L&T opts out of GAIL tender to build LNG carriers locally

Bangalore: Larsen and Toubro Ltd (L&T) has decided not to participate in the tender issued by GAIL (India) Ltd for constructing three new liquefied natural gas (LNG) carriers for use by the state-run natural gas firm to ship the commodity from the US starting January 2019, citing a clause that requires shipyards to hold equity stake of as much as 13% in the LNG carriers that are to be built locally.

The decision by India’s biggest engineering and construction firm is a big blow to Prime Minister Narendra Modi’s Make in India initiative.

An L&T spokesman said the company does not comment on business prospects under consideration as a matter of policy.

“We are not participating in the tender because of the stipulation put by GAIL for winning shipyards to take equity stake in the LNG tankers,” said an L&T executive familiar with developments, asking not to be named because he is not authorized to speak with the media.

Some years ago, L&T took a policy decision to not invest in ships, after the company, which once owned ships to move cement and clinker, had to go for distress sale of the vessels when it exited the cement business.

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 construct three of the nine LNG tankers in India.

The prospective bidders are required to quote for lots of three vessels with a provision that under each lot, one of the vessels shall be built in an Indian yard, according to the 14 September tender issued by GAIL (India).

In today’s market, an LNG carrier costs more than $200 million to build from scratch. Bidding groups have time till 14 December to submit their techno-commercial bids.

Local shipbuilder/s winning the contract to build the three LNG tankers have the option of acquiring a 5% to 13% stake in each of these tankers, according to the GAIL tender documents reviewed by Mint.

“This was not acceptable to us and we decided not to take part in the tender,” said the L&T executive mentioned earlier.

Larsen and Toubro Shipbuilding Ltd, a unit of L&T, had signed a technical collaboration agreement with South Korea’s Hyundai Heavy Industries Co. Ltd, to be eligible for participation in the tender.

“We have informed Hyundai about our decision of not participating in the tender,” said the L&T executive.

L&T’s decision leaves only two other local shipyards—the state-run Cochin Shipyard Ltd and Pipavav Defence and Offshore Engineering Co. Ltd—in the fray for constructing the three LNG carriers locally.

Cochin Shipyard and Pipavav Defence and Offshore Engineering have managed to sign technical collaboration pacts with South Korea’s Samsung Heavy Industries Co. Ltd and Daewoo Shipbuilding and Marine Engineering Co. Ltd, respectively, with the help of lobbying by the Indian government with its South Korean counterpart to comply with the tender conditions.

Indian yards that have never built LNG ships before had to get technology collaboration with overseas specialists in the business.

The LNG carriers ordered at overseas yards will have to be constructed and delivered between 1 January and 31 May 2019 while the delivery timeline for those ordered at Indian yards is between 1 July 2022 and 30 June 2023, according to the tender terms.