Bengaluru: Oil and Natural Gas Corp. Ltd (ONGC) has issued notices to terminate the contracts of 27 Indian registered ships it had hired for three-year periods more than a year ago from 10 local fleet owners to support oil exploration activities, as the state-run oil explorer looks to cut costs by taking advantage of the drop in daily hiring rates for such ships amid a fall in global crude prices.

ONGC has invoked a contract clause to terminate the agreement on the 27 offshore support vessels such as anchor handling tug cum supply vessels (AHTSVs) and platform supply vessels (PSVs) from 28 May in a notice sent to each of these 10 ship owners on 28 April. Mint has reviewed copies of the notices written by the offshore logistics and marine planning cell of ONGC in Mumbai.

These 27 ships were hired for day rates ranging from $10,000 to $14,000. ONGC had hired six ships from Shipping Corp. of India Ltd, four from Greatship (India) Ltd (the offshore unit of The Great Eastern Shipping Co. Ltd), three each from TAG Offshore Ltd, Samson Maritime Ltd, Global Offshore Services Ltd and ABG FPSO Pvt. Ltd, two from GOL Offshore Ltd and one each from Ocean Sparkle Ltd, Vision Projects Technologies Pvt. Ltd and one more company, whose name could not be ascertained.

The immediate provocation for issuing the termination notices, according to fleet owners, is a recent tender issued by ONGC for hiring 18 more such ships on three year contracts, which fetched day rates between $6,600 to $7,200 or less than half of the rates paid on the existing 27 ship hiring contracts.

“Notwithstanding anything contained herein, the charterer (ONGC) shall have its exclusive right to terminate the contract for the chartered vessel operating under the contract by giving to the contractor thirty (30) days written notice without assigning any reason therefor. However, this clause would apply after first 12 months of the contract," according to clause 14.2 of the contract.

“This letter may be treated as notice of termination in accordance with the above clause and thus your vessels as stated above stands de-hired on 28 May 2016," the 28 April notice said.

ONGC, according to fleet owners, may opt for a fresh tender to hire these 27 ships to get lower rates as discovered through the recent 18-ship hiring tender.

Local fleet owners have started lobbying the government to get the contract cancellations over-turned. Ship-owners have also urged the government to scrap the termination clause incorporated by ONGC in its ship hiring contracts saying it was “one-sided".

Revenue from offshore support vessels have bailed out shipping companies after a global downturn in 2008 roiled the global shipping industry from which they are yet to recover fully.

Some fleet owners, however, are viewing the development more realistically saying that they are willing to drop rates to retain the contracts for the rest of the term ranging from six months to two years (depending on when the ship was hired) rather than go through a tender drill with the attendant risk of losing work given the acute competition for renting such ships in a falling market.

An ONGC executive at the Mumbai office of the offshore logistics and marine planning cell declined to comment saying that the “matter was under discussion". ONGC could not be reached immediately for comment.

“ONGC has a right to do it and they are justified in doing it (cancelling the contracts)," says a Mumbai-based shipping industry executive who declined to be named. “ONGC got extremely low day rate in the recent tender for hiring 18 ships. So, what they have done is for vessels which are operating with them for more than a year now, they have given a 30-day termination notice. Their basic contention is that the ship owners should match the rates that are currently prevalent in the market. As far as owners are concerned, their stance is that those ships were contracted at a different time and that time you had done price discovery in an open tender and you had accepted the price. So now, you cannot go back and say that I need a lower price," he said.

“The point here really is whether ONGC has an unfettered legal right to do it (cancellations) without compensation. It is a contract after all. It is a one-sided termination clause because if the rates move up during the contract period, we don’t have the right to seek a raise; we don’t even have the right to walk away from the contract," said the shipping executive cited earlier.

“ONGC has a point," said another fleet owner whose ships are facing cancellations.

“My view is that this is part of ONGC’s cost reduction programme. What they are doing is across the board. Whether you are an offshore charterer or a service provider, whatever you are doing, ONGC is saying all oil companies have renegotiated contracts with their vendors in view of the price crash globally. So, the ministry has asked them to renegotiate with everybody. So, the way they are doing is cancelling the contracts and not threatening. Cancelling, and then they’ll call you back and say that if you are willing to take lower rates we will continue. There is such a lot of competition in the market; it is such a bad market for any kind of vessel today that owners will be forced to accept lower rates" he said asking not to be named.

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