LNG shipbuilding plans cross a milestone

GAIL (India) received initial bids from two consortiums for hiring at least nine LNG carriers on a long-term basis for transporting gas from the US


GAIL (India) will not order the ships directly at shipyards—both overseas and Indian, but plans to charter the carriers from global fleet owners who will have to construct three of the nine LNG tankers in India as part of the Make in India plan, aimed at attracting foreign investment and turn India into a manufacturing hub. Photo: Pradeep Gaur/Mint
GAIL (India) will not order the ships directly at shipyards—both overseas and Indian, but plans to charter the carriers from global fleet owners who will have to construct three of the nine LNG tankers in India as part of the Make in India plan, aimed at attracting foreign investment and turn India into a manufacturing hub. Photo: Pradeep Gaur/Mint

One of the biggest elements of Prime Minister Narendra Modi’s Make in India initiative crossed a milestone recently when state-run natural gas company GAIL (India) Ltd received initial bids from two consortiums for hiring at least nine liquefied natural gas (LNG) carriers on a long-term basis for transporting gas from the US.

The supply of 2.3 million tonnes per annum (mtpa) of LNG from the Cove Point terminal in the US will begin in December 2017. The delivery of 3.5 mtpa LNG from the Sabine Pass terminal, also in the US, will start in March 2018.

While two bids may look a tad disappointing for a tender worth $7 billion, the fact remains that the consortium partners comprise most of the world’s top LNG shipowners.

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 have applied for one of the most keenly watched shipping tenders globally.

That makes it a total of seven fleet owners that have participated in the tender in two separate consortiums. Given the huge investments involved in constructing nine LNG carriers, with an option for an additional two, and the risks inherent in building three of the nine tankers on firm order locally for the first time, it is not a small number at all.

That it took GAIL a second attempt to receive the two bids (the first tender issued in August 2014 had to be scrapped in February 2015 because nobody showed up) speaks volumes of the complexity involved in the auction.

GAIL will not order the ships directly at shipyards—both overseas and Indian. It plans to charter the carriers from global fleet owners who will have to construct three of the nine LNG tankers in India as part of the Make in India plan, aimed at attracting foreign investment and turn India into a manufacturing hub. Prospective bidders were required to quote for lots of three vessels (one lot consisting of three carriers) with a provision that under each lot, one of the vessels has to be built in an Indian yard. Bidders could quote for one or more lots of three ships each.

GAIL may hire one or two extra tankers to fulfil its capacity requirement. Hence, in addition to the quote for lot(s), it was mandatory for bidders to quote for at least one additional ship from an Indian shipyard. A bidder offering two additional ships has to necessarily quote for one additional vessel from an Indian shipyard and the other from an overseas shipyard.

In case one additional vessel is required, it will be built at an Indian shipyard. If two additional vessels are required, the first vessel has to be from an Indian shipyard and the second vessel from an overseas yard.

Both the bidding groups have applied for one lot each of three LNG carriers. Besides, the MOL-NYK-Mitsui consortium has submitted techno-commercial bids for two additional ships (taking the total offer to five ships). Plus, it has expressed willingness to offer a sixth ship (this is not in line with the tender conditions).

The Mitsubishi-K Line-GasLog-Foresight consortium has applied for one lot of three tankers and an additional ship to comply with the tender requirements.

The five ships offered by the first consortium (excluding the sixth one on offer that may not fit the tender rules) and the four quoted by the second will take the total tankers on offer to nine. This clearly shows none of the two consortia were keen on making an investment for nine ships. It also means that there will be more than one successful bidder.

Critics who still harbour doubts over India’s capability to build LNG ships should recall what China did to enter the LNG shipbuilding/LNG shipowning business during the early years of the past decade. When none of the global yards were willing to part with the technology to build LNG carriers, Shanghai-based Hudong-Zhonghua Shipbuilding (Group) Co. Ltd, a unit of state-run China State Shipbuilding Corp., was directed to start constructing LNG ships with design developed locally and financed by Chinese lenders. The LNG containment system used on the ships was licensed from French firm Gaztransport et Technigaz SA (GTT).

China LNG Shipping (Holdings) Co. Ltd (CLNG) was set up in Hong Kong, as an equal joint venture between two state-owned firms, China Ocean Shipping (Group) Company and China Merchants Group, for planning, coordinating and arranging all the investments and management works related to LNG transportation projects in China. The JV has invested around $1 billion in six LNG carriers so far.

China later brought in BP Shipping Ltd, a unit of London-based oil and gas firm BP Plc, as a 40% shareholder in China LNG Shipping (International) Co. Ltd (CLSICO), a Hong Kong-based JV 60% owned by CLNG, to manage the six LNG tankers. BP is one of the partners in the North West Shelf project in Australia that supplies 3.7 mt LNG a year to Guangdong Dapeng LNG Co. Ltd, China’s first LNG import project, for 25 years beginning May 2006.

BP Shipping exited the ship management JV in August 2013 by selling its 40% stake to China’s national oil firm China National Offshore Oil Corp. (CNOOC). Hudong now has an order book for 13 LNG tankers and two more Chinese yards have started constructing LNG carriers.

In India, Shipping Corp. of India Ltd (SCI) and GAIL, both state-owned, have a step-in right to take at least 26% and 10% stakes, respectively, in each of the nine LNG carriers.

Besides, the local shipbuilder winning the contract to build the three LNG tankers has the option of acquiring another 5-13% stake in each of the three carriers. This means Indian entities can hold as much as a 49% stake in the three locally built LNG tankers to spread financial risks.

Unlike China, India has been lucky in getting a global shipyard to share technology for building LNG ships. State-run Cochin Shipyard Ltd is the only local yard that has fulfilled the eligibility criteria set by GAIL to build three LNG tankers locally. It has signed a technology collaboration pact with South Korea’s Samsung Heavy Industries Co. Ltd to build the ships. It also secured a licence from GTT, France, to use its patented Mark-III LNG containment systems.

India’s resolve to wrap up the technical collaboration pact with Samsung was evident when it got Dae-young Park, the chief executive officer of the South Korean shipbuilder, to fly to Mumbai from Perth, Australia, where he was attending LNG 18, the world’s largest LNG event, to sign the agreement on 14 April at a maritime summit organized by the government.

India cannot brook any further delays in finalizing the tender.

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