Tough negotiations are under way between GAIL (India) Ltd and two bidding groups that applied to charter nine new liquefied natural gas (LNG) carriers required by the state-run gas processor and distributor for shipping gas from the US.
The intense bargaining is over the three LNG tankers that are to be built in India as part of Prime Minister Narendra Modi’s Make in India programme. The two consortiums comprising mainly Japanese fleet owners with a strong presence in LNG shipping want GAIL or the government to take on potential risks associated with the Indian-built LNG tankers, which would be the first such sophisticated ships built locally. GAIL doesn’t want to assume the risks and is waiting for the government to take a position.
A consortium of Mitsui O.S.K. Lines Ltd (MOL)-Nippon Yusen Kabushiki Kaisha Ltd (NYK Line) and Mitsui and Co. Ltd and another group comprising Mitsubishi Corp.-Kawasaki Kisen Kaisha Ltd (K Line)-GasLog Ltd and Foresight Ltd are eyeing the long-term deal because of its sheer size—worth around $7 billion. Such long-term shipping contracts translate into huge cost savings for GAIL and for the end-use consumers of LNG, a clean source of fuel which India is seeking to rely on to cut carbon emissions.
Executives briefed on the tender issued by GAIL for the second time in two years (the first one failed because no one showed up), says there was an attempt by global shipowners to scuttle the bidding process and the Make in India plan by putting conditions that either GAIL or the government may find it difficult to accept.
Conversations with these executives, who declined to be named because they are not authorized to speak to the media, gives an insight into the role played by local representatives (mostly looking after crewing and other ship agency functions and not well versed with ship construction) of bidding groups in influencing their top bosses in the Tokyo headquarters on the perils of building LNG ships in India and to avoid taking perceived risks associated with this.
A GAIL executive summed this up pretty well by saying that the company faced more resistance in pursuing the tender from the local representatives of the bidding groups than from senior executives based in Japan.
To illustrate the point, a local representative with one of the bidding groups voiced concern during a meeting on the possible de-hiring of Indian-built LNG ships by GAIL, citing the example of Oil and Natural Gas Corp. Ltd, which a few months ago prematurely cancelled contracts on ships taken on a long-term basis to support its oil exploration activities after daily rentals crashed due to a plunge in crude prices. However, those were small and old vessels which cannot be compared with the sheer scale of the Make in India project, intended to promote local manufacturing.
Initially, even GAIL was not willing to get three of the nine LNG ships built in India, but had to change course following a directive from the ministry of petroleum and natural gas.
Similarly, fleet owners were extremely reluctant to build these tankers in India due to concerns over construction time line, quality issues and risks associated with running such ships. Again, they had to relent after the government clearly indicated that it was going to use its LNG buying clout to get local yards to enter the highly lucrative LNG shipbuilding business.
The LNG cargo purchasing power has been used by other nations such as South Korea and China to promote and augment their local shipping fleet or to build ships locally.
Much has happened since the plan was unveiled. India’s state-owned Cochin Shipyard Ltd has managed to get a technology tie-up with South Korea’s Samsung Heavy Industries Co. Ltd to build the LNG carriers. It has also secured a licence from French firm GTT to use its patented Mark-III LNG containment systems.
It is imperative for both the government/GAIL and the bidders to meet half way to make this a reality. There should be give and takes in such an exercise; that’s how plans such as Make in India can work.
It would be childish on the part of global fleet owners to assume that Indian-built LNG ships may lack quality and run into operational problems, resulting in financial implications for them.
After all, even the Japanese and the South Koreans, who are reputed LNG shipbuilders in the world today, got started at some point. There is always a first time.
Having said that, the government and GAIL should not let go of this once-in-a-lifetime opportunity to start building LNG ships locally for want of a final push in the last lap of the tendering process.
There are many upsides to this, one among them being the huge employment it can generate, which is also a political plank of the government.
The government needs to guard against those trying to derail the process. The stakes are high for India. It is now or never.
P. Manoj looks at trends in the shipping industry.