only challenge. State-operated Qatar Petroleum and oil major Royal Dutch Shell have canceled plans to build petrochemical facilities in Qatar. The roughly 750 billion yen ($6.23 billion) project's demise disappointed Toyo Engineering, which had tendered a bid and was considered the most likely candidate.

     State-run Malaysian oil company Petronas has decided to postpone a final investment decision on the Pacific Northwest LNG project in Canada. The move frustrated Japan's JGC, which had set its sights on orders.

     The trend will not hurt engineering companies' earnings in the short term. Chiyoda and JGC, for example, handle a combined 70% of LNG plant construction worldwide. Projects have been sprouting like mushrooms in this field, thanks to both brisk demand in emerging markets and increased imports in Japan due to the nuclear plant shutdown.

     Chiyoda's order backlog came to 1.44 trillion yen at the end of December, up 35% from the end of last March. JGC's backlog stood at 1.83 trillion yen at the end of December. Meanwhile, the International Energy Agency expects an upturn in oil prices in the second half of this year.

     Still, a lower number of projects could lead to a resurgence of a war of attrition with such South Korean rivals as Samsung Engineering. Until about two or three years ago, South Korean companies had gone on the offensive without regard for profits. They had forced back Japanese counterparts in the Middle East, until then considered a stronghold.

     The highly profitable projects had wrapped up by fiscal 2013, so profits have tended to decline even as sales rise. Engineering companies hope to avoid gross profit margins narrowing even further because of fiercer competition. As things stand, they cannot lean on their record backlogs.

     "Energy companies seem likely to maintain their wait-and-see stance on plant orders for the time being," observed Takahiro Mori of Merrill Lynch Japan Securities. "Large-scale projects in fiscal 2015 may be limited to such cases as the Mozambique LNG plant."

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